<PAGE>
Registration No. 33-30084
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
CORPORATE SYSTEMS HOLDING, INC.
(Exact name of registrant as specified in its charter)
1200 Corporate Systems Center
Amarillo, Texas 79102
(806) 376-4223
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
______________________
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount to Offering Aggregate Amount of
Securities to be be Regis- Price Per Offering Registra-
Registered tered Unit Price tion Fee
- -------------------------------------------------------------------------------
Common Stock 5,922,814 $1.60(1) $9,494,227(1) $3,273.87
- -------------------------------------------------------------------------------
(1) Based on book value of assets and securities as of June 30, 1996, to
be received in exchange for the Securities to be Registered.
- -------------------------------------------------------------------------------
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
----------------------------
Cross-Reference Between Items in Part I of Form S-4 and the Prospectus
<TABLE>
FORM S-4 LOCATION IN
ITEM NUMBER AND CAPTION PROSPECTUS
- --------------------------------------- ------------------------------------
<S> <C>
1. Forepart of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front Cover Page;
Cover Pages of Prospectus Back Cover Page
3. Risk Factors, Ratio of Earnings to Summary, Risk Factors and Other
Fixed Charges and Other Special Considerations, Selected
Information Financial Information
4. Terms of the Reorganization Summary, The Organization
5. Pro Forma Financial Information Summary Information About the Plan
8. Interests of Named Experts and Legal Opinions; Experts
Counsel
9. Disclosure of Commission Position Limited Liability
on Indemnification for Securities
Act Liabilities
14. Information with Respect to Summary, Risk Factors and Other
Registrants Other Than S-3 or S-2 Special Considerations,
Registrants Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management;
Principal Owners and Ownership of
Management, Financial Statements
17. Information with Respect to Summary, Risk Factors and Other
Companies Other Than S-3 or S-2 Special Considerations,
Registrants Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management;
Principal Owners and Ownership of
Management, Financial Statements
18. Information if Proxies, Consents, Summary, Risk Factors and Other
or Authorizations are to be Special Considerations, Certain
Solicited Federal Income Tax Considerations,
Summary Comparison of Units and
Common Stock and CSC Shares and
Common Stock, Description of Common
Stock
</TABLE>
_____________________
*Items 6, 7, 10, 11, 12, 13, 15,
16, and 19 are not applicable to
this Registration Statement
ii
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
PROSPECTUS
CORPORATE SYSTEMS HOLDING, INC.
5,992,814 SHARES COMMON STOCK
Corporate Systems Holding, Inc., a newly formed Nevada corporation
(HOLDING COMPANY) offers, as set forth in this prospectus (EXCHANGE OFFER),
Shares of Common Stock, to the limited partners of Corporate Systems, Ltd.,
a Texas limited partnership (PARTNERSHIP) and to the shareholders of CSC
General Partner, Inc. (GENERAL PARTNER) pursuant to a plan of exchange and
reorganization (REORGANIZATION or PLAN) developed by the General Partner for
the reorganization of the Partnership as a corporation.
The Plan provides for the following transactions:
STEP 1----The Holding Company will issue one of its shares to the
accepting shareholders of the General Partner and to the accepting
limited partners of the Partnership in exchange for each of their
General Partner shares and for each of their Partnership units. Each
exchanging shareholder and limited partner will then own the same
percentage of the Holding Company that he or she formerly owned of the
Partnership.
STEP 2----The Holding Company will transfer of all of the acquired
Partnership units to the General Partner, which will then own
substantially all interest in the Partnership.
STEP 3----The General Partner will merge with and into Corporate
Systems, Inc., a newly formed Nevada corporation (the OPERATING
COMPANY), which will be a wholly owned subsidiary of the Holding Company.
STEP 4----The Partnership will dissolve at the discretion of the
Operating Company, then acting as the general partner of the
Partnership; and the Operating Company and the Limited Partners who did
not accept the Exchange Offer will succeed to all assets and liabilities
of the Partnership; and the Operating Company will continue its business
as Corporate Systems, Inc.
After the Reorganization, if the Partnership has been dissolved by the
Operating Company, a newly formed Employee Stock Ownership Trust ("ESOT")
will offer to purchase up to ten percent of each shareholder's Holding
Company Shares.
The Reorganization will not change the percentage ownership of Management
or any other person. Prior to the Reorganization, Management owns, either
directly through partnership units or beneficially through shares of the
General Partner, 36.90 percent interest in the Partnership and after the
Reorganization, Management will own 36.90 percent of the outstanding shares
of the Holding Company.
THE REORGANIZATION INVOLVES CERTAIN SPECIAL CONSIDERATIONS, INCLUDING TAX
CONSEQUENCES OF THE TRANSACTION AND CERTAIN RISKS RELATED THERETO. SEE "RISK
FACTORS AND OTHER SPECIAL CONSIDERATIONS."
______________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE COMMISSION OR ANY
STATE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
______________________________
August 29, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
AVAILABLE INFORMATION. . . . . . . . . . . . . . 3
SUMMARY. . . . . . . . . . . . . . . . . . . . . 4
SUMMARY INFORMATION ABOUT
CORPORATE SYSTEMS . . . . . . . . . . . . . . . 4
SUMMARY INFORMATION ABOUT THE
PLAN. . . . . . . . . . . . . . . . . . . . . . 4
ORGANIZATIONAL CHARTS. . . . . . . . . . . . . . 10
THE REORGANIZATION . . . . . . . . . . . . . . . 11
Background of the Reorganization . . . . . 11
Reasons for the Reorganization . . . . . . 11
Terms of Reorganization . . . . . . . . . . 13
Allocation of Common Stock . . . . . . . . 14
Risk Factors and Other
Special Considerations . . . . . . . . . . 15
Tax Considerations . . . . . . . . . . 15
Conflicts of Interest. . . . . . . . . 16
Uncertainty Regarding Market Price
and Common Stock . . . . . . . . . . 16
Effect on Non-Transferring
Limited Partners. . . . . . . . . . . 16
Disadvantages of Reorganizing
to Corporate Form . . . . . . . . . . 16
Recommendation of the General Partner . . . 17
Effective Time. . . . . . . . . . . . . . . 19
Issuance of Certificates. . . . . . . . . . 19
Conditions to the Reorganization . . . . . 19
Termination; Amendment. . . . . . . . . . . 20
No Appraisal Rights for Limited Partners
Who Do Not Accept Exchange Offer . . . . . 20
Consequences If Reorganization Is
Terminated . . . . . . . . . . . . . . . . 20
Fiduciary Duties. . . . . . . . . . . . . . 20
Accounting Treatment. . . . . . . . . . . . 20
Fees and Expenses . . . . . . . . . . . . . 21
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES. . . . . . . . . . . . . . . . . . 21
MARKET PRICES AND
DISTRIBUTIONS . . . . . . . . . . . . . . . . . 26
SELECTED FINANCIAL INFORMATION
OF THE PARTNERSHIP. . . . . . . . . . . . . . . 28
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS. . . . . . . . . . . . . . . . . . . 29
BUSINESS AND PROPERTIES. . . . . . . . . . . . . 37
Background. . . . . . . . . . . . . . . . . 37
The Partnership and the Holding Company . . 37
General Business. . . . . . . . . . . . . . 37
Material Customers. . . . . . . . . . . . . 38
Research and Development. . . . . . . . . . 38
Business Plan . . . . . . . . . . . . . . . 38
Competition . . . . . . . . . . . . . . . . 38
Properties. . . . . . . . . . . . . . . . . 38
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . 39
MANAGEMENT - BEFORE AND AFTER
THE REORGANIZATION. . . . . . . . . . . . . . . 40
PRINCIPAL OWNERS AND OWNERSHIP
OF MANAGEMENT . . . . . . . . . . . . . . . . . 43
SUMMARY COMPARISON OF UNITS
AND COMMON STOCK AND CSC SHARES AND
COMMON STOCK. . . . . . . . . . . . . . . . . . 45
Taxation. . . . . . . . . . . . . . . . . . 45
Distributions and Dividends . . . . . . . . 45
Management. . . . . . . . . . . . . . . . . 46
Voting Rights . . . . . . . . . . . . . . . 46
Special Meetings. . . . . . . . . . . . . . 47
Liquidation Rights. . . . . . . . . . . . . 47
Right to Compel Dissolution . . . . . . . . 47
Limited Liability . . . . . . . . . . . . . 47
Liquidity and Marketability . . . . . . . . 47
Continuity of Existence . . . . . . . . . . 48
Financial Reporting . . . . . . . . . . . . 48
Certain Legal Rights. . . . . . . . . . . . 48
Right to List of Holders; Inspection
of Books and Records . . . . . . . . . . . 48
Issuance of Additional Equity . . . . . . . 49
Preemptive Rights . . . . . . . . . . . . . 49
Duties Owed to Equity Owners . . . . . . . 49
Compensation to Management . . . . . . . . 50
Partnership Interest . . . . . . . . . 50
CSC Shares . . . . . . . . . . . . . . 50
Common Stock . . . . . . . . . . . . . 50
DESCRIPTION OF COMMON STOCK. . . . . . . . . . . 50
LEGAL OPINIONS . . . . . . . . . . . . . . . . . 52
EXPERTS. . . . . . . . . . . . . . . . . . . . . 52
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . .F-1
GLOSSARY . . . . . . . . . . . . . . . . . . . .G-1
2
<PAGE>
AVAILABLE INFORMATION
The Holding Company has filed a Registration Statement on Form S-4 under
the Securities Act of 1933 with the Securities and Exchange Commission (the
"SEC") with respect to the common stock. Statements contained in this
Prospectus concerning the provisions of documents are necessarily summaries
of such documents, and each such statement is qualified in its entirety by
reference to the copy of the applicable document filed with the SEC. Copies
of the Registration Statement and the Exhibits to such filing are on file at
the offices of the SEC and may be obtained upon payment of the fee prescribed
by the SEC, or may be examined without charge at the Public Reference
Facilities of the SEC, Room 1024, 450 Fifth Street, N.W., Washington D.C.
20549.
No person has been authorized to give any information or to make any
representations other than as contained in the Prospectus and, if given or
made, such information or representations must not be relied upon as having
been authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the common stock to
which it relates, or an offer to or solicitation of any person in any
jurisdiction in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder will, under any
circumstances, imply that the information contained herein is correct any
time subsequent to its date.
Remainder of page intentionally left blank
3
<PAGE>
SUMMARY
This Prospectus is being furnished to the limited partners of the
Partnership (the "LIMITED PARTNERS") and the shareholders of the common stock
of the General Partner (the "CSC SHAREHOLDERS") in connection with the
Reorganization of the Partnership. The following summary is not intended to
be complete. Limited Partners and CSC Shareholders are urged to read the
more detailed information set forth elsewhere in this Prospectus. A Glossary
of frequently used capitalized terms is attached as Annex A (located inside
the back cover).
SUMMARY INFORMATION ABOUT CORPORATE SYSTEMS
CORPORATE SYSTEMS.
The principal business of Corporate Systems is to provide risk
information services for the property and casualty insurance industry. These
services consist generally of claims administration products including data
conversion, data intake, data processing, and reporting. Corporate Systems'
products include a claims administration system, a workers' compensation
medical bill repricing system, an incident reporting system, data conversion
services, computer outsourcing services, software development project
management services, a disability claims administration system, and risk
information reporting.
THE PARTNERSHIP AND THE HOLDING COMPANY.
THE PARTNERSHIP. Currently, Corporate Systems operates as a limited
partnership. The Partnership was formed in 1976 and exists under the Texas
Revised Partnership Act. Its general partner is CSC General Partner, Inc., a
Texas corporation. Ownership of the Partnership is composed of one class of
partnership interest, divided into units (the "UNITS"). Each Unit entitles
the holder to share in the profits, losses, distributions, and rights in the
event of liquidation. Currently, there are 5,922,814 Units outstanding. The
General Partner holds 2,666,672 of the outstanding Units. The remaining
3,256,142 Units are divided among 255 Limited Partners.
The General Partner has issued one share of common stock for each Unit it
holds. Because the General Partner has elected to be taxed under Subchapter
S of the Internal Revenue Code, its profits and losses are passed through to
the CSC Shareholders so that they are subject to substantially the same
income tax consequences as they would if they held Units instead of shares of
the General Partner ("CSC SHARES"). Therefore, for purposes of determining
percentage ownership and control of the Partnership, each holder of a CSC
Share is deemed to be the beneficial holder of one Unit.
THE HOLDING COMPANY. The Holding Company was formed pursuant to the Plan
adopted by the General Partner for the reorganization of the Partnership and
has nominal assets at present. The Holding Company's Articles of
Incorporation authorize one class of common stock. It has not taken any
substantial action since its incorporation on August 7, 1996, other than in
connection with the Plan.
The address of the principal executive offices of both the Holding
Company and the Partnership is 1200 Corporate Systems Center, Amarillo, Texas
79102. Their telephone number at that address is (806) 376-4223.
SUMMARY INFORMATION ABOUT THE PLAN
MATERIAL TERMS OF THE PLAN.
Under the Plan prepared by the General Partner, the Partnership will be
reorganized into a two-tiered corporate organization comprised of the Holding
Company and the Operating Company, both organized as Nevada corporations.
The reorganization of Corporate Systems will be implemented through the
Exchange Offer. The Reorganization of Corporate Systems will not adversely
affect any
4
<PAGE>
Limited Partner's or CSC Shareholder's voting rights, percentage of
ownership, or limited liability. The Reorganization is planned as follows:
STEP ONE - THE EXCHANGE OFFER
- - The CSC Shareholders who accept the Exchange Offer exchange their CSC
Shares for shares of common stock of the Holding Company.
- - The Limited Partners who accept the Exchange Offer exchange their
Units for shares of common stock of the Holding Company.
STEP TWO - TRANSFER OF UNITS TO THE GENERAL PARTNER
- - The Holding Company transfers to the General Partner all the Units
it holds in the Partnership.
STEP THREE - THE MERGER
- - The General Partner merges with the Operating Company pursuant to the
Nevada Merger Statutes.
STEP FOUR - DISSOLUTION OF PARTNERSHIP
- - At the discretion of the Operating Company, then serving as the
general partner of the Partnership, the Partnership will be dissolved
pursuant to the Partnership Agreement, as amended, and applicable Texas
law; and the assets and liabilities of the Partnership will be
distributed to the Operating Company and any Limited Partners that did
not transfer their Units to the Holding Company pursuant to the Exchange
Offer.
After the Registration Statement becomes effective, the Holding Company
will deliver to each Unitholder of record a copy of this Prospectus and a
subscription agreement (the "Subscription Agreement") pursuant to which a
Limited Partner or CSC Shareholder may accept the Exchange Offer. The
subscription agreement will require that a Limited Partner or CSC Shareholder
who accepts the Exchange Offer must tender all his or her Units or CSC
Shares. The Holding Company will not accept subscription agreements for the
tender of only a portion of a Limited Partner's Units or CSC Shareholder's
CSC Shares.
The Plan results in a two-tiered structure. If the Partnership is
dissolved at the discretion of the Operating Company, the Operating Company
will continue the business of Corporate Systems and assume and be responsible
for all liabilities of the Partnership. If the Partnership is not dissolved
at the discretion of the Operating Company, the Operating Company will
continue the Partnership and act as its General Partner. The Holding Company
will own 100 percent of the Operating Company. The former CSC Shareholders
and the former Limited Partners will own 100 percent of the outstanding
capital stock of the Holding Company in the same percentages in which they
owned (either directly through Units or indirectly through CSC Shares) the
Partnership.
RISK FACTORS AND OTHER CONSIDERATIONS.
In evaluating the Plan, Limited Partners and CSC Shareholders should take
into account the following risk factors and other considerations, which are
discussed in greater detail in "Risk Factors and Other Special
Considerations":
- - the tax consequences of the Reorganization and certain risks related
thereto.
REASONS TO CONVERT TO CORPORATE FORM.
The Plan will reorganize Corporate Systems to corporate form, replacing
Units and CSC Shares with Common Stock of the Holding Company. The General
Partner believes there are seven principal reasons to reorganize the
Partnership to corporate form at this time:
5
<PAGE>
- ESOP. Corporate Systems has approved the formation of an employee
stock ownership plan for the benefit of its employees and to provide
some liquidity to the Limited Partners and CSC Shareholders, which can
only be accomplished if Corporate Systems is a corporation;
- RETENTION OF CAPITAL. Corporate Systems has a greater need now
than in the past to retain capital rather than make cash distributions
to Unitholders, reducing the utility of its current limited partnership
form;
- EQUITY MARKETS. As a corporation, Corporate Systems will in the
future have better access to equity capital markets if equity is
needed;
- MORE RECOGNIZABLE FORM. It will be easier for Corporate Systems to
do business as a corporation because the corporate form is more commonly
recognized as a business entity, and persons and organizations are more
familiar with the corporate form of doing business;
- TAX REPORTING. The complexities of the tax reporting associated
with partnership investments have become unduly burdensome for the
Partnership and most Unitholders under current conditions;
- STOCK TRANSFERABILITY. Shares of Common Stock of the Holding
Company will be freely transferrable, thereby increasing the liquidity
of a Limited Partner's and CSC Shareholder's investment in Corporate
Systems; and
- ENHANCED VOTING RIGHTS. The Shareholders of the Holding Company
will be entitled to elect a board of directors at each annual meeting.
In contrast, Limited Partners do not elect a general partner on an
annual basis but can only remove the General Partner on an affirmative
vote of the Partners holding a majority of the outstanding Units under
the terms of the Partnership Agreement, which would result in the
dissolution of the Partnership.
DISADVANTAGES OF CONVERTING TO CORPORATE FORM.
The only disadvantages of converting to corporate form are tax-related.
The principal tax disadvantage is the double taxation of distributed
corporate earnings compared to the pass-through taxation of the Partnership:
a corporation pays taxes on its net income, and its shareholders generally
pay taxes on any dividends received from the corporation; whereas a
partnership pays no tax, and its partners pay tax on their share of
partnership net income.
Prior to the Reorganization, Partnership taxable income allocable to CSC
Shareholders and Limited Partners that do not materially participate in the
conduct of the business of the Partnership constitutes income from a passive
activity. Such passive income realized by a CSC Shareholder or Limited
Partner could be offset by deductions generated by other passive activities
of such CSC Shareholder or Limited Partner. After the Reorganization, former
CSC Shareholders and Limited Partners that hold shares of Holding Company
Common Stock will realize taxable income from such investment to the extent
the Holding Company pays dividends to its shareholders. Such dividends will
constitute portfolio income for tax purposes and will no longer qualify as
income from a passive activity. As a general rule, dividends paid by the
Holding Company cannot be offset or reduced by passive losses arising from
investments in passive activities that are held by the shareholders of the
Holding Company.
MATERIAL EFFECTS TO LIMITED PARTNERS AND CSC SHAREHOLDERS.
BUSINESS PLAN. Other than forming an Employee Stock Ownership Plan for
its employees, the Reorganization will not materially affect the current
business plan of Corporate Systems. Corporate Systems plans to continue to
provide services to the property and casualty insurance industry.
6
<PAGE>
VOTING RIGHTS. The Reorganization will not materially alter the voting
rights of the Limited Partners or the CSC Shareholders. Like each Unit and
CSC Share, each share of Holding Company's Common Stock entitles its holder
to cast one vote on each matter presented to its shareholders. As a
shareholder in the Holding Company, a former Limited Partner and former CSC
Shareholder will continue to have voting rights with respect to the
dissolution of Corporate Systems, the sale of all or substantially all of the
assets of Corporate Systems, amendment of the Articles of Incorporation (as
compared to amendment of the Partnership Agreement), and the annual election
of directors (as compared to the removal and replacement of the General
Partner). Provided, however, the vote required to dissolve, sell
substantially all the assets of Corporate Systems, or amend the Holding
Company's Articles of Incorporation is a majority of the outstanding Shares;
whereas the vote required to dissolve the General Partner, sell substantially
all the assets of the General Partner, and amend the General Partner's
Articles of Incorporation is two-thirds of the outstanding CSC Shares.
CASH DISTRIBUTION POLICY. One of the reasons for reorganizing Corporate
Systems into a corporation is the growing need of Corporate Systems to retain
capital for operations and growth. However, after the Reorganization,
Management expects to provide the Holding Company shareholders a return on
their investment through dividends or through an increase in the value of the
Common Stock, or both.
FORM OF OWNERSHIP INTEREST. Currently the Partnership is owned by the
Limited Partners through their ownership of Units and by the CSC Shareholders
through their ownership of CSC Shares. After the Reorganization, the form of
ownership interest will change from Units and CSC Shares to shares of Common
Stock in the Holding Company. There will be no adverse change in the rights
of Limited Partners or CSC Shareholders when their ownership interest is
exchanged for shares of Common Stock of the Holding Company. See "Summary
Comparison of Units and Common Stock."
MANAGEMENT COMPENSATION. The Reorganization will not materially alter
the compensation received by Management. See "Management - Before and After
the Reorganization."
CONFLICTS OF INTEREST.
The General Partner believes there are no conflicts of interest in
connection with the Reorganization. The General Partner and the CSC
Shareholders will receive the same benefits and accept the same risks from
the Reorganization as do the Limited Partners. In addition, the
Reorganization will not materially affect any rights or liabilities of
Management and Management will continue to receive the same compensation from
the Operating Company as it did from the Partnership. The CSC Shareholders
will own the same percentage in the Holding Company as they beneficially
owned in the Partnership through the ownership of CSC Shares.
RESALE MARKET FOR COMMON STOCK.
The Holding Company Common Stock, like the Units and the CSC Shares, will
not be publicly traded; and there will be no established resale market for
the Common Stock. However, the Common Stock will have no restrictions on its
transferability; whereas the CSC Shares are restricted by regulations
governing S corporations and the Units are restricted by the terms of the
Partnership Agreement that state an assignee of a Limited Partner may not
become a substituted Limited Partner without the prior written consent of the
General Partner, which consent may be withheld by the General Partner in its
sole discretion. Although there is no established resale market for the
Common Stock, Management does not anticipate that, as a result of the
Reorganization, the Common Stock will trade at prices substantially different
than the prices at which the Units or CSC Shares have changed hands in the
recent past. For recent price information, see "Market Prices and
Distributions - Market Information."
7
<PAGE>
RECOMMENDATION OF GENERAL PARTNER.
The General Partner believes that the Plan is fair to Limited Partners
and CSC Shareholders and recommends that they approve it. The General
Partner believes that the Reorganization will result in the benefits to
Limited Partners and the CSC Shareholders and to Corporate Systems, which are
described above under "Reasons to Convert to Corporate Form." On the other
hand, it will have the disadvantages described above under "Disadvantages of
Converting to Corporate Form." The General Partner further believes that the
allocation of equity interests in the Exchange Offer among the Units and the
CSC Shares is fair from a financial point of view to Unitholders and CSC
Shareholders. See "Allocation of Common Stock." Because the Limited
Partners and the CSC Shareholders will be treated the same in the Plan and
neither the General Partner, its shareholders, nor Management will receive
any benefit that is not also received by a Limited Partner, the General
Partner has not obtained an opinion from any third party regarding the
fairness of the Reorganization to the Limited Partners or CSC Shareholders.
The Reorganization will not adversely affect the voting rights, percentage of
equity interest, or limited liability of the Limited Partners and the CSC
Shareholders. After the Reorganization, the Holding Company Shareholders
will have substantially the same rights as did the former Limited Partners
and CSC Shareholders.
CONTROL OF CORPORATE SYSTEMS.
Control of the Holding Company following the Reorganization will be
vested in the Holding Company's board of directors, each member of which will
be elected by the Shareholders annually. The Board will initially consist of
six persons, each of whom currently serves on the board of directors of the
General Partner.
PRINCIPAL FEDERAL INCOME TAX CONSEQUENCES.
Except for the tax effects to any Limited Partners that fail to transfer
their Units to the Holding Company, neither the Limited Partners, the CSC
Shareholders, the Partnership, the Holding Company, nor the Operating Company
will recognize any gain or loss in the Reorganization, subject to the
assumptions and exceptions described under "Certain Federal Income Tax
Consequences."
If the Partnership is dissolved in the discretion of the Operating
Company, the winding up and liquidation of the Partnership will result in
taxable gain or loss to any remaining Limited Partners. See "Certain Federal
Income Tax Consequences - Effect on Remaining Limited Partners."
After the Reorganization, the Holding Company will be subject to tax on
any net taxable income subsequently derived. New Shareholders of the Holding
Company will realize taxable income from the ownership of Common Stock in the
Holding Company to the extent the Holding Company pays dividends to
Shareholders.
CONSEQUENCES IF LIMITED PARTNERS OR CSC SHAREHOLDERS DO NOT ACCEPT THE SHARE
EXCHANGE.
If the Reorganization is abandoned for any reason, then the Partnership
will continue to operate as a going business. No other reorganization plan
is being considered by the General Partner as an alternative to the Plan.
8
<PAGE>
COMPARATIVE UNAUDITED PER HOLDING COMPANY SHARE AND PER UNIT DATA.
The following tables set forth historical per Unit (divided between Units
held by Limited Partners and Units held by the General Partner) and the pro
forma per share data of the Holding Company. The equivalent pro forma per
share amounts are equal to the pro forma per share amounts of the Holding
Company due to the 1:1 exchange ratio under the Plan. This information
should be read in conjunction with the historical and pro forma financial
information included elsewhere in this Prospectus.
Six Months Year Ended
Ended June 30, 1996 December 31, 1995
------------------- -----------------
THE PARTNERSHIP
Historical per Unit data:
Net Income (loss) per:
General Partner Unit(1) 0.43 0.73
Limited Partner Unit(2) 0.43 0.73
Distributions per:
General Partner Unit 0.20 0.67
Limited Partner Unit 0.20 0.67
Book Value per:
General Partner Unit(3) 1.39 1.16
Limited Partner Unit 1.81 1.50
THE NEW COMPANY
Pro forma per share data:
Net income per share 0.25 0.45
Cash dividends per share 0.20 0.67
Book value per share 1.13 1.05
________________
(1) The term "General Partner Unit" means a Partnership Unit held by the
General Partner.
(2) The term "Limited Partner Unit" means a Partnership Unit held by a
Limited Partner.
(3) The difference between the book value of the Partnership Units held by
the General Partner and the book value of the Partnership Units held by a
Limited Partner is solely the result of the varying sales prices of
Partnership Units sold in the past and the number of Partnership Units sold.
The difference in book value in no way affects the rights of the Unitholders.
Each Partnership Unit, whether held by the General Partner or a Limited
Partner, entitles the holder to the same rights in regards to distributions,
income, loss, and division of assets upon liquidation of the Partnership.
9
<PAGE>
ORGANIZATIONAL CHARTS
BEFORE THE REORGANIZATION --THE PARTNERSHIP.
- --------------------------- ---------------------------
256 Limited Partners 28 Shareholders
holding 3,256,142 holding 2,666,672
Units Shares
- --------------------------- ---------------------------
54.98% 100%
- --------------------------- ---------------------------
Corporate Systems, Ltd. CSC General Partner,
Inc., holding
45.02% 2,666,672 Partnership
Units
- --------------------------- ---------------------------
AFTER THE REORGANIZATION--THE HOLDING COMPANY AND THE OPERATING COMPANY.
------------------------------------------
Common Shareholders
holding 5,922,814
Holding Company Shares
------------------------------------------
100%
------------------------------------------
Corporate Systems
Holding, Inc.
(Holding Company)
------------------------------------------
100%
------------------------------------------
Corporate Systems, Inc.
(Operating Company)
------------------------------------------
10
<PAGE>
THE REORGANIZATION
BACKGROUND OF THE REORGANIZATION.
The Partnership was formed in April 1976 in connection with the
restructuring of Management Information Systems, Inc., a Texas corporation.
Because operating profits exceeded the capital requirements of Management
Information Systems, Inc., the Board of Directors of the corporation
determined that a change in corporation structure to a limited partnership
would provide a more effective means of distributing income to the
shareholders. The shareholders of Management Information Systems, Inc. voted
to convert the corporation into a limited partnership and to change the name
to Corporate Systems, Ltd.
During the years that the Partnership was growing as a data processing
service for large organizations and as an outsourcing facility for insurance
companies, it was able to sustain itself with the retention of approximately
12 percent of its earnings, the balance being distributed to Unitholders for
tax payments and a return on their investment. After the Partnership
incurred a loss in 1992, it was important to recapitalize the Partnership;
and distributions were adjusted, with the Partnership retaining, on average,
a higher portion of earnings.
Management's philosophy has been to retain more of the Partnership's
earnings as a means of strengthening the balance sheet and building equity as
protection against any future downturn. Because distribution of earnings is
now secondary to retention of earnings, the advantage of a limited
partnership tax structure is substantially reduced. Management believes that
the benefits of converting Corporate Systems to a corporate form outweigh any
benefits achieved through a limited partnership form.
REASONS FOR THE REORGANIZATION.
The Plan will convert Corporate Systems to corporate form, replacing
Units and CSC Shares with Common Stock of the Holding Company. The General
Partner believes there are seven principal reasons to convert the Partnership
to corporate form at this time:
ESTABLISHING AN EMPLOYEE STOCK OWNERSHIP PLAN. Recently, the General
Partner's Board of Directors has approved the establishment of a leveraged
employee stock ownership plan ("ESOP") for the employees of Corporate
Systems; provided that Corporate Systems is reorganized into a corporate
structure. After the Reorganization, if the Partnership has been dissolved
by the Operating Company, a newly formed ESOT will offer to purchase up to
ten percent of each shareholder's Holding Company Shares. An ESOP is a
qualified plan designed to invest primarily in the employer's securities and
provide the plan participants with an ownership interest in their employer.
The key characteristic of a leveraged ESOP is that the trust established
pursuant to the ESOP, the ESOT, borrows money from a bank or other lender to
purchase the employer's securities, which provides immediate partial
liquidity to those owners who choose to sell a portion of their shares to the
ESOT.
Under current federal laws, an ESOP may only be established by a
corporate employer. Therefore, Corporate Systems' organization as a limited
partnership prevents it from creating an ESOP for its employees. Only the
reorganization of Corporate Systems into a corporation allows it the
opportunity to form a leveraged ESOP.
Because Corporate Systems has operated as a Partnership, its owners (both
Limited Partners and CSC Shareholders) have had virtually no liquidity in
their investment in Corporate Systems. An ESOP would create a mechanism
through which the owners of Corporate Systems could liquidate a portion of
their investment and at the same time create an incentive benefit for the
employees of Corporate Systems.
In anticipation of the formation of the ESOP, the Partnership has
retained the law firm of Oppenheimer, Wolff & Donnely of Chicago, Illinois,
to represent it in the formation and structuring of the ESOP. In addition,
LaSalle National
11
<PAGE>
Trust, N.A. has issued an engagement letter pursuant to which it will act as
the trustee of the ESOT.
After the Reorganization, Management expects the Operating Company's Board
of Directors to complete the formation of the ESOP and ESOT, including obtaining
a valuation of the Holding Company's common stock by an independent appraiser.
DESIRE TO RETAIN CAPITAL. In the past it has been the policy of Management
to make distributions to the Unitholders in an amount that exceeded the
Unitholder's tax liability. The ability to distribute income free of income
tax, combined with Management's expectation that Corporate Systems could sustain
a policy of making large cash distributions, was a primary reason that
Management Information Systems, Inc. converted to partnership form in April
1976. Because of its current capital requirements, Management anticipates that
in the future it will not make cash distributions to its Unitholders in as
large an amount as it has in the past. Thus, the principal advantage of being
structured as a partnership is not currently useful to Corporate Systems or its
Unitholders, nor is it likely to be useful in the foreseeable future. As a
partnership, the Unitholders have tax liability for earnings of Corporate
Systems regardless of whether the Partnership distributes any earnings to the
Unitholders. Therefore, Management's past policy of making distributions in
excess of the Unitholders' tax liability restricted Management from retaining
capital necessary for growth and normal operations. In contrast, if Corporate
Systems converts into corporate form, Shareholders would have no personal tax
liability unless the Holding Company declared dividends. Therefore, Corporate
Systems' current capital requirements could be better fulfilled through a
corporation than a partnership.
GREATER ACCESS TO EQUITY MARKETS. The General Partner expects the
Holding Company will have greater access to public and private equity capital
markets than does the Partnership, potentially enabling the Holding Company
to raise equity capital on more favorable terms than are now available to the
Partnership. Although Management does not have any current plans to access
any equity market, greater access to equity markets may be of particular
benefit to Corporate Systems in the future if Corporate Systems proposes to
issue equity securities to expand its business. If, after the Reorganization,
Corporate Systems were to raise additional equity, the Reorganization would
not affect Shareholders of the Holding Company any differently than if they
were still Limited Partners or CSC Shareholders. Additional equity, whether
in the form of additional Units or additional shares of Common Stock, would
decrease every Unitholder's or Shareholder's percentage ownership in
Corporate Systems unless the Unitholder or Shareholder bought additional
Shares or Units in the additional equity offering.
MORE COMMONLY RECOGNIZED FORM OF ORGANIZATION. The General Partner
believes it will be easier for Corporate Systems to do business as a
corporation because the corporate form of organization is more commonly
recognized than the limited partnership form of organization. Therefore,
Corporate Systems' customers, lenders, and other business contacts will be
more familiar with a corporate structure.
TAX REPORTING OF UNITHOLDERS AND CSC SHAREHOLDERS. The Partnership's
organization as a limited partnership and the General Partner's election to
be be taxed as a partnership under Subchapter S of the Code makes the
preparation of tax returns by the Partnership, the Limited Partners, and the
CSC Shareholders complex and expensive. The General Partner believes that
the complexities of tax reporting associated with partnership investments
have become unduly burdensome for the Partnership and most CSC Shareholders
and Limited Partners under current conditions. The ownership of stock,
rather than partnership units, will greatly simplify tax reporting with
respect to an investment in Corporate Systems on each holder's individual
federal tax returns for future years.
As a partnership, Corporate Systems pays no federal income tax. Rather,
each Unitholder reports a share of income on an individual or separate income
tax return. The Unitholders are unable to determine their share of taxable
income until the Partnership return is prepared and they receive the
applicable K-1 Form. This leads to delays in the preparation of the
Unitholders' returns and uncertainties about the adequacy of estimated tax
payments each year for many Unitholders. Also, since the Partnership does
business in more than one state,
12
<PAGE>
Unitholders with significant interest need to file individual state returns
to report their share of Partnership income. Additionally, income from Units
that are held by tax exempt entities (IRA's and Qualified Retirement Plans)
is treated as unrelated business income and thus requires these entities to
file income tax returns and to pay income tax on the otherwise exempt
entities' share of Partnership business earnings.
As a corporation, the Holding Company would report its income on
corporate federal and state returns and pay tax at the entity level.
Shareholders would need only to report dividends they actually receive, a
great simplification from their status as partners. Preparation of corporate
income tax returns is also much less complex than partnership returns, since
the entity need not accurately allocate its items of income and deduction
among the partners whose interests may change during the year. Additionally,
adjustments from amending returns, if any, would only affect the corporation;
whereas with a partnership, all partners are affected.
TRANSFERABILITY OF STOCK. The assignment or transfer of the Units by
Limited Partners is restricted by the terms of the Partnership Agreement.
Although a Limited Partner may assign Units in the Partnership, the assignee
may not become a substituted limited partner unless certain conditions set
forth in the Partnership Agreement are fulfilled, including the consent of
the General Partner. In addition, because the General Partner has elected to
be treated as an S corporation for federal income tax purposes, the
transferability of the CSC Shares is restricted under current federal tax
laws. In contrast, the Holding Company's Common Stock will be freely
transferable by the Shareholders, and the liquidity of a holder's investment
in Corporate Systems will be increased.
ENHANCED VOTING RIGHTS. Under Nevada law, shareholders of the Holding
Company will be entitled to elect a board of directors at each annual
meeting. In contrast, under the Partnership Agreement, Limited Partners do
not elect a General Partner on an annual basis, but can only remove the
General Partner upon an affirmative vote of the Partners holding a majority
of the outstanding Units, which under the terms of the Partnership Agreement
would result in the dissolution of the Partnership.
TERMS OF REORGANIZATION.
Under the Plan prepared by the General Partner, the Partnership will be
reorganized to a two-tiered organization comprised of the Holding Company and
the Operating Company, both organized as corporations in Nevada. The
Reorganization will be implemented through the Exchange Offer and a merger of
the General Partner with the Operating Company. The Reorganization of
Corporate Systems will not materially affect any Limited Partner's or CSC
Shareholder's voting rights,
13
<PAGE>
percentage of ownership, or limited liability. The Reorganization is planned
as follows:
STEP ONE - THE EXCHANGE OFFER
- - The CSC Shareholders who accept the Exchange Offer exchange their CSC
Shares for shares of common stock of the Holding Company.
- - The Limited Partners who accept the Exchange Offer exchange their Units
for shares of common stock of the Holding Company.
STEP TWO - TRANSFER OF UNITS TO GENERAL PARTNER
- - The Holding Company transfers all the Units it holds in the Partnership
to the General Partner.
STEP THREE - THE MERGER
- - The General Partner merges with the Operating Company pursuant to the
Nevada Merger Statutes.
STEP FOUR - DISSOLUTION OF PARTNERSHIP
- - At the discretion of the Operating Company, then serving as the general
partner of the Partnership, the Partnership will be dissolved pursuant
to the Partnership Agreement, as amended, and applicable Texas law; and
the assets and liabilities of the Partnership will be distributed to the
Operating Company and any Limited Partners that did not transfer their
Units to the Holding Company pursuant to the Exchange Offer.
After the Registration Statement becomes effective, the Holding Company
will deliver to each Unitholder of record a copy of this Prospectus and a
subscription agreement (the "Subscription Agreement") pursuant to which a
Limited Partner or CSC Shareholder may accept the Exchange Offer. The
subscription agreement will require that a Limited Partner or CSC Shareholder
who accepts the Exchange Offer must tender all his or her Units or CSC
Shares. The Holding Company will not accept subscription agreements for the
tender of only a portion of a Limited Partner's Units or CSC Shareholder's
CSC Shares.
The Plan results in a two-tiered structure. If the Partnership is
dissolved at the discretion of the Operating Company, the Operating Company
will continue the business of Corporate Systems and assume and be responsible
for all liabilities of the Partnership. If the Partnership is not dissolved
at the discretion of the Operating Company, the Operating Company will
continue the Partnership and act as its General Partner. The Holding Company
will own 100 percent of the Operating Company. The former CSC Shareholders
and the former Limited Partners will own 100 percent of the outstanding
capital stock of the Holding Company in the same percentages in which they
owned (either directly through Units or indirectly through CSC Shares) the
Partnership.
The reorganization of Corporate Systems from a limited partnership to a
corporate structure will not adversely affect any Unitholder's voting rights,
percentage of ownership, or limited liability. The Units and CSC Shares will
be treated equally in the allocation of Holding Company Common Stock. Each
Limited Partner who accepts the Holding Company's Exchange Offer will receive
one share of Holding Company Common Stock for each Unit held, and each CSC
Shareholder who accepts the Holding Company's Exchange Offer will receive one
share of Holding Company Common Stock for each CSC Share held.
ALLOCATION OF COMMON STOCK.
Under the Reorganization, the Limited Partners and the CSC Shareholders
will be treated identically. The Limited Partners will receive one share of
Common Stock for each Unit owned, and the CSC Shareholders will receive one
share of Common Stock for each CSC Share owned. The General Partner
determined this allocation based on the relative rights of the Limited
Partners and the CSC
14
<PAGE>
Shareholders. The Limited Partners and the General Partner have identical
rights as Unitholders of the Partnership. A Unit, whether held by a Limited
Partner or the General Partner, entitles its holder to share in the profits,
losses, and distributions of the Partnership. Historically, a holder of CSC
Shares has been deemed to be the beneficial owner of a number of Units equal
to the number of CSC Shares actually owned. Because the General Partner has
elected to be taxed under Subchapter S of the Internal Revenue Code, its
profits and losses are passed through directly to the CSC Shareholders so
that they are subject to substantially the same tax consequences as they
would be if they held Units rather than CSC Shares. As can be seen from the
following example, if the Partnership makes a distribution to its
Unitholders, the amount distributed per Unit will be the same as the amount
distributed per CSC Share.
EXAMPLE - FOR ILLUSTRATION ONLY
Assume that the Partnership distributes $2,961,407 to its Unitholders.
The number of outstanding Units is 5,992,814; Limited Partners hold
3,256,142 of the outstanding Units, and the General Partner holds
2,666,672 Units. The Limited Partners as a group would receive
$1,628,071 ($2,961,407 x (3,256,142 DIVIDED BY 5,922,814), which is 50
cents per Unit ($1,628,071 DIVIDED BY 3,256,142). The General Partner
would receive $1,333,336 ($2,961,407 x (2,666,672 DIVIDED BY 5,922,814)
which it would pass directly through to its shareholders who would
receive 50 cents per share ($1,333,336 DIVIDED BY 2,666,672).
In determining the allocation of Common Stock between the Limited Partners
and the CSC Shareholders, the book value of the Units was not considered.
There is a small difference between the book value of the Units held by the
Limited Partners and the book value of the Units held by the General Partner.
The difference arose over a period of years and was solely caused by
differing sales prices of Units, which affected the book value of the Units.
The book value of the Units in no way affects the relative rights of the
Unitholders. The Unitholders, whether Limited Partners or the General
Partner, are treated identically under the Partnership Agreement regardless
of the book value of the Units held.
RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS.
Limited Partners and CSC Shareholders should carefully examine the entire
Prospectus and should give particular attention to the following risk factors
and other special considerations.
TAX CONSIDERATIONS. The Partnership is generally not subject to federal
or state income tax or state franchise taxes. Instead, Limited Partners and
CSC Shareholders through the General Partner, which is an S corporation,
report their allocable share of the income and, subject to certain
limitations, the losses of the Partnership in their respective tax returns.
As a corporation, the Holding Company will be taxed as a separate entity and
will be subject to corporate, federal, and state income taxes. Shareholders
of the Holding Company will also be subject to income tax on receipt of
dividends.
Except for the tax effects to any Limited Partners that fail to transfer
their Units to the Holding Company, neither Limited Partners nor CSC
Shareholders will recognize any taxable gain or loss in connection with the
Exchange Offer, subject to the assumptions and exceptions described under
"Certain Federal Income Tax Consequences."
If the Partnership is dissolved in the discretion of the Operating
Company, the winding up and liquidation of the Partnership will result in
taxable gain or loss to any remaining Limited Partners. See "Certain Federal
Income Tax Consequences - Effect on Remaining Limited Partners."
Prior to the Reorganization, Partnership taxable income allocable to CSC
Shareholders and Limited Partners that do not materially participate in the
conduct of the business of the Partnership constitutes income from a passive
activity. Such passive income realized by a CSC Shareholder or Limited
Partner could be offset by deductions generated by other passive activities
of such CSC
15
<PAGE>
Shareholder or Limited Partner. After the Reorganization, former
CSC Shareholders and Limited Partners that hold shares of Holding Company
Common Stock will realize taxable income from such investment to the extent
the Holding Company pays dividends to its shareholders. Such dividends will
constitute portfolio income for tax purposes and will no longer qualify as
income from a passive activity. As a general rule, dividends paid by the
Holding Company cannot be offset or reduced by passive losses arising from
investments in passive activities that are held by the shareholders of the
Holding Company.
Limited Partners and CSC Shareholders should carefully review the
information contained in "Certain Federal Income Tax Consequences."
CONFLICTS OF INTEREST. The General Partner believes there are no
conflicts of interest between the General Partner and the Limited Partners or
CSC Shareholders in connection with the Reorganization. The General Partner
and CSC Shareholders will receive the same benefits and accept the same risks
from the Reorganization as do the Limited Partners. In addition, Management
will not gain in special benefits from the Reorganization. After the
Reorganization, Management will continue to receive the same compensation
from the Operating Company as it did from the Partnership. Members of
Management who own Units have no liability under the Texas Revised Limited
Partnership Act because of their control of the affairs of the Partnership,
and will continue to have no liability after the Reorganization due to their
ownership of Common Stock. In addition, the Reorganization will not affect
Limited Partners' or CSC Shareholders percentage ownership in Corporate
Systems. The CSC Shareholders will own the same percentage in the Holding
Company as they beneficially owned in the Partnership through the ownership
of CSC Shares.
UNCERTAINTY REGARDING MARKET PRICE AND COMMON STOCK. The Common Stock
will be a new security, reflecting the Reorganization of Corporate Systems to
corporate form and the replacement of existing Units and CSC Shares. Because
the Common Stock will not be publicly traded, there will be no established
resale market for the Common Stock. However, there is no reason for
Management to believe that the Common Stock will sell at prices substantially
below the prices at which the Units have changed hands in the past.
EFFECT ON NON-TRANSFERRING LIMITED PARTNERS. If a few Limited Partners
fail to transfer his or her Units to the Holding Company, he or she will
remain as Limited Partners in the Partnership. Under the Plan, the
Partnership will be dissolved at the discretion of the Operating Company.
Under the Partnership Agreement, as amended (see "Conditions to the
Reorganization," below), the General Partner may distribute either cash or
assets in kind to the Partners in liquidation of the Partnership. If the
Operating Company in its discretion continues the Partnership, the Limited
Partners who fail to transfer his or her Units to the Holding Company will
continue to be Limited Partners in the Partnership.
DISADVANTAGES OF REORGANIZING TO CORPORATE FORM. The General Partner
believes the only disadvantages of reorganizing to corporate form are tax
related. The principal tax disadvantage is the double taxation of
corporate income (i.e., first on the corporation's earnings and then on the
profits distributed to shareholders as dividends) versus the pass-through
taxation of a partnership. A corporation pays taxes on its net income, and
its shareholders generally pay taxes on any dividends from the corporation;
whereas a partnership generally pays no tax, and its partners pay taxes on
their share of partnership net income. This distinction is not expected to
have any significant immediate or near term economic effect on the
Shareholders of the Holding Company but could have adverse economic effect on
shareholders in the future, depending upon the growth of the Holding Company's
business, the level of future dividend payments, and other factors.
Also, the Operating Company will be subject to state franchise taxes in
excess of the taxes now being paid on behalf of the General Partner.
However, the General Partner
- -------------------
(1) Under Section 3.03(a), a limited partner is not liable for the
obligations of a limited partnership unless the limited partner participates
in the control of the business. Under Section 3.03(b), a limited partner does
not participate in the control of the business by acting as an employee,
officer, director, or stockholder of a corporate general partner.
16
<PAGE>
believes the cost of preparing federal income tax reports as a corporation
will be less than as a partnership. The state franchise taxes to which the
Operating Company will be subject is estimated to be approximately $100,000
more than that paid by the Partnership based on 1995 earnings. The cost
savings associated with tax reporting as a corporation rather than a
partnership is estimated to be approximately $15,000. This does not take
into account any reduction in costs of tax return preparation for the
Unitholders.
Prior to the Reorganization, Partnership taxable income allocable to CSC
Shareholders and Limited Partners that do not materially participate in the
conduct of the business of the Partnership constitutes income from a passive
activity. Such passive income realized by a CSC Shareholder or Limited
Partner could be offset by deductions generated by other passive activities
of such CSC Shareholder or Limited Partner. After the Reorganization, former
CSC Shareholders and Limited Partners that hold shares of Holding Company
Common Stock will realize taxable income from such investment to the extent
the Holding Company pays dividends to its shareholders. Such dividends will
constitute portfolio income for tax purposes and will no longer qualify as
income from a passive activity. As a general rule, dividends paid by the
Holding Company cannot be offset or reduced by passive losses arising from
investments in passive activities that are held by the shareholders of the
Holding Company.
RECOMMENDATION OF THE GENERAL PARTNER.
The General Partner believes the Reorganization is fair and is in the
best interests of the Partnership, the CSC Shareholders, and the Limited
Partners. The General Partner recommends that the Limited Partners and the
CSC Shareholders accept the Exchange Offer of the Holding Company and vote
for the amendment of the Partnership Agreement.
The General Partner's recommendation that Corporation Systems reorganize
into corporate form is based on its belief that such reorganization will
result in the benefits to the Unitholders, to the CSC Shareholders, and to
Corporate Systems described above under "Reasons for the Reorganization." On
the other hand, the General Partner also considered the potential tax
disadvantages discussed above under "Disadvantages of Reorganizing to
Corporate Form." The General Partner recommends the Reorganization because
it believes the advantages outweigh the disadvantages.
In reaching its recommendation and determining the fairness to Limited
Partners and CSC Shareholders, the General Partner also considered (a) the
affect of the Reorganization on the Limited Partners' and CSC Shareholders'
ownership interest, (b) the allocation of Common Stock between Limited
Partners and CSC Shareholders, (c) any conflicts of interest between the
General Partner and the Limited Partners, (d) a comparison of rights between
Units and Common Stock and CSC Shares and Common Stock, and (e) whether there
are any advantages gained by the General Partner and Management from the
Reorganization. All of these factors are discussed in this Prospectus.
The Reorganization will not affect or dilute any Limited Partner's
ownership interest in Corporate Systems. Before the Reorganization, the
Limited Partners as a group hold 54.98 percent of the outstanding Units and
the General Partner holds 45.02 percent. After the Reorganization, the
shareholders of the Holding Company who were formerly Limited Partners will
hold 54.98 percent of the outstanding shares of Common Stock, and the
Shareholders of the Holding Company who were formerly CSC Shareholders will
hold 45.02 percent. The Limited Partners' and the CSC Shareholders'
percentage of ownership of Corporate Systems will not change because the
General Partner has allocated the Holding Company shares of Common Stock
based on the relative rights of the Unitholders.
All Limited Partners and the CSC Shareholders will be treated the same in
the Reorganization. Each Limited Partner will receive one share of Holding
Company Common Stock for each Unit owned, and each CSC Shareholder will
receive one share of Holding Company Common Stock for each CSC Share owned.
The General Partner determined the allocation of Holding Company Common Stock
based on the relative rights of the Limited Partner and the CSC Shareholders.
Historically, a CSC Shareholder has been deemed to be the beneficial owner
of the same number
17
<PAGE>
of Units as CSC Shares held by the shareholder. The Partnership has treated
the CSC Shareholders as beneficial owners of Units because the CSC
Shareholders receive the same profits and losses of the Partnership and would
receive the same distribution of assets upon the Partnership's liquidation as
they would if they owned Units rather than CSC Shares. The General Partner
has issued the same number of shares of its common stock as the number of
Units it holds in the Partnership. The Units the General Partner holds are
treated identically to Units the Limited Partners hold. Because the General
Partner has elected to be taxed under Subchapter S of the Code, its profits
and losses (which are derived solely from the Units it holds) are passed
through directly to its shareholders. Therefore, the CSC Shareholders are
subject to substantially the same tax consequences as they would be if they
owned Units rather than CSC Shares. The General Partner did not use the
book value of the Units as a factor in determining the allocation of Holding
Company Common Stock. The book value of the Units does not affect any rights
received by the Unitholders, either Limited Partners or the General Partner.
The book value is merely a reflection of varying purchase prices of Units over
a period of time. Because the CSC Shareholders have always been treated as the
beneficial owners of Units, the General Partner believes the allocation of
Holding Company Common Stock is fair to the Limited Partners as well as to
the CSC Shareholders. See "Allocation of Common Stock."
The General Partner does not believe that the Reorganization creates any
conflicts between it and the Limited Partners. The General Partner will not
gain any benefits that are not also gained by the Limited Partners. Any
risks assumed by the Limited Partners will also be assumed by the General
Partner. See "Risk Factors and Other Special Considerations - Conflicts of
Interest."
The rights of the shareholders of the Holding Company will be
substantially the same as the rights of the Limited Partners and the CSC
Shareholders. The Reorganization WILL NOT adversely change any of the
following rights of the Limited Partners or CSC Shareholders:
- Voting Rights
- Right to Call Special Meetings
- Rights upon Dissolution
- Derivative Action Rights
- Right to Inspect Books and Records
- Preemptive Rights
- Limited Liability
See "Summary Comparison of Units and Common Stock and CSC Shares and Common
Stock."
Neither the General Partner nor Management will gain any special
advantage or disadvantage from the Reorganization. The Reorganization WILL
NOT materially change any of the following items relating to the General
Partner or Management:
- Management Compensation
- Limited Liability of Management
The Reorganization will not affect the business or investment plan of
Corporate Systems. Corporate Systems will continue as an ongoing, reinvesting
business that provides services to the property and casualty insurance
industry.
In addition to the factors considered for a determination of the
substantive fairness of the Reorganization, the General Partner also
considered
- --------------------
(1) However, under the Holding Company, approval of the following
transactions take a majority vote: the merger of the Holding Company, the
sale of substantially all the assets of the Holding Company, and the
amendment of the Holding Company's Articles of Incorporation. In contrast,
under the General Partner, the approval of the following transactions takes
a two-thirds vote of all outstanding CSC Shares: the merger of the General
Partner, the sale of substantially all the assets of the General Partner, and
the Amendment of the General Partner's Articles of Incorporation.
18
<PAGE>
the procedural fairness of the Reorganization to Limited Partners
and to the CSC Shareholders. Under the Plan, each Limited Partner and CSC
Shareholder is offered shares of the Holding Company. Each Limited Partner
and CSC Shareholder may accept or reject the Exchange Offer. Management
anticipates that all Limited Partners and CSC Shareholders will accept the
Exchange Offer. However, even if some Limited Partners and CSC Shareholders
reject the Exchange Offer, the Plan may be completed at the discretion of the
General Partner. Members of Management plan to exchange each of his or her
Units or CSC Shares for Holding Company Common Stock. Many of the Limited
Partners have conveyed to Management their desire for an increase in the
liquidity of their investment in Corporate Systems. Therefore, because it is
anticipated that the Reorganization will allow Corporate Systems to complete
the formation of an ESOP and ESOT that would increase the liquidity of an
owner's investment, it is Management's belief that all or at least a
substantial majority of the Limited Partners will favor the Reorganization
because of their desire for an increase in liquidity.
In reaching the recommendations and conclusions described above, the
General Partner also considered (i) the General Partner's fiduciary duties,
as described under "Fiduciary Duties" below; (ii) the tax consequences
described under "Certain Federal Income Tax Consequences"; and (iii) other
information about the Reorganization and Corporate Systems included in this
Prospectus. Because the General Partner does not believe there are any
conflicts of interest and because it believes the Reorganization is fair to
the Limited Partners and CSC Shareholders, Management and General Partner
gain no advantage or benefit from the Reorganization that is not also
received by the Limited Partners and CSC Shareholders, and the Reorganization
is in the best interests of Corporate Systems, the General Partner did not
retain an unaffiliated representative to act on behalf of the Limited
Partners or CSC Shareholders for the purposes of negotiating the terms of the
Reorganization.
All of the factors listed above were considered by the General Partner as
a whole in reaching its decision with respect to the overall fairness of the
Reorganization. Management believes it is impractical to assign relative
weights to the factors considered.
EFFECTIVE TIME.
Provided that all the conditions for the Reorganization are fulfilled and
provided that the General Partner has not terminated and abandoned the Plan
for any reason, the Reorganization will become effective no later than
December 31, 1996 (the "EFFECTIVE DATE"). The specific date will be
determined by the General Partner.
ISSUANCE OF CERTIFICATES.
The Holding Company will mail to each Limited Partner and each CSC
Shareholder of record a subscription agreement pursuant to which the Limited
Partner or CSC Shareholder may accept the Exchange Offer. The subscribing
Limited Partners and CSC Shareholders will receive certificates representing
the number of shares of Holding Company Common Stock to which they are
entitled pursuant to the Plan.
CONDITIONS TO THE REORGANIZATION.
The Reorganization is conditioned upon the following events:
(1) the Limited Partners approve an amendment of the Partnership
Agreement that will allow the General Partner, in its discretion, to
distribute either cash or assets in kind to the Limited Partners upon
dissolution of the Partnership.
(2) each CSC Shareholder and all or substantially all the Limited
Partners accept the Exchange Offer within the Acceptance Period.
Although the General Partner believes that all the CSC Shareholders and
substantially all the Limited Partners will accept the Exchange Offer, as a
practical matter a few Limited Partners may fail to exchange their Units for
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<PAGE>
Holding Company Common Stock. The Plan retains to the General Partner the
final approval of the Reorganization. If the General Partner determines in
its sole discretion that the Reorganization is not feasible because one or
more Limited Partners have not accepted the Exchange Offer, the General
Partner may terminate and abandon the Plan. Consummation of the
Reorganization is also subject to the Registration Statement's being declared
effective and all SEC and state approvals relating to the issuance of the
Holding Company Shares have been issued.
TERMINATION; AMENDMENT.
The General Partner may terminate and abandon the Reorganization at any
time before the Effective Date. Any provision of the Plan may be waived at
any time by the party that is entitled to the benefits thereof, and the Plan
may be amended at any time before or after the Exchange Offer. After the
Exchange, however, no amendment or waiver may be made that decreases the
amount or changes the type of consideration to the Limited Partners or the
CSC Shareholders or that otherwise in any way materially and adversely
affects the rights of the Limited Partners or the CSC Shareholders without
the prior approval of the Limited Partners and the CSC Shareholders.
NO APPRAISAL RIGHTS FOR LIMITED PARTNERS WHO DO NOT ACCEPT EXCHANGE OFFER.
Under Texas law and the terms of the Partnership Agreement, if a Limited
Partner does not accept the Exchange Offer, the Limited Partner will have no
appraisal, dissenters', or similar rights (i.e., the right, instead of
receiving Common Stock, to seek a judicial determination of the "fair value"
of the Units and to compel Corporate Systems to purchase their Units for cash
in that amount), nor will such rights be voluntarily accorded to Limited
Partners by Corporate Systems. Upon completion of the Reorganization, the
Partnership will be dissolved at the discretion of the Operating Company.
Upon dissolution, the Limited Partners who did not accept the Exchange Offer
will receive, at the sole discretion of the General Partner, either cash or
assets in kind.
CONSEQUENCES IF REORGANIZATION IS TERMINATED.
It is expected that if the Reorganization is terminated and abandoned for
any reason, the Partnership will continue to operate as an ongoing business.
No other transaction is currently being considered by the Partnership as an
alternative to the Reorganization.
FIDUCIARY DUTIES.
As a general partner of a limited partnership, the General Partner owes
the Unitholders, under Texas law, the fiduciary duties of good faith,
fairness and loyalty in handling the affairs of the Partnership. This
fiduciary duty, to the extent not modified by the Partnership Agreement, may
include a duty to refrain from self-dealing to the advantage of the General
Partner at the expense of the Partnership. The fiduciary duty of the General
Partner may also include a duty to disclose to the Unitholders all material
information concerning the Partnership's affairs.
The Board of Directors of the General Partner believes that the General
Partner has satisfied its fiduciary duties in connection with the
Reorganization. Neither the General Partner nor the CSC Shareholders receive
any advantage from the Reorganization that is not also received by the
Limited Partners. See "Allocation of Common Stock."
ACCOUNTING TREATMENT.
For financial accounting purposes, the Reorganization will be treated as
a reorganization of affiliated entities, with the assets and liabilities
recorded at their historical costs.
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<PAGE>
FEES AND EXPENSES.
The Holding Company, the General Partner, and the Partnership will each
pay its own legal and other costs and expenses incurred in connection with
the Reorganization, whether or not the Reorganization is consummated. The
following is a statement of certain estimated fees and expenses to be
incurred by Corporate Systems in connection with the Reorganization:
Securities and Exchange Commission Registration Fee $ 3,274
Legal fees and expenses 120,000
Accounting fees and expenses 85,000
Printing, engraving, and mailing expenses 5,000
Blue Sky filing fees 9,699
--------
Total $222,973
--------
--------
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
INTRODUCTION.
This section summarizes the material federal income tax consequences of
general application that should be considered by CSC Shareholders and Limited
Partners in light of the proposed exchanges that would occur pursuant to the
Exchange Offer. The transfers of Units and CSC Shares to the Holding Company
by those Limited Partners and CSC Shareholders that choose to accept the
Exchange Offer, and the issuance of Holding Company Common Stock in exchange,
are collectively referred to as the "Exchanges." This section does not,
however, comment on all tax matters that may affect the Partnership, the
General Partner, the Operating Company, the Holding Company, the CSC
Shareholders, or the Limited Partners; and it does not consider various facts
or limitations applicable to any particular CSC Shareholder or Limited
Partner that may modify or alter the results described herein. It is not
feasible to describe all of the tax consequences associated with the
Exchanges. CONSEQUENTLY, EACH CSC SHAREHOLDER AND EACH LIMITED PARTNER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO THE PARTICULAR TAX
CONSEQUENCES TO HIM OR HER OF THE EXCHANGES APPLICABLE TO HIS OR HER SPECIFIC
CIRCUMSTANCES, INCLUDING THE APPLICABILITY AND EFFECT OF FOREIGN, STATE,
LOCAL, OR OTHER TAX LAWS. No rulings have been requested from the Internal
Revenue Service, and the Internal Revenue Service may disagree with some of
the conclusions set forth below.
In particular, the following discussion does not address the potential
tax consequences applicable to CSC Shareholders or Limited Partners who are
not citizens or residents of the United States, who are dealers in
securities, CSC Shareholders who acquired their CSC Shares through stock
option or stock purchase programs or other employee plans, or CSC
Shareholders or Limited Partners who are subject to special treatment under
the Code (such as insurance companies or tax-exempt organizations), nor any
potential tax consequences applicable to the holders of stock options or
warrants applicable to CSC Shares. The following summary is based on the
Code, applicable Treasury regulations, judicial authority, and administrative
rulings and practice, all as of the date hereof. There can be no assurance
that future legislative, judicial, or administrative changes or
interpretations will not adversely affect the statements and conclusions set
forth herein. Any such changes or interpretations could be applied
retroactively and could affect the tax consequences of the Exchanges to the
CSC Shareholders, the Limited Partners, the General Partner, the Operating
Company, the Holding Company, and/or the Partnership. Furthermore, the
following discussion addresses only certain federal income tax matters and
does not consider any state, local, or foreign tax consequences of the
Exchanges or other transactions described in this Registration Statement.
TAX CONSEQUENCES OF THE EXCHANGES.
Neither the Partnership nor the General Partner has requested a ruling
from the Internal Revenue Service as to the federal income tax consequences
of the Exchanges. However, the Exchanges have been structured with the
intention that they will qualify as nontaxable exchanges under Section 351 of
the Internal Revenue Code of 1986, as amended (the "CODE"). The management
of the Partnership
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<PAGE>
and the General Partner have received an opinion of Strasburger & Price,
L.L.P. to the effect that the Exchanges will constitute tax-free exchanges
under the Code. Such opinion is subject to certain assumptions and
qualifications and is based on (i) various representations of the management
of the Partnership and the General Partner; and (ii) the assumption that the
Exchanges will be consummated as described in the Plan and this Registration
Statement. Such opinion is also based on certain representations of the CSC
Shareholders and Limited Partners that transfer their CSC Shares and Units,
respectively, to the Holding Company in exchange for Holding Company Shares
in the Exchanges, including representations by such CSC Shareholders and
Limited Partners that, except for possibly accepting a future offer from the
ESOT involving the purchase of up to ten percent of the outstanding shares of
Holding Company Common Stock, they have no present plan or intention to sell
or otherwise dispose of any shares of the Holding Company Common Stock they
receive as a result of participating in the Exchanges. Such opinion of
counsel is not binding on the Internal Revenue Service or the courts and will
not preclude either from adopting a contrary position.
SUMMARY OF TAX OPINION. The following summary of certain federal income
tax consequences of the Exchanges is based on the opinion of Strasburger &
Price, L.L.P. This summary assumes that the CSC Shareholders and the Limited
Partners hold their Shares and Units, respectively, as capital assets within
the meaning of Section 1221 of the Code.
(1) No gain or loss will be recognized by Limited Partners
transferring their Units or by CSC Shareholders transferring their CSC
Shares to the Holding Company solely in exchange for Holding Company
Common Stock.
(2) No gain or loss will be recognized to the Holding Company upon
receipt of the Units and the CSC Shares transferred to the Holding
Company in exchange for shares of Holding Company Common Stock.
(3) The basis in the hands of the Holding Company of the assets
transferred to it in exchange for shares of Holding Company Common Stock
will be the same as the adjusted basis of such assets in the hands of
the transferors immediately prior to the exchange.
(4) The holding period of the assets received by the Holding
Company in exchange for shares of Holding Company Common Stock will
include the period in which such assets were held by the transferors
immediately prior to the exchange.
(5) The basis of the shares of Holding Company Common Stock
received by each of the transferors will be the same as that
transferor's basis in the assets transferred to the Holding Company in
exchange for shares of Holding Company Common Stock.
(6) The holding period of the Holding Company Common Stock to be
received by each CSC Shareholder who transfers his or her CSC Shares to
the Holding Company in the Exchanges will include the period such CSC
Shareholder held such CSC Shares.
(7) For purposes of determining the holding period applicable to
the shares of Holding Company Common Stock to be received by a Limited
Partner in exchange for the transfer of his or her Units to the Holding
Company, each share of such Holding Company Common Stock will have a
separated holding period. Each Limited Partner will have a holding
period in such shares of Holding Company Common Stock that includes the
holding period for the Units transferred, except that, with respect to
each such share of Holding Company Common Stock, the holding period for
the portion of such share received by the Limited Partner in exchange
for his or her interest in the Ordinary Income Assets of the Partnership
will begin on the day following the date of the exchange. The Ordinary
Income Assets of the Partnership generally refers to the categories of
assets defined in Section 751 of the Code as "unrealized receivables"
and "substantially appreciated inventory." While "unrealized
receivables" classically refers
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<PAGE>
to a category of assets that is not applicable to an accrual basis
reporting entity such as the Partnership, i.e., the receivables of a
cash-basis taxpayer (generally receivables earned but not yet reported
as taxable income), "unrealized receivables" also includes, among other
things, recapture of depreciation under Section 1245 and the value of
certain long-term contracts with customers. While it is impossible to
accurately predict the dollar value of the Ordinary Income Assets that
the Partnership will have at the time of the Exchanges, the management of
the Partnership believes, based on reasonable estimates, that
approximately ______% of each share of Holding Company Common Stock
received in exchange for Units will have a holding period that begins on
the day following the day of the exchange.
OPERATIONS OF THE GENERAL PARTNER AND THE PARTNERSHIP PRIOR TO THE
EXCHANGES. Each CSC Shareholder who transfers his or her Shares to the
Holding Company in the Exchanges will be required to include in his or her
federal income tax return for the taxable year of such CSC Shareholder in
which the Exchanges are consummated the CSC Shareholder's distributive share
of income, losses, deductions, and credits of the General Partner allocable
to such Shares for that portion of the General Partner's taxable year
preceding the consummation of the Exchanges, whether or not the CSC
Shareholder receives any cash distributions with respect to such amounts.
Each CSC Shareholder will receive a Schedule K-1 from the General Partner for
1996 reflecting the income and deductions allocated to him or her for the
period in 1996 such CSC Shareholder owned CSC Shares.
Similarly, each Limited Partner who transfers his or her Units to the
Holding Company in the Exchanges will be required to include in his or her
federal income tax return for the taxable year of such Limited Partner in
which the Exchanges are consummated the Limited Partner's distributive share
of income, losses, deductions, and credits of the Partnership allocable to
such Units for that portion of the Partnership's taxable year preceding the
consummation of the Exchanges, whether or not the Limited Partner receives
any cash distributions with respect to such amounts. Each Limited Partner
will receive a Schedule K-1 from the Partnership for 1996 reflecting the
income and deductions allocated to him or her for the period in 1996 such
Limited Partner owned Units in the Partnership.
REPORTING REQUIREMENTS. Each CSC Shareholder and Limited Partner that
receives shares of Holding Company Common Stock in the Exchanges will be
required to file with his or her federal income tax return a statement that
provides details relating to the property transferred to the Holding Company
and the shares of Holding Company Common Stock received. The Holding Company
will provide holders of its shares with information to assist them in
preparing such statements.
OWNERSHIP OF SHARES. After the Exchanges, the holders of shares of
Holding Company Common Stock will be taxed only on distributions received
from the Holding Company, if any. Such distributions will be taxable as
dividends to the extent of any current or accumulated earnings and profits of
the Holding Company and its subsidiary.
CHANGE IN CHARACTER OF INCOME. Prior to the Reorganization, Partnership
taxable income allocable to CSC Shareholders and Limited Partners that do not
materially participate in the conduct of the business of the Partnership
constitutes income from a passive activity. Such passive income realized by
a CSC Shareholder or Limited Partner could be offset by deductions generated
by other passive activities of such CSC Shareholder or Limited Partner.
After the Reorganization, former CSC Shareholders and Limited Partners that
hold shares of Holding Company Common Stock will realize taxable income from
such investment to the extent the Holding Company pays dividends to its
shareholders. Such dividends will constitute portfolio income for tax
purposes and will no longer qualify as income from a passive activity. As a
general rule, dividends paid by the Holding Company cannot be offset or
reduced by passive losses arising from investments in passive activities that
are held by the shareholders of the Holding Company.
TAX CONSEQUENCES OF STOCK SALE TO ESOT.
It is proposed that, upon completion of the Exchanges and the other
transactions involved in the Reorganization, the Holding Company will
establish an ESOP for the benefit of its employees and the employees of the
Operating Company. It is further proposed that, once the ESOP is in place,
the ESOT (i.e., the trust established to hold and administer the assets of
the ESOP) will make
23
<PAGE>
an offer to each shareholder of the Holding Company to purchase up to ten
percent of his or her shares of Holding Company Common Stock.
In the event a shareholder of the Holding Company chooses to accept such
offer and sell up to ten percent of his or her shares to the ESOT, the
shareholder will recognize capital gain or loss on the transaction, assuming
such shares of Holding Company Common Stock constitute a capital asset in the
shareholder's hands at the time of the sale, equal to the difference between
the amount of the sales proceeds received by the shareholder and the
shareholder's tax basis for the shares of Holding Company Common Stock sold
to the ESOT. The gain or loss will be long-term if the shareholder has a
holding period for his or her shares of Holding Company Common Stock of more
than one year and will be short-term if the shareholder's holding period is
of shorter duration. See "Certain Federal Income Tax Consequences - Tax
Consequences of the Exchanges - Summary of Tax Opinion," Item (6), regarding
the holding period of shares of Holding Company Common Stock received in
exchange for CSC Shares, and "Certain Federal Income Tax Consequences - Tax
Consequences of the Exchanges - Summary of Tax Opinion," Item (7), regarding
the holding period of shares of Holding Company Common Stock received in
exchange for Units.
EFFECT ON REMAINING LIMITED PARTNERS.
TERMINATION OF PARTNERSHIP. If 50 percent or more of the interests in
profits and capital in any given partnership are sold or exchanged within 12
months, such partnership will be considered terminated pursuant to Section
708(b)(1)(B) of the Code. It should be anticipated that the consummation of
the Exchanges will cause such a termination of the Partnership. The
termination will be treated as a constructive distribution of all the assets
of the Partnership to the new partners (the nonexchanging Limited Partners
and either the General Partner or its successor, the Operating Company)
followed by a constructive contribution of the assets to a new partnership.
As a result of the termination, the nonexchanging Limited Partners (the
"REMAINING LIMITED PARTNERS") might suffer adverse tax consequences,
including the following:
(1) If, as of the date of termination, the allocable portion of the
Cash Assets of the Partnership constructively distributed to a Remaining
Limited Partner exceeded his or her adjusted basis in such Limited
Partner's Units, such Limited Partner would recognize gain to the extent
of such excess. The Cash Assets of the Partnership generally refers to
the cash of the Partnership but also includes the fair market value of
certain marketable securities. While it is impossible to accurately
predict the amount of Cash Assets that the Partnership will have at the
time of the Exchanges, the management of the Partnership believes, based
on reasonable estimates, that the Partnership will have Cash Assets of
$________ per Unit at the time of the Exchanges, which would mean that
each Remaining Limited Partner would be treated as receiving a
constructive distribution from the Partnership equal to $________ per
Unit as of the date of termination. In the event a Remaining Limited
Partner recognizes a gain by reason of such constructive distribution,
the gain would be treated as gain from the sale or exchange of the Units
and would constitute capital gain except to the extent of the Remaining
Limited Partner's interest in the Ordinary Income Assets of the
Partnership. Such gain would be taxed as ordinary income to the extent
of the Remaining Limited Partner's interest in the Ordinary Income
Assets of the Partnership.
(2) The Partnership's taxable year would terminate upon the
constructive termination of the Partnership, and, if a Remaining Limited
Partner's taxable year were to differ from the Partnership's calendar
taxable year, the termination could result in the "bunching" of more
than one year of Partnership income or loss in the Remaining Limited
Partner's income tax return for the taxable year in which the
Partnership terminates.
(3) As a result of the termination, the Partnership (and later the
Operating Company, in the event the Partnership is liquidated and
dissolved) may be required to compute depreciation for tax purposes
under less favorable methods than the Partnership presently uses. The
General Partner does not believe the use of less favorable depreciation
methods will significantly increase the tax costs of the Partnership or
the Operating Company.
In the opinion of the General Partner, none of these potential adverse
consequences is likely to have a material tax consequence on Remaining
Limited Partners.
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<PAGE>
DISSOLUTION AND LIQUIDATION OF PARTNERSHIP. If, in the discretion of the
General Partner, the Partnership is dissolved and liquidated after
consummation of the Exchanges, the federal income tax consequences to any
Remaining Limited Partners would be as follows:
(1) TAXATION OF INCOME OR LOSS OF PARTNERSHIP. As a partnership,
the Partnership is not subject to federal income tax at the partnership
level. Each item of income, gain, loss, deduction, and credit flows
through to Limited Partners and is reported by them on their individual
returns. Because of these flowthroughs, Limited Partners claim
partnership losses and credits on their tax returns, to the extent
allowable, and are taxed on their allocable share of partnership income,
even though they may not receive equivalent amounts of cash
distributions from the Partnership. Until the Partnership is completely
liquidated, each Remaining Limited Partner will be required to continue
to include in his or her federal income tax return such Limited
Partner's distributive share of income, losses, deductions, and credits
of the Partnership allocable to such Limited Partner's Units, whether or
not the Limited Partner receives any cash distributions with respect to
such amounts.
(2) TAX CONSEQUENCES OF LIQUIDATION OF PARTNERSHIP. In the event
the Partnership is dissolved and liquidated, each Remaining Limited
Partner will receive a distribution or distributions of cash or other
property in liquidation of such Limited Partner's interest in the net
assets of the Partnership.
Limited Partners are taxed on income when it is received or
realized by the Partnership under its method of accounting for tax
purposes. They are not taxed on distributions of cash from the
Partnership except to the extent such distributions exceed the adjusted
tax basis in their Units.
In general, any gain or loss recognized by a Remaining Limited
Partner by reason of a distribution from the Partnership to such Limited
Partner in connection with the dissolution and liquidation of the
Partnership would be considered as gain or loss from the sale or
exchange of an interest in the Partnership.
Taxable gain will be recognized by a Remaining Limited Partner to
the extent that distributions of money (which for this purpose includes
the fair market value of certain marketable securities) exceeds such
Limited Partner's adjusted tax basis for his or her Units. The gain
will be treated as gain from the sale or exchange of the Units and
will constitute capital gain except to the extent of the Remaining Limited
Partner's interest in the unrealized receivables (including depreciation
recapture) and substantially appreciated inventory, if any, of the
Partnership that are not distributed in kind to such Limited Partner.
Such gain will be taxed as ordinary income to the extent of the
Remaining Limited Partner's interest in the unrealized receivables
(including depreciation recapture) and substantially appreciated
inventory of the Partnership that are not distributed in kind to such
Limited Partner.
Loss would not be recognized by a Remaining Limited Partner as a
result of receiving a liquidating distribution from the Partnership
unless such Limited Partner receives no other property in the
distribution other than money (which for this purpose includes the fair
market value of certain marketable securities), unrealized receivables,
or inventory. In that event, loss would be recognized only to the
extent that the money and the basis to the Remaining Limited Partner of
unrealized receivables and inventory received by him or her are less
than such Limited Partner's adjusted tax basis for his or her Units.
The loss would be treated as a loss from the sale or exchange of the
Units; and if such Units constitute capital assets in the hands of the
Remaining Limited Partner, the loss would constitute a capital loss.
Generally, the tax basis to a Remaining Limited Partner of any
property (other than money) distributed in kind would be equal to such
Limited Partner's adjusted tax basis for his or her Units.
25
<PAGE>
STATE, LOCAL, AND OTHER TAXATION.
Neither the Partnership, the General Partner, the Operating Company, nor
the Holding Company is expected to incur any significant state or local tax
incident to the Exchanges. After the Exchanges, however, the Operating
Company and the Holding Company will be subject to state franchise taxes and
perhaps other state and local taxes to which the Partnership had not been
subject. Apart from federal income taxes, no attempt has been made to
determine any tax that may be imposed on a CSC Shareholder or Limited Partner
by the country, state, or other jurisdiction in which he or she resides or is
a citizen.
THE FOREGOING DISCUSSION IS INTENDED ONLY TO BE A SUMMARY OF THE
PRINCIPAL FEDERAL INCOME TAX CONSIDERATIONS OF THE PROPOSED EXCHANGES AND
POSSIBLE SUBSEQUENT DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP.
MANAGEMENT HAS OBTAINED A TAX OPINION REGARDING THE ANTICIPATED FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE. HOWEVER, THE OPINION DOES NOT AND
CANNOT COVER THE SPECIFIC TAX EFFECTS OF THE PROPOSED TRANSACTIONS TO EACH
CSC SHAREHOLDER AND LIMITED PARTNER. EACH CSC SHAREHOLDER AND LIMITED PARTNER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR CONCERNING THE FEDERAL, STATE,
LOCAL, AND OTHER TAX CONSEQUENCES TO HIM OR HER OF THE PROPOSED TRANSACTIONS.
MARKET PRICES AND DISTRIBUTIONS
MARKET INFORMATION.
There is not an established public trading market for the Units nor will
there be for the shares of Common Stock of the Holding Company. The high and
low sales price of Units traded recently are as follows:
QUARTER ENDED HIGH LOW
------------- ---- ---
3-31-93 $5.00 $5.00
6-30-93 5.00 5.00
9-30-93 5.00 5.00
12-31-93 5.00 5.00
3-31-94 5.00 4.30
6-30-94 5.00 4.75
9-30-94 5.00 5.00
12-31-94 5.00 5.00
3-31-95 5.00 5.00
6-30-95 5.00 5.00
9-30-95 6.00 5.00
12-31-95 6.00 5.00
3-31-96 7.00 4.90
6-30-96 6.00 5.25
The price ranges listed above reflect actual trades of Units during the
periods indicated.
HOLDERS.
The number of holders of Units is 256; this number includes counting as
one the ownership of the General Partner who has 28 shareholders. There are
5,922,814 Units outstanding of which the General Partner owns 2,666,672.
After the Reorganization, there will be 277 shareholders and 5,922,814 shares
of Common Stock outstanding.
DISTRIBUTIONS.
It has been the practice of the Partnership to distribute to the Limited
Partners more cash than has been necessary for them to pay their tax
liability on the Partnership's annual earnings. During the period of 1976
through 1991, the Partnership distributed approximately 88 percent of its
earnings. If the loss year of 1992 is included in the totals for the period
1976 through 1992, the Partnership distributed over 100 percent of its
earnings. For the three complete years since 1992 when Corporate Systems
incurred a loss, the Partnership distributed approximately 15 percent of
earnings in 1993, 53 percent of earnings in 1994, and 92 percent in 1995.
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After the Reorganization, Management of the Holding Company and its Board
of Directors expect to provide the shareholders a return on their investment
through dividends or through an increase in the value of each share of common
stock, or both. As discussed in prior sections, the distributed earnings of
the Holding Company will be subject to double taxation rather than the
pass-through taxation of a partnership. Therefore, it is possible that
shareholders may realize less income.
It is impossible for Management to predict the level of distributions
that will be paid out if Corporate Systems remains in its present limited
partnership form just as it is impossible to predict the dividend payments
and future value of the Common Stock once Corporate Systems has been
converted into a corporation. In determining the amount of the dividends,
the Board of Directors will consider the Holding Company's (and its
subsidiaries) cash requirements for operations and growth, other factors
relevant to the viability of the Holding Company, and applicable laws
relating to the declaration and payment of dividends.
Recent distributions to Unitholders have been as follows:
QUARTER ENDED AMOUNT PER UNIT
------------- ---------------
3-31-93 $0.00
6-30-93 0.00
9-30-93 .14
12-31-93 .12
3-31-94 .12
6-30-94 .09
9-30-94 .16
12-31-94 .16
3-31-95 .16
6-30-95 .19
9-30-95 .16
12-31-95 .13
3-31-96 .10
6-30-96 .10
Remainder of page intentionally left blank
_____________
(1) The table reflects the distributions declared by the Partnership in
the respective quarters. Once declared, the distributions were generally paid
to Limited Partners in the following quarter.
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<PAGE>
SELECTED FINANCIAL INFORMATION OF THE PARTNERSHIP
The following table sets forth summary selected financial and operating
information of the Partnership as of the dates and for the periods indicated
(dollar amounts and number of units in thousands, except per unit data).
<TABLE>
SIX MONTHS
ENDED JUNE 30 YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------
1996 1995 1995 1994 1993 1992 1991
----------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues $21,247 $24,889 $46,095 $39,747 $31,769 $26,363 $27,283
Research and development, net 1,475 626 4,081 2,129 245 472 259
Operating income 2,411 4,366 4,648 5,120 4,852 1,389 2,758
Net earnings (loss) 2,545 3,891 4,277 5,335 5,351 (4,325) 1,800
Net earnings (loss) per:
General partner 1,155 1,787 1,953 2,453 2,460 (1,997) 859
Limited partners 1,390 2,104 2,324 2,882 2,891 (2,328) 941
Net earnings (loss) per unit:
General partner 0.43 0.67 0.73 0.92 0.92 (0.75) 0.33
Limited partners 0.43 0.67 0.73 0.92 0.92 (0.75) 0.33
Distributions per unit 0.20 0.32 0.67 0.49 0.14 0.09 0.34
BALANCE SHEET:
Working capital (deficit) $ 4,706 $ 4,407 $ 2,606 $ 2,695 $ 2,277 $(2,287) $(3,103)
Total assets 17,567 18,683 18,365 15,515 13,200 9,016 13,349
Long-term obligations,
including current maturities 44 2,479 118 1,575 3,310 5,092 7,036
Total partners' equity 9,494 9,570 7,901 7,175 4,681 142 3,053
Total number of units outstanding 5,923 5,876 5,876 5,800 5,800 5,800 5,380
Book value per unit 1.60 1.63 1.34 1.24 0.81 0.02 0.56
</TABLE>
1991 units outstanding and per unit amounts have been adjusted to reflect the
4-for-1 unit split in 1992.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
References to "fiscal" in this discussion pertain to the Partnership's
fiscal years, which begin January 1 and end December 31. References to
"Footnotes" pertain to footnotes to the Consolidated Financial Statements.
The principal business of the Partnership is to provide risk information
services for the property and casualty insurance industry. These services
consist generally of claims administration products including data
conversion, data intake, data processing, and reporting.
The Partnership's products include a claims administration system, a
workers' compensation medical bill repricing system, an incident reporting
system, data conversion services, computer outsourcing services, software
development project management services, a disability claims administration
system, and risk information reporting.
The Partnership's ability to generate operating revenues is dependent on
the volume and timing of the signing of sales contract agreements and service
deliveries during the year, which are difficult to forecast. Additionally,
certain business and credit concentrations exist that could have a
significant impact on the Partnership's operating revenues should adverse
conditions occur. The Partnership had revenues from five customers totaling
$21.6 million and four customers totaling $18.48 million during fiscal 1995
and 1994, respectively. Such revenues from significant customers represent
individually over 5 percent of total operating revenues and in the aggregate
approximately 47 percent and 46 percent of total operating revenues for 1995
and 1994, respectively. For the fiscal years ended 1995 and 1994, material
customers representing over 10 percent of total operating revenues were The
Travelers Insurance Company and ITT Hartford. At December 31, 1995 and 1994,
the Partnership also had $4.56 million and $6.91 million, respectively, of
unsecured trade accounts receivable due from customers that operate primarily
in the insurance industry.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995, COMPARED TO THE YEAR ENDED DECEMBER 31, 1994.
OPERATING REVENUES.
Operating revenues for fiscal 1995 were $46.09 million compared to fiscal
1994 operating revenues of $39.75 million, an increase of 6.35 million (16
percent).
The most significant components of the Partnership's operating revenue
growth during fiscal 1995 were increases in risk management claims
administration services of $2.19 million (9 percent) and special project fees
of $3.55 million (41 percent). Growth in these specific revenue components
were attributed to increases in the volume of risk management claims
administration services, as well as the Partnership's ability to obtain
several new significant customer contracts in both revenue components during
fiscal 1995. New customer contract revenue is also reflected in the
installations and programming revenue increase of $.56 million (31 percent).
Offsetting these increases in revenue was a decrease in computer equipment
rental of $.52 million (13 percent) due to competitive considerations and
certain contract price concessions given to customers, as well as customers
purchasing stand-alone systems and terminating existing service agreements
with the Partnership.
The Partnership expects continuing operating revenue growth across most
service lines due to new product development, increased marketing of existing
services, and upgrades of current systems technology. At December 31, 1995,
the Partnership was operating with a revenue backlog of approximately $.94
million.
OPERATING EXPENSES.
Operating Expenses increased $6.82 million (20 percent) in fiscal 1995 as
compared to fiscal 1994. As a percent of operating revenues, operating
expenses
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increased for fiscal 1995 as compared to fiscal 1994 to approximately 90
percent from 87 percent.
Additional increases in operating expenses are primarily related to new
product development, which includes research and development and product
development performed under contracts for others. When the effects of new
product development activity is removed from both years, operating income as
a percent of revenue increased to 21 percent for fiscal 1995 as compared to
19 percent for fiscal 1994.
Research and development expenditures, net of amounts reimbursed by
customers, for the year ended December 31, 1995 and 1994, were $4.08 million
and $2.13 million, respectively. The total amount of new product development
expenditures, which includes development performed under contracts for
others, research and development expenditures, and other development costs,
totaled $7.71 million and $4.18 million in fiscal 1995 and 1994,
respectively. The increase in new product development expenses is in support
of the Partnership's new and existing product development initiatives. New
product development costs are expensed as incurred and are reflected
primarily as components of cost of services in the financial statements. The
following table sets forth the amounts related to new product development
included in the financial statements under the following captions:
For Year Ended For Year Ended
December 31, 1995 December 31, 1994
----------------- -----------------
OPERATING REVENUES
Research and Development $1,500,000 $ 206,083
Product development performed
under contract for others 1,767,441 1,906,962
---------- ----------
SPECIAL PROJECT FEES 3,267,441 2,113,045
---------- ----------
OPERATING EXPENSES
Research and development 5,581,390 2,334,613
Product development performed
under contract for others 1,841,332 1,616,884
Other development costs 285,480 230,516
---------- ----------
COST OF SERVICES 7,708,202 4,182,013
---------- ----------
NET NEW PRODUCT DEVELOPMENT $4,440,761 $2,068,968
---------- ----------
---------- ----------
Excluding the increases in new product development costs, operating expenses
increased $3.29 million in 1995 over 1994. This increase is primarily due to
increases in the volume of services provided to customers. As a result of
increased service volume, the Partnership employed additional people and
entered into various new computer and equipment contracts.
NET EARNINGS.
Partnership net earnings for fiscal 1995 decreased from fiscal 1994 by
$1.06 million ($.19 per Unit). This is primarily due to planned increases in
product development, upgrades in technology tools used by employees, and
recognition of the cumulative effect of the change in accounting for
post-retirement benefits.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO THE YEAR ENDED DECEMBER 31, 1993.
OPERATING REVENUES.
Operating revenues for fiscal 1994 were $39.75 million compared to fiscal
1993 operating revenues of $31.77 million, an increase of $7.98 million (25
percent).
The most significant components of the Partnership's operating revenue
growth during fiscal 1994 were increases in risk management claims
administration services and special project fees of $4.33 million (22
percent) and $3.56 million (70 percent), respectively. Growth in these
specific revenue components was attributed to increases in the volume of risk
management claims administration
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services, as well as the Partnership's ability to obtain several new
significant customer contracts in both revenue components during fiscal 1994.
Offsetting these increases in revenue was a decrease in computer equipment
rental of $.41 million due to competitive considerations and certain contract
price concessions given to customers, as well as customers purchasing
stand-alone systems and terminating existing service agreements with the
Partnership.
The Partnership had revenues from four customers totaling $18.48 million
and three customers totaling $11.45 million during fiscal 1994 and 1993,
respectively. Such revenues from significant customers represent
individually over 5 percent of total operating revenues and in the aggregate
approximately 46 percent and 36 percent of total operating revenues for 1994
and 1993 respectively. For the fiscal year ended 1994, material customers
representing over 10 percent of total operating revenues were The Travelers
Insurance Company and ITT Hartford. For the fiscal year ended 1993, material
customers representing over 10 percent of total operating revenues were The
Travelers Insurance Company, ITT Hartford, and AEtna Casualty & Surety. At
December 31, 1994 and 1993, the Partnership also had $6.91 million and $2.48
million, respectively, of unsecured trade accounts receivable due from
customers that operate primarily in the insurance industry.
OPERATING EXPENSES.
Operating expenses increased $7.71 million (29 percent) in fiscal 1994 as
compared to fiscal 1993. However, as a percent of operating revenues,
operating expenses remained relatively consistent with only a slight increase
for fiscal 1994 as compared to fiscal 1993 at approximately 87 percent and 85
percent, respectively.
The additional increase in operating expense is related primarily to new
product development, which includes research and development and product
development performed under contracts for others. When the effects of new
product development activity is removed from both years, operating income as
a percent of revenue increased to 19 percent for fiscal 1994 as compared to
16 percent for fiscal 1993.
Research and development expenditures, net of amounts reimbursed by
customers, for the year ended December 31, 1994 and 1993, were $2.13 million
and $.25 million, respectively. The total amount of new product development
expenditures, which includes development performed under contracts for
others, research and development expenditures, and other development costs,
totaled $4.18 million and $.34 million in fiscal 1994 and 1993, respectively.
The increase in new product development expenses is in support of the
Partnership's new and existing product development initiatives. New product
development costs are expensed as incurred and are reflected as components of
cost of services in the financial statements. The following table sets forth
the amounts related to new product development included in the financial
statements under the following captions:
For Year Ended For Year Ended
December 31, 1994 December 31, 1993
----------------- -----------------
OPERATING REVENUES
Research and development $ 206,083 $ -
Product development performed under
contract for others 1,906,962 -
---------- --------
SPECIAL PROJECT FEES 2,113,045 -
---------- --------
OPERATING AND EXPENSES
Research and development 2,334,613 245,000
Product development performed under
contract for others 1,616,884 -
Other development costs 230,516 90,734
---------- --------
COST OF SERVICES 4,182,013 $335,734
---------- --------
NET NEW PRODUCT DEVELOPMENT $2,068,968 $335,734
---------- --------
---------- --------
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Excluding the increases in new product development costs, operating expenses
increased $3.86 million in 1994 over 1993. This increase is primarily due to
increases in the volume of services provided to customers, which prompted the
Partnership to employ additional people and includes the addition of
management personnel and other service related people. Additionally, as a
result of increased service volume, the Partnership entered into various new
computer and equipment contracts, which increased expense by $.69 million in
1994 over 1993.
OTHER INCOME (EXPENSE).
The decrease in other income for fiscal 1994 is primarily due to the
final dissolution of Genesys Cost Management Systems, Inc. ("GENESYS"), a
former affiliate. In 1991, the Partnership acquired 49.5 percent of the
outstanding common stock of Genesys and entered into a stockholders'
agreement with Genesys and the majority stockholder, Focus Healthcare
Management, Inc. ("FOCUS"). Prior to the acquisition of the stock of Genesys,
Corporate Systems, and Focus were unaffiliated. Prior to Genesys' final
dissolution in 1993, Genesys was able to generate cash flows and make
collections from customers in excess of that formerly estimated by the
Partnership. Also, the Partnership's actual obligations and liabilities
related to Genesys were less than originally estimated. Accordingly, during
fiscal 1993, the Partnership recognized income of $.73 million which included
collections of accounts receivable previously written off and reversals of
certain accrued liabilities. Currently, Focus is a customer of the
Partnership.
NET EARNINGS.
Partnership net earnings remained relatively flat for fiscal 1994 and
1993 at $5.33 million ($.92 per unit) and $5.35 million ($.92 per unit),
respectively. This is primarily due to planned increases in product
development, upgrades in technology tools used by employees, and additions of
staff to support the increased revenues.
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO THE SIX MONTHS ENDED JUNE 30,
1995.
OPERATING REVENUES.
Operating revenues for the six month period ended June 30, 1996,
decreased $3.64 million (15 percent) over the same period in 1995.
Risk management claims administration services decreased $3.38 million
(22 percent) from 1995 to 1996. Nineteen percent of this decrease is due to
additional revenue generated during the period in 1995 by one customer that
increased its volume of claims to catch up on its backlog. The decrease in
risk management claims administration services revenue was offset by gains in
other revenue components such as installations and programming and other
income. During the six month period ended June 30, 1996, installations and
programming revenues were up 56 percent from the same period in 1995 partly
due to new sales to the existing customer base of a new product, CS
KnowlEDGE. Programming reimbursements from new customers also increased over
1995. The special project fees decrease is mainly due to the near completion
of a one time project in 1996 of product development performed under a
contract for a customer that was in progress throughout 1995. Other income
increased $.41 million (43 percent) due to an increase in revenue from
reimbursed time and software support during the same period in 1995.
Computer equipment rental declined 16 percent due to continued competitive
considerations and certain contract price concessions given to customers, as
well as customers purchasing stand alone systems and terminating existing
service agreements with the Partnership.
The Partnership had revenues from four customers in 1996 and five
customers in 1995 totaling $9.57 million and $11.52 million during the six
month periods ended June 30, 1996 and 1995, respectively. Such revenues from
significant customers represent individually over 5 percent of total
operating revenues and in the aggregate approximately 45 percent and 46
percent of total operating revenues during the periods ended June 30, 1996
and 1995, respectively. For the six month periods ended June 30, 1996 and
1995, material customers representing over 10 percent of total operating
revenues were Travelers and ITT Hartford. At
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June 30, 1996 and 1995, the Partnership also had $2.58 million and $4.80
million, respectively, of unsecured trade accounts receivable due from
customers that operate primarily in the insurance industry.
At June 30, 1996, the Partnership was operating with a revenue backlog of
approximately $.54 million.
OPERATING EXPENSES.
Operating expenses decreased 8 percent in the six month period ended June
30, 1996, as compared to the six month period ended June 30, 1995. However,
as a percent of operating revenues, operating expenses showed an increase in
1996 compared to the same period in 1995 at approximately 89 percent and 82
percent, respectively.
Within the components of operating expenses, there was a shift of expense
from cost of services to selling, general, and administrative expense. Cost
of services as a percent of revenues remained relatively flat at 70 percent
of operating revenues.
New product development includes research and development, product
development performed under contracts for others, and other development
efforts. Research and development expenditures, net of amounts reimbursed by
customers, for the six month periods ended June 30, 1996 and 1995, were $1.48
million and $.63 million, respectively. The net new product development
expense totaled $1.70 million and $.83 million for the six month periods
ended June 30, 1996 and 1995, respectively. The increase in new product
development expenses is in support of the Partnership's new and existing
product development initiatives. New product development costs are expensed
as incurred and are reflected as components of costs of services in the
financial statements. The following table sets forth the amounts related to
new product development included in the financial statements under the
following captions:
Period Ended Period Ended
June 30, 1996 June 30, 1995
OPERATING REVENUES
Research and development $ - $1,500,000
Product development performed under
contract for others 238,000 988,562
---------- ----------
SPECIAL PROJECT FEES 238,000 2,488,562
---------- ----------
OPERATING EXPENSES
Research and development 1,475,000 2,125,798
Product development performed under
contract for others 223,244 1,071,692
Other development costs 238,942 119,444
---------- ----------
COST OF SERVICES 1,937,186 3,316,934
---------- ----------
NET NEW PRODUCT DEVELOPMENT $1,699,186 $ 828,372
---------- ----------
---------- ----------
Selling, general, and administrative expenses increased $.88 million in
the period ended June 30, 1996, over the same period in 1995. The increase
can mainly be attributed to increased costs incurred for internal
restructuring, legal and accounting costs related to the proposed changes to
the legal form of the organization, and increased depreciation for the new
building built in 1995.
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31, 1995, COMPARED TO DECEMBER 31, 1994.
Cash and cash equivalents increased from December 31, 1994, to December
31, 1995, by approximately $.99 million. The current ratio decreased from
1.34 at December 31, 1994 to 1.28 at December 31, 1995, primarily due to
increases in debt from the interim construction loan, which is reflected as a
current liability until permanent financing is obtained.
33
<PAGE>
Net cash provided by operating activities was $5.33 million for the year
ended December 31, 1995, as compared to $5.69 million for the year ended
December 31, 1994. Cash received from customers increased $10.18 million,
which was offset by an increase in cash paid to suppliers and employees of
$10.53 million.
The allowance for doubtful accounts decreased $.40 during the year ended
December 31, 1995. Such decrease was mainly attributed to the removal of a
specific reserve totaling $.37 million on an account receivable that was
fully collected subsequent to December 31, 1994.
During the year ended December 31, 1995, the Partnership expended $3.62
million for property, plant, and equipment, which were financed by an interim
construction loan. Additionally, the Partnership paid $3.00 million in
distributions to partners and made principal payments on debt and capital
lease obligations of $1.46 million, which were financed by internally
generated funds.
During November 1994, the Partnership obtained a secured $3,145,000
interim construction loan commitment from a bank to acquire, construct, and
renovate certain facilities. At December 31, 1995, $2,668,088 was advanced
under the interim construction loan. The interim construction loan requires
monthly payments of interest at the bank's prime rate or 8.5 percent at
December 31, 1995. The interim construction loan originally matured on March
31, 1996; however, it was subsequently extended until December 31, 1996.
Additionally, the Partnership is required to maintain a compensating balance
on deposit at the bank equal to 20 percent of the outstanding interim
construction loan balance.
The Partnership currently has commitments from the bank and the Amarillo
Economic Development Corporation ("AEDC") to convert the interim construction
loan into long term debt upon maturity. Such long term debt is expected to
be amortized over a ten year period at the bank's prime rate. The portion of
the debt financed by the AEDC, approximately $1,400,000 is expected to have a
provision that allows for the refunding of all or a portion of the interest
paid if the Partnership maintains certain employment levels.
At December 31, 1994, the Partnership had the ability to borrow $.5
million and $.4 million, under certain separate existing bank revolving line
of credit agreements. The Partnership had no advances on the lines of credit
at December 31, 1994 or 1993. At December 31, 1995, the lines of credit
agreements had expired. The bank has indicated its willingness to provide
the Partnership lines of credit as necessary.
The Partnership has several noncancelable operating leases primarily for
equipment and office space that expire over the next four years. The
Partnership has several operating leases for certain computer equipment that
require monthly rental payments that are charged to operations as incurred.
Future minimum lease payments at December 31, 1995, under noncancelable
operating leases for fiscal 1996, 1997, 1998 and 1999 are $3.72 million,
$2.33 million, $1.58 million, and $.04 million, respectively.
During 1995, the Partnership terminated an operating lease on certain
computer equipment prior to the expiration of such lease. The early
termination resulted in the Partnership's recognizing a loss of approximately
$670,000, which represents the Partnership's remaining obligation on the
lease at the date of termination. Additionally, the Partnership entered into
a new lease for similar computer equipment and received an incentive from the
new lessor totaling $615,000. The incentive has been reflected as a
liability in the consolidated balance sheet at December 31, 1995, and will be
amortized over the three year lease term, which begins in January 1996.
Although a loss was recognized in 1995 as a result of this transaction,
Management believes the economic benefits that will be realized in subsequent
years under the new lease due to reduced obligations will exceed the loss
realized 1995.
During 1995 and 1994, net research and development costs were
approximately $4.08 million and $2.13 million, respectively. Due to the
nature of the Partnership's business, research and development costs may
continue to increase in the foreseeable future. Research and development
costs have historically been funded from internally generated funds. In the
future, it is expected that these costs will be funded from internally
generated funds, and possibly through borrowings and/or outside capital.
DECEMBER 31, 1994 COMPARED TO DECEMBER 31, 1993.
Cash and cash equivalents decreased from $5.03 million at December 31,
1993 to $3.35 million at December 31, 1994. The decrease was primarily due
to capital
34
<PAGE>
expenditures, debt reductions and distributions to partners as discussed
below. The current ratio increased from 1.32 at December 31, 1993, to 1.34
at December 31, 1994.
During fiscal 1994, the Partnership expended $2.82 million for property,
plant, and equipment and paid $2.84 million in distributions to partners.
Additionally, the Partnership made principal payments on debt and capital
lease obligations of $1.71 million in 1994. These transactions were financed
from internally generated funds.
Net cash provided by operating activities was $5.69 million in fiscal
1994 as compared to $7.35 million in fiscal 1993. The decrease of $1.65
million in fiscal 1994 to 1993 was primarily due to an increase in trade
accounts receivable of $3.42 million partially offset by increases in certain
liability accounts. The increase in trade accounts receivable and certain
liability accounts is primarily due to the growth in revenues in fiscal 1994.
During 1994 and 1993, research and development costs were approximately
$2.13 million and $.25 million, respectively. Due to the nature of the
Partnership's business, research and development costs may continue to
increase in the foreseeable future. Research and development costs have
historically been funded from internally generated funds. In the future, it
is expected that these costs will be funded from internally generated funds,
and possibly through borrowings and/or outside capital.
JUNE 30, 1996, COMPARED TO DECEMBER 31, 1995.
Cash and cash equivalents increased from December 31, 1995, to June 30,
1996, by approximately $1.05 million. The current ratio increased from 1.28
at December 31, 1995, to 1.68 at June 30, 1996, primarily due to decreases in
current liabilities.
Net cash provided by operating activities was $2.45 million for the six
month period ended June 30, 1996. In addition to earnings, $2.27 million in
cash was provided by collections of trade accounts receivable, which was
offset by payment of $2.32 million in cash for accounts payable and accrued
expenses.
During the six month period ended June 30, 1996, the Partnership expended
$.37 million for property, plant, and equipment. Additionally, the
Partnership paid $1.18 million in distributions to Partners and made
principal payments on capital lease obligations of $.07 million. These
transactions were financed with internally generated funds.
The Partnership has several noncancellable operating leases primarily for
equipment and office space that expire over the next four years. The
Partnership has several operating leases for certain computer equipment that
require monthly rental payments that are charged to operations as incurred.
During the six month periods ended June 30, 1996 and 1995, research and
development costs were approximately $1.48 million and $.63 million,
respectively. Due to the nature of the Partnership's business, research, and
development, costs may continue to increase in the foreseeable future.
Research and development costs have historically been funded from internally
generated funds. In the future it is expected that these costs will be
funded from internally generated funds and possibly through borrowings and/or
outside capital.
ACCOUNTING PRONOUNCEMENTS
The Partnership sponsors a health care plan for substantially all
retirees and employees. Effective January 1, 1995, the Partnership adopted
SFAS No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN
PENSIONS (Statement 106), which established a new accounting standard for the
cost of retiree health care and other postretirement benefits. The
Partnership's obligation under the plan using the accounting method
prescribed by Statement 106 was $.59 million for the transition obligation,
recorded effective January 1, 1995, and $.08 million for the net periodic
cost recorded for the year ended December 31, 1995. The
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Partnership recognized the entire transition obligation as a cumulative
effect of change in accounting in 1995.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR THE
LONG-LIVED ASSETS TO BE DISPOSED OF (Statement 121), effective for fiscal
years beginning after December 15, 1995. Statement 121 requires that
long-lived assets be reviewed for impairment by estimating future cash flows
expected to result from the use of the asset and its eventual disposition.
If the sum of the expected future cash flows is less than the carrying amount
of the asset, an impairment loss is recognized. The Partnership implemented
Statement 121 on January 1, 1996; however, there was no material impact on
the consolidated financial statements as a result of such implementation.
EFFECT OF INFLATION
The Partnership's revenues are derived from the sales of products and
services that generally can be adjusted due to the effects of inflation.
OTHER MATTERS
See the discussion of Contingencies in the Footnote No. 9 to the 1995
Consolidated Financial Statements.
Remainder of page intentionally left blank
36
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BUSINESS AND PROPERTIES
BACKGROUND.
The principal products and services currently offered by Corporate
Systems were originally developed in 1967 by Ordway-Saunders Company, an
insurance agency in Amarillo, Texas. Guyon Saunders, founder of Corporate
Systems and a partner in Ordway-Saunders Company, developed a concept of
managing insurance programs for large organizations through the use of claim
and premium data that modeled the sources, causes, and costs of all types of
claims within the insured organization. Using early computer programs that
captured claims and premium data, Ordway-Saunders Company developed the concept
called Computer Claims Control. In the fall of 1967, Ordway-Saunders Company
began offering Computer Claims Control to other agents and brokers. The concept
of Computer Claims Control expanded when large insurance companies began
consolidating their internal safety, insurance, and claim management teams into
risk management departments. These departments used Computer Claims Control for
consolidating and managing information for accounting and decision-making
purposes and for communications to operating divisions.
During August of 1968, Ordway-Saunders Company formed a new corporation,
Management Information Systems, Inc., in order to more fully develop and
deliver the Computer Claims Control system and other computer services. In
April 1976, Management Information Systems, Inc. was converted into its present
partnership form. Because operating profits exceeded the capital requirements
of Management Information Systems, Inc., the Board of Directors of the
corporation determined that a change in corporation structure to a limited
partnership would provide a more effective means of distributing income to
the shareholders. The shareholders of Management Information Systems, Inc.
voted to convert the corporation into a limited partnership and to change the
name to Corporate Systems, Ltd.
THE PARTNERSHIP AND THE HOLDING COMPANY.
THE PARTNERSHIP. Currently, Corporate Systems operates as a limited
partnership. The Partnership was formed in 1976 and exists under the Texas
Revised Partnership Act. Its General Partner is CSC General Partner, Inc., a
Texas corporation. Ownership of the Partnership is composed of one class of
partnership interest, divided into Units. Each Unit entitles the holder to
share in the profits, losses, distributions, and rights in the event of
liquidation. Currently, there are 5,922,814 Units outstanding. The General
Partner holds 2,666,672 of the outstanding Units. The remaining 3,256,142
Units are divided between 255 Limited Partners.
The General Partner has issued one share of common stock for each Unit
it holds. Because the General Partner has elected to be taxed under
Subchapter S of the Internal Revenue Code, its profits and losses are passed
through to its shareholders so that they are subject to substantially the
same income tax consequences as they would if they held Units instead of CSC
Shares. Therefore, for purposes of determining percentage ownership and
control of the Partnership, each holder of a General Partner Share is deemed
to be the beneficial holder of one Unit.
THE HOLDING COMPANY. The Holding Company was formed to become the
Partnership's corporate successor and has nominal assets at present. The
Holding Company's Articles of Incorporation authorize one class of common
stock. It has not taken any substantial action since its incorporation on
August 7, 1996, other than in connection with the plan of converting the
Partnership into corporate form.
GENERAL BUSINESS.
The principal business of Corporate Systems is to provide risk information
services for the property and casualty insurance industry. These services
consist generally of claims administration products including data conversion,
data intake, data processing, and reporting. Corporate Systems has approximately
435 employees; and its principal office is located in Amarillo, Texas.
37
<PAGE>
Corporate Systems' products include a claims administration system, a
workers' compensation medical bill repricing system, an incident reporting
system, data conversion services, computer outsourcing services, software
development project management services, a disability claims administration
system, and risk information reporting.
MATERIAL CUSTOMERS.
Corporate Systems had revenues from five customers totaling $21.6
million and four customers totaling $18.48 million during fiscal 1995 and
1994, respectively. Such revenues from significant customers represent
individually over 5 percent of total operating revenues and in the aggregate
approximately 47 and 46 percent of total operating revenues for 1995 and
1994, respectively. For the years ended 1995 and 1994, material customers
representing over 10 percent of total operating revenues were The Travelers
Insurance Company and ITT Hartford. At December 31, 1995 and 1994, the
Partnership also had $4.56 million and $6.91 million, respectively, of
unsecured trade accounts receivable due from customers which operate
primarily in the insurance industry.
RESEARCH AND DEVELOPMENT.
As with most information businesses that offer services dependent on
computer software, research and development is a significant expense for
Corporate Systems. Research and development expenditures, net of amounts
reimbursed by customers, for the year ended December 31, 1995 and 1994, were
$4.08 million and $2.13 million, respectively. The total amount of new
product development expenditures, which includes development performed under
contracts for others, research and development, and other development costs,
totaled $7.71 million and $4.18 million in fiscal 1995 and 1994, respectively.
The increase in new product development expenses is in support of the
Partnership's new and existing product development initiatives. For more
information regarding research and development see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
BUSINESS PLAN.
Whether or not the Reorganization is consummated, Corporate Systems
plans to continue pursuing its principal business strategy of providing risk
information services for the property and casualty insurance industry.
COMPETITION.
The business of providing risk information services to the insurance
industry is developing into a highly competitive industry. Other companies
provide products similar to the products offered by Corporate Systems.
Corporate Systems actively competes with these other companies. Management
believes that Corporate Systems' competitive position is affected by, among
other things, price, contract terms, and quality of its products and service.
PROPERTIES.
Corporate Systems owns three buildings located at its principal place of
business in Amarillo, Texas. The two original buildings have a total of 48,037
square feet. In 1995, Corporate Systems completed construction of a new
building of 26,000 square feet, which is used as office space for its customer
service division.
In Lisle, Illinois, Corporate Systems leases 12,553 square feet of the
Lisle Executive Center, which is used as an office for its midwest region
division.
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LEGAL PROCEEDINGS
THE PARTNERSHIP.
The Partnership has only one material legal proceeding, which is
currently pending in the 353rd Judicial District Court of Travis County,
Texas. The suit was filed February 22, 1993, and is docketed as No. 92-02133
under the name of TEXAS ASSOCIATION OF SCHOOL BOARDS WORKER'S COMPENSATION
SELF-INSURANCE FUND, EL PASO ISD, IRVING ISD, HICO ISD, AND ARANSAS PASS ISD,
ON BEHALF OF THEMSELVES AND ALL OTHER PAST AND PRESENT MEMBERS OF THE FUND V.
EMPLOYERS CASUALTY COMPANY, PHILIP M. MATHIS, AS CONSERVATOR OF THE TEXAS
DEPARTMENT OF INSURANCE, EMPLOYERS NATIONAL RISK MANAGEMENT SERVICES, INC.,
HAVIS WAYNE DORTCH, GENESYS COST MANAGEMENT SYSTEMS, INC., CORPORATE SYSTEMS,
LTD., AND FOCUS HEALTHCARE MANAGEMENT SYSTEMS, INC.
The Texas Association of School Boards Workers' Compensation
Self-Insurance Fund (the "FUND") is composed of a group of school districts
in Texas that arranged for their employees to have workers' compensation
coverage by being self-insured. The individual school districts named in the
suit were members of the Fund. The Fund contracted with Employers Casualty
Company to handle the workers' compensation claims that were filed by the
employees of the Fund's member school districts. As part of the process,
Genesys Cost Management Systems, Inc. was retained to process the medical
bills through Corporate Systems' "CS Managed Care Plus" computer software
system.
The plaintiffs in the suit have alleged that Corporate Systems
misrepresented the quality and character of the medical cost containments
they were to provide or failed to provide quality medical cost containment
services, or both. The plaintiffs are seeking $10,000,000 from Corporate
Systems. Additionally, plaintiffs have asserted that Corporate Systems
violated the Texas Deceptive Trade Practices Act and seek three times their
actual damages as provided by the Act. Plaintiffs further seek exemplary
damages in an unspecified amount. Corporate Systems has retained counsel
separate from the other defendants.
The suit has been certified as a class action. In addition, all claims
against Havis Wayne Dortch and Employers National Risk Management Services,
Inc. have been dismissed with prejudice pursuant to a compromise settlement
agreement with the plaintiffs.
At the present time, a jury trial has been scheduled to begin February
24, 1997. The Partnership denies the allegations and intends to vigorously
defend this action. Also, the Partnership believes it has insurance coverage
(in the amount of up to $5,000,000) for a part of the damages, if any. Its
insurer, St. Paul Fire and Marine Insurance Company, is proceeding with the
defense of the suit. However, St. Paul has expressly reserved its right to
deny coverage under the terms of the policy. Management believes that the
resolution of this suit will not have a materially adverse effect on the
Partnership's financial position.
A change into corporate form from a limited partnership will not affect,
either beneficially or adversely, the liability of Corporate Systems if the
plaintiff prevailed in the suit and a judgment entered against Corporate
Systems. Management is not a party to the suit and has no individual liability
for any judgments entered against the Partnership. In regards to the suit,
Management will not gain any benefit from the Reorganization.
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MANAGEMENT - BEFORE AND AFTER THE REORGANIZATION
BEFORE THE REORGANIZATION - MANAGEMENT OF THE PARTNERSHIP.
The Board of Directors of CSC General Partner, Inc., the corporate
general partner of the Partnership, is composed of six persons. The General
Partner has the exclusive right and full authority to manage, conduct, and
operate the business of the Partnership subject to the provisions of the
Partnership Agreement. The following table sets forth the name, age, and
five-year employment history of each Director and executive officer of
Corporate Systems(1), each of whom is a United States citizen:
NAME AND AGE BUSINESS EXPERIENCE OVER PAST FIVE YEARS
- ------------ ----------------------------------------
Guyon H. Saunders (66) April 1976 - Present, Director of General
Partner; March 1994 - Present, Secretary;
April 1976 - March 1993, Chairman of the
Board; April 1976- March 1991, President of
Corporate Systems; August 1968 - April 1976,
Founder of Management Information Systems,
Inc.
Edward A. Fancher, Jr. (69) April 1976 - Present, Director of General
Partner; March 1994 - Present, Assistant
Secretary and Treasurer; April 1976 - March
1994, Secretary; August 1988 - Present,
Insurance Agent, PIA Insurance Agency
Max R. Sherman (60) March 1993 - Present, Chairman of the Board
of General Partner; April 1976 - Present,
Director of General Partner; April 1976 -
Present, Dean, University of Texas LBJ School
of Public Affairs
Jess Latham, Jr. (77) April 1976 - Present, Director of General
Partner; April 1976 - Present, President of
Producers Lloyds Insurance Co.
Johnny E. Mize (35) November 1992 - Present, Director of General
Partner and President and CEO of Corporate
Systems; November 1988 - November 1992, Vice
President of Client Services of Corporate
Systems; October 1985 - October 1988, Western
Regional Manager of Corporate Systems; May
1985 - October 1985, Eastern Regional Manager
of Corporate Systems; January 1984 - May
1985, Account Executive, Western Region,
Corporate Systems; January 1983 - January
1984, Systems Manager, Western Region,
Corporate Systems
Charles Scott Gilmour (51) October 1984 - Present, Director of General
Partner and Vice President of Corporate
Systems, Sales and Marketing; September 1975
- October, 1984, Western Division Manager of
Corporate Systems; February 1970 - September
1975, Sales Representative of Corporate
Systems
- --------------------
(1) As of September 30, 1995, Bob Holeman, Vice-President of Technology,
took early retirement. Therefore, he is not included in the table.
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John S. Champlin (37) December 1993 - Present, Vice President of
Corporate Systems, Client Services; July
1988 - December 1993, Account Executive for
Sedgwick of Pennsylvania, Inc. (promoted to
Assistant Vice President in 1989); September
1985 - July 1988, Eastern Regional Manager
of Corporate Systems; January 1983 -
September 1985, Account Executive and Systems
Manager of Corporate Systems
Michael D. Unruh (52) April 1993 - Present, Vice President and
Chief Financial Officer of Corporate Systems;
December 1991 - April 1993, Controller of
Corporate Systems; April 1991 - December
1991, Director of Human Resources of
Corporate Systems
All directors of the General Partner hold office until the next annual
meeting of the CSC Shareholders and until their successors are duly elected
and qualified. All officers of the General Partner are elected by its Board
of Directors and hold office until the next annual meeting of the General
Partner's Board and until their successors are elected and qualified. There
are no family relationships among directors or executive officers.
In 1995, the General Partner's Board of Directors had one regular
meeting and six special meetings. Each non-employee director is paid a
quarterly director fee of $3,000 except for Mr. Sherman who is paid $3,625
due to extra required traveling time. In addition, the General Partner
reimburses the directors for travel expenses. Employee directors do not
receive additional compensation for their service on the Board. Each
non-employee director serves on two standing committees of the Board without
additional compensation, the audit committee and the compensation committee.
AFTER THE REORGANIZATION - MANAGEMENT OF THE HOLDING COMPANY AND THE OPERATING
COMPANY.
The Holding Company will be managed by a Board of Directors, which will
be composed of six persons, each of whom is currently a director of the
General Partner. The Holding Company's Board of directors will be the
Operating Company's Board of Directors also. Each executive officer of the
Partnership will continue his respective position for the Holding Company.
All directors of the Holding Company will hold office until the next annual
meeting of the shareholders of the Holding Company and until their successors
are duly elected and qualified. All officers of the Holding Company will
hold office until the next annual meeting of the Holding Company's Board of
Directors and until their successors are elected and qualified. There are no
family relationships among
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directors or executive officers. Each non-employee director of the Holding
Company will continue to receive compensation at the same rate as they
received as a director of the General Partner.
The Compensation paid to Management will not change due to the
Reorganization except that under Corporate Systems Incentive Award Plan, key
employees will receive options for shares of Common Stock rather than options
for Units.
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PRINCIPAL OWNERS AND OWNERSHIP OF MANAGEMENT
The following table sets forth as of June 30, 1996, the beneficial
ownership of the Partnership's Units of each person known by Management to
beneficially own more than five percent of the Units, each director of the
General Partner, the executive officers of the Partnership, and all directors
and executive officers as a group. The number of outstanding CSC Shares is
the same as the number of Units (2,666,672) owned by the General Partner. A
holder of CSC Shares is deemed to be the beneficial owner of the same number
of Units owned by the General Partner. The beneficial ownership of the
Holding Company after the Reorganization will be the same as the beneficial
ownership of the Partnership shown in this table.
Amount and
Nature of
Beneficial Percentage
Name and Address of Beneficial Owner Ownership of Class
- ------------------------------------ ---------- ----------
Guyon H. Saunders. . . . . . . . . . . . . . . . 833,000(1) 13.90%
DIRECTOR
P.O. Box 31780
Amarillo, Texas 79120
Edward A. Fancher, Jr. . . . . . . . . . . . . . 776,512(2) 13.11%
DIRECTOR
3204 South Lipscomb
Amarillo, Texas 79109
Max R. Sherman . . . . . . . . . . . . . . . . . 402,840(3) 6.80%
DIRECTOR
3505 Greenway
Austin, Texas 78705
Joe C. Richardson, Jr. . . . . . . . . . . . . . 300,000(4) 5.07%
P.O. Box 8246
Amarillo, Texas 79114
Jess Latham, Jr. . . . . . . . . . . . . . . . . 79,056(5) 1.33%
DIRECTOR
P.O. Box 229
Amarillo, Texas 79105
Johnny E. Mize . . . . . . . . . . . . . . . . . 85,098(6) 1.44%
DIRECTOR, PRESIDENT AND CEO
P.O. Box 31780
Amarillo, Texas 79120
- --------------------
(1) All are General Partner Shares.
(2) All are General Partner Shares.
(3) Includes 43,200 Partnership Units registered in the name of
Mr. Sherman's wife and 359,640 General Partner Shares.
(4) Includes 10,000 General Partner Shares registered in the name of
Mr. Richardson's wife.
(5) All are General Partner Shares.
(6) Includes 4,500 General Partner Shares.
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Charles Scott Gilmour. . . . . . . . . . . . . . 12,220 .21%
DIRECTOR AND VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
John S. Champlin . . . . . . . . . . . . . . . . 8,960 .15%
VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
Michael D. Unruh . . . . . . . . . . . . . . . . 20,262(7) .34%
VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
All Directors and Officers(8). . . . . . . . . . 2,217,948 37.44%(9)
- --------------------
(7) Includes 60 Units registered in the name of Mr. Unruh's wife.
(8) Figures do not include Joe Richardson, who is not a director or
officer.
(9) The officers and directors of the General Partner own 2,052,708
(76.98%) of the outstanding shares of the General Partner, and the General
Partner owns 2,666,672 (45.02%) of the outstanding Partnership Units. The
officers and directors hold a controlling interest in the General Partner and
will determine how it will vote all of the Partnership Units it holds. As
individuals, the officers and directors own and can vote an additional 165,240
Partnership Units, effectively controlling 47.81% of the Partnership Units.
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SUMMARY COMPARISON OF UNITS AND COMMON STOCK AND CSC SHARES AND COMMON STOCK
The following summary compares a number of differences between ownership
of Units and ownership of shares of Common Stock and the difference between
ownership of CSC Shares and the ownership of Holding Company Common Stock.
This summary is qualified in its entirety by the more complete legal
description of the Holding Company Common Stock contained under "Description
of Holding Company Common Stock" and the information contained in the
Partnership Agreement, the Articles of Incorporation of the General Partner,
and the Articles of Incorporation of the Holding Company included as exhibits
to the Registration Statement of which the Prospectus is a part.
TAXATION.
UNITS. Under current law, the Partnership is not subject to federal
income tax. Rather, each holder of Units includes his or her share of
the income and, subject to certain limitations, the losses of the
Partnership in computing taxable income without regard to the cash
distributed to the Unitholder. Generally, cash distributions to the
holders of Units are not taxable.
CSC SHARES. Because the General Partner has elected to be taxed as an S
Corporation, the General Partner is not subject to federal income tax,
and income and losses are passed through to the CSC Shareholders.
Therefore, like the Limited Partners, each CSC Shareholder includes his
or her share of the income and losses of the General Partner in computing
taxable income regardless of the cash distributed to the CSC
Shareholders. Generally, cash distributions to the CSC Shareholders are
not taxable.
HOLDING COMPANY COMMON STOCK. The Holding Company will be a taxable
entity with respect to its income after allowable deductions and credits.
Shareholders will not be taxed with respect to Holding Company income,
but will generally be taxed with respect to dividends received from the
Holding Company. See "Certain Federal Income Tax Consequences - Tax
Consequences of the Exchange - Change in Character of Income" regarding
the change in the character of the taxable income to be realized by the
shareholders of the Holding Company, changing from passive activity
income or loss prior to the Reorganization to portfolio income after the
transactions.
DISTRIBUTIONS AND DIVIDENDS.
UNITS. It has been the practice of the Partnership to distribute to the
Unitholders more cash than has been necessary for them to pay the tax
liability on the Partnership's annual earnings. During the period of
1976 through 1991, the Partnership distributed approximately 88 percent
of its earnings; if the loss year of 1992 is included in the totals for
the period of 1976 through 1992, the Partnership distributed over 100
percent of its earnings. For the three complete years since 1992 when
the Partnership incurred a loss, the Partnership distributed
approximately 15 percent of earnings in 1993, 53 percent of earnings in
1994, and 92 percent of earnings in 1995. Under the Partnership
Agreement, distributions may be paid if, as, and when determined by the
General Partner in its discretion, subject to legal and contractual
limitations.
CSC SHARES. It has been the practice of the General Partner to declare
dividends on the CSC Shares in the same amount and at the same time as it
declared distributions on the Units. Under Texas law and the General
Partner's bylaws, dividends may be declared by the Board of Directors at
its discretion.
HOLDING COMPANY COMMON STOCK. After the conversion, Management of the
Holding Company and its Board of Directors expect to provide the
shareholders a return on their investment through dividends or through an
increase in the value of each share of common stock, or both. However,
the amount of any future dividends cannot be determined at the present
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time. Dividends may be paid if, as, and when declared by the Board of
Directors in its discretion, subject to legal and contractual limitations.
MANAGEMENT.
UNITS. The business and affairs of the Partnership are managed by the
General Partner. The General Partner may be removed and replaced, with
or without cause, by a majority vote of the Unitholders.
CSC SHARES. The business and affairs of the General Partner are managed
its Board of Directors who are elected on an annual basis and may be
removed or replaced, with or without cause, by a majority vote of CSC
Shareholders at any meeting of the Shareholders.
HOLDING COMPANY COMMON STOCK. The business and affairs of the Holding
Company will be managed by or under the direction of the Board of
Directors of the Holding Company. Each director will be elected annually
by the shareholders and may be removed and replaced, with or without
cause, by a majority vote of shareholders at any meeting of such holders.
VOTING RIGHTS.
UNITS. Under Texas law and the Partnership Agreement, limited partners
have voting rights with respect to (i) the removal and replacement of the
General Partner, (ii) the dissolution or termination of the Partnership,
(iii) the sale of all or substantially all of the assets of the
Partnership outside the ordinary course of business, and (iv) amendment
of the Partnership Agreement.
Each Unit entitles each holder who is admitted as a limited partner to
cast one vote on all matters presented to Unitholders. Approval of any
matter submitted to limited partners generally requires the affirmative
vote of holders of more than 50 percent of the Units then outstanding,
except that the election of an additional General Partner requires the
affirmative vote of all Unitholders.
CSC SHARES. Under Texas law and the General Partner's Articles of
Incorporation, shareholders have voting rights with respect to (i) the
annual election of directors, (ii) the removal and replacement of
directors, (iii) certain mergers and share exchanges involving the
Holding Company, (iv) the sale of all or substantially all of the Holding
Company's assets other than in the regular course of business, (v) the
dissolution of the Holding Company, and (vi) amendments to the Holding
Company's Articles of Incorporation.
Each CSC Share entitles its holder to cast one vote on each matter
presented to the CSC Shareholders. Any (i) amendment of the General
Partner's Articles of Incorporation requires the affirmative vote of at
least two-thirds of the CSC Shares outstanding, and (ii) vote required
for the approval of a plan of merger or plan of dissolution of the
General Partner requires the affirmative vote of the holders of at least
two-thirds of the CSC Shares outstanding. Approval of any other matter
submitted to the CSC Shareholders requires the affirmative vote of
holders of at least 50 percent of the CSC Shares outstanding.
HOLDING COMPANY COMMON STOCK. Under Nevada law and the Holding Company's
Articles of Incorporation, shareholders have voting rights with respect
to (i) the annual election of directors, (ii) the removal and replacement
of directors, (iii) certain mergers and share exchanges involving the
Holding Company, (iv) the sale of all or substantially all of the Holding
Company's assets other than in the regular course of business, (v) the
dissolution of the Holding Company and (vi) amendments to the Holding
Company's Articles of Incorporation.
Each share of Common Stock entitles its holder to cast one vote on each
matter presented to shareholders. Approval of any matter submitted to
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shareholders requires the affirmative vote of holders of at least 50
percent of the Common Stock outstanding.
SPECIAL MEETINGS.
UNITS. The General Partner may call a meeting to amend the Partnership
Agreement upon ten days prior notice.
CSC SHARES. Special meetings of shareholders may be called by the Board
of Directors or by holders of at least ten percent of the outstanding
voting stock.
HOLDING COMPANY COMMON STOCK. Special meetings of shareholders may be
called by the Board of Directors or by holders of at least ten percent of
the outstanding voting stock.
LIQUIDATION RIGHTS.
UNITS. In the event of liquidation (except as contemplated by the
Reorganization), Unitholders would be entitled to share ratably in any
assets remaining after satisfaction of obligations to creditors.
CSC SHARES. In the event of liquidation of the General Partner, the
holders of the Common Stock would be entitled to share ratably in any
assets remaining after satisfaction of obligations to creditors.
HOLDING COMPANY COMMON STOCK. In the event of liquidation of the Holding
Company, the holders of the Common Stock would be entitled to share
ratably in any assets remaining after satisfaction of obligations to
creditors.
RIGHT TO COMPEL DISSOLUTION.
UNITS. Holders of at least a majority of the outstanding Units may vote
to compel the dissolution and liquidation of the Partnership.
CSC SHARES. Under Texas law, the General Partner may be voluntarily
dissolved (i) upon written consent of all of its shareholders, or (ii)
after a resolution adopted by the General Partner's Board of Directors
recommending the dissolution of the General Partner, by a two-thirds vote
of its shareholders.
HOLDING COMPANY COMMON STOCK. Under Nevada law, the Holding Company may
be voluntarily dissolved after a resolution adopted by the Holding
Company's Board of Directors recommending the dissolution of the Holding
Company, by a vote of the shareholders holding a majority of the
outstanding Shares of Common Stock.
LIMITED LIABILITY.
UNITS. Unitholders generally do not have personal liability for
obligations of the Partnership.
CSC SHARES. CSC Shares are fully paid and non-assessable. Shareholders
generally do not have personal liability for obligations of the General
Partner.
HOLDING COMPANY COMMON STOCK. Shares of Common Stock will be fully paid
and non-assessable. Shareholders generally will not have personal
liability for obligations of the Holding Company.
LIQUIDITY AND MARKETABILITY.
UNITS. There is a limited market for the sale of the Units.
CSC SHARES. There is a limited market for the sale of the CSC Shares.
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HOLDING COMPANY COMMON STOCK. There will be a limited market for the
sale of the Common Stock.
CONTINUITY OF EXISTENCE.
UNITS. The Partnership Agreement provides for the Partnership to
continue in existence until June 30, 2006, unless earlier terminated or
extended in accordance with the Partnership Agreement.
CSC SHARES. The General Partner's Articles of Incorporation provide for
perpetual existence, subject to Texas law.
HOLDING COMPANY COMMON STOCK. The Holding Company's Articles of
Incorporation provide for perpetual existence, subject to Nevada law.
FINANCIAL REPORTING.
UNITS. The Partnership Agreement provides that, no later than 120 days
after the end of each fiscal year of the Partnership, the General Partner
will furnish each Unitholder a report of the Partnership's business and
operations during such year, including a copy of the Partnership's annual
financial statements for such year.
CSC SHARES. The General Partner provides to CSC Shareholders the same
report as it provides to the Limited Partners.
HOLDING COMPANY COMMON STOCK. The Holding Company will provide annual
reports to its shareholders.
CERTAIN LEGAL RIGHTS.
UNITS. Texas law allows a Unitholder to institute legal action on behalf
of the Partnership (a partnership derivative action) to recover damages
from a third party where the General Partner has refused to bring the
action. In addition, a Limited Partner may institute legal action on
behalf of himself or all other similarly situated Unitholders (a class
action) to recover damages from the General Partner for violations of its
fiduciary duties to the Unitholders. Unitholders may also have rights to
bring actions in federal courts to enforce federal rights.
CSC SHARES. Texas law affords shareholders of a corporation similar
rights to bring shareholder derivative actions when the board of
directors has failed to institute an action against third parties or
directors of the corporation, and class actions to recover damages from
directors for violations of their fiduciary duties. Shareholders may
also have rights to bring actions in federal courts to enforce federal
rights.
HOLDING COMPANY COMMON STOCK. Nevada law states that a derivative action
may be brought by one or more shareholders or members to enforce a right
of a corporation if the corporation failed to enforce a right that may
properly be asserted by it.
RIGHT TO LIST OF HOLDERS; INSPECTION OF BOOKS AND RECORDS.
UNITS. Upon written request by a Unitholder with a legitimate purpose,
the General Partner will furnish to the requesting Unitholder a list of
names and addresses of all Unitholders. The books and records of the
Partnership are open to the reasonable inspection and examination of the
Unitholders during reasonable business hours.
CSC SHARES. Under Texas law, upon written request, at reasonable times
and for a proper purpose, any person who has been a shareholder for at
least six months or is the holder of at least five percent of the
outstanding shares of common stock has the right to examine and copy
relevant books of account, minutes, and share transfer records, including
a list of current shareholders.
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HOLDING COMPANY COMMON STOCK. Under Nevada law, upon five days written
demand, during normal business hours and for a proper purpose, any person
who has been a shareholder of record and is the holder of at least five
percent of the outstanding shares of common stock has the right to
inspect and audit relevant books of account and financial records of the
Holding Company.
ISSUANCE OF ADDITIONAL EQUITY.
UNITS. In order to raise additional capital for the Partnership or for
any other proper Partnership purpose, the General Partner is authorized
under the Partnership Agreement to issue additional Units from time to
time and admit the holders of such additional Units as Limited Partners
of the Partnership.
CSC SHARES. Under applicable Texas law, the Corporation may issue the
number of shares stated in its Articles of Incorporation. The General
Partner's Articles of Incorporation authorize 5,000,000 shares of Common
Stock. The General Partner's Board of Directors is authorized to issue
CSC Shares for such consideration, not less than the par value thereof,
as may be determined by the Board.
HOLDING COMPANY COMMON STOCK. Under applicable Nevada law, the Holding
Company may issue the number of shares stated in its Articles of
Incorporation. The Holding Company's articles of incorporation authorize
20,000,000 shares of Common Stock. The Holding Company's board of
directors will be authorized to issue shares of Common Stock for such
consideration, not less than the par value thereof, as may be determined
by the Board.
PREEMPTIVE RIGHTS.
UNITS. The Unitholders have no preemptive rights (the right to maintain
a proportionate share of ownership by purchasing a proportionate share of
any new Units issued by the General Partner) either under the Texas
Revised Partnership Act or under the Partnership Agreement.
CSC SHARES. The General Partner's Articles of Incorporation expressly
state that no shareholder or other person will have any preemptive rights
to acquire additional unissued or treasury shares.
HOLDING COMPANY COMMON STOCK. The Shareholders of the Holding Company
have no preemptive rights under the Holding Company's Articles of
Incorporation or Nevada law.
DUTIES OWED TO EQUITY OWNERS.
UNITS. As a general partner of a limited partnership, under Texas law
the General Partner owes the Unitholders the fiduciary duties of good
faith, fairness, and loyalty on handling the affairs of the Partnership.
In addition, the fiduciary duty of the General Partner may include (i) a
duty to refrain from self-dealing to the advantage of the General Partner
at the expense of the Partnership, and (ii) a duty to disclose to the
unitholders all material information concerning the Partnership's affairs.
CSC SHARES. Under Texas law, a director of a corporation has the duty
(i) to manage the business of the corporation as a reasonable person in
the director's position would manage it, (ii) to avoid taking personal
advantage of corporate opportunities, and (iii) to obey the laws
governing corporations. In the management of corporate affairs,
directors have a duty to exercise the degree of care that a person of
ordinary prudence would exercise in the same or similar circumstances.
HOLDING COMPANY COMMON STOCK. Under Nevada law, directors and officers
must exercise their powers in good faith and with a view to the interest
of the Holding Company. In performing their respective duties, directors
and officers are entitled to rely on information, opinions, reports,
books
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of accounts or statements, including financial statements and other
financial data that are prepared or presented by one or more directors,
officers, or employees of the corporation reasonably believed to be
reliable and competent in the manner prepared or presented; counsel,
public accountants, or other persons as to matters reasonably believed to
be within the preparer's or presenter's professional or expert
competence; or a committee on which the director or officer relying
thereon does not serve, established in accordance with applicable Nevada
law, as to matters within the committee's designated authority and
matters on which the committee is reasonably believed to merit
confidence. However, a director or officer is not entitled to rely on
such information, opinions, reports, books of account or statements if he
or she has knowledge concerning the matter in question that would cause
reliance thereon to be unwarranted. Directors and officers of the
Holding Company, in exercising their respective powers with a view to the
interest of the Holding Company, may consider: the interest of the
Corporation's employees, suppliers, creditors, and customers; the economy
of the state and nation; the interest of the community and society; and
the long term, as well as short term, interests of the Holding Company
and its shareholders, including the possibility that these interests may
be best served by the continued independence of the corporation.
COMPENSATION TO MANAGEMENT.
PARTNERSHIP INTEREST. Under the Partnership Agreement, the General
Partner may not be paid any management fees for its services to the
Partnership. However, the General Partner is reimbursed by the
Partnership for any expenses incurred by the General Partner in
performing services for the Partnership, including, but not limited to,
accounting and legal fees, reasonable fees to directors when meeting in
consideration of Partnership business, and other expenses relating to the
acquisition, financing, operation, or disposition of the business of the
Partnership. The General Partner pays its non-employee directors a
quarterly director fee of $3,000 except for the chairman, Max Sherman,
who is paid $3,625.
CSC SHARES. The General Partner pays its non-employee directors a
quarterly director fee of $3,000 except for the chairman, Max Sherman,
who is paid $3,625.
COMMON STOCK. The Holding Company will be managed by a board of
directors rather than a general partner. The initial board of directors
will be composed of six persons, each of whom is currently a director of
the General Partner. All directors will hold office until the annual
shareholders' meeting. Each non-employee director of the Holding Company
will receive compensation at the same rate as he or she received as a
director of the General Partner.
DESCRIPTION OF COMMON STOCK
Upon consummation of the Reorganization, the authorized capital stock of
the Holding Company will consist of 20 million shares of Common Stock, par
value $.001 per share. Of such authorized shares, 5,922,814 shares will be
issued and outstanding. All such outstanding shares of Common Stock will be
fully paid and nonassessable.
COMMON STOCK.
Holders of the Holding Company Common Stock will have no preemptive
rights to purchase or subscribe for securities of the Holding Company, and
the Holding Company Common Stock is not convertible or subject to redemption
by the Holding Company.
SPECIAL MEETINGS.
Pursuant to the Holding Company's bylaws, special meetings of the
shareholders of the Holding Company may be called by the chief executive
officer, the board of directors, or by shareholders holding not less than ten
percent of
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the outstanding common stock of the Holding Company. Holders of Holding
Company Common Stock may act by written consent without a meeting provided
that Stockholders holding at least a majority of the voting power approve
such action unless that if a different proportion of voting power is required
for such action, then that proportion of written consents is required.
VOTING.
Holders of Holding Company Common Stock are entitled to cast one vote per
share on matters submitted to a vote of shareholders. Each director will be
elected annually. Any director may be removed, with or without cause, at any
meeting of shareholders called expressly for that purpose, by a vote of the
holders of a majority of the outstanding shares.
Subject to any additional voting rights that may be granted to holders of
future classes or series of stock and to the additional voting requirements
described in the next paragraph, the Holding Company's Articles of
Incorporation require the affirmative vote of holders of a majority of the
outstanding shares entitled to vote thereon to approve any amendment to the
Articles of Incorporation, dissolution of the Holding Company, sale of all or
substantially all the assets of the Holding Company, share exchange or merger
for which a vote is required by the Nevada Private Corporation Act.
Approval of any other matter not described above that is submitted to the
shareholders requires the affirmative vote of the holders of a majority of
the shares of Common Stock represented at the meeting. The holders of a
majority of the shares entitled to vote will constitute a quorum at meetings
of shareholders.
LIMITATION OF DIRECTOR LIABILITY.
The Articles of Incorporation of the Holding Company contain a provision
that limits the liability of the Holding Company's directors as permitted by
the Nevada Private Corporation Act. The provision eliminates the personal
liability to directors of the Holding Company, and its shareholders may be
unable to recover monetary damages against directors for negligent or grossly
negligent acts or omissions in violation of their duty of care. The
provision does not change the liability of a director for breach of his duty
of loyalty to the Holding Company or to shareholders, acts, or omission not
in good faith or that involve intentional misconduct or a knowing violation
of law, an act or omission for which the liability of a director is expressly
provided for by an applicable statute, or in respect of any transaction from
which a director received an improper personal benefit. Pursuant to the
Articles of Incorporation, the liability of directors will be further limited
or eliminated without action by shareholders if Nevada law is amended to
further limit or eliminate the personal liability of directors.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, or persons controlling
the registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against the public policy as expressed in the Act and is
therefore unenforceable.
51
<PAGE>
LEGAL OPINIONS
A legal opinion to the effect that the shares of the Holding Company
offered pursuant to this Prospectus, when issued in accordance with the
Reorganization Plan, will be validly issued and fully paid and nonassessable,
has been rendered by the law firm of Gibson, Ochsner & Adkins, L.L.P.,
Amarillo, Texas.
EXPERTS
The consolidated financial statements of Corporate Systems, Ltd. and
subsidiary as of December 31, 1995 and 1994, and for each of the years in the
three-year period ended December 31, 1995, and the balance sheet of Corporate
Systems Holding, Inc. as of August 15, 1996, have been included herein in
reliance upon the reports of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP covering the December 31, 1995, consolidated financial statement
of Corporate Systems, Ltd. and subsidiary refers to a change in the method of
accounting for postretirement benefits other than pensions.
The references in "Certain Federal Income Tax Consequences" to the
opinion of Strasburger & Price, L.L.P. have been included based on that
firm's authority as experts in federal taxation.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
Page
----
<S> <C>
Unaudited Pro Forma Condensed Consolidated Financial Information of the Company ...... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet ........................... F-3
Unaudited Pro Forma Condensed Consolidated Statements of Income
for the Six Months Ended June 30, 1996 and the Year ended December 31, 1995....... F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements............ F-5
Corporate Systems Holding, Inc. Historical Financial Statement as of August 26, 1996
Independent Auditors' Report...................................................... F-6
Balance Sheet..................................................................... F-7
Note to Balance Sheet............................................................. F-8
Corporate Systems, Ltd. and Subsidiary Consolidated Financial Statements
for the Six Months Ended June 30, 1996 and 1995 (Unaudited)....................... F-9
Consolidated Balance Sheets..................................................... F-10
Consolidated Statements of Income............................................... F-12
Consolidated Statements of Changes in Partners' Equity.......................... F-13
Consolidated Statements of Cash Flows........................................... F-14
Notes to Consolidated Financial Statements...................................... F-15
Corporate Systems, Ltd. and Subsidiary Consolidated Financial Statements
for the Years Ended December 31, 1995, 1994 and 1993
Independent Auditors' Report.................................................... F-17
Consolidated Balance Sheets..................................................... F-18
Consolidated Statements of Income............................................... F-20
Consolidated Statements of Changes in Partners' Equity.......................... F-21
Consolidated Statements of Cash Flows........................................... F-22
Notes to Consolidated Financial Statements...................................... F-24
</TABLE>
F-1
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL INFORMATION OF THE COMPANY
For financial accounting purposes, the merger transaction will be treated as a
reorganization of affiliated entities. Accordingly, the assets and liabilities
transferred to the Company in accordance with the merger transaction will be
recorded at their historical costs. Additionally, the pro forma information
reflects the establishment of a leveraged ESOP.
The accompanying unaudited pro forma condensed consolidated financial statements
of the Company are based upon the historical financial statements of the
Partnership. The pro forma condensed consolidated statements of income for the
six-month period ended June 30, 1996 and for the year ended December 31, 1995
present the results of operations of the Company as if the transactions had been
consummated on January 1, 1995.
The pro forma condensed consolidated balance sheet as of June 30, 1996 presents
the financial position of the Company as if the transactions had been
consummated on the balance sheet date.
The transactions are more fully discussed elsewhere in this Prospectus. The
unaudited pro forma condensed consolidated financial statements of the Company
should be read in conjunction with the historical financial statements of the
Partnership. The unaudited pro forma condensed consolidated financial
statements are not necessarily indicative of the financial results that would
have occurred had the transactions been consummated on the above indicated
dates, nor are they necessarily indicative of future results.
F-2
<PAGE>
CORPORATE SYSTEMS HOLDING, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
THE THE
PARTNERSHIP PRO FORMA COMPANY
ASSETS (HISTORICAL) ADJUSTMENTS (PRO FORMA)
------------ ----------- ----------
(in thousands)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 5,391 $ - $ 5,391
Trade accounts receivable, net 4,739 - 4,739
Prepaid expenses and supplies 1,430 - 1,430
Current portion of prepaid airline passes 65 - 65
--------- --------- --------
11,625 - 11,625
Property, plant and equipment, net 5,769 - 5,769
Other assets:
Prepaid airline passes, excluding current portion 53 - 53
Deferred income taxes - 1,100 (a) 1,100
Other, net 119 - 119
--------- --------- --------
$ 17,566 $ 1,100 $ 18,666
--------- --------- --------
--------- --------- --------
LIABILITIES AND EQUITY
Current liabilities:
Interim construction loan 2,668 - 2,668
Current maturities of long-term obligations $ 41 $ 676 (c) $ 717
Accounts payable 1,172 - 1,172
Accrued expenses 1,167 - 1,167
Lease incentive 239 - 239
Deferred income 1,632 - 1,632
--------- --------- --------
6,919 676 7,595
Long-term obligations, excluding current maturities 3 4,062 (c) 4,065
Lease incentive - noncurrent 328 - 328
Deferred income - noncurrent 132 - 132
Accumulated postretirement benefit obligation 690 - 690
Partners' equity 9,494 (9,494)(b) -
Shareholders' equity - 5,856 (a)(b)(c) 5,856
--------- --------- --------
$ 17,566 $ 1,100 $ 18,666
--------- --------- --------
--------- --------- --------
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-3
<PAGE>
CORPORATE SYSTEMS HOLDING, INC. AND SUBSIDIARY
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
1996 1995
-------------------------------------- -------------------------------------
THE THE THE THE
PARTNERSHIP PRO FORMA COMPANY PARTNERSHIP PRO FORMA COMPANY
(HISTORICAL) ADJUSTMENTS (PRO FORMA) (HISTORICAL) ADJUSTMENTS (PRO FORMA)
------------ ----------- ----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues: (IN THOUSANDS, EXCEPT PER UNIT/SHARE DATA)
Risk management claims administration services $ 12,027 - 12,027 $ 26,031 - 26,031
Installations and programming 1,728 - 1,728 2,407 - 2,407
Computer equipment rental 1,549 - 1,549 3,583 - 3,583
Special project fees 4,574 - 4,574 12,235 - 12,235
Other 1,369 - 1,369 1,839 - 1,839
--------- ------- ------- --------- ------- -------
21,247 - 21,247 46,095 - 46,095
Expenses:
Cost of services 14,797 - 14,797 35,631 - 35,631
Selling, general and administrative 4,039 - 4,039 5,816 - 5,816
--------- ------- ------- --------- ------- -------
18,836 - 18,836 41,447 - 41,447
--------- ------- ------- --------- ------- -------
Operating income 2,411 - 2,411 4,648 - 4,648
--------- ------- ------- --------- ------- -------
Other income (expense):
Gain on sale of assets 1 - 1 8 - 8
Interest income 94 - 94 159 - 159
Interest expense (116) (169)(c) (285) (144) (398)(c) (542)
Other, net 154 - 154 196 - 196
--------- ------- ------- --------- ------- -------
133 (169) (36) 219 (398) (179)
--------- ------- ------- --------- ------- -------
Earnings before cumulative effect
of change in accounting 2,544 (169) 2,375 4,867 (398) 4,469
Cumulative effect of change in accounting - - - (590) - (590)
--------- ------- ------- --------- ------- -------
Net earnings $ 2,544 (169) 2,375 $ 4,277 (398) 3,879
--------- ---------
--------- ---------
Income tax expense (865)(a) (865) (1,237)(a) (1,237)
------ ------- ------- -------
Net earnings (1,034) 1,510 (1,635) 2,642
------ ------- ------- -------
------ ------- ------- -------
Net earnings per:
General partner unit $ 0.43 $ 0.73
Limited partner unit 0.43 0.73
Weighted average units outstanding:
General partner units 2,667 2,667
Limited partner units 3,209 3,174
Net earnings per common share $ 0.25 $ 0.45
Weighted average shares outstanding 6,003 5,926
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-4
<PAGE>
CORPORATE SYSTEMS HOLDING, INC. AND SUBSIDIARY
NOTES TO UNAUDITED PRO FORMA
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying pro forma condensed consolidated financial statements were
derived from the historical financial records of the Partnership and should be
read in conjunction with the historical financial statements of the Partnership.
The following is a summary of the pro forma adjustments:
(a) To provide income taxes and state franchise taxes for the
period presented, as the Company's income would be subject to
taxation.
(b) To record the Company's initial capitalization through the
issuance of 5,922,814 shares of Company common stock, $.001 par
value, in respect of the outstanding units of the Partnership.
(c) To reflect the establishment of a leveraged ESOP through the
purchase of shares from existing shareholders financed through
bank debt of $4,738,000.
It is assumed the debt will be payable over seven years and will
bear interest at 9%. Contributions to the ESOP, other than
interest expense, will offset substantially all of the
contributions currently being made to the Company's existing
profit sharing plan.
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Corporate Systems Holding, Inc.:
We have audited the accompanying balance sheet of Corporate Systems Holding,
Inc. as of August 26, 1996. This financial statement is the responsibility of
the Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. an audit of a
balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Corporate Systems Holding, Inc. as
of August 26, 1996, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
August 26, 1996
F-6
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
Balance Sheet
August 26, 1996
ASSETS
Cash $ 1,000
-------
-------
SHAREHOLDER'S EQUITY
Shareholder's equity:
Common stock, $.001 par value, 20,000,000 shares authorized,
1 share issued and outstanding $ -
Additional paid-in capital 1,000
-------
Total shareholder's equity $ 1,000
-------
-------
See accompanying note to balance sheet.
F-7
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
Note to Balance Sheet
August 26, 1996
ORGANIZATION
Corporate Systems Holding, Inc. (the Company), a Nevada corporation, was
incorporated on August 7, 1996 and has conducted no business activity since
inception.
Except for one share of common stock issued in exchange for $1,000 cash for the
purpose of capitalizing the Company to do business, the remainder of the
Company's common stock has been authorized but is unissued pending consummation
of the proposed reorganization of Corporate Systems, Ltd. from a partnership
structure to a corporation. Such reorganization will be implemented through an
exchange offer whereby owners of Corporate Systems Ltd. units will exchange such
units for the Company's common stock.
F-8
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Financial Statements for the Six Months Ended
June 30, 1996 and 1995
The accompanying consolidated financial statements of the Partnership reflect
the financial position as of June 30, 1996 and December 31, 1995 and the results
of operations and cash flows for the six-month periods ended June 30, 1996 and
1995. All such financial statements, except the consolidated balance sheet as
of December 31, 1995, are unaudited. Such financial statements should be read
in conjunction with the audited financial statements of the Partnership and
notes thereto for the years ended December 31, 1995, 1994 and 1993 included
elsewhere in this Prospectus.
F-9
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995
<TABLE>
ASSETS June 30, December 31,
------ 1996 1995
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents, including interest-bearing
assets of $4,975,000 at June 30, 1996 and $3,200,000
at December 31, 1995 $ 5,390,772 4,343,196
Trade accounts receivable, less allowance for doubtful
accounts of $284,680 at June 30, 1996 and $501,111
at December 31, 1995 4,738,850 6,788,414
Prepaid expenses and supplies 1,429,742 681,106
Current portion of prepaid airline passes 65,525 26,858
----------- ----------
Total current assets 11,624,889 11,839,574
----------- ----------
Property, plant and equipment:
Land and office buildings 4,087,620 4,072,265
Computer equipment 2,322,163 2,233,720
Leased computer equipment under capital leases 733,672 733,672
Furniture and fixtures 1,964,255 1,871,489
Computer software 1,088,624 911,756
----------- ----------
10,196,334 9,822,902
Less accumulated depreciation and amortization (4,427,156) (3,492,357)
----------- ----------
Net property, plant and equipment 5,769,178 6,330,545
----------- ----------
Prepaid airline passes, excluding current portion 53,567 43,066
Other assets, net 119,090 151,342
----------- ----------
$17,566,724 18,364,527
----------- ----------
----------- ----------
</TABLE>
(Continued)
F-10
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Balance Sheets, Continued
<TABLE>
LIABILITIES AND PARTNERS' EQUITY June 30, December 31,
1996 1995
---- ----
(unaudited)
<S> <C> <C>
Current liabilities:
Interim construction loan $ 2,668,088 2,668,088
Current maturities of obligations under capital leases 41,039 95,792
Accounts payable 1,171,644 1,574,492
Accrued expenses:
Employee commissions and bonuses 161,613 694,964
Profit sharing 341,184 682,370
Distributions payable - 940,202
Other 664,422 764,304
Lease incentive 239,166 239,166
Deferred income 1,632,220 1,574,497
------------ ----------
Total current liabilities 6,919,376 9,233,875
------------ ----------
Obligations under capital leases, excluding current maturities 3,122 21,965
Lease incentive - noncurrent 328,085 375,834
Deferred income - noncurrent 132,188 161,563
Accumulated postretirement benefit obligation 689,726 669,864
------------ ----------
Total liabilities 8,072,497 10,463,101
------------ ----------
Partners' equity:
General partner 3,698,154 3,080,953
Limited partners 5,796,073 4,820,473
------------ ----------
9,494,227 7,901,426
------------ ----------
Commitments and contingencies
$ 17,566,724 18,364,527
------------ ----------
------------ ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Income
Six months ended June 30, 1996 and 1995
<TABLE>
1996 1995
----------- ----------
(unaudited)
<S> <C> <C>
Operating revenues:
Risk management claims administration services $12,026,894 15,409,398
Installations and programming 1,727,577 1,110,773
Computer equipment rental 1,549,281 1,852,040
Special project fees 4,573,704 5,558,368
Other 1,369,360 958,885
----------- ----------
Total operating revenues 21,246,816 24,889,464
Operating expenses:
Cost of services 14,796,405 17,360,285
Selling, general and administrative 4,039,478 3,163,539
----------- ----------
Total operating expenses 18,835,883 20,523,824
----------- ----------
Operating income 2,410,933 4,365,640
----------- ----------
Other income (expense):
Interest income 93,971 81,180
Interest expense (116,194) (92,185)
Other, net 155,913 125,902
----------- ----------
Total other income 133,690 114,897
----------- ----------
Earnings before cumulative
effect of change in accounting for
postretirement benefits 2,544,623 4,480,537
Cumulative effect of change in accounting
for postretirement benefits - (590,000)
----------- ----------
Net earnings $ 2,544,623 3,890,537
----------- ----------
----------- ----------
Net earnings allocated to:
General partner $ 1,154,759 1,786,924
Limited Partners 1,389,864 2,103,613
----------- ----------
$ 2,544,623 3,890,537
----------- ----------
----------- ----------
Earnings per unit before cumulative effect $ .43 .77
Cumulative effect per unit - 10
----------- ----------
Net earnings per unit $ .43 .67
----------- ----------
----------- ----------
Distributions per unit $ .20 .32
----------- ----------
----------- ----------
Average units outstanding:
General partner 2,666,672 2,666,672
Limited partner 3,209,595 3,138,669
----------- ----------
5,876,267 5,805,341
----------- ----------
----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statement of Changes in Partners' Equity
Six months ended June 30, 1996
(unaudited)
<TABLE>
General Limited
partner partners Total
---------- --------- ---------
<S> <C> <C> <C>
Partners' equity, January 1, 1996 $3,080,953 4,820,473 7,901,426
Net earnings 1,154,759 1,389,864 2,544,623
Distributions to partners (537,558) (647,004) (1,184,562)
Sale of partnership units (46,548 units) - 232,740 232,740
---------- --------- ----------
Partners' equity, June 30, 1996 $3,698,154 5,796,073 9,494,227
---------- --------- ----------
---------- --------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Cash Flows
Six months ended June 30, 1996 and 1995
1996 1995
----------- ----------
(unaudited)
Cash flow provided by operating activities $ 2,446,426 2,693,279
----------- ----------
Cash flows used by investing activities - additions
to property, plant and equipment (373,432) (2,107,144)
----------- ----------
Cash flows from financing activities:
Borrowings under interim construction loan - 1,658,135
Principal payments under capital lease
obligations (73,596) (170,760)
Principal payments of long-term debt - (583,238)
Distributions to partners (1,184,562) (1,879,064)
Sale of partnership units 232,740 383,416
----------- ----------
Net cash used by financing activities (1,025,418) (591,511)
----------- ----------
Net increase (decrease) in cash 1,047,576 (5,376)
Cash and cash equivalents at beginning of period 4,343,196 3,354,842
----------- ----------
Cash and cash equivalents at end of period $ 5,390,772 3,349,466
----------- ----------
----------- ----------
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
June 30, 1996
(1) General
See note 1 of the Notes to the Consolidated Financial Statements in the
Partnership's December 31, 1995 Consolidated Financial Statements for a
summary of the Partnership's significant accounting policies.
The unaudited consolidated financial statements included herein were
prepared from the books of the Partnership in accordance with generally
accepted accounting principles and reflect all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management,
necessary to present a fair statement of the financial position, results of
operations and cash flows for the interim periods. Such financial
statements generally conform to the presentation reflected in the
Partnership's December 31, 1995 Consolidated Financial Statements. The
current interim period reported herein is included in the fiscal year
subject to independent audit at the end of that year and is not necessarily
an indication of the expected results for the fiscal year.
(2) Interim Construction Loan
During November 1994, the Partnership obtained a secured $3,145,000 interim
construction loan commitment from a bank to acquire, construct and renovate
certain facilities. At June 30, 1996, $2,668,088 was advanced under the
interim construction loan. The interim construction loan agreement
requires monthly payments of interest at the bank's prime rate or 8.25% at
June 30, 1996 and was originally due on March 31, 1996 but was extended to
December 31, 1996. Additionally, the Partnership is required to maintain a
compensating balance on deposit at the bank equal to 20% of the outstanding
interim construction loan balance.
The Partnership currently has commitments from the bank and the Amarillo
Economic Development Corporation (AEDC) to convert the interim construction
loan into long term debt upon maturity. Such long term debt is expected to
be amortized over a ten year period at the bank's prime rate. The portion
of the debt financed by the AEDC, approximately $1,400,000, is expected to
have a provision that allows for the refunding of all or a portion of the
interest paid if the Partnership maintains certain employment levels.
(3) Contingencies
The Partnership is a defendant in a lawsuit alleging nonperformance
relating to a contract. The plaintiff has alleged damages of $10,000,000,
subject to trebling, plus certain other damages. The case is in discovery
and the Partnership's liability, if any, is not determinable at this time.
The Partnership denies the allegations and intends to vigorously defend
this action. Also, the Partnership believes it has insurance coverage for
a part of the damages, if any. Management believes that the resolution of
this suit will not have a materially adverse effect on the Partnership's
consolidated financial position.
F-15
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(4) Accounting Pronouncement
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
(Statement 121). Statement 121 addresses the accounting for the impairment
of long-lived assets, certain identifiable intangibles and goodwill when
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Impairment is evaluated by estimating future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected future cash flows is less than the
carrying amount of the assets, an impairment loss is recognized. The
Partnership implemented Statement 121 on January 1, 1996; however, such did
not have a material effect on the Partnership's consolidated financial
position or results of operations.
(5) Conversion to Corporate Form
The Partnership has decided to reorganize from a partnership to corporate
form. It is currently expected that the conversion to corporate form will
be effective in late 1996.
F-16
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Partners
Corporate Systems, Ltd.:
We have audited the accompanying consolidated balance sheets of Corporate
Systems, Ltd. (a Texas limited partnership) and subsidiary as of December 31,
1995 and 1994, and the related consolidated statements of income, changes in
partners' equity, and cash flows for each of the years in the three-year
period ended December 31, 1995. These consolidated financial statements are
the responsibility of the Partnership's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Corporate
Systems, Ltd. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in notes 1 and 7, the Partnership adopted the provisions of the
Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER
THAN PENSIONS effective January 1, 1995.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
February 9, 1996
F-17
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Balance Sheets
December 31, 1995 and 1994
ASSETS 1995 1994
------ ----------- -----------
Current assets:
Cash and cash equivalents, including
interest-bearing assets of $3,200,000 in
1995 and $3,310,000 in 1994 $ 4,343,196 3,354,842
Trade accounts receivable, less allowance
for doubtful accounts of $501,111 in 1995
and $904,366 in 1994 (notes 2 and 8) 6,788,414 6,916,302
Prepaid expenses and supplies 681,106 308,887
Current portion of prepaid airline passes 26,858 125,737
----------- -----------
Total current assets 11,839,574 10,705,768
----------- -----------
Property, plant and equipment (notes 4 and 5):
Land and office buildings 4,072,265 3,114,251
Computer equipment 2,233,720 1,779,731
Leased computer equipment under capital leases 733,672 1,270,597
Furniture and fixtures 1,871,489 1,006,985
Computer software 911,756 652,470
----------- -----------
9,822,902 7,824,034
Less accumulated depreciation and amortization (3,492,357) (3,252,211)
----------- -----------
Net property, plant and equipment 6,330,545 4,571,823
----------- -----------
Prepaid airline passes, excluding current portion 43,066 47,209
Other assets, net 151,342 189,928
----------- -----------
$18,364,527 15,514,728
----------- -----------
----------- -----------
(Continued)
F-18
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Balance Sheets, Continued
LIABILITIES AND PARTNERS' EQUITY 1995 1994
-------------------------------- ----------- -----------
Current liabilities:
Interim construction loan (note 5) $ 2,668,088 -
Current maturities of long-term debt (note 5) - 1,139,076
Current maturities of obligations under
capital leases (note 4) 95,792 327,808
Accounts payable 1,574,492 2,360,568
Accrued expenses:
Employee commissions and bonuses 694,964 498,021
Profit sharing (note 6) 682,370 1,000,000
Distributions payable 940,202 -
Other 764,304 1,107,569
Lease incentive (note 4) 239,166 -
Deferred income 1,574,497 1,578,083
----------- -----------
Total current liabilities 9,233,875 8,011,125
----------- -----------
Obligations under capital leases, excluding
current maturities (note 4) 21,965 107,886
Lease incentive - noncurrent (note 4) 375,834 -
Deferred income - noncurrent 161,563 220,313
Accumulated postretirement benefit obligation
(note 7) 669,864 -
----------- -----------
Total liabilities 10,463,101 8,339,324
Partners' equity (note 10):
General partner 3,080,953 2,914,692
Limited partners 4,820,473 4,260,712
----------- -----------
7,901,426 7,175,404
----------- -----------
Commitments and contingencies (notes 4, 5, 6 and 9)
----------- -----------
$18,364,527 15,514,728
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Income
Years ended December 31, 1995, 1994 and 1993
<TABLE>
1995 1994 1993
----------- ---------- ----------
<S> <C> <C> <C>
Operating revenues (note 8):
Risk management claims administration services $26,030,942 23,838,381 19,504,041
Installations and programming 2,407,139 1,840,008 1,495,561
Computer equipment rental (note 4) 3,582,708 4,104,387 4,519,199
Special project fees 12,234,711 8,685,108 5,121,248
Other 1,839,364 1,278,735 1,128,920
----------- ---------- ----------
Total operating revenues 46,094,864 39,746,619 31,768,969
----------- ---------- ----------
Operating expenses (note 1):
Cost of services 35,630,595 29,268,495 21,362,548
Selling, general and administrative 5,816,266 5,357,658 5,554,351
----------- ---------- ----------
Total operating expenses 41,446,861 34,626,153 26,916,899
----------- ---------- ----------
Operating income 4,648,003 5,120,466 4,852,070
----------- ---------- ----------
Other income (expense):
Income associated with dissolved investment in
affiliated company (note 3) - - 730,780
Gain (loss) on sale of assets 7,834 (5,033) (143,685)
Interest income 159,812 151,794 71,126
Interest expense (144,391) (205,304) (365,652)
Other, net 195,857 272,968 206,545
----------- ---------- ----------
Total other income 219,112 214,425 499,114
----------- ---------- ----------
Earnings before cumulative
effect of change in accounting for
postretirement benefits 4,867,115 5,334,891 5,351,184
Cumulative effect of change in accounting
for postretirement benefits (note 7) 590,000 - -
----------- ---------- ----------
Net earnings $ 4,277,115 5,334,891 5,351,184
----------- ---------- ----------
----------- ---------- ----------
Net earnings allocated to:
General partner $ 1,952,931 2,453,004 2,460,496
Limited Partners 2,324,184 2,881,887 2,890,688
----------- ---------- ----------
$ 4,277,115 5,334,891 5,351,184
----------- ---------- ----------
----------- ---------- ----------
Earnings per unit before cumulative effect $ .83 .92 .92
Cumulative effect per unit .10 - -
----------- ---------- ----------
Net earnings per unit $ .73 .92 .92
----------- ---------- ----------
----------- ---------- ----------
Distributions per unit $ .67 .49 .14
----------- ---------- ----------
----------- ---------- ----------
Average units outstanding:
General partner 2,666,672 2,666,672 2,666,672
Limited partner 3,174,132 3,132,911 3,132,911
----------- ---------- ----------
5,840,804 5,799,583 5,799,583
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Changes in Partners' Equity
Years ended December 31, 1995, 1994 and 1993
General Limited
partner partners Total
------------ ---------- ----------
Partners' Equity, December 31, 1992 $ (319,158) 461,456 142,298
Net earnings 2,460,496 2,890,688 5,351,184
Distributions to partners (373,633) (438,958) (812,591)
----------- ---------- ----------
Partners' equity, December 31, 1993 1,767,705 2,913,186 4,680,891
Net earnings 2,453,004 2,881,887 5,334,891
Distributions to partners (1,306,017) (1,534,361) (2,840,378)
----------- ---------- ----------
Partners' equity, December 31, 1994 2,914,692 4,260,712 7,175,404
Net earnings 1,952,931 2,324,184 4,277,115
Distributions to partners (1,786,670) (2,149,088) (3,935,758)
Sale of partnership units (76,683 units) - 384,665 384,665
----------- ---------- ----------
Partners' equity, December 31, 1995 $ 3,080,953 4,820,473 7,901,426
----------- ---------- ----------
----------- ---------- ----------
See accompanying notes to consolidated financial statements.
F-21
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
<TABLE>
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 47,400,707 37,221,604 33,439,725
Cash paid to suppliers and employees (42,008,185) (31,473,775) (25,776,865)
Interest received 159,812 151,794 71,126
Interest paid (222,610) (205,304) (387,696)
------------ ----------- -----------
Net cash provided by operating activities 5,329,724 5,694,319 7,346,290
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from the sale of property, plant and
equipment 60,786 300 239
Additions to property, plant and equipment (3,617,340) (2,819,987) (249,462)
------------ ----------- -----------
Net cash used by investing activities (3,556,554) (2,819,687) (249,223)
------------ ----------- -----------
Cash flows from financing activities:
Borrowings under interim construction loan 2,668,088 - -
Principal payments under capital lease obligations (317,937) (426,764) (418,340)
Cash received from lease incentive 615,000 - -
Principal payments of long-term debt (1,139,076) (1,285,680) (1,364,066)
Distributions to partners (2,995,556) (2,840,378) (812,591)
Sale of partnership units 384,665 - -
------------ ----------- -----------
Net cash used by financing activities (784,816) (4,552,822) (2,594,997)
------------ ----------- -----------
Net increase (decrease) in cash 988,354 (1,678,190) 4,502,070
Cash and cash equivalents at beginning of year 3,354,842 5,033,032 530,962
------------ ----------- -----------
Cash and cash equivalents at end of year $ 4,343,196 3,354,842 5,033,032
------------ ----------- -----------
------------ ----------- -----------
(Continued)
</TABLE>
F-22
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Statements of Cash Flows, Continued
<TABLE>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $4,277,115 5,334,891 5,351,184
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 1,860,126 1,654,283 1,664,170
Provision (credit) for losses on
accounts receivable (478,075) 664,982 220,000
(Gain) loss on sale of assets (7,834) 5,033 143,685
Income associated with investment in
dissolved company - - (730,780)
Change in assets and liabilities:
Trade accounts receivable 605,963 (3,420,760) (1,149,063)
Prepaid expenses and supplies (372,219) (187,101) (22,611)
Prepaid airline passes 103,022 54,726 91,387
Other assets (15,874) 33,014 39,475
Accounts payable (786,076) 445,738 (412,785)
Accrued expenses (463,952) 581,714 946,789
Deferred income (62,336) 527,799 1,204,839
Accumulated postretirement benefit
obligation 669,864 - -
---------- --------- ---------
Net cash provided by operating activities $5,329,724 5,694,319 7,346,290
---------- --------- ---------
---------- --------- ---------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - During 1995,
distributions to partners totaling $940,202 were declared and recorded
as a liability.
See accompanying notes to consolidated financial statements.
F-23
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The principal business of Corporate Systems, Ltd. (the Partnership) is
to provide risk management and control services in various areas,
including medical, property and casualty, worker's compensation and
disability claims.
The Partnership operates under a Texas limited partnership agreement
which provides for an initial term of 30 years, beginning in 1976.
Under the agreement, the maximum amount of any limited partner's
individual liability may not exceed the contributions of such partner
plus related undistributed profits. Profits and losses of the
Partnership are allocated among the partners in proportion to the
Partnership units owned by each partner. The Partnership had 6,000,000
units authorized and 5,876,266 outstanding at December 31, 1995 and
5,799,583 outstanding at December 31, 1994 and 1993.
The general partner of the Partnership is CSC General Partner, Inc.
The general partner is responsible for management of the operations of
the Partnership. The general partner receives no management fees for
its services but is reimbursed for all expenses incurred in performing
services for the Partnership. Such reimbursed expenses were not
significant during 1995, 1994 and 1993.
The preparation of financial statements in accordance 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 revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(b) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Partnership and its wholly owned subsidiary, Diagnostic Profiles, Inc.
(DPI). All significant intercompany transactions and balances have
been eliminated in consolidation.
(c) TRADE ACCOUNTS RECEIVABLE
The Partnership maintains an allowance for doubtful accounts based on
management's estimate of the collectibility of all trade accounts
receivable. The Partnership's trade accounts receivable are generally
unsecured.
F-24 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(d) PREPAID AIRLINE PASSES
Prepaid airline passes allow certain employees to travel for a
specified amount of air miles per year. The passes are amortized as
they are used and the amount expected to be used during the next
fiscal year is included in current assets.
(e) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Leased computer
equipment under capital leases is stated at the lower of the present
value of minimum lease payments or the fair value of the equipment at
the inception of the lease. Office buildings are depreciated over
their estimated useful lives on the straight-line basis. Computer
equipment and furniture and fixtures are depreciated using accelerated
and straight-line methods over their estimated useful lives. Assets
recorded under capital leases are amortized using the straight-line
method over the shorter of the lease term or estimated useful life of
the asset.
Purchased computer software is included in property, plant and
equipment and is capitalized at cost and amortized using the straight-
line method over the estimated useful life of the software which
generally ranges from one to five years.
The Partnership removes fully depreciated plant and equipment,
including computer software, from the respective asset and accumulated
depreciation accounts. In 1995, 1994 and 1993, the Partnership removed
approximately $2,080,000, $1,123,000 and $911,000, respectively, of
fully depreciated assets.
During 1995, the Partnership capitalized approximately $78,000 in
interest costs incurred on debt obtained to finance the construction
of an additional office building.
In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO
BE DISPOSED OF (Statement 121). Statement 121 addresses the accounting
for the impairment of long-lived assets, certain identifiable
intangibles and goodwill when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Impairment is evaluated by estimating future cash flows expected to
result from the use of the asset and its eventual disposition. If the
sum of the expected future cash flows is less than the carrying amount
of the assets, an impairment loss is recognized. The Partnership
implemented Statement 121 on January 1, 1996; however, such did not
have a material effect on the Partnership's consolidated financial
position or results of operations.
(f) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Partnership sponsors a defined benefit health care plan for
substantially all retirees and employees. Prior to January 1, 1995,
the Partnership's policy had been to recognize expenses as claims were
paid. Effective January 1, 1995, the Partnership adopted SFAS No. 106,
EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
(Statement 106). Statement 106 requires accrual of postretirement
F-25 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
benefits other than pensions, primarily medical and dental benefits
provided to retired employees, during the years an employee provides
services. The cumulative effect of this change in accounting for such
postretirement benefits of $590,000 was reported in the 1995
consolidated statement of income.
(g) REVENUE RECOGNITION
Revenue from risk management claims administration services consists
of fees charged for the processing of various risk management reports
and related services and reimbursed costs associated with printing
and shipping such reports. Another revenue component of the risk
management claims administration services is the medical cost
management fee income which involves entering customer medical claims
into the system and performing an analysis of the cost on the claims.
Installations and programming revenue consists primarily of licensing
fees, file construction and custom programming services. Revenues
from computer equipment rentals represent amounts charged for leasing
certain computer equipment. Special project fees represent revenues
from agreements with several large customers to provide risk
management services. Significant terms of these special project
agreements generally include management fees based on a specified
amount or number of claims on file, and reimbursement of direct and
indirect operating costs. Also, the agreements have initial terms and
renewal options and are subject to termination (generally 180 day
notice) by the other party. Other operating revenues primarily result
from software sales and support, consulting and certain other
reimbursed costs. Consulting fees include amounts charged for
training customer personnel.
Revenue from risk management claims administration services, computer
equipment rentals, special project fees, software support agreements
and reimbursed costs are generally recognized at the time services are
performed or ratably over the contract period during which the
services are performed.
Revenue from software licensing fees that have insignificant vendor
obligations remaining are recognized on delivery of the software. The
remaining obligations are accounted for by deferring a pro rata
portion of the revenue and recognizing it either ratably as the
obligations are fulfilled or on completion of performance. For
software licensing fees that have significant vendor obligations
remaining, revenue is not recognized until delivery has occurred and
other remaining vendor obligations are no longer significant.
Postcontract customer support is generally recognized upon delivery of
software, with the cost of providing postcontract customer support
charged to operations as incurred or accrued and charged to operations
at the time revenue is recognized, whichever occurs first.
Revenues from custom programming, software sales requiring significant
modifications or customization and other consulting fees are generally
recognized using percentage of completion contract accounting. As
contracts progress, changes from the original contract such as
contract specifications, completion dates, and final contract
settlements may result in changes to revenues and profit. These
changes are recognized in the period that the revisions occur.
F-26 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(h) COMPUTER SOFTWARE DEVELOPMENT COSTS
Costs of internally developed software, primarily programmers'
salaries, are charged to expense as incurred. Production costs
incurred after technological feasibility has been established are not
considered significant.
(i) FEDERAL INCOME TAXES
Under provisions of the Internal Revenue Code, the income or loss of a
partnership is includable in the federal income tax returns of the
individual partners. Accordingly, federal income taxes related to the
Partnership have not been provided in the financial statements.
As a corporation, DPI's income is subject to taxation under provisions
of the Internal Revenue Code and a separate federal income return is
filed. Such amounts related to DPI were not significant in 1995, 1994
and 1993.
(j) CASH EQUIVALENTS
Cash equivalents of $3,200,000 and $3,310,000 at December 31, 1995 and
1994, respectively, consist of investments in U.S. Treasury Notes and
money market funds. The Partnership has an arrangement with a
financial institution that allows the Partnership's excess cash to be
invested in U.S. Treasury Notes under an agreement that requires the
financial institution to repurchase the investments as cash is needed
by the Partnership.
(k) RESEARCH AND DEVELOPMENT COSTS
Research and development costs of new products are expensed currently
as required by SFAS No. 2, ACCOUNTING FOR RESEARCH AND DEVELOPMENT
COSTS. Costs charged to expenses for 1995, 1994 and 1993 were
approximately $4,081,000, $2,129,000 and $245,000, respectively.
Additionally, the Partnership has a software development project with
one customer. The arrangement requires the customer to reimburse the
Partnership for certain expenses, primarily programmers salaries,
incurred on the project. During 1995 and 1994, revenues totaling
approximately $1,767,000 and $1,907,000, respectively, were recognized
as a result of such reimbursements. There were no such amounts in
1993.
F-27 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Company disclose estimated fair values for its
financial instruments. Fair value estimates at December 31, 1995, are
set forth below for the Partnership's financial instruments.
Cash and cash equivalents, trade accounts receivable, accounts payable
and accrued expenses - The carrying amounts approximate fair value
because of the short maturity of these instruments.
Interim construction loan - The carrying amount of the interim
construction loan approximates market because the interest rate is
based on prime lending rates.
(m) RECLASSIFICATIONS
Certain amounts in the 1994 and 1993 consolidated financial statements
have been reclassified to conform to the 1995 method of presentation.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The following is a summary of activity in the allowance for doubtful
accounts for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
--------- ------- -------
Balance at beginning of year $ 904,366 276,608 64,538
Provisions charged (credited)
to expense (478,075) 664,982 220,000
Charge-offs (360) (94,978) (97,382)
Recoveries 75,180 57,754 89,452
--------- ------- -------
Balance at end of year $ 501,111 904,366 276,608
--------- ------- -------
--------- ------- -------
(3) DISSOLUTION OF AFFILIATED COMPANY
During 1993, the Partnership recognized income of $730,780 related to
Genesys Cost Management Systems, Inc., an entity that the Partnership held
a 49.5% interest in prior to its dissolution in 1993. The income related
to the collection of receivables previously written off and reversal of
certain accrued liabilities.
(4) LEASES
The Partnership is obligated under various capital leases for certain
computer equipment and furniture that expire over the next two years. At
December 31, 1995 and 1994, computer equipment and furniture having a cost
of approximately $734,000 and $1,271,000, respectively, and accumulated
depreciation of approximately $636,000 and $921,000, respectively, were
recorded under capital leases and included in property, plant and
equipment. Amortization of assets held under capital leases is included
with depreciation and amortization expense.
F-28 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
The Partnership also has several noncancelable operating leases primarily
for equipment and office space that expire over the next four years. The
Partnership has several operating leases for certain computer equipment
that require monthly rental payments that are charged to operations as
incurred. Rent expense for all the Partnership's operating leases totaled
approximately $4,986,000, $4,187,000 and $3,777,000 for 1995, 1994 and
1993, respectively.
During 1995, the Partnership terminated an operating lease on certain
computer equipment prior to the expiration of such lease. Such early
termination resulted in the Partnership recognizing a loss of approximately
$670,000, which represents the Partnership's remaining obligation on the
lease at the date of termination. Additionally, the Partnership entered
into a new lease for similar computer equipment and received an incentive
from the new lessor totaling $615,000. Such incentive has been reflected
as a liability in the accompanying consolidated balance sheet at December
31, 1995 and will be amortized over the three year lease term which begins
in January 1996. Although a loss was recognized in 1995 as a result of
this transaction, the Partnership's management believes the economic
benefits that will be realized in subsequent years under the new lease due
to reduced obligations will exceed the loss realized in the current year.
The following is a schedule by year of future minimum lease payments under
noncancelable operating leases (with initial or remaining lease terms in
excess of one year) and the present value of the future minimum capital
lease payments as of December 31, 1995:
Year ending December 31: CAPITAL OPERATING
LEASES LEASES
-------- ---------
1996 $112,417 3,721,331
1997 22,827 2,325,831
1998 - 1,577,773
1999 - 36,910
---------
Total minimum lease payments 135,244 7,661,845
Less amount representing interest 17,487 ---------
-------- ---------
Present value of net minimum capital lease
payments 117,757
Less current maturities of obligations under
capital leases 95,792
--------
$ 21,965
--------
--------
Certain computer equipment leased by the Partnership under long-term leases
is subleased to its customers on a month-to-month basis.
F-29 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(5) BORROWINGS
Long-term debt at December 31, 1995 and 1994 consists of the following:
1995 1994
--------- ---------
Note payable to a bank, due in monthly
installments, including interest at
1% over prime, and final installment
due December 10, 1995; secured by
substantially all the Partnership's assets $ - 665,019
Noninterest bearing obligation related to
computer software with final payment due
on April 1, 1995 (net of discount based on
imputed interest rate of 8.0%) - 401,587
Real estate lien note due in monthly
installments of $12,500 plus interest at
3/4% above prime. Remaining balance due
August 15, 1995 - 72,470
--------- ---------
$ - 1,139,076
--------- ---------
--------- ---------
During November 1994, the Partnership obtained a secured $3,145,000
interim construction loan commitment from a bank to acquire, construct and
renovate certain facilities. In connection with the commitment, the bank
agreed to provide permanent long-term financing of up to $1,445,000,
subject to certain conditions. The Partnership also has a commitment of
$1,400,000 from the Amarillo Economic Development Corporation for a
permanent loan for the same purpose as the bank permanent loan, secured by
an inferior lien on the same collateral.
At December 31, 1995, $2,668,088 was advanced under the interim
construction loan. The interim loan agreement requires monthly payments of
interest at the bank's prime rate or 8.5% at December 13, 1995 and is due
March 31, 1996. Additionally, the Partnership is required to maintain a
compensating balance on deposit at the bank equal to 20% of the outstanding
interim construction loan balance. It is expected that upon maturity, the
interim loan will be converted to long-term debt.
(6) EMPLOYEE BENEFIT PLANS
The Partnership has a self-employed profit sharing plan that provides
certain retirement, disability, death and termination benefits for eligible
employees and owner-employees (employees who own more than 10% of the
capital interest in the Partnership). Additionally, the Plan was amended
to provide for a 401(k) arrangement whereby each participant may elect to
contribute a portion of their salary to the Plan beginning in 1994. Each
plan year, the Partnership may contribute an amount of matching
contributions determined at the Partnership's discretion. Such matching
contributions are allocated to participants based on the Plan's provisions.
Additional discretionary Partnership contributions may also be made.
Participant after-tax contributions are not allowed. The provision for the
Partnership's matching contributions for 1995 and 1994 was approximately
$237,000 and $253,000, respectively. The provision for discretionary
profit sharing contributions was approximately $682,000, $1,000,000 and
$500,000 for 1995, 1994 and 1993, respectively.
F-30 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
During 1995, the Partnership adopted an incentive award plan that provides
certain employees with cash equivalent options to purchase limited
partnership units valued at $5 per unit. Under this plan, a total of 95,096
unit options were granted. Of this total, 50% become vested and are
eligible to be exercised during 1996 with the remainder eligible in 1997.
Also during 1995, the Partnership expensed and paid out approximately
$301,000 under a similar incentive plan. Under this plan, 42,140 options
for units were granted and exercised.
The Partnership self-insures group health care for employees. Claims
expense, including estimated incurred but not reported claims, was
approximately $840,000, $1,154,000 and $759,000 in 1995, 1994 and 1993,
respectively.
(7) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
As discussed in note 1, the Partnership adopted Statement 106, effective
January 1, 1995. The Partnership recognized the entire transition
obligation of approximately $590,000 at the date of adoption. For the year
ended December 31, 1995, net periodic pension cost consisting of the
portion of expected postretirement benefit obligation attributable to
employee service during the period and interest costs associated with the
unfunded accumulated obligation for future benefits was approximately
$98,000. The effect of adopting Statement 106 on net earnings and the net
periodic postretirement benefit cost for the year ended December 31, 1995,
was a decrease of approximately $670,000 and $80,000, respectively.
Postretirement benefits costs for 1994 and 1993 have not been restated.
Summary information on the Partnership's plan for the year ended December
31, 1995 is as follows:
Accumulated postretirement benefit
obligation at January 1, 1995:
Actives eligible to retire $115,191
Retired participants 260,801
Actives not yet eligible to retire 214,433
--------
Accrued postretirement benefit costs 590,425
Postretirement benefit cost 98,165
Benefit payments made (18,726)
--------
Obligation at December 31, 1995 $669,864
--------
--------
F-31 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
A summary of the service cost and interest cost components for the
Partnership's plan for 1995 and the effect of a one-percentage-point
increase in the assumed health care cost trend rate is as follows:
Current
Medical Current
Trend Assumptions
Assumptions Plus 1%
----------- -----------
Service cost $55,000 66,000
Interest cost 43,000 48,000
------- -------
$98,000 114,000
------- -------
------- -------
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5%. The assumed health care cost trend rate was
10% graded down to 4.5% after ten years.
(8) BUSINESS AND CREDIT CONCENTRATIONS
The Partnership's customers are located throughout the United States.
Revenues which individually represent more than five percent of total
operating revenues during the years ended December 31 are as follows:
1995 1994 1993
----------- ---------- ----------
Customer "A" $ 5,854,233 5,536,087 3,332,442
Customer "B" 5,670,300 6,925,341 4,622,558
Customer "C" 4,139,768 3,697,641 3,494,281
Customer "D" 3,824,381 - -
Customer "E" 2,070,013 2,316,742 -
----------- ---------- ----------
$21,558,695 18,475,811 11,449,281
----------- ---------- ----------
----------- ---------- ----------
At December 31, 1995 and 1994, the Partnership had approximately
$4,560,000 and $6,906,000, respectively, of unsecured trade accounts
receivable due from customers which operate in the insurance industry.
(9) CONTINGENCIES
The Partnership is a defendant in a lawsuit alleging nonperformance
relating to a contract. The plaintiff has alleged damages of $10,000,000,
subject to trebling, plus certain other damages. The case is in discovery
and the Partnership's liability, if any, is not determinable at this time.
The Partnership denies the allegations and intends to vigorously defend
this action. Also, the Partnership believes it has insurance coverage for
a part of the damages, if any. Management believes that the resolution of
this suit will not have a materially adverse effect on the Partnership's
consolidated financial position.
F-32 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(10) CONVERSION TO CORPORATE FORM
The Partnership has elected to reorganize from a partnership to corporate
form. It is currently expected that the conversion to corporate form will
be effective in mid 1996.
F-33
<PAGE>
GLOSSARY
The following defined terms are used frequently in this Prospectus.
Acceptance Period The period for 30 days following the
date the Holding Company delivers the
Subscription Agreement to the Limited
Partners and the CSC Shareholders or
for such longer period of time as the
Holding Company may determine.
CSC Shares Shares of common stock of CSC General
Partner, Inc.
Common Stock Common Stock, par value $.001 per
share, of the Holding Company.
Corporate Systems The Partnership prior to
Reorganization or the Holding Company
after the Reorganization, or both.
ESOP Employee Stock Ownership Plan.
ESOT Employee Stock Option Trust.
Exchange Offer The offer made by the Holding Company
to the Limited Partners and the CSC
Shareholders to exchange Units or CSC
Shares for Holding Company Stock.
General Partner CSC General Partner, Inc., a Texas
corporation, the general partner of
the Partnership.
General Partner Shareholders Holders of the General Partner Shares.
Holding Company Corporate Systems Holding, Inc., a
Texas corporation, formed to become the
Partnership's corporate successor.
Limited Partner A Unitholder who is not the General Partner.
Management The officers and directors of the General
Partner.
Partner The General Partner and all Limited Partners,
collectively, where no distinction is required
by the context in which the term is used
herein. Reference to a "Partner" will be to
any one of the Partners.
Partnership Corporate Systems, Ltd., a Texas limited
partnership.
Plan A plan prepared by the General Partner that
sets forth the terms of the Reorganization.
G - 1
<PAGE>
Registration Statement The Registration Statement on Form S-4
(Registration No. 33-30084) of the Holding
Company filed with the SEC, together with all
amendments thereto, of which this Prospectus
is a part.
Reorganization The reorganization of the Partnership to
corporate form.
SEC The Securities and Exchange Commission.
Unit A unit representing an ownership interest in
the Partnership, including the entire legal and
equitable ownership interest of a partner in
the Partnership at any particular time,
including without limitation, the respective
Partner's interest in the capital, income,
gains, profits, losses, deductions, and
expenses of the Partnership. When used in the
context of the General Partner, "Unit" means
the Units held by the General Partner. When
used in the context of a Limited Partner,
"Unit" means the Unit or Units held by a
Limited Partner.
Unitholder A holder of one or more Units.
G - 2
<PAGE>
Part II--Information Not Required in Prospectus
Item 20. Indemnification of Directors and Officers
The Limited Partnership Agreement of Corporate Systems, Ltd. indemnifies
the General Partner, each officer and director of the General Partner and each
of their agents for liability or losses sustained by reason of their acts or
omissions while acting on behalf of, or in furtherance of the interest of, the
Limited Partnership.
The Bylaws of CSC General Partner, Inc. the General Partner of Corporate
Systems, Ltd., indemnifies officers, directors and employees as provided in
Section 2.02 of the Texas Business Corporation Act. Section 2.02 of the Texas
Business Corporation Act empowers a corporation to indemnify its directors,
officers, employees and former directors and officers and to purchase insurance
with respect to liability arising out of their capacity or status as such.
Section 2.02 provides further that the indemnification permitted in the statute
is not exclusive of any other rights to which the directors and officers may be
entitled under any bylaw, agreement, vote of shareholders or otherwise.
Under the Articles of Incorporation of the Corporate Systems Holding, Inc.,
the Holding Company has the authority and power to indemnify its directors,
officers, employees and agents to the full extent permitted by Nevada law.
Section 78.751 of the Nevada Revised Statutes empowers a corporation to
indemnify a person who is a party or is threatened to be named a party to any
threatened, administrative or investigative suit or proceeding by reason of
the fact that he or she is or was a director, officer, employee or agent of
the corporation.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
2 Plan of Reorganization
3 (i) Articles of Incorporation of Holding Company
(ii) Bylaws of Holding Company
(iii) Articles of Incorporation of General Partner
(iv) Bylaws of General Partner
(v) Partnership Agreement of Partnership
4 Instrument defining the rights of security holders (see Articles of
Incorporation)
8 Form of opinion of Strasburger & Price, LLP regarding tax matters
10 (ii) Software License, Development Services and Maintenance
Agreement between Partnership and Hartford Fire Insurance
Company (Redacted for Confidentiality)
10 (iii) CS-MCM Management System Agreement for Computer Services
between Partnership and Travelers Insurance Company (Redacted
for Confidentiality)
10 (iv) Agreement for Information Management Services between AEtna
Casualty and Surety Company, AEtna Technical Services, Inc.
and Partnership (Redacted for Confidentiality)
23 (i) Consent of KPMG Peat Marwick LLP
(ii) Consent of Gibson, Ochsner & Adkins, LLP (included in
previously filed Exhibit 5)
(iii) Consent of Strasburger & Price, LLP
24 Power of Attorney (included on signature page of this registration
statement, as previously filed)
27 Financial Data Schedule
99 Form of Subscription Agreement
(b) Financial Statement Schedules (none required)
Item 22. Undertakings
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule
II-1
<PAGE>
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Items 4, 10(b), 11, or 13 of the Form, within one business
day of receipt of such request, and to send the incorporated documents by
first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) The undersigned registrant hereby undertakes as follows: That prior
to any public reoffering of the securities registered hereunder through
the use of a prospectus which is a part of this registration statement,
by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
(e) The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph h(i) immediately preceding, or (ii) that purports
to meet the requirements of section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will
not be used until such amendment is effective, and that, for the purposes
of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING FOR FORM S-4 AND HAS DULY CAUSED THIS AMENDMENT TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, WHO ARE
DULY AUTHORIZED, IN THE CITY OF AMARILLO, STATE OF TEXAS, ON AUGUST 29, 1996.
CORPORATE SYSTEMS HOLDING, INC.
By: /s/ Johnny E. Mize
-----------------------------------
Johnny E. Mize, President and CEO
(Signature and Title)
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following persons the
capacities and on the date indicated.
Signature Title
- --------- -----
/s/ Johnny E. Mize President, CEO
- ----------------------------- (Principal Executive Officer
(Johnny E. Mize) and Director)
/s/ Michael D. Unruh (Principal Financial and
- ----------------------------- Accounting Officer
(Michael D. Unruh)
/s/ Max R. Sherman (Chairman of the Board of
- ----------------------------- Directors)
(Max R. Sherman)
Guyon H. Saunders (Director)
- -----------------------------
(Guyon H. Saunders)
/s/ Edward A. Fancher, Jr. (Director)
- -----------------------------
(Edward A. Fancher, Jr.)
/s/ Jess Latham, Jr. (Director)
- -----------------------------
(Jess Latham, Jr.)
/s/ Charles Scott Gilmour (Director)
- -----------------------------
(Charles Scott Gilmour)
By: /s/ Johnny E. Mize
--------------------------
Johnny E. Mize
(Attorney-in-Fact)
August 29, 1996
II-3
<PAGE>
PLAN OF REORGANIZATION
FOR
CORPORATE SYSTEMS, LTD.
* * * * * * * * * * * * * * * * * * * * * * *
THIS PLAN OF REORGANIZATION (the "Plan") is by and among Corporate Systems,
Ltd., a Texas limited partnership (the "Partnership"); CSC General Partner,
Inc., a Texas corporation ("CSC"); and Corporate Systems Holding, Inc., a newly
organized Nevada corporation (the "Holding Company").
WHEREAS, the business known as Corporate Systems is now conducted by the
Partnership; and
WHEREAS, CSC serves as the general partner of the Partnership; and
WHEREAS, ownership of the Partnership is composed of one class of
Partnership interest divided into units (the "Units"), with CSC holding
2,666,672 of the outstanding Units, and the remaining 3,256,142 Units being
divided among 255 limited partners of the Partnership (the "Limited Partners");
and
WHEREAS, CSC has issued to its shareholders (the "CSC Shareholders") one
share of its common stock, $0.10 par value (the "CSC Shares"), for each Unit it
holds, so that there are 2,666,672 outstanding CSC Shares divided among 28 CSC
Shareholders; and
WHEREAS, the Board of Directors of CSC has determined it to be in the best
interests of the Limited Partners, the CSC Shareholders, and Corporate Systems
to convert Corporate Systems to corporate form, replacing Units and CSC Shares
with shares of common stock, $0.001 par value, to be issued by the Holding
Company ("Holding Company Common Stock"); and
WHEREAS, the Board has also determined it to be in the best interests of
the Limited Partners, the CSC Shareholders, and Corporate Systems for the
business to be conducted by CSC as a subsidiary of the Holding Company, but with
the state of incorporation of the subsidiary to be changed to Nevada.
NOW, THEREFORE, the Partnership, CSC, and the Holding Company hereby adopt
the Plan, upon the terms and subject to the conditions set forth in this Plan.
ARTICLE 1
FORMATION OF HOLDING COMPANY
1.1 CSC shall cause the Holding Company to be formed as a Nevada
corporation.
<PAGE>
1.2 CSC shall cause Corporate Systems Successor, Inc. ("CSS"), a Texas
corporation that has not conducted any business activities, to be merged into
the Holding Company pursuant to the provisions of Article 5.01 of the Texas
Business Corporation Act, the Nevada General Corporation Law, and Sections
368(a)(1)(A) and (F) of the Internal Revenue Code in order to re-incorporate CSS
as a Nevada corporation.
1.3 When the merger of CSS into the Holding Company becomes effective, the
existence of CSS as a separate and distinct entity will cease. At that time,
the Holding Company will succeed, without other transfer, to all the rights and
property of CSS. All rights of creditors and all liens on the property of CSS
will remain in force with respect to property affected by such liens immediately
prior to the merger.
ARTICLE 2
EXCHANGE OF SHARES
2.1 The Holding Company shall make an offer to the CSC Shareholders and
the Limited Partners (the "Exchange Offer") under which the Holding Company will
issue one share of Holding Company Common Stock for each CSC Share that is
transferred to the Holding Company pursuant to the Exchange Offer and one share
of Holding Company Common Stock in exchange for each Unit that is transferred to
the Holding Company pursuant to the Exchange Offer. A subscription agreement, a
copy of which is attached as Exhibit 2.1, will be sent to the Limited Partners
and the CSC Shareholders to be completed and executed by the Limited Partners
and CSC Shareholders who accept the Exchange Offer. The subscription agreement
must be completed, executed and returned to the Holding Company within the
"Acceptance Period". The Acceptance Period shall be for 30 days following the
Holding Company's delivery of the subscription agreement to the Limited Partners
and CSC Shareholders or for such longer period or periods of time as the Holding
Company may, from time to time, determine; provided that any extension or
extensions of the Acceptance Period shall be in the sole discretion of the
Holding Company.
2.2 Under the Exchange Offer, the Limited Partners and the CSC Shareholders
who accept the Exchange Offer will be treated identically. Each Limited Partner
who accepts the Exchange Officer will receive one share of Holding Company
Common Stock for each Unit owned, and each CSC Shareholder will receive one
share of Holding Company Common Stock for each CSC Share owned.
2.3 Each Limited Partner and CSC Shareholder who accepts the Exchange Offer
must tender all his or her Units or CSC Shares, as applicable. The Holding
Company will not accept a partial tender of Units or CSC Shares.
2.4 If each CSC Shareholder tenders all of his or her CSC Shares in
exchange for Holding Company Common Stock and if all or at least a substantial
majority of the Limited Partners tender all their Units in exchange for Holding
Company Common Stock, then the Holding Company will issue shares of its Common
Stock to the CSC Shareholders and the Limited Partners who accepted the Exchange
Offer. If the General Partner determines, in its sole discretion, that an
insufficient amount of Units were tendered by Limited Partners
2
<PAGE>
in exchange for Holding Company Common Stock, the Exchange Offer and this
Plan will be terminated.
2.5 Upon completion of the transfers of the CSC Shares and the Units to
the Holding Company pursuant to the Exchange Offer, CSC's temporary and
transitory ownership of the organizational shares of the Holding Company Common
Stock shall be terminated by causing the shares of Holding Company Common Stock
issued to CSC upon the organization of the Holding Company to be cancelled in
exchange for the reimbursement to CSC of all cash contributed to CSS and the
Holding Company upon the initial organization of such corporations.
ARTICLE 3
TRANSFER OF UNITS TO CSC
3.1 After the Holding Company issues shares of its common stock to the CSC
Shareholders and Limited Partners that accept the Exchange Offer, the Holding
Company will transfer all of the Units it acquired in the Exchange Offer to CSC
in exchange for the issuance to the Holding Company of 1,000 CSC Shares, after
which transaction CSC will then own all or substantially all the Units of the
Partnership.
ARTICLE 4
CONVERSION OF CSC TO NEVADA CORPORATION
4.1 The Holding Company shall cause a Nevada corporation to be formed to be
named Corporate Systems, Inc. (the "Operating Company").
4.2 The Holding Company shall cause CSC to be merged into the Operating
Company pursuant to the provisions of Article 5.01 of the Texas Business
Corporation Act, the Nevada General Corporation Law, and Sections 368(a)(1)(A)
and (F) of the Internal Revenue Code.
4.3 When the merger of CSC into the Operating Company becomes effective,
the existence of CSC as a separate and distinct entity will cease. At that
time, the Operating Company will succeed, without other transfer, to all the
rights and property of CSC. All rights of creditors and all liens on the
property of CSC will remain in force with respect to property affected by such
liens immediately prior to the merger.
ARTICLE 5
DISSOLUTION OF PARTNERSHIP
5.1 At the discretion of the Operating Company, acting as the general
partner of the Partnership, the Partnership will be dissolved pursuant to the
Partnership Agreement and the asset and liabilities of the Partnership will be
distributed to the Operating Company and any Limited Partners that did not
transfer their Units to the Holding Company pursuant to the Exchange Offer.
3
<PAGE>
ARTICLE 6
CONDITIONS TO THE REORGANIZATION
6.1 The following terms are conditions that must be fulfilled for the
Reorganization to be consummated:
(a) the amendment to the partnership agreement of the Partnership
which is attached as Exhibit 6.1(a) must be approved by Limited
Partners holding at least a majority of the outstanding Units;
(b) each CSC Shareholder must accept the Exchange Offer within the
Acceptance Period; and
(c) all or substantially all the Limited Partners, as determined in
the discretion of the Operating Company, must accept the Exchange
Offer within the Acceptance Period.
6.2 For the purposes of this Plan 6.2, the "Reorganization" shall mean
and include: (i) the exchange of CSC Shares and Units for shares of Holding
Company Common Stock pursuant to Article 2 of this Plan; (ii) the transfer of
Units to CSC in exchange for CSC Shares pursuant to Article 3 of this Plan;
(iii) the conversion of CSC to a Nevada corporation pursuant to Article 4 of
this Plan; and (iv) in the event the Partnership is dissolved, the dissolution
of the Partnership pursuant to Article 5 of this Plan.
6.3 Notwithstanding the preceding paragraph, CSC may, in its
discretion, waive any or all of the conditions to the Reorganization.
ARTICLE 7
MISCELLANEOUS
7.1 The officers of CSC, the Partnership, the Holding Company, and the
Operating Company are authorized to take, or cause to be taken, any and all such
actions as the officer or officers in their discretion may deem necessary or
desirable in order to consummate the transactions contemplated by this Plan.
7.2 Except as otherwise provided in this Plan, this Plan may be amended,
modified, or terminated by written document executed by the Partnership, CSC,
and the Holding Company.
7.3 This Plan shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns.
7.4 Except as otherwise specifically provided in this Plan, CSC, the
Partnership, the Holding Company, and the Operating Company shall each pay its
own expenses incurred in connection with this Plan.
4
<PAGE>
EXHIBIT 2.1
SUBSCRIPTION AGREEMENT
CORPORATE SYSTEMS HOLDING, INC.
SUBSCRIPTION AGREEMENT
TO: CORPORATE SYSTEMS HOLDING, INC.
The undersigned (hereinafter referred to as "SUBSCRIBER") hereby subscribes
for the number of shares of common stock ("HOLDING COMPANY SHARES") in CORPORATE
SYSTEMS HOLDING, INC., a Nevada Corporation (the "HOLDING COMPANY") equal to the
sum of (a) the number of units of partnership interest ("UNITS") the undersigned
holds in Corporate Systems, Ltd. (the "PARTNERSHIP"), plus (b) the number of
shares of common stock ("GENERAL PARTNER SHARES") the undersigned owns in CSC
General Partner, Inc. (the "GENERAL PARTNER"), as set forth below, pursuant to
the terms of the Plan of Reorganization (the "PLAN") contained in the Prospectus
of the Partnership (the "PROSPECTUS"). Under the Plan, each Limited Partner of
the Partnership will exchange his, her, or its Units for Holding Company Shares;
and each Shareholder of the General Partner will exchange his, her, or its
General Partner Shares for Holding Company Shares (the "EXCHANGES"). The
undersigned hereby tenders (a) all of his, her, or its Units in the Partnership,
and (b) all certificates evidencing all of his, her, or its General Partner
Shares in exchange for Holding Company Shares. Subscriber must tender all his,
her or its Units and General Partner Shares. The Holding Company will not
accept any subscription agreements under which the Subscriber tenders only a
portion of his, her or its Units or General Partner Shares.
The subscription agreement must be returned to the Holding Company within the
Acceptance Period. The Acceptance Period is 30 days from the date the Holding
Company delivers this agreement to the limited partners of Corporate Systems,
Ltd. and to the shareholders of the General Partner or such longer period of
time as the Holding Company may determine.
Subscriber warrants and represents that:
1. Subscriber has received the Prospectus.
2. Subscriber has read and reviewed the Prospectus. Subscriber
understands the federal income tax aspects of the Exchanges and the other
transactions involved in the Reorganization and understands that the Partnership
and the General Partner have advised Subscriber to seek such tax advice relating
to such matters from such qualified sources as an attorney, accountant, or tax
advisor as Subscriber deems necessary. Subscriber understands that the
Partnership has obtained a tax opinion regarding the federal income tax
consequences of the Exchanges; however, the opinion does not and cannot cover
the specific tax effects of the Exchanges to each Limited Partner and
Shareholder of the General Partner. Subscriber understands that the Partnership
has not requested a ruling
5
<PAGE>
from the Internal Revenue Service as to the federal income tax consequences
of the Exchanges or the Reorganization.
3. Subscriber, if executing this Subscription Agreement in a
representative or fiduciary capacity, has full power and authority to execute
and deliver this Subscription Agreement on behalf of the subscribing individual,
ward, partnership, trust, estate, corporation, or other entity for whom
Subscriber is executing this Subscription Agreement; and such individual, ward,
partnership, trust, estate, corporation, or other entity has full right and
power to exchange his, her, or its Units and General Partner Shares for Holding
Company Shares pursuant to this Subscription Agreement.
4. Subscriber understands and agrees that the Exchanges are intended to
be treated as tax free transactions for federal income tax purposes. Subscriber
has been informed that for the Exchanges to constitute tax free transactions for
federal income tax purposes, those Limited Partners transferring their Units to
the Holding Company and those Shareholders transferring their General Partner
Shares to the Holding Company, considered together as a group, must be "in
control" of the Holding Company immediately after the Exchanges. For purposes
of determining the tax consequences of the Exchanges, "control" means owning at
least 80 percent of the issued and outstanding shares of the common stock of the
Holding Company. In determining the existence of such "control," sales,
exchanges, transfers by gift, or other dispositions of any of the shares of the
common stock of the Holding Company to be received in the Exchanges must be
taken into account. Subscriber understands that the representations and
warranties Subscriber makes in this Subscription Agreement will be relied upon
by the Holding Company, the General Partner, the Partnership, their counsel and
accounting firms, and all of the parties participating in the Exchanges; and
Subscriber consents to such reliance.
5. Subscriber represents and warrants that Subscriber is under no binding
commitment, and Subscriber is not subject to any agreement under which
Subscriber would sell, exchange, or otherwise dispose of any of the shares of
common stock of the Holding Company that Subscriber will receive as a result of
participation in the Exchanges. Subscriber understands that the Holding Company
plans to adopt an employee stock ownership plan ("Stock Plan"). Subscriber also
understands that such Stock Plan may offer to purchase from the Shareholders of
the Holding Company up to ten percent of the outstanding shares of the common
stock of the Holding Company. Except for the possibility that Subscriber might
accept such an offer, Subscriber represents and warrants that Subscriber has no
present plan or intention, and at the time of the Exchanges will not have any
present plan or intention, to sell, exchange, transfer by gift, or otherwise
dispose of any of the shares of the common stock of the Holding Company that
Subscriber will receive as a result of participation in the Exchanges.
Please complete the information on the following page:
6
<PAGE>
Name of Owner(s):
---------------------------------------------------------
Address:
------------------------------------------------------------------
Social Security or Tax Identification Number:
-----------------------------
1. Total amount of Units owned
----------
2. Total amount of General Partner Shares owned
----------
Total amount of Subscription (1+2)
----------
Signature:
------------------------------------------------------------------
Date: , 1996
-------------------
ACCEPTED:
CORPORATE SYSTEMS HOLDING, INC.
By:
----------------------------------------------
Date: , 1996
--------------
7
<PAGE>
EXHIBIT 6.1(a)
AMENDMENT TO LIMITED PARTNERSHIP
AMENDMENT TO LIMITED PARTNERSHIP AGREEMENT
OF
CORPORATE SYSTEMS, LTD.
The Limited Partnership Agreement of Corporate Systems, Ltd., dated April
23, 1976, is, upon an affirmative vote of the Partners holding a majority of the
outstanding Units, amended as follows:
1. The following paragraph shall be added as paragraph 15.10:
Notwithstanding any other provision in this Agreement to the contrary,
the General Partner may transfer all of its Units and Partnership Interest
as a General Partner to a new Nevada corporation to be called Corporate
Systems, Inc. pursuant to the merger of the General Partner with Corporate
Systems, Inc., if such transfer is made pursuant to the Plan of
Reorganization of the Partnership adopted by the General Partner in
July, 1996. After the merger, Corporate Systems, Inc. shall automatically
become the General Partner of the Partnership.
2. The following Article is added to the Agreement:
ARTICLE XXIII
PROCEDURES UPON DISSOLUTION PURSUANT TO PLAN OF REORGANIZATION
Section 23.1 DISSOLUTION AND WINDING-UP. Upon dissolution of the
Partnership pursuant to the Plan of Reorganization adopted by the
General Partner, the General Partner shall promptly commence winding up
the affairs of the Partnership pursuant to the appropriate provisions of
the Texas Revised Limited Partnership Act. During the winding-up of the
Partnership and prior to termination, the Partners shall continue to share
profits and losses in the same proportion as before the dissolution.
Section 23.2 LIQUIDATING DISTRIBUTIONS. Upon termination of the
Partnership pursuant to the terms of the Plan of Reorganization,
liquidating distributions to the Partners will be made as
follows, at the discretion of the General Partner:
(1) the General Partner, as the Partner holding a substantial
majority of the Units, will receive the assets of the Partnership in-
kind and the General Partner will assume all liabilities of the
Partnership; and
8
<PAGE>
(2) each Limited Partner who does not tender his or her Units to the
Corporate Systems Holding, Inc. pursuant to the Plan of Reorganization
will receive a liquidating cash distribution equal to such Limited
Partner's Participating Percentage in the fair value of the net assets
of the Partnership.
All distributions pursuant to this section shall be made no later than the
end of the Partnership's taxable year during which the liquidation of the
Partnership occurs (or if later, within 90 days after the date of such
liquidation).
Section 23.3 TERMINATION OF PARTNERSHIP. Upon the completion of the
liquidation of the Partnership and the distribution of all Partnership
assets, the Partnership's affairs shall terminate and the General Partner
shall cause to be executed and filed a certificate of cancellation of the
Partnership's certificate of limited partnership pursuant to the Texas
Revised Limited Partnership Act, as well as any and all other documents
required to effectuate the termination of the Partnership.
Section 23.4 NO OBLIGATION TO RESTORE DEFICIT CAPITAL ACCOUNT BALANCE.
No Partner, General or Limited, has any obligation to restore a deficit
balance in his or its capital account, or to make any contributions to the
Partnership in order to restore such deficit balance, or to make any
contribution to the capital of the Partnership solely by reason of such
deficit capital account balance. Any deficit balance in a Partner's
capital account shall not be considered an asset of the Partnership or of
any Partner.
Section 23.5 WITHHOLDING. The Partnership is authorized to withhold from
distributions to a Partner, or with respect to allocations to a Partner,
and to pay over to a federal, state or local government, any amounts
required to be withheld pursuant to the Code or any provisions of any other
federal, state or local law. Any amounts so withheld shall be treated as
distributed to such Partner pursuant to this Article for all purposes of
this Agreement, and shall be offset against the net amounts otherwise
distributable to such Partner. The Partnership may also withhold from
distributions that would otherwise be made to a Partner, and applied to the
obligations of such Partner, any amounts that such Partner owes to the
Partnership.
Section 23.6 LIMITATIONS. No Limited Partner who does not exchange his
or her Units to Corporate Systems Holding, Inc. pursuant to the Plan of
Reorganization will be entitled to demand and receive property other
than cash in return for his or her capital contribution to the Partnership.
Section 23.7 OVERRIDING PROVISION. The terms and conditions in this
Article shall override any conflicting terms or conditions set forth in any
other Article in this Agreement.
9
<PAGE>
ARTICLES OF INCORPORATION OF
CORPORATE SYSTEMS HOLDING, INC.
1. The name of the corporation is Corporate Systems Holding, Inc..
2. The period of its duration is perpetual.
3. The name of the designated resident agent and its street address in
Nevada where process may be served is:
The Corporation Trust Company of Nevada
One East First Street
Reno, Nevada 89501
4. The Corporation shall have authority to issue 20,000,000 shares of
common stock of $0.001 par value.
5. The governing board shall be styled as directors. The number of
directors shall be fixed by the Bylaws of the Corporation. The first Board of
Directors shall serve until the first annual meeting of shareholders or until
their successors are elected and qualified and shall consist of six (6) members,
whose names and addresses are as follows:
Name Address
---- -------
Edward A. Fancher, Jr. 500 S. Taylor
Amarillo, Texas 79101
Charles Scott Gilmour 1200 Corporate Systems Center
Amarillo, Texas 79102
Jess Latham 2027 S. Hughes
Amarillo, Texas 79109
Johnny Mize 1200 Corporate Systems Center
Amarillo, Texas 79102
Guyon H. Saunders 1200 Corporate Systems Center
Amarillo, Texas 79102
Max R. Sherman LBJ School of Public Affairs
The University of Texas at Austin
1
<PAGE>
Drawer 1, Austin Station
Austin, Texas 78712
6. The Corporation shall have the power to indemnify its directors,
officers, employees, and agents to the full extent permitted by Nevada law. A
director of the Corporation shall not be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for breach of the director's duty of loyalty
to the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under the terms of Section 78.037 of the Nevada Corporation Law, as the
same exists or hereafter may be amended, or (iv) for any transaction from which
the director derived any improper personal benefit. If the Nevada Corporation
Law is amended to authorize the further elimination or limitation of the
liability of directors, then the liability of a director of the Corporation, in
addition to the limitation on personal liability provided herein, shall be
limited to the fullest extent permitted by the amended Nevada Corporation Law.
Any repeal or modification of this section by the stockholders of the
Corporation shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Corporation existing
at the time of such repeal or modification.
7. (a) The Corporation may, in the discretion of the Board of Directors,
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that such person is or was a
director, officer, employee, or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee, or agent of
another corporation, partnership, joint venture, trust, other enterprise, or
employee benefit plan against reasonable expenses (including attorneys' fees),
judgments, fines, amounts paid in settlement actually and reasonably incurred by
such person in connection with such action, suit, or proceeding if such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. The termination of any action, suit, or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendre or its
equivalent, shall not, of itself, create a presumption that such person did not
act in good faith and in a manner that he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation may, in the discretion of the Board of Directors,
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending, or completed action or suit by or in the right of
the Corporation to procure a judgment in its favor by reason of the fact that
such person is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against expenses (including attorneys'
fees), actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit if such person acted in good faith
2
<PAGE>
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation; provided, that no indemnification shall be under
this Article 7.(b) in respect to any claim, issue, or matter as to which such
person shall have been adjudged to be liable to the Corporation unless and only
to the extent a court of appropriate jurisdiction shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity of such expenses that the court of appropriate jurisdiction, shall
deem proper.
(c) Any indemnification under Articles 7.(a) or 7.(b) (unless ordered
by a court of appropriate jurisdiction) shall be made by the Corporation only as
authorized in the specific case upon a determination by the Board of Directors
that indemnification of such person is proper in the circumstances because he
has met the applicable standard of conduct set forth in Articles 7.(a) or 7.(b).
Such determination shall be made (i) by the Board of Directors by a majority
vote of a quorum consisting of directors not parties to such action, suit, or
proceeding; or (ii) if such disinterested directors so direct, by independent
legal counsel, in a written opinion, selected by the Board of Directors; or
(iii) by the stockholders. In the event a determination is made under this
Article 7.(c) that the director, officer, employee, or agent has met the
applicable standard of conduct as to some matters but not as to others, amounts
to be indemnified may be reasonably prorated.
(d) To the extent that a director, officer, employee, or agent of the
Corporation has been successful on the merits or otherwise in the defense of any
action, suit, or proceeding referred to in Articles 7.(a) or 7.(b), or in
defense of any claim, issue, or matter in the action, suit, or proceeding, the
person may be indemnified against expenses (including attorneys' fees) actually
and reasonably incurred by the person in connection with the defense,
notwithstanding that the person has not been successful on any other claim,
issue, or matter in the action, suit, or proceeding.
(e) Expenses incurred by a person who is or was a director, officer,
employee, or agent of the Corporation in appearing at, participating in, or
defending any threatened, pending, or completed action, suit, or proceeding,
whether civil, criminal, administrative, or investigative, may be paid by the
Corporation, in the discretion of the Board of Directors, at reasonable
intervals in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee, or agent to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation.
(f) It is the intention of the Corporation to indemnify the persons
referred to herein to the fullest extent permitted by law. The indemnification
and advancement of expenses provided for herein shall not be deemed exclusive of
any other rights to which those seeking indemnification or advancement of
expenses may be or become entitled under any law, the Certificate of
Incorporation, Bylaws, agreement, the vote of stockholders or disinterested
directors or otherwise, or under any policy or policies of insurance purchased
and maintained by the Corporation on behalf of any such person, both as to
action in his official capacity and as to action
3
<PAGE>
in another capacity while holding such office, and shall continue as to a person
who has ceased to be a director or officer and shall inure to the benefit of the
heirs, executors, and administrators of such person.
(g) The indemnification provided for herein shall be subject to all
valid and applicable laws and, in the event the indemnification contemplated
hereby is found to be inconsistent with or contrary to any such valid laws, the
latter shall be deemed to control and this provision shall be regarded as
modified accordingly and, as so modified, to continue in full force and effect.
(h) For purposes of this Article, references to "the Corporation"
shall include all constituent corporations absorbed in a consolidation or merger
as well as the resulting or surviving corporation so that any person who is or
was a director, officer, employee, or agent of a constituent corporation or is
or was serving at the request of the constituent corporation as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, or other enterprise shall stand in the same position under the provisions
of this Article as to the resulting or surviving corporation as the person would
if the person had served the resulting or surviving corporation in the same
capacity.
(i) The Corporation may maintain insurance, at its expense, to
protect itself or any director or officer of the Corporation, or another
corporation, partnership, joint venture, trust, or other enterprise against any
such expense, liability, or loss, whether or not the Corporation would have the
power to indemnify such person against such expense, liability, or loss under
the Nevada Corporation Law.
8. The name and address of the incorporator signing the articles:
James M. House
701 S. Taylor, Suite 500
Amarillo, Texas 79101-2400
----------------------------------------
James M. House, Incorporator
4
<PAGE>
STATE OF TEXAS Section
Section
COUNTY OF POTTER Section
This instrument was acknowledged before me on July ____, 1996, by JAMES M.
HOUSE, as incorporator of Corporate Systems Holding, Inc.
---------------------------------------------
Notary Public, State of Texas
My Commission Expires:
-----------------------
9. CERTIFICATE OF ACCEPTANCE OF APPOINTMENT OF RESIDENT AGENT.
The Corporation Trust Company of Nevada hereby accepts appointment as
registered agent of the Corporation.
The Corporation Trust Company of Nevada
By:
-------------------------------------
Signature of Resident Agent
5
<PAGE>
Exhibit 3(ii)
BYLAWS
OF
CORPORATE SYSTEMS HOLDING, INC.
SECTION 1: SHAREHOLDERS' MEETINGS
1.1 PLACE OF MEETINGS. The Corporation may hold its shareholders'
meetings at the Corporation's registered office or at whatever other place in or
out of the State of Nevada as the Board of Directors may determine from time to
time.
1.2 TIME OF ANNUAL MEETING. The shareholders' annual meetings shall be
held on a day chosen by the Board of Directors during the month of April. If
this day falls on a legal holiday, the annual meeting will instead be held at
the same time on the next following business day.
1.3 NOTICE OF MEETING. The Secretary must give notice of each
shareholders' meeting to each shareholder entitled to vote at the meeting. The
Secretary must give the notice at least ten but not more than sixty days before
the date of the meeting. The Secretary may give the notice in one of the
following ways:
(a) delivering it personally or by messenger to the shareholder;
(b) mailing it to the shareholder at the shareholder's most recent
address appearing on the books of the Corporation or at the
address he has most recently specified for receiving notices; or
(c) delivering it to the shareholder using any other reasonable means
of delivering written communications.
The notice must be in writing. It must state the place, day, and hour of the
meeting, and, for special meetings, the purpose or purposes of the meeting.
The Secretary need not give notice of adjourned meetings unless the meeting
is adjourned for thirty days or more. In that case, the Secretary must give
notice of the adjourned meeting in the same manner as any special shareholders'
meeting.
1.4 SPECIAL MEETINGS. Any of the following persons may call a special
shareholders' meeting:
<PAGE>
(a) the President.
(b) the Board of Directors.
(c) any three or more Directors.
(d) any one or more shareholders holding shares that comprise not
less than one tenth of all the shares entitled to vote at the
meeting.
They may call special shareholders' meetings at any time and for any purpose or
purposes.
1.5 QUORUM. The holders of a majority of the Corporation's shares having
voting rights will constitute a quorum for transacting business. Once the
Secretary has confirmed the presence of a quorum at a shareholders' meeting, the
shareholders may continue to transact business at a meeting even if they fail to
maintain a quorum during the remainder of the meeting.
1.6 VOTING. Only persons listed as shareholders in the Corporation's
records on the record date for the meeting have the right to vote at the
meeting. The record date for a meeting will be the date on which the Secretary
gives notice of the meeting, unless the Board of Directors establishes as the
record date some other day. At each election for the Directors, each
shareholder has the right to vote the number of shares owned by him which carry
voting rights for as many persons as there are members of the Board to be
elected, but may not cumulate his votes. Shareholders must vote their shares by
voice vote unless any shareholder demands a ballot vote before the voting
begins.
1.7 PROXIES. Every person entitled to vote or execute consents may do so
either in person or by written proxy executed by him or his duly authorized
attorney in fact.
1.8 CONSENT OF ABSENTEES. No defect in calling or giving notice of a
shareholders' meeting will affect the validity of any action taken at the
meeting if:
(a) the meeting had a quorum, and
(b) each shareholder not present at the meeting in person or by proxy
(1) waives notice of the meeting,
(2) consents to holding the meeting, or
(3) approves the minutes of the meeting
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<PAGE>
in writing, executed before or after the meeting.
The Secretary must, however, file the waivers, consents, or approvals with the
corporate records or otherwise make them a part of the minutes of the meeting.
1.9 ACTION WITHOUT MEETING. The shareholders may take any action without
a meeting, without prior notice, and without a vote even though the Nevada
Private Corporation Act (or other law or rule) would otherwise require them to
take the action only at any annual or special shareholders' meeting. They may
do so, however, only if shareholders holding shares possessing enough votes to
take the action (if a meeting had been held and all shareholders entitled to
vote were present and voted at the meeting) sign a written consent or consents
that specify the action so taken.
SECTION 2: DIRECTORS
2.1 POWERS. The Board of Directors has the authority to exercise all the
Corporation's powers. They control the business and affairs of the Corporation
within any limitations imposed by law, the Articles of Incorporation, or these
Bylaws (particularly the limitations on actions requiring shareholder
authorization or approval). The Directors may not act individually, they may
act only as a board. The Board of Directors may, by contract or otherwise, give
general, limited, or special power and authority to the officers and employees
of the Corporation to transact the general business, or any special business, of
the Corporation. They may give powers of attorney to agents of the Corporation
to transact any special business.
2.2 NUMBER AND QUALIFICATION OF DIRECTORS. The Corporation has six
Directors. The Directors need not be shareholders of this Corporation or
residents of Nevada. The number of Directors may be increased or decreased from
time to time by amending these Bylaws, but no decrease may act to shorten the
term of any incumbent Director. The shareholders must elect additional
Directors to fill any vacancy on the Board caused by an increase in the number
of Directors at their annual meeting or at a special shareholders' meeting
called for that purpose.
2.3 ELECTION AND TERM OF OFFICE. The shareholders entitled to vote must
elect Directors annually. Each Director, once elected, holds office until his
successor is elected, or he dies, resigns, or is removed.
2.4 VACANCIES. Except as provided in Section 2.2, a majority of the
remaining Directors, though less than a quorum, or a sole remaining Director may
fill any vacancies on the Board of Directors. The shareholders may at any time
elect a Director to fill any vacancy not filled by the Directors.
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<PAGE>
2.5 REMOVAL OF DIRECTORS. The holders of a majority of the shares
entitled to vote for Directors may, at any regular or special shareholders'
meeting, remove the entire Board of Directors or any individual Director from
office with or without cause.
2.6 PLACE OF MEETINGS. The Board of Directors may hold their meetings at
the principal office of the Corporation or at whatever other place within or
outside the State of Nevada as they may designate from time to time.
2.7 REGULAR MEETINGS. The Board of Directors may hold regular meetings,
without call or notice, immediately following each annual meeting of the
Corporation's shareholders and at whatever other times they determine.
2.8 SPECIAL MEETINGS--CALL AND NOTICE. The Chairman of the Board (or, if
the Chairman of the Board is absent or unable or refuses to act, the President)
or any three or more Directors may call at any time special meetings of the
Board of Directors for any purpose. The person calling the special meeting must
give notice of the special meeting, stating the time and in general terms the
purpose or purposes of the meeting. The person may give the notice in writing,
by mailing, faxing, telegraphing, or personally delivering the notice to each
Director not later than the day before the day selected for the meeting.
2.9 QUORUM. A majority of the authorized number of Directors constitutes
a quorum for transacting business, except that a lesser number may adjourn
according to Section 2.11. They may then act by majority decision of the
Directors present, unless a greater number is required by law or by the Articles
of Incorporation.
2.10 BOARD ACTION WITHOUT MEETING. The Board of Directors may act without
a meeting, if all members of the Board individually or collectively consent in
writing to the action. Any action taken in this manner will have the same force
and effect as a unanimous vote of Directors at a meeting of the entire Board of
Directors.
2.11 ADJOURNMENT--NOTICE. A quorum of the Directors may adjourn any
Directors' meeting to meet again at a stated hour on a stated day. Notice of
the time and place where an adjourned meeting will be held need not be given to
absent Directors if the time and place is fixed at the adjourned meeting. If a
quorum is not present at a duly called regular or special meeting of the Board
of Directors, a majority of the Directors present may adjourn from time to time
until the time fixed for the next regular meeting of the Board.
2.12 CONDUCT OF MEETINGS. The Chairman of the Board or, in the Chairman of
the Board's absence, any Director selected by the Directors present, will
preside at meetings of the Board of Directors. The Secretary or, in the
Secretary's absence, any person appointed by the presiding officer, will act as
secretary of the Board of Directors.
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<PAGE>
2.13 COMPENSATION. The Board of Directors may determine whether and to
what extent the corporation will pay the Directors and members of committees any
compensation for their services or reimburse them for their expenses.
2.14 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Board of Directors may
authorize the Corporation to pay expenses incurred by, or to satisfy a judgment
or fine rendered or levied against, present or former Directors, officers, or
employees of the Corporation in accord with the Corporation's Articles of
Incorporation and Nevada law.
SECTION 3: OFFICERS
3.1 TITLE AND APPOINTMENT. The Corporation has the following officers: a
Chairman of the Board, a President, one or more Vice Presidents, a Secretary, a
Treasurer, and whatever assistants and other officers as the Board of Directors
may determine from time to time. One person may hold any two or more offices.
The Board of Directors has the exclusive right to elect all officers who will
hold office at the pleasure of the Board of Directors. The Board of Directors
also has the exclusive right to fix the officers' compensation and tenure.
3.2 POWERS AND DUTIES OF OFFICERS. The officers of the Corporation have
the powers and duties generally ascribed to the respective offices, and whatever
additional authority or duty as the Board of Directors may from time to time
establish.
SECTION 4: EXECUTION OF INSTRUMENTS
The Board of Directors may authorize an officer or officers, or other
person or persons, to
(a) execute any corporate instrument or document, or
(b) sign the corporate name
without limitation, unless otherwise provided by law. Any execution or
signature so authorized will bind the corporation.
SECTION 5: ISSUANCE OF SHARES
5.1 REQUIREMENT OF PAYMENT FOR SHARES. The corporation may issue
certificates for its shares only when it has received full payment of the
consideration for the shares.
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<PAGE>
5.2 SHARE CERTIFICATES. The corporation must deliver certificates
representing all shares to which shareholders are entitled. The Board of
Directors will determine what form and device the certificates will take. Each
certificate must bear on its face
(a) the statement that the corporation is organized in Nevada,
(b) the name of the corporation,
(c) the number, class, and series (if any) of the shares, and
(d) the par value of the shares or a statement that the shares are
without par value.
The President or a Vice President and the Secretary or an Assistant Secretary
must sign and affix the corporation's seal to the certificates. They may sign
by facsimile if a transfer agent countersigns them or a registrar registers
them. Certificates for shares must contain all recitations or references
required by law.
5.3 REPLACEMENT OF CERTIFICATES. The corporation may not issue any new
certificate until the former certificate for the relevant shares has been
surrendered and cancelled. In the case of a lost or destroyed certificate,
however, the Board of Directors may order any new certificate issued on whatever
terms, conditions, and guarantees as they may see fit to impose. For example,
the Board of Directors may require the filing of sufficient indemnity.
5.4 TRANSFER OF SHARES. The holder of shares of the corporation may
transfer them by endorsement and delivery of the certificate. A holder may
endorse the certificate with his or her signature or the holder's agent,
attorney, or legal representative may endorse it on the holder's behalf. The
transferee of shares shall be deemed to have full notice of, and to consent to,
the bylaws of the corporation.
SECTION 6: RECORDS AND REPORTS
6.1 INSPECTION OF BOOKS AND RECORDS. The corporation must keep all books
and records required by statute open to inspection of the shareholders from time
to time, but only to the extent expressly required by statute. The Directors
may examine all corporate books and records at all reasonable times.
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<PAGE>
6.2 CLOSING STOCK TRANSFER BOOKS. The Board of Directors may, in its
discretion, close the transfer books for a period not exceeding fifty days
preceding the date
(a) of any annual or special shareholders' meeting, or
(b) appointed for payment of a dividend.
SECTION 7: AMENDMENT OF BYLAWS
The Directors have the principal power to alter, amend, or repeal these
bylaws. The shareholders may, however, repeal or change the Directors' action.
SECRETARY'S CERTIFICATE
I, the Secretary of Corporate Systems Holding, Inc., by signing this
document, certify that this document contains a true and correct copy of the
bylaws adopted by written consent of the Board of Directors of Corporate Systems
Holding, Inc. in their organizational minutes dated August 9, 1996.
_________________________________________
Edward A. Fancher, Jr., Secretary
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<PAGE>
ARTICLES OF INCORPORATION
OF
CSC GENERAL PARTNER, INC.
We, the undersigned natural persons of the age of eighteen years or
more, at least two of whom are citizens of the State of Texas, acting as
incorporators of a corporation under the Texas Business Corporation Act,
hereby adopt the following Articles of Incorporation for such corporation:
I.
The name of the corporation is CSC GENERAL PARTNER, INC.
II.
The period of its duration is perpetual.
III.
The purpose of the corporation is to buy, sell, and deal in personal
property, real property and services subject to Part Four of the Texas
Miscellaneous Corporation Laws Act.
IV.
The aggregate number of shares which the corporation shall have
authority to issue is Five Hundred Thousand shares (500,000) of the par value
of One Dollar ($1) each, The shares shall be designated as Common Stock and
shall have identical rights and privileges in every respect.
V.
The corporation will not commence business until it has received for the
issuance of its shares consideration of the value of One Thousand Dollars
($1,000), consisting of money, labor done, or property actually received.
VI.
No shareholder or other person shall have any preemptive right whatsoever.
VII.
The shareholders of the corporation hereby delegate to the Board of
Directors power to adopt, alter, amend, or repeal the bylaws of the
corporation; the power shall be vested exclusively in the Board of Directors
and shall not be exercised by the shareholders.
VIII.
A. If Paragraph B is satisfied, no contract or other transaction between
the Corporation and any of its Directors, Officers, or shareholders
(or any corporation or firm which any of them are directly or
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<PAGE>
indirectly interested) shall be invalid solely because of this
relationship or because of the presence of such Director, Officer, or
shareholder at the meeting authorizing such contract or transaction or
his participation in such meeting or authorization.
B. Paragraph A shall apply only if;
1. the material facts of the relationship or interest of each such
Director, Officer or shareholder are known or disclosed; or
2. the contract or transaction is fair to the corporation as of the
time it is authorized or ratified by the Board of Directors, a
committee of the Board or the shareholders.
C. This provision shall not be construed to invalidate a contract or
transaction which would be valid in the absence of this provision.
IX.
The post office address of its initial registered office is 605 Amarillo
Building, Amarillo, Texas, 79101, and the name of its initial registered agent
at such address is Don R. Riggs.
X.
The number of Directors constituting the initial Board of Directors is
six (6), and the names and addresses of the persons who are to serve as
directors until the first annual meeting of the shareholders, or until their
successors are elected and qualified are:
Name Address
---- -------
Guyon H. Saunders 605 Amarillo Bldg., Amarillo, TX 79101
Don R. Riggs 605 Amarillo Bldg., Amarillo, TX 79101
Ed A. Fancher 605 Amarillo Bldg., Amarillo, TX 79101
Max R. Sherman 300 Fisk Bldg., Amarillo, TX 79101
Joe C. Richardson, Jr. 1709 South Avondale, Amarillo, TX 79106
Jess Latham, Jr. 2025 South Hughes, Amarillo, TX 79101
XI.
The names and addresses of the incorporators are:
Name Address
---- -------
James M. House 300 Fisk Bldg., Amarillo. TX 79101
Edward R. Scott 300 Fisk Bldg., Amarillo, TX 79101
James W. Sharrock 300 Fisk Bldg., Amarillo, TX 79101
IN WITNESS WHEREOF, we have executed these Articles of Incorporation on
this 9th day of February, 1976.
/s/ James M. House
---------------------------------------
James M. House
/s/ Edward R. Scott, Jr.
---------------------------------------
Edward R. Scott, Jr.
/s/ James W. Sharrock, Jr.
---------------------------------------
James W. Sharrock, Jr.
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<PAGE>
THE STATE OF TEXAS )(
COUNTY OF POTTER )(
I, the undersigned a notary public, do hereby certify that on this 9th day
of February, 1976, personally appeared before me JAMES M. HOUSE, EDWARD R.
SCOTT, and JAMES W. SHARROCK, who each being by me first duly sworn, severally
declared that they are the persons who signed the foregoing document as
incorporators, and that the statements therein contained are true.
Vona Lynn Deaver
---------------------------------------
Notary Public in and for
Potter County, Texas
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<PAGE>
ARTICLES OF AMENDMENT BY THE DIRECTORS
TO THE ARTICLES OF INCORPORATION
OF
CSC GENERAL PARTNER, INC.
Pursuant to the provisions of Article 4.04(A) of the Texas Business
Corporation Act, the undersigned Corporation adopts the following Articles of
Amendment to its Articles of Incorporation which changes the par value of its
common stock from One Dollar ($1.00) per share to Ten Cents ($.10) per share.
ARTICLE ONE:
The name of the Corporation is CSC GENERAL PARTNER, INC.
ARTICLE TWO:
The following amendment to the Articles of Incorporation was adopted by
the Directors of the Corporation on April 5, 1976:
Article IV of the Articles of Incorporation is hereby amended to read
as follows:
" The aggregate number of shares which the Corporation shall have
authority to issue is Five Hundred Thousand (500,000) shares of the
par value of Ten Cents ($.10) each. The shares shall be designated
as Common Stock and shall have identical rights and privileges in
every respect.
ARTICLE THREE:
None of the shares of the Corporation have been issued.
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<PAGE>
ARTICLE FOUR:
The foregoing amendment was adopted by the unanimous written consent
of the directors named in the Articles of Incorporation.
DATED: _______________, 1976.
CSC GENERAL PARTNER, INC.
By: /s/ Guyon H. Saunders
----------------------------------
Guyon H. Saunders, President
By: /s/ Ed A. Fancher
----------------------------------
Ed A. Fancher, Secretary
STATE OF TEXAS Section
Section
COUNTY OF POTTER Section
I, Betty Burgy, a Notary Public, do hereby certify that on this 9th
day of April, 1976, personally appeared before me Guyon H. Saunders, who
declared he is President of the Corporation executing the foregoing document,
and being first duly sworn, acknowledged that he signed the foregoing document
in the capacity therein set forth and declared that the statements therein
contained are true.
IN WITNESS WHEREOF, I have hereunto set my hand and seal the day and
year before written.
[Notarial Seal] Betty Burgy
---------------------------------------
Notary Public in and for
Potter County, Texas
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<PAGE>
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
CSC GENERAL PARTNER, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following Articles of
Amendment to its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is CSC GENERAL PARTNER, INC.
ARTICLE TWO
The following amendment to the Articles of Incorporation was adopted by
the shareholders of the corporation on March 21, 1992, which increases the
number of shares authorized.
The amendment alters or changes Article IV of the original or amended
Articles of Incorporation to read as follows:
ARTICLE IV
The aggregate number of shares which the corporation shall have the
authority to issue is 5,000,000 shares of $.10 par value voting common
stock. The shares shall have identical rights and privileges in every
respect.
<PAGE>
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such
adoption was 500,000; and the number of shares entitled to vote thereon was
500,000.
ARTICLE FOUR
The number of shares voted for such amendment was 500,000; and the
number of shares voted against such amendment was zero.
Dated: April 28, 1992
CSC GENERAL PARTNER, INC.
By: /s/ Guyon Saunders
-----------------------------------
Guyon Saunders, President
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<PAGE>
STATEMENT OF CHANGE OF REGISTERED OFFICE AND REGISTERED AGENT
Of CSC GENERAL PARTNER, INC.
1. The name of the limited partnership is CSC General Partner, Inc.
2. The street address of its registered office is 605 Amarillo Building,
Amarillo, Texas 79101.
3. The street address to which its registered office is to be changed is
1212 Ross Street, Amarillo, Texas 79102.
4. The name of its registered agent is Don R. Riggs.
5. The name of its successor registered agent is Guyon Saunders.
6. The street address of its registered office and the street address of
the business office of its registered agent, as changed, will be the same.
7. The change was authorized by the board of Directors.
Executed: July 30, 1992
CSC GENERAL PARTNER, INC.
By: /s/ Guyon Saunders
-----------------------------------
Guyon Saunders, President
<PAGE>
EXHIBIT 3(iv)
BYLAWS
OF
CSC GENERAL PARTNER, INC.
SECTION 1: SHAREHOLDERS' MEETINGS
1.1 PLACE OF MEETINGS. The Corporation must hold all its shareholders'
meetings at the Corporation's registered office or at whatever other place in or
out of this State as the Board of Directors may determine from time to time.
1.2 TIME OF ANNUAL MEETING. The shareholders' annual meetings must be held
on a day chosen by the Board of Directors during the month of March.
1.3 NOTICE OF MEETING. The Secretary must give notice of each
shareholders' meeting to each shareholder entitled to vote at the meeting. The
Secretary must give the notice at least ten but not more than sixty days before
the date of the meeting. The Secretary must give the notice in one of the
following ways:
(a) delivering it personally or by messenger to the shareholder.
(b) mailing it to the shareholder at the shareholder's most recent
address appearing on the books of the Corporation or at the
address he has most recently specified for receiving notices.
(c) delivering it to the shareholder using any other reasonable means
of delivering written communications.
The notice must be in writing. It must state the place, day, and hour of the
meeting, and, for special meetings, the purpose or purposes of the meeting.
The Secretary need not give notice of adjourned meetings unless the meeting
is adjourned for thirty days or more. In that case, the Secretary must give
notice of the adjourned meeting in the same manner as any special shareholders'
meeting.
1.4 SPECIAL MEETINGS. Any of the following persons may call a special
shareholders' meeting:
(a) the President.
(b) the Board of Directors.
(c) any one or more shareholders holding shares that comprise not
less than one tenth of all the shares entitled to vote at the
meeting.
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They may call special shareholders' meetings at any time and for any purpose
or purposes.
1.5 QUORUM. The holders of a majority of the Corporation's shares having
voting rights will constitute a quorum for transacting business. Once the
Secretary has confirmed the presence of a quorum at a shareholders' meeting, the
shareholders may continue to transact business at a meeting even if they fail to
maintain a quorum during the remainder of the meeting.
1.6 VOTING. Only persons listed as shareholders in the Corporation's
records on the record date for the meeting have the right to vote at the
meeting. The record date for a meeting will be the date on which the Secretary
gives notice of the meeting, unless the Board of Directors establishes as the
record date some other day. At each election for the Directors, each shareholder
has the right to vote the number of shares owned by him which carry voting
rights for as many persons as there are members of the Board to be elected, but
may not cumulate his votes. Shareholders must vote their shares by voice vote
unless any shareholder demands a ballot vote before the voting begins.
1.7 PROXIES. Every person entitled to vote or execute consents may do so
either in person or by written proxy executed by him or his duly authorized
attorney in fact.
1.8 CONSENT OF ABSENTEES. No defect in calling or giving notice of a
shareholders' meeting will affect the validity of any action taken at the
meeting if:
(a) the meeting had a quorum, and
(b) each shareholder not present at the meeting in person or by proxy
(1) waives notice of the meeting,
(2) consents to holding the meeting, or
(3) approves the minutes of the meeting
(A) in writing, executed before or after the meeting.
The Secretary must, however, file the waivers, consents, or approvals with the
corporate records or otherwise make them a part of the minutes of the meeting.
1.9 ACTION WITHOUT MEETING. The shareholders may take any action without a
meeting, without prior notice, and without a vote even though the Texas Business
Corporation Act (or other law or rule) would otherwise require them to take the
action only at any annual or special shareholders' meeting. They may do so,
however, only if
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shareholders holding shares possessing enough votes to take the action (if a
meeting had been held and all shareholders entitled to vote were present and
voted at the meeting) sign a written consent or consents that specify the
action so taken.
SECTION 2: DIRECTORS
2.1 POWERS. The Board of Directors has the authority to exercise all the
Corporation's powers. They control the business and affairs of the Corporation
within any limitations imposed by law, the Articles of Incorporation, or these
Bylaws (particularly the limitations on actions requiring shareholder
authorization or approval). The Directors may not act individually, they may act
only as a board. The Board of Directors may, by contract or otherwise, give
general, limited, or special power and authority to the officers and employees
of the Corporation to transact the general business, or any special business, of
the Corporation. They may give powers of attorney to agents of the Corporation
to transact any special business.
2.2 NUMBER AND QUALIFICATION OF DIRECTORS. The Corporation has nine (9)
Directors. The Directors need not be shareholders of this Corporation or
residents of Texas. The number of Directors may be increased or decreased from
time to time by amending these Bylaws, but no decrease may act to shorten the
term of any incumbent Director unless the amendment is adopted by the
shareholders. The shareholders must elect additional Directors to fill any
vacancy on the Board caused by an increase in the number of Directors at their
annual meeting or at a special shareholders' meeting called for that purpose.
2.3 ELECTION AND TERM OF OFFICE. The shareholders entitled to vote must
elect Directors annually. Each Director, once elected, holds office until his
successor is elected, or he dies, resigns, or is removed.
2.4 VACANCIES. Except as provided in Section 2.2, a majority of the
remaining Directors, though less than a quorum, or a sole remaining Director may
fill any vacancies on the Board of Directors. The shareholders may at any time
elect a Director to fill any vacancy not filled by the Directors.
2.5 REMOVAL OF DIRECTORS. The holders of a majority of the shares entitled
to vote for Directors may, at any regular or special shareholders' meeting,
remove the entire Board of Directors or any individual Director from office with
or without cause.
2.6 PLACE OF MEETINGS. The Board of Directors may hold all their meetings
at the principal office of the Corporation or at whatever other place within or
outside the State of Texas as they may designate from time to time.
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2.7 REGULAR MEETINGS. The Board of Directors must hold regular meetings,
without call or notice, immediately following each annual meeting of the
Corporation's shareholders and at whatever other times they determine.
2.8 SPECIAL MEETINGS--CALL AND NOTICE. The President (or, if the
President is absent or unable or refuses to act, any Vice President) or any
Director may call at any time special meetings of the Board of Directors for any
purpose. The person calling the special meeting must give notice of the special
meeting, stating the time and in general terms the purpose or purposes of the
meeting. The person may give the notice in writing, by mailing, faxing,
telegraphing, or personally delivering the notice to each Director not later
than the day before the day selected for the meeting.
2.9 QUORUM. A majority of the authorized number of Directors constitutes a
quorum for transacting business, except that a lesser number may adjourn
according to Section 2.11. They may then act by majority decision of the
Directors present, unless a greater number is required by law or by the Articles
of Incorporation.
2.10 BOARD ACTION WITHOUT MEETING. The Board of Directors may act without
a meeting, if all members of the Board individually or collectively consent in
writing to the action. Any action taken in this manner will have the same force
and effect as a unanimous vote of Directors at a meeting of the entire Board of
Directors.
2.11 ADJOURNMENT--NOTICE. A quorum of the Directors may adjourn any
Directors' meeting to meet again at a stated hour on a stated day. Notice of the
time and place where an adjourned meeting will be held need not be given to
absent Directors if the time and place is fixed at the adjourned meeting. If a
quorum is not present at a duly called regular or special meeting of the Board
of Directors, a majority of the Directors present may adjourn from time to time
until the time Fixed for the next regular meeting of the Board.
2.12 CONDUCT OF MEETINGS. The President or, in the President's absence,
any Director selected by the Directors present, will preside at meetings of the
Board of Directors. The Secretary or, in the Secretary's absence, any person
appointed by the presiding officer, will act as secretary of the Board of
Directors.
2.13 COMPENSATION. The Board of Directors may determine whether and to
what extent the corporation will pay the Directors and members of committees any
compensation for their services or reimburse them for their expenses.
2.14 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Board of Directors may
authorize the Corporation to pay expenses incurred by, or to satisfy a judgment
or fine rendered or levied against, present or former Directors, officers, or
employees of the Corporation in accord with Article 2.02(A)(16) of the Texas
Business Corporation Act.
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SECTION 3: OFFICERS
3.1 TITLE AND APPOINTMENT. The Corporation has the following officers: a
President, one or more Vice Presidents, a Secretary, a Treasurer, and whatever
assistants and other officers as the Board of Directors may determine from time
to time. One person may hold any two or more offices. The Board of Directors
has the exclusive right to elect all officers who will hold office at the
pleasure of the Board of Directors. The Board of Directors also has the
exclusive right to fix the officers' compensation and tenure.
3.2 POWERS AND DUTIES OF OFFICERS. The officers of the Corporation have
the powers and duties generally ascribed to the respective offices, and whatever
additional authority or duty as the Board of Directors may from time to time
establish.
SECTION 4: EXECUTION OF INSTRUMENTS
The Board of Directors may authorize an officer or officers, or other
person or persons, to
(a) execute any corporate instrument or document, or
(b) sign the corporate name
without limitation, unless otherwise provided by law. Any execution or
signature so authorized will bind the corporation.
SECTION 5: ISSUANCE OF SHARES
5.1 REQUIREMENT OF PAYMENT FOR SHARES. The corporation may issue
certificates for its shares only when it has received full payment of the
consideration for the shares.
5.2 SHARE CERTIFICATES. The corporation must deliver certificates
representing all shares to which shareholders are entitled. The Board of
Directors will determine what form and device the certificates will take. Each
certificate must bear on its face
(a) the statement that the corporation is organized in Texas,
(b) the name of the corporation,
(c) the number, class, and series (if any) of the shares, and
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(d) the par value of the shares or a statement that the shares are
without par value.
The President or a Vice President and the Secretary or an Assistant Secretary
must sign and affix the corporation's seal to the certificates. They may sign
by facsimile if a transfer agent countersigns them or a registrar registers
them. Certificates for shares must contain all recitations or references
required by law.
5.3 REPLACEMENT OF CERTIFICATES. The corporation may not issue any new
certificate until the former certificate for the relevant shares has been
surrendered and canceled. In the case of a lost or destroyed certificate,
however, the Board of Directors may order any new certificate issued on whatever
terms, conditions, and guarantees as they may see fit to impose. For example,
the Board of Directors may require the filing of sufficient indemnity.
5.4 TRANSFER OF SHARES. The holder of shares of the corporation may
transfer them by endorsement and delivery of the certificate. A holder may
endorse the certificate with his or her signature or the holder's agent,
attorney, or legal representative may endorse it on the holder's behalf. The
transferee of shares shall be deemed to have full notice of, and to consent to,
the bylaws of the corporation.
SECTION 6: RECORDS AND REPORTS
6.1 INSPECTION OF BOOKS AND RECORDS. The corporation must keep all books
and records required by statute open to inspection of the shareholders from time
to time, but only to the extent expressly required by statute. The Directors
may examine all corporate books and records at all reasonable times.
6.2 CLOSING STOCK TRANSFER BOOKS. The Board of Directors may, in its
discretion, close the transfer books for a period not exceeding fifty days
preceding the date
(a) of any annual or special shareholders' meeting, or
(b) appointed for payment of a dividend.
SECTION 7: AMENDMENT OF BYLAWS
The Directors have the principal power to alter, amend, or repeal these
bylaws. The shareholders may, however, repeal or change the Directors' action.
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SECRETARY'S CERTIFICATE
I, the Secretary of CSC General Partner, Inc., by signing this document,
certify that this document contains a true and correct copy of the bylaws
adopted by the Board of Directors of CSC General Partner, Inc.
------------------------------------
Secretary
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EXHIBIT 3(v)
LIMITED PARTNERSHIP AGREEMENT
CORPORATE SYSTEMS
* * * * * * * *
AGREEMENT OF Limited Partnership, made and entered into this 23rd day of
April, 1976, by and among CSC GENERAL PARTNER, INC., a Texas corporation, as
general partner, hereinafter referred to as the General Partner, and those
shareholders of CORPORATE SYSTEMS CORPORATION, a Texas corporation, who
execute a counterpart of the signature page of this agreement, as limited
partners, such parties and any other parties admitted as substituted limited
partners being referred to as the Limited Partners.
ARTICLE I
FORMATION OF LIMITED PARTNERSHIP
The parties hereby enter into a limited partnership under the provisions
of the Uniform Limited Partnership Act of the State of Texas, and the rights
and liabilities of the Partners shall be as provided in that Act except as
herein otherwise expressly provided.
ARTICLE II
DEFINITIONS
The business of the partnership shall be conducted under the firm name
of "Corporate Systems" or such other name as the General Partner shall
hereafter designate in writing to the Limited Partners.
ARTICLE III
DEFINITIONS
"Agreement" means this Limited Partnership Agreement, as amended,
modified, or supplemented from time to time.
"General Partner" means CSC GENERAL PARTNER, INC.
"Limited Partners" means the parties who have executed this agreement as
limited partners as long as they shall remain Limited Partners, and any other
party admitted as a substituted Limited Partner pursuant to Article XVI.
"Participating Percentage" means, as to each holder of a Unit or Units,
at any particular time, the percentage arrived at by dividing the total
number of Units held by such party by the total number of Units outstanding
hereunder and multiplying the quotient thereof by 100.
"Partners" means the General Partner and all Limited Partners, where no
distinction is required by the context in which the term is used herein.
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"Partnership Unit" or "Unit" means one of the equal parts into which the
capital of the Partnership shall be divided. At the inception of the
Partnership its capital shall be divided into such number of Partnership
Units as shall be equal to the number of shares of common stock of CORPORATE
SYSTEMS CORPORATION outstanding on the date of this agreement.
ARTICLE IV
PURPOSE
The purpose of the Partnership is to create, develop, sell and operate
management information systems, by way of computer programs, for controlling
customer's insurance programs and to engage in any and all activities related
or incidental thereto.
ARTICLE V
NAMES AND ADDRESSES OF PARTNERS
The names, addresses, and capital contributions of the Partners and the
number of Partnership Units owned by each are set forth in Schedule A
attached hereto and incorporated herein by reference.
ARTICLE VI
TERM
The term of the Partnership shall be from the date hereof to June 30,
2006, unless sooner terminated as hereinafter provided.
ARTICLE VII
PRINCIPAL PLACE OF BUSINESS
The principal place of business of the Partnership shall be 605 Amarillo
Building, Amarillo, Texas. The General Partner may from time to time change
the principal place of business, and in such event the General Partner shall
notify the Limited Partners in writing within twenty (20) days of the
effective date of such change. The General Partner may in its discretion
establish additional places of business of the Partnership.
ARTICLE VIII
CAPITAL AND CONTRIBUTIONS
Section 8.1. The capital of the Partnership shall be the aggregate
amount of the capital contributions made to it by the General Partner and
Limited Partners.
Section 8.2. The initial capital contribution to be made by the
General Partner will be its pro rata share of the assets received from
CORPORATE SYSTEMS CORPORATION pursuant to the Plan of Complete Liquidation
and Dissolution of such corporation.
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Section 8.3. The capital contribution of the initial Limited Partners
will be made by the transfer to the Partnership of the Limited Partners' pro
rata share of the assets of such corporation, subject to all of the
liabilities and obligations of such corporation, which will be assumed by the
Partnership.
Section 8.4. The General Partner is authorized to issue additional
Units from time to time, and to admit the parties to whom such additional
Units are issued as Limited Partners in the Partnership, in order to raise
additional capital for the Partnership or for any other proper Partnership
purpose. The General Partner shall have sole and complete discretion in
determining the consideration and terms and conditions with respect to any
such future issuance of Units, and the General Partner is authorized and
directed to do all things which it deems to be necessary or advisable in
connection therewith.
Section 8.5. No Partner shall at any time be required to make any
additional contribution to the Partnership.
ARTICLE IX
ALLOCATION OF PROFITS AND LOSSES
The net profits or losses of the Partnership for each fiscal year will
be allocated among the record holders of Units at the end of each such fiscal
year in proportion to their respective Participating Percentages, without
adjustment for any assignments of Units during such year and without regard
to the date, amount or recipient of any distributions which may have been
made with respect to such Units.
ARTICLE X
DISTRIBUTIONS AND COMPENSATION
Section 10.1. Distributions to the holders of the Units shall be made
in such amounts per unit and at such times as the General Partner may
determine, subject to such restrictions, if any, upon such distributions as
may be provided under any instrument governing indebtedness of the
Partnership. The General Partner shall designate a record date to determine
the owners of Units who shall be entitled to receive any distribution.
Section 10.2. The General Partner shall be paid no management fees for
its services to the Partnership.
Section 10.3. The Partnership shall reimburse the General Partner, at
its cost, for the direct and indirect expenses which it incurs in performing
services for the Partnership, including, but not limited to, accounting and
legal fees, reasonable fees to its directors when meeting in consideration of
Partnership business, and other expenses relating to the acquisitions,
financing, operation, or disposition of the business of the Partnership.
Section 10.4. Except with respect to matters as to which the General
Partner is granted discretion hereunder, the opinion of the independent
public accountants retained by the Partnership from time to time shall be
final and binding with respect to all computations and determinations
required to be made under this Article X (including computations and
determinations in connection with any distribution pursuant to Article
XVIII).
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ARTICLE XI
BOOKS OF ACCOUNT, RECORDS AND REPORTS
Section 11.1. Proper and complete records and books of account shall be
kept by the General Partner in which shall be entered fully and accurately
all transactions and other matters relative to the Partnership's business as
are usually entered into records and books of account maintained by persons
engaged in businesses of a like character. The Partnership books and records
shall be kept on the accrual basis in accordance with generally accepted
accounting principles, consistently applied. The books and records shall be
open to the reasonable inspection and examination of the Partners or their
duly authorized representatives during reasonable business hours. The General
Partner shall furnish a list of names and addresses of all Limited Partners
to any Limited Partner who requests such a list in writing for any legitimate
purpose.
Section 11.2. No later than one hundred twenty (120) days after the end
of each fiscal year of the Partnership, the General Partner shall furnish to
each Limited Partner a report of the business and operations of the
Partnership during such year, which report shall constitute the accounting of
the General Partner for such year. Such report shall contain a copy of the
annual financial statement of the Partnership showing the Partnership's
profit or loss for the year and the allocation thereof among the holders of
the Units, which statement shall have been audited by the Partnership's
independent public accountants and shall otherwise be in such form and have
such content as the General Partner deems proper.
ARTICLE XII
FISCAL YEAR
The fiscal year of the Partnership shall be determined by the General
Partner.
ARTICLE XIII
PARTNERSHIP FUNDS
The funds of the Partnership shall be deposited in such bank account or
accounts, or invested in such interest-bearing or noninterest-bearing
investments, as shall be designated by the General Partner. All withdrawals
from any of such bank accounts shall be made by the duly authorized agent or
agents of the General Partner.
ARTICLE XIV
STATUS OF LIMITED PARTNERS
Section 14.1. The Limited Partners shall not participate in the
management or control of the Partnership's business nor shall they transact
any business for the Partnership, nor shall they have the power to act for or
bind the Partnership, such powers being vested solely and exclusively in the
General Partner.
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Section 14.2. No Limited Partner shall have any personal liability
whatever, whether to the Partnership, to any of the Partners or to the
creditors of the Partnership, for the debts of the Partnership or any of its
losses except to the extent of his rights and interests in and to the
Partnership and its assets.
Section 14.3. The death or legal incapacity of a Limited Partner shall
not cause a dissolution of the Partnership, but the rights of such Limited
Partner to share in the profits and losses of the Partnership, to receive
distributions of Partnership funds and to assign a Partnership interest
pursuant and subject to Article XVI hereof shall, on the happening of such an
event, devolve on his personal representatives, or in the event of the death
of one whose limited partnership interest is held in joint tenancy, shall
pass to the surviving joint tenant, subject to the terms and conditions of
this Agreement, and the Partnership shall continue as a limited partnership.
However, in no event shall such personal representatives or surviving joint
tenant become a substituted Limited Partner, except with the consent of the
General Partner in accordance with Section 16.2 hereof.
ARTICLE XV
GENERAL PARTNER
Section 15.1. The General Partner shall have exclusive authority to
manage and control the business and affairs of the Partnership. Pursuant to
the foregoing, the General Partner shall have all of the rights and powers of
a general partner as provided in the Texas Uniform Limited Partnership Act
and as otherwise provided by law, and any action taken by the General Partner
shall constitute the act of and serve to bind the Partnership. In dealing
with the General Partner acting on behalf of the Partnership, no person shall
be required to inquire into the authority of such Partner to bind the
Partnership.
Section 15.2. The General Partner is hereby granted the right, power,
and authority to do on behalf of the Partnership all things which, in its
sole judgment, are necessary or desirable to carry out the aforementioned
duties and responsibilities, including, but not limited to, the right, power
and authority: to incur all reasonable expenditures; to employ and dismiss
from employment any and all employees, agents, independent contractors
attorneys, and accountants; to sell, exchange, or grant an option for the
sale or exchange of, all or any portion of the real and personal property of
the Partnership; to lease all or any portion of any property for any purpose
and without limit as to the term thereof; to borrow money and as security
therefor to mortgage or grant security interests in all or any part of any
property; to prepay in whole or in part, refinance, modify or extend any
indebtedness; to do any and all of the foregoing at such price, rental or
amount, for cash, securities or other property and upon such terms as the
General Partner deems proper; to place record title to any property in its
name or in the name of a nominee or a trustee; to adjust, compromise, settle
or refer to arbitration any claim against or in favor of the Partnership or
any nominee, and to institute, prosecute and defend any legal proceeding
relating to the business or property of the Partnership; to delegate all or
any portion of the powers granted hereunder to one or more attorneys-in-fact;
and to execute, acknowledge and deliver any and all instruments to effectuate
any and all of the foregoing. The General Partner shall also be empowered to
admit an assignee of a Limited Partner's interest to be a substituted Limited
Partner, pursuant to and subject to the terms of Section 16.2 of this
Agreement.
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Section 15.3. The General Partner shall devote such time to the
Partnership business as it, in its sole discretion, shall deem to be
necessary to manage and supervise the Partnership business and affairs; but
nothing in this Agreement shall preclude the employment, at the expense of
the Partnership, of any agent or third party to manage or provide other
services in respect of the Partnership property subject to the control of the
General Partner.
Section 15.4. The General Partner and its officers, directors, and
stockholders and any member of the families of any of them and any other
person or firm to which any of them is related or in which any of them is
interested, all of which General Partner and other persons and firms are
herein referred to as Affiliates, may engage in or possess any interest in
other business ventures of any kind, independently or with others. The fact
that any such Affiliate may encounter and take advantage of opportunities to
do any of the foregoing himself or on behalf of others in whom he may or may
not have an interest shall not subject such Affiliate to any liability to the
Partnership or any of the Partners on account of the loss of opportunity.
Neither the Partnership nor any Partner shall have any right by virtue of
this Agreement or the partnership relationship created hereby in or to such
ventures or activities or to the income or profits derived therefrom, and the
pursuit of such ventures shall not be deemed wrongful or improper. Affiliates
are not, however, authorized to engage in or possess any interest in any
business venture which is competitive with the business of the Partnership
other than the ownership of noncontrolling interests in companies registered
under Section 12 of the Securities Exchange Act of 1934.
Section 15.5. Any Affiliate other than the General Partner may be
employed or retained by the Partnership and may otherwise deal with the
Partnership (whether as a buyer, lessor, lessee, manager, furnisher of
services, broker, agent, lender or otherwise) and may receive from the
Partnership any compensation, price or other payment therefor which the
General Partner determines to be fair and reasonable, and neither the
Partnership nor any of the Partners, as such, shall have any rights in or to
any income or profits derived therefrom. Without limiting the generality of
the foregoing, any such Affiliate may purchase from the Partnership any
property (including any interest therein) for any price which is fair and
reasonable (regardless of whether such price is greater or less than the cost
of such property to the Partnership), but only if such price is not less than
the fair market value of such property, and only if such price has been
confirmed in a written evaluation report signed by an independent appraiser
retained by the General Partner as being not less than the fair market value
of such property.
Section 15.6. Neither the General Partner nor any officer or director
of the General Partner shall be liable, responsible or accountable in damages
or otherwise to the Partnership or any Limited Partner for any act or failure
to act on behalf of the Partnership within the scope of the authority
conferred on the General Partner by this Agreement or by law unless such act
or omission was performed or omitted fraudulently or in bad faith or
constituted wanton and wilful misconduct or gross negligence.
Section 15.7. The Partnership shall indemnify and hold harmless the
General Partner, each officer and director of the General Partner, and the
agents of each of them (herein referred to as "Indemnified Parties"), from
and against any loss, expense, damage or injury suffered or sustained by him
by reason of any act, omission, or alleged act or omission arising out of his
activities on behalf of the Partnership or in furtherance of the interests of
the Partnership, including, but not limited to, any judgement, award,
settlement, reasonable attorney's fees, and other costs or expenses incurred
in connection with the
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defense of any actual or threatened action, proceeding, or claim and
including any payments made by the General Partner to any of its officers or
directors pursuant to an indemnification agreement no broader than this
Section 15.7; provided that the act, omission, or alleged act or omission
upon which such actual or threatened action, proceeding, or claim is based
was not performed or omitted fraudulently or in bad faith or as a result of
wanton and wilful misconduct or gross negligence by such Indemnified Party.
Section 15.8. The General Partner may, in its sole discretion, make or
revoke any election available to the Partnership under the Internal Revenue
Code, as amended from time to time. Each of the Partners will upon request
supply any information necessary to properly give effect to any such election.
Section 15.9. No additional General Partner may be admitted at any time
without the written consent or affirmative vote of all the Partners.
ARTICLE XVI
TRANSFER OF PARTNERSHIP INTERESTS
Section 16.1. A Limited Partner or any assignee of a Limited
Partnership interest who has not become a substituted Limited Partner may
assign the whole or any part of his interest in the Partnership (but only in
whole Units) by executing and acknowledging a written instrument of
assignment which is satisfactory in form to the General Partner and the terms
of which are not inconsistent with or contrary to the provisions of this
Agreement, and by filing with the Partnership a duly executed and
acknowledged counterpart of such instrument. Any assignment pursuant to this
Section 16.1 shall be effective, and shall be recognized by the General
Partner, as of the close of business on the day on which the Partnership
actually received the counterpart of the instrument of such assignment which
complies with the requirements of the preceding sentence.
Section 16.2. If an assignment of the whole or any part of a Limited
Partnership interest is made to an assignee other than the General Partner,
such assignee shall not have the right to become a substituted Limited
Partner in place of his assignor unless all of the conditions of Section 16.1
have been satisfied and all of the following additional conditions have been
satisfied:
(a) The duly executed and acknowledged written instrument of assignment
which has been filed with the Partnership shall expressly state that it is
the assignor's intention that the assignee become a substituted Limited
Partner in his place.
(b) The assignor and assignee shall have executed and acknowledged such
other instruments as the General Partner may deem necessary or desirable to
effect such admission, including, if requested by the General Partner, the
written acceptance and adoption by the assignee of all the provisions of this
Agreement, including the Power of Attorney set forth in Article XIX hereof.
(c) The General Partner shall have consented in writing to such
substitution, the granting or denial of which consent shall be in the sole
and absolute discretion of the General Partner.
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Any substitution of Limited Partners pursuant to this Section 16.2 shall be
effective only as of the last day of the fiscal year in which all of the
conditions herein have been satisfied, and the General Partner shall not be
required to amend the Partnership's Certificate of Limited Partnership more
than once each year to reflect such substitutions.
Section 16.3. Any person admitted to the Partnership as a substituted
Limited Partner shall be subject to and bound by all the provisions of this
Agreement as if originally a party to this Agreement.
Section 16.4. Anything in this Agreement to the contrary
notwithstanding, if in its sole discretion the General Partner deems it to be
in the best interests of the Partnership the General Partner may admit, as a
substituted Limited Partner in the place of his assignor an assignee of an
interest in the Partnership who has not otherwise become a substituted
Limited Partner.
Section 16.5 The General Partner may assign Units in the same manner
as a Limited Partner. Any such assignment of less than all of the Units of
the General Partner shall not constitute a withdrawal by the General Partner
from the Partnership. Any assignee of such Units shall be deemed an assignee
of a Limited Partnership interest to the extent of such Units. Any such
assignee shall be eligible to become a substituted Limited Partner upon
compliance with the conditions set forth in Section 16.2.
Section 16.6. Anything in this Agreement to the contrary
notwithstanding, no Partner or other person who has become the Holder of an
interest in the Partnership shall transfer, assign or encumber all or any
portion of his interest in the Partnership during any fiscal year if such
transfer, assignment or encumbrance would (in the sole and unreviewable
opinion of the General Partner) result in the termination of the Partnership
for purposes of the Internal Revenue Code, as amended from time to time.
ARTICLE XVII
DISSOLUTION OF THE PARTNERSHIP
Section 17.1. The happening of any one of the following events shall
work an immediate dissolution of the Partnership:
(a) The bankruptcy, dissolution, or withdrawal of the General Partner;
(b) The sale of all the business assets of the Partnership;
(c) The agreement in writing by Partners holding a majority of all the
then outstanding Units to dissolve the Partnership; or
(d) The termination of the term of the Partnership pursuant to Article
VI of this Agreement.
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<PAGE>
Section 17.2. Upon the written consent or affirmative vote of the
Partners holding a majority of the then outstanding Units, the General
Partner may be removed. The General Partner so removed shall, for the purpose
of this Agreement, be deemed to have "withdrawn" from the Partnership as a
General Partner, but shall be deemed to continue as a Limited Partner with
respect to his Partnership Units. The removal of the General Partner shall in
no way derogate from any rights or affect any obligations of such General
Partner attributable to the period prior to the date of such removal.
ARTICLE XVIII
ADDITIONAL PROVISIONS CONCERNING
DISSOLUTION OF THE PARTNERSHIP
Section 18.1. In the event of the dissolution of the Partnership for
any reason, the General Partner shall proceed promptly and continue with
reasonable expedition to wind up the affairs of and liquidate the
Partnership. The holders of the Units shall continue to share profits and
losses during the period of liquidation in the same proportion as before the
dissolution. The General Partner shall have full right and unlimited
discretion to determine the time, manner and terms of any sale or sales of
Partnership property pursuant to such liquidation having due regard to the
activity and condition of the relevant market and general financial and
economic conditions.
Section 18.2. After paying or providing for the payment of all debts
and liabilities of the Partnership and all expenses of liquidation, and
subject to the right of the General Partner to set up such reserves as it may
deem reasonably necessary for any contingent or unforeseen liabilities or
obligations of the Partnership, the proceeds of the liquidation and any other
assets of the Partnership shall be distributed to or for the benefit of the
Partners in accordance with their respective interests therein.
Section 18.3. Within a reasonable time following the completion of the
liquidation of the Partnership, the General Partner shall supply to each of
the Partners a statement audited by the Partnership's independent public
accountants which shall set forth the assets and the liabilities of the
Partnership as of the date of complete liquidation and each Unit holder's pro
rata portion of distributions pursuant to Section 18.2.
Section 18.4. Each holder of a Unit shall look solely to the assets of
the Partnership for all distributions with respect to the Partnership and his
capital contribution thereto and share of profits or losses thereof, and
shall have no recourse therefor against the General Partner or any Limited
Partner. No holder of a Unit shall have any right to demand or receive
property other than cash upon dissolution and termination of the Partnership.
Section 18.5. Upon the completion of the liquidation of the Partnership
and the distribution of all Partnership assets, the Partnership shall
terminate and the General Partner shall have the authority to execute and
record a Certificate of Cancellation of the Partnership as well as any and
all other documents required to effectuate the dissolution and termination of
the Partnership.
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<PAGE>
ARTICLE XIX
POWER OF ATTORNEY
Section 19.1. The Partners, by their execution hereof, jointly and
severally hereby irrevocably constitute and appoint the General Partner, with
full power of substitution, their true and lawful attorney-in-fact in their
name, place and stead to make, execute, sign, acknowledge, record, and file,
on behalf of them and on behalf of the Partnership, the following:
(a) a Certificate of Limited Partnership, a Certificate of Doing
Business Under an Assumed Name, and any other certificates or instruments
which may be required to be filed by the Partnership or the Partners under
the laws of the State of Texas and any other jurisdiction whose laws may be
applicable;
(b) a Certificate of Cancellation of the Partnership and such other
instruments or documents as may be deemed necessary or desirable by the
General Partner upon the termination of the Partnership business;
(c) any and all amendments of the instruments described in
subsection 19.1-a) and 19.1-b) above; provided such amendments are either
required by law to be filed, or are consistent with this Agreement or have
been authorized by the particular Partner or Partners; and
(d) any and all such other instruments as may be deemed necessary
or desirable by the General Partner to carry out fully the provisions of this
Agreement in accordance with its terms.
Section 19.2. The foregoing grant of authority:
(a) is a Special Power of Attorney coupled with an interest, is
irrevocable and shall survive the death or incapacity of the Partner granting
the power;
(b) may be exercised by the General Partner on behalf of each
Partner by a facsimile signature or by listing all of the Partners executing
any instrument with a single signature as attorney-in-fact for all of them;
and
(c) shall survive the delivery of an assignment by a Partner of the
whole or any portion of his interest.
ARTICLE XX
NOTICES
All notices and demands required or permitted under this Agreement shall
be in writing and shall be deemed to have been delivered upon deposit in the
United States mail, certified or registered, postage prepaid, to the Partners
at their addresses as shown from time to time on the records of the
Partnership. Any Partner may specify a different address by notifying the
General Partner in writing of such different address.
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<PAGE>
ARTICLE XXI
AMENDMENT OF LIMITED PARTNERSHIP AGREEMENT
Section 21.1. Except as otherwise required by law, this Agreement may
be amended in any respect upon the affirmative vote of the Partners holding a
majority of the then outstanding Units. If Partners holding more than ten
percent (10%) of the then outstanding Units request in writing that the
General Partner submit to a vote of the Partners a particular proposed
amendment to this Agreement, the General Partner shall do so. Any vote of the
Partners may be accomplished at a meeting of Partners called for such purpose
by the General Partner upon not less than ten (10) days prior notice or, in
lieu of a meeting by the written consent of the required percentage of
Partners.
Section 21.1. In the event this Agreement shall be amended pursuant to
this Article XXI, the General Partner shall amend the Certificate of Limited
Partnership to reflect such change if it deems such amendment of the
Certificate to be necessary or appropriate.
ARTICLE XXII
MISCELLANEOUS
Section 22.1. The Partners agree that the Partnership properties are
not and will not be suitable for partition. Accordingly, each of the Partners
hereby irrevocably waives any and all rights that he may have to maintain any
action for partition of any of the Partnership property.
Section 22.2. This Agreement constitutes the entire agreement among the
parties. It supersedes any prior agreement or understandings among them, and
it may not be modified or amended in any manner other than as set forth
herein.
Section 22.3. This Agreement and the rights of the parties hereunder
shall be governed by and interpreted in accordance with the laws of the State
of Texas.
Section 22.4. Except as herein otherwise specifically provided, this
Agreement shall be binding upon and inure to the benefit of the parties and
their legal representatives, heirs, administrators, executors, successors and
assigns.
Section 22.5. Wherever from the context it appears appropriate, each
term stated in either the singular or the plural shall include the singular
and the plural, and pronouns stated in either the masculine, the feminine or
the neuter gender shall include the masculine feminine, and neuter.
Section 22.6. Captions contained in this Agreement are inserted only as
a matter of convenience and in no way define, limit or extend the scope or
intent of this Agreement or any provision hereof.
Section 22.7. If any provision of this Agreement, or the application of
such provision to any person or circumstance, shall be held invalid, the
remainder of this Agreement, or the application of such provision to persons
or circumstances other than those to which it is held invalid, shall not be
affected thereby.
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<PAGE>
Section 22.8. This Agreement may be executed in several counterparts,
each of which shall be deemed an original but all of which shall constitute
one and the same instrument. In addition, this Agreement may contain more
than one counterpart of the signature page and this Agreement may be executed
by the affixing of the signatures of each of the Partners to one of such
counterpart signature pages; all of such counterpart signature pages shall be
read as though one, and they shall have the same force and effect as though
all of the signers had signed a single signature page.
(Signature Page follows)
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<PAGE>
AMENDMENT TO LIMITED PARTNERSHIP AGREEMENT
OF CORPORATE SYSTEMS
Articles I, II and IX of the Limited Partnership Agreement of Corporate
Systems were amended by a vote of the Partners on March 31, 1990, to read as
follows:
ARTICLE I
FORMATION OF LIMITED PARTNERSHIP
The parties hereby enter into a limited partnership under the provisions
of the Uniform Limited Partnership Act of the State of Texas, and the rights
and liabilities of the Partners shall be as provided in that Act except as
herein otherwise expressly provided. On March 31, 1990, the Partners adopt
the Texas Revised Limited Partnership Act and elect to become subject to its
provisions and to file an Amendment to its Certificate of Limited Partnership
stating that the Partnership is electing to adopt the Texas Revised Limited
Partnership Act.
ARTICLE II
NAME
The business of the partnership shall be conducted under the firm name
of "Corporate Systems, Ltd." or such other name as the General Partner shall
hereafter designate in writing to the Limited Partners.
ARTICLE IX
ALLOCATION OF PROFITS AND LOSSES
The net profits or losses of the partnership for each fiscal year will
be allocated among all record holders of Units during the fiscal year in
proportion to their respective Participating Percentages, with adjustment for
any assignments and other ownership changes of Units occurring during the
year, and without regard to the date, amount or recipient of any
distributions which may have been made with respect to such Units.
CSC GENERAL PARTNER, INC.,
General Partner of Corporate Systems
By:
------------------------------------
Its
------------------------------
<PAGE>
[LETTERHEAD]
AUGUST 23, 1996
Corporate Systems, Ltd.
1200 Corporate Systems Center
Amarillo, Texas 79102
Re: FEDERAL INCOME TAX CONSEQUENCES OF PROPOSED
EXCHANGES FOR SHARES OF NEW HOLDING COMPANY
Gentlemen:
As counsel to Corporate Systems, Ltd. (the "Partnership") and CSC General
Partner, Inc. (the "Operating Company"), we have been asked to advise you
concerning the anticipated United States Federal income tax consequences of
proposed transactions in which a newly-formed Nevada corporation, Corporate
Systems Holding, Inc. (the "Holding Company") would make an offer (the "Exchange
Offer") pursuant to which the Holding Company would issue shares of its voting
common stock ("Holding Stock") in exchange for (i) shares of the common stock of
the Operating Company ("Operating Stock") to be transferred to the Holding
Company by the holders of Operating Stock (the "CSC Shareholders") that accept
the Exchange Offer, and (ii) units of partnership interest in the Partnership
(the "Units") to be transferred to the Holding Company by the limited partners
in the Partnership (the "Limited Partners") that accept the Exchange Offer. The
transfers of the shares of Operating Stock and Units to the Holding Company by
those CSC Shareholders and Limited Partners that choose to accept the Exchange
Offer, and the issuance of shares of Holding Stock in exchange therefor, are
hereinafter collectively referred to as the "Exchanges".
After the Exchanges, the Operating Company, which is currently a Texas
corporation, will be reincorporated in Nevada and its name will be changed to
Corporate Systems, Inc. This change of state of incorporation and name will be
accomplished by merging the Operating Company into a newly-formed Nevada
corporation bearing the desired name.
The Exchanges would be carried out pursuant to the terms of the Plan of
Reorganization (the "Plan") dated as of July 2, 1996 and adopted by the Board of
Directors of the Operating Company on that date, as described in the
Registration Statement on Form S-4 to be filed by the Holding Company today (the
"Registration Statement"). Unless otherwise specified, all capitalized terms
have the meaning assigned to them in the Registration Statement.
<PAGE>
STRASBURGER & PRICE, L.L.P.
AUGUST 23, 1996
PAGE 2
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In connection with the preparation of this opinion, we have examined such
documents concerning the Exchanges, including the Plan, as we deem necessary.
In our examination, we have assumed the genuineness of all signatures, the legal
capacity of all natural persons, the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified, conformed or photostatic copies and the authenticity of the
originals of such copies. In rendering the opinion set forth below, we have
relied upon certain written representations of the Partnership, the Operating
Company and the Holding Company, which are annexed hereto. We have also relied
on certain representations to be made by the transferors in the various
Subscription Agreements to be executed by such transferors in the form attached
as Exhibit "99(iii)" to the Registration Statement, and we have assumed that
such form of Subscription Agreement will be executed by each party that will be
transferring either Operating Stock or Units to the Holding Company pursuant to
the Plan. We have assumed for all purposes that the Exchanges will be effected
as described in the Plan and in the Registration Statement.
We have based our conclusions on the Internal Revenue Code of 1986 (the
"Code") and the regulations promulgated pursuant thereto, each as amended from
time to time and existing on the date hereof, as well as existing judicial and
administrative interpretations thereof. Specifically, we have examined
published rulings of the Service involving substantially similar transactions.
Legislation passed, administrative action taken, administrative interpretations
or rulings issued, or judicial decisions issued subsequent to the date of this
letter may result in a different treatment of the proposed transaction than is
anticipated by our opinion herein. This opinion does not purport to, and should
not be construed to, speak to any question concerning state or foreign laws.
We have not discussed this opinion with representatives of the Internal
Revenue Service, and it is not binding on the Service. The Service is not bound
by and may not concur in the conclusions we have reached.
Based upon, and subject to the foregoing, and with due regard to such legal
consideration as we deem necessary, we are of the opinion that, for United
States Federal income tax purposes:
(1) No gain or loss will be recognized by Limited Partners
transferring their Units or by CSC Shareholders transferring their shares of
Operating Stock to the Holding Company solely in exchange for Holding
Stock.
(2) No gain or loss will be recognized to the Holding Company upon
receipt of the Units and the shares of Operating Stock transferred to the
Holding Company in exchange for shares of Holding Stock.
<PAGE>
STRASBURGER & PRICE L.L.P.
AUGUST 23, 1996
PAGE 3
- ------------------------------
(3) The basis in the hands of the Holding Company of the assets
transferred to it in exchange for shares of Holding Stock will be the same
as the adjusted basis of such assets in the hands of the transferors
immediately prior to the exchange.
(4) The holding period of the assets received by the Holding Company
in exchange for shares of Holding Stock will include the period in which
such assets were held by the transferors immediately prior to the exchange.
(5) The basis of the shares of Holding Stock received by each of the
transferors will be the same as that transferor's basis in the assets
transferred to the Holding Company in exchange for shares of Holding Stock.
(6) The holding period of the Holding Stock to be received by the CSC
Shareholders in exchange for their shares of Operating Stock will include
the holding period for the shares of Operating Stock transferred, provided
such shares of Operating Stock were held as capital assets or Section 1231
assets on the date of the exchange.
(7) The holding period of the Holding Stock to be received by the
Limited Partners in exchange for their Units will include the holding
period for the Units transferred, except that the holding period of the
shares of Holding Stock received by the Limited Partners in exchange for
their interests in the unrealized receivables and substantially appreciated
inventory items of the Partnership, within the meaning of Section 751 of
the Code, that are neither capital assets nor Section 1231 assets begins on
the day following the date of the exchange.
Except as set forth above, we express no opinion as to the tax consequences
to any party, whether Federal, state, local or foreign, of the Exchanges or of
any transactions related to the Exchanges or contemplated by the Plan. This
opinion is being furnished only to you in connection with the Exchanges and
solely for your benefit in connection therewith. It may not be used or relied
upon for any other purpose, and may not be circulated, quoted or otherwise
referred to for any other purpose without our express written consent.
Very truly yours,
STRASBURGER & PRICE, L.L.P.
By:
---------------------------
<PAGE>
EXHIBIT 10(ii)
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
By and Between
Corporate Systems Ltd.
and
Hartford Fire Insurance Company
<PAGE>
TABLE OF CONTENTS
Section 1. Definitions
Section 2. Software License
Section 3. [THIS SECTION INTENTIONALLY OMITTED]
Section 4. Access, Telecommunication System Usage and Storage of Hartford
Data and Information
Section 5. Software Development Services
Section 6. Report Services
Section 7. Maintenance Services
Section 8. Training Services
Section 9. Other Services
Section 10. Personnel
Section 11. Documentation
Section 12. Warranties
Section 13. Liability and Indemnities
Section 14. Source Code
Section 15. Intellectual Property Indemnity
Section 16. Confidentiality
Section 17. Fees, Payment, Charges and Taxes
Section 18. Auditing
Section 19. Term and Termination
Section 20. Relationship Between the Parties
Section 21. Assignment
Section 22. General
SCHEDULES
Schedule A. Authorized Hardware, Operating System and Interface Software
Schedule B. Description and Specifications for the Customizations
Schedule C. Software Purchase Pricing Options
Schedule D. Description and Specifications for the MCM System
Schedule E. Third Party Software
Schedule F. [THIS SECTION INTENTIONALLY OMITTED]
Schedule G. [THIS SECTION INTENTIONALLY OMITTED]
Schedule H. [THIS SECTION INTENTIONALLY OMITTED]
Schedule I. Hartford Code Development Guidelines
Schedule J. Service Level Agreement
Schedule K. Report Schedule
Schedule L. Preferred Provider Organizations
Schedule M. CS Nondisclosure Agreement
Schedule N. Hartford Nondisclosure Agreement
Schedule O. Payment Schedule
Schedule P. Disaster Recovery Plan
2
<PAGE>
AGREEMENT effective as of the 1st day of January, 1994 by and between
Corporate Systems Ltd. ("CS"), a limited partnership having an address at
1212 Ross Street, Amarillo, Texas 79120 and Hartford Fire Insurance Company
("Hartford"), a Connecticut Corporation having an address at 690 Asylum
Avenue, Hartford, Connecticut 06115.
WITNESSETH
WHEREAS, Hartford wishes to license certain data processing software from CS
and to obtain certain services related to such software; and
WHEREAS, CS wishes to license such software and to provide related services;
and
WHEREAS, CS will install CS's proprietary software as well as software
developed by CS for Hartford on computers in the CS Computer Facility, will
maintain Hartford's data base on said computers in the CS Computer Facility
as well as at other sites as specified in Section 4 below, and will provide
Hartford, as specified in this Agreement, with access via telecommunications
to such software.
NOW, THEREFORE, in consideration of the mutual covenants and agreement herein
contained and subject to the terms and conditions hereinafter set forth,
Hartford and CS hereby agree as follows:
1.0 DEFINITIONS
1.1 As used in this Agreement, the terms set forth in this Section 1 shall
have those meanings indicated below:
1.2 Access - Shall mean telecommunications access to the MCM System.
1.3 Acceptance Test - As described in Section 5.8 below.
1.4 Additions - As described in Section 5.3 below.
1.5 Agreement This Software License, Development Services and Maintenance
Agreement
1.6 Application Crisis - Any production problem that prevents Hartford from
receiving daily data feeds within four (4) hours or prevents Hartford
from accessing on-line data for any length of time that materially and
adversely affects Hartford.
1.7 Authorized Hardware, Operating Systems and Interface Software - As
specified in Schedule A, which is attached hereto and incorporated
herein by reference.
1.8 CS Computer Facility - CS's computer facility in Texas (or such other
locations where it may move or add facilities) where the MCM System is
or will be installed and to which Hartford shall have full access as
described herein for processing purposes.
1.9 [THIS SECTION INTENTIONALLY OMITTED]
3
<PAGE>
1.10 Custom Programming - The software programming developed by CS for
Hartford in accordance with Hartford's user requirements and as
described in the Specifications in Schedule B which is attached hereto
and incorporated herein by reference and as such Schedule B may be
changed from time to time with Supplements upon the mutual written
agreement of the Parties.
1.11 Customizations - All Custom Programming (together with all related
Documentation and an" portion or copies thereof) related to the MCM
System as specified in Section 5 below.
1.12 Development Services - As described in Section 5 below.
1.13 Documentation - All materials which are necessary to instruct or assist
users, operators and systems personnel in the installation, operations,
use and modification of the MCM System and the Customizations,
including but not limited to such materials as operating manuals,
program manuals, systems manuals and users manuals. All Documentation
shall include information on the functionality of each and every
Customization and new Release and of the interrelationship of each such
Customization and Release to the rest of the MCM System and process. CS
WILL PROVIDE HARTFORD ON A QUARTERLY BASIS WITH DOCUMENTATION WHICH MAY
BE NECESSARY FOR HARTFORD'S USE OF THE MCM SYSTEM AND THE CUSTOMIZATIONS
REFLECTING THE COLLECTION OF ALL DAILY ENHANCEMENTS MADE BY CS.
1.14 [THIS SECTION INTENTIONALLY OMITTED]
1.15 Enhancements - Any modification, change, correction, or update of the
MCM System developed by CS on a daily basis, except for Customizations
and Third Pay Software and Enhancements thereto. CS shall deliver to
Hartford Documentation for such Enhancements on a quarterly basis.
1.16 Hartford - Hartford Fire Insurance Company and, unless it refers to the
party to this Agreement which may exercise discretion in any matter
arising under this Agreement, all its corporate affiliates and
subsidiaries.
1.17 Integrated Customizations - Customizations ordered by Hartford as part
of Development Services which are integrated by CS into the MCM System
and are provided as part of an Enhancement or Release to other CS
customers.
1.18 MCM System - The CS software system operating on CS's mainframe
computer in Amarillo, Texas, or such other place where CS may locate
its mainframe computer, described in Schedule D, which is attached
hereto and incorporated herein by reference, and Claim Administration
System (CAS) Account Design and Special Report modules essential to the
execution and use of the MCM System as well as such Third Party
Software as are listed and added to from time to time in Schedule E,
which is attached hereto and incorporated herein by reference. The MCM
System shall include all Enhancements thereto and all Releases thereof
as well as all related Documentation.
1.19 Medical Management Centers- One or more ITT Hartford processing facilities
where ITT Hartford employees use the MCM System to process Hartford claims.
4
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
1.20 Nonconformance - A variance, due to a programming error, in any
part of the MCM System or the Custom Programming from the related
Specifications.
1.21 Object Code - The software in a form resulting from the
translation or processing of the machine readable portions of the
Source Code by a computer into machine language or intermediate
code, and which is thus in a form that would not be convenient for
human understanding of the program logic of the software, but
which is appropriate for its execution or interpretation by a
computer.
1.22 Parties - CS and Hartford.
1.23 PPO - Preferred Provider Organization.
1.24 Project - Custom Programming done by CS for Hartford pursuant to
this Agreement on a defined project basis as specified in
Supplements to Schedule B.
1.25 Release - A System upgrade such as CICS, MVS, security, operating
platform, or environment.
1.26 Reports - Reports generated by using the computer software
capability developed by CS at Hartford's request.
1.27 Section - The numbered Section referred to and all numbered
subsections of said Section. (For example, Section 2.2 includes
Section 2.2.1.)
1.28 Services - Any and all services to be performed by CS hereunder,
including but not limited to services performed pursuant to
Section 4, 5, 6, 7 and 8 below.
1.29 Source Code - Both machine readable and human readable copies of
all software covered under this Agreement consisting of
instructions to be executed upon a computer in the language used
by its programmers (i.e., prior to compilation or assembly) in a
form in which the program logic of the software is deducible by a
human being, fully (to the extent available to CS in tangible -
human or machine readable - form) commented, and including all
related flow diagrams and all other documentation and manuals
available to CS in tangible - human or machine readable - form
which would allow Hartford to properly effect modifications and
support for the MCM System.
1.30 Specifications - Detailed descriptions of the MCM System and the
Customizations.
1.31 Supplement - An instrument which incorporates this Agreement
executed by Hartford and CS.
1.32 Third Party Software - All third party software and data bases,
including but not limited to Enhancements thereto and all Releases
thereof as well as all related Documentation, which have been
approved by Hartford and will be used to carry out the
requirements described in this Agreement. All such Third Party
Software products are specified in Schedule E.
1.33 [THIS SECTION INTENTIONALLY OMITTED]
5
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
2.0 SOFTWARE LICENSE
2.1 CS hereby grants Hartford and Hartford hereby accepts subject to
the terms and conditions of this Agreement a non-exclusive,
non-transferable perpetual license to use and access the MCM System
in the ordinary course of its insurance, insurance administration,
including but not limited to third party administration, claims
services, and insurance services businesses, or such other
insurance businesses that may be mandated by state and/or federal
law, but not otherwise.
2.2 OPTION TO PURCHASE
2.2.1 Hartford shall have the option and the right to exercise said
option at any time to purchase one (l) copy of the Source Code and
all Documentation together with one (1) copy of the Object Code to
the MCM System from CS. with CS for maintenance of the System
without contracting for maintenance of the System by CS. The
software purchase pricing options are specifically defined in
Schedule C.
2.2.2 In the event that Hartford exercises said option, CS will assist
Hartford (at CS's usual time and expense rates) as reasonably
necessary in such a transition, including but not limited to using
its best efforts to: (i) continue to provide access to the MCM
System at the CS Computer Facility until such time as Hartford is
processing all claims on the MCM System at Hartford's site and (ii)
facilitate and assist Hartford in obtaining sublicenses (at
Hartford's expense) from vendors to all Third Party Software
specified in Schedule E and the Operating and Interface Software
specified in Schedule A.
3.0 [THIS SECTION INTENTIONALLY OMITTED]
4.0 HARTFORD DIRECT ACCESS TO MCM SYSTEM
4.1 CS will provide Hartford, at all times while this Agreement is in
effect, at Hartford's Home Office, Medical Management Centers,
participating Hartford claim offices and any other sites that
Hartford designates with remote access to CS's data processing
system, in order that Hartford may:
(a) view the detailed claim information and the MCM System review
process, and
(b) allow Hartford's nurse auditors, cost containment coordinators
and/or claim processing supervisors and other individuals so
designated by Hartford to communicate with Hartford's Medical
Management Centers via on-line diary system as is currently
being utilized.
6
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
4.1.1 CS acknowledges that the MCM System and all Customizations
will be installed on computers at the CS Computer Facility,
and that Hartford, as specified in Section 4.1.2 below, will
have complete access from any compatible computer system (as
specified in Schedule A) in the United States and Canada to
fully use the MCM System and all Customizations, subject to
CS's reasonable security requirements.
4.1.2
4.2
4.3 CS shall maintain the appropriate computer files of all
information and data transmitted to the CS Computer Facility
by Hartford. This will not require CS to retain data
transmission or tape files after such data has been entered
into the MCM System. It is expressly understood that all such
data transmitted by Hartford and maintained and stored by CS
shall remain the exclusive property of Hartford.
4.3.1 CS acknowledges that the data processed on the MCM System is
extremely valuable to Hartford. Accordingly, CS agrees to
follow the provisions in Section 4.7.1 below for two (2) daily
back-ups of Hartford's data, one to be kept at the CS Computer
Facility and the other at an off-premises location remote from
the CS Computer Facility.
4.4 CS agrees that it will not permit access to Hartford data by
any person or entity other than Hartford or to such other
persons or entities who have been approved in advance by
Hartford.
4.5 [THIS SECTION IN INTENTIONALLY OMITTED]
4.6 ON-GOING HARTFORD OBLIGATIONS
4.6.1 All Hartford claim offices using the MCM System will provide
CS with a daily update consisting of new claim additions and
existing claim transactions, including but not limited to
changes and deletions.
4.6.2 Hartford will determine compensability of claims and provide
final authorization for claim payment.
7
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
4.7 DISASTER RECOVERY PLAN
4.7.1 CS shall make available a disaster recovery program that will
allow for reinstatement of full production capacity as
specified in this Section 4.7. CS represents and warrants that
no later than March 1, 1994 it will have established a
disaster recovery plan, in accordance with the provisions
specified in this Section 4.7 ("Disaster Recovery Plan") in
the event that one or more disasters should prevent the CS
Computer Facility from processing Hartford's data on the MCM
System. A copy of the Disaster Recovery Plan will be attached
hereto as Schedule P, which will be incorporated herein by
reference. Hartford shall have the right to approve any
Disaster Recovery Plan so that it as a minimum reflects the
terms of this Section 4.7. In the event that the Disaster
Recovery Plan does not reflect the terms of this Section 4.7,
Hartford shall have the right to cancel the Agreement. In
order to safeguard Hartford's data and information on the MCM
System, CS represents and warrants that at a minimum CS shall
take the following back-up and recovery measures in order to
permit recovery and processing of Hartford's data on the MCM
System in the event of destruction of normal processing files
and computers at the CS Computer Facility:
(i) CS shall maintain daily back-up computer tape files of
Hartford's historical database stored in a safe area at the
CS Computer Facility.
(ii) In addition to the daily back-up computer tape files at the CS
Computer Facility, CS shall prepare daily back-up computer
tape files which shall be delivered on a daily basis to an
off-premises location for safe-keeping. Hartford shall have
the right to approve such off-premises location.
(iii) WARM SITE. CS shall have a continuous contractual agreement
with a reliable entity in the business of providing a computer
"Warm Site" where back-up computer tape files can be processed
with remote telecommunications access to Hartford staff at any
location in the United States in the event that the CS
Computer Facility is damaged by such occurrences as tornados
or storms and therefore unable to process data on the MCM
System. Hartford shall have the right to review such Warm Site
agreement and to approve the Warm Site vendor.
(a) TOTAL FAILURE. In the event that the CS Computer
Facility is totally disabled and such disability causes
the MCM System not to be accessible for the purpose of
processing Hartford business ("Total Failure"), as soon
as CS knows or reasonably should have known of such
Total Failure or such Total Failure has existed for
twenty-four (24) hours, whichever is the shorter time
period, CS must install the MCM System and all Hartford
data files at the Warm Site with the result that
Hartford processing on the MCM System is fully
operational in accordance with the approved Disaster
Recovery Plan within forty-eight (48) hours, unless
Hartford agrees in writing to another plan.
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(b) PARTIAL FAILURE. In the event that the CS Computer
Facility is partially disabled and such disability
causes the MCM System to be partially inaccessible for
the purpose of processing Hartford business ("Partial
Failure"), as soon as CS knows or reasonably should have
known of such Partial Failure or such Partial Failure
has existed for forty-eight (48) hours, whichever is the
shorter time period, CS must install the MCM System and
all Hartford data files at the Warm Site with the result
that Hartford processing on the MCM System is fully
operational in accordance with the approved Disaster
Recovery Plan within forty-eight (48) hours, unless
Hartford agrees in writing to another plan.
4.7.2 CS shall make available to Hartford for Hartford's
review the Disaster Recovery Plan and procedures in
effect. Furthermore, Hartford may inspect the CS
Computer Facility as well as the off-site storage
facility upon demand. Any material changes to the
Disaster Recover Plan, including but not limited to a
change in the off-site storage center or in the backup
procedures, will require the prior written consent of
Hartford which consent will not be unreasonably withheld.
5.0 SOFTWARE DEVELOPMENT AGREEMENT
5.1 CS agrees to provide Development Services, at Hartford's cost as
specified in Schedule O, developing for Hartford the following
types of Custom Programming: (i) software to enhance or modify the
MCM System which will be integrated with the MCM System
("Integrated Customizations"); and (ii) stand-alone software
("Stand-Alone Customizations"). Said Development Services shall
include, but not be limited to, consulting in identifying
Customizations to meet Hartford's needs, software development and
implementation activities with respect to such identified
Customizations, and software to meet Hartford reporting needs.
5.2
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5.3 In the event that Hartford requests changes or additions to
earlier agreed-upon Specifications ("Additions"), CS shall analyze
such requests and respond to Hartford, within a reasonable time
period as mutually agreed to by CS and Hartford, with a written
plan, including stages and tasks in the development and
implementation of such requested Additions and the associated
costs together with time frames in which such stages and tasks are
to be completed. If Hartford and CS agree to such Additions and
associated additional costs, if any, the Specifications for such
Additions, including time frames, will become part of the
Supplement to Schedule B for such Customizations.
5.4 CS shall develop the Custom Programming in accordance with
Hartford's Source Code Development Guidelines specified in
Schedule I, which is attached hereto and incorporated herein by
reference.
5.5 CS shall design and develop all Customizations to conform to the
Minimum MCM System Requirements specified in Schedule D unless
waived by Hartford in a particular instance.
5.6 OWNERSHIP OF CUSTOMIZATIONS. Prior to CS starting work on any
Customization, the Parties will discuss whether such requested
Custom Programming shall constitute a Integrated Customization or
a Stand-Alone Customization. If Hartford decides that a
Customization shall be a Stand-Alone Customization, Hartford shall
have all right, title and interest in such Customization. CS
agrees not to provide any Stand-Alone Customizations to any other
CS customers unless CS and Hartford have agreed otherwise in
writing.
5.7 CS shall make such Integrated Customizations and Stand-Alone
Customizations accessible to Hartford from the CS Computer
Facility. In addition, CS shall deliver to Hartford as soon as
available one (1) copy of the Source Code and all Documentation
for all Stand-Alone Customizations which will run as a discrete
module not a part of the MCM System. CS shall have no obligation
to provide Hartford with the Source Code to any Hartford Specific
Integrated Customization, except as provided in Section 14 below.
5.8 ACCEPTANCE TESTING. CS agrees that as part of the Development
Services, CS shall thoroughly test each and every Customization to
assure that such Customization: (i) performs in accordance with
the Specifications and the standards in the Service Level
Agreement set forth in Schedule J; (ii) does not adversely affect
the capabilities of the current accepted Release of the MCM
System; and (iii) as an individual program and together with the
current accepted Release of the MCM System functions as a totality
and operates with internal consistency. After CS has conducted
such tests and corrected any Nonconformances, Hartford shall have
the option to acceptance test all Customizations.
5.8.1 ACCEPTANCE TESTING OF STAND-ALONE CUSTOMIZATIONS. Upon Hartford's
receipt of notice from CS that a StandAlone Customization is ready
to be tested, Hartford shall have the option to test the
Stand-Alone Customization together with CS at the CS Computer
Facility, using all related Documentation, in accordance with the
standards set forth in this Section 5.8.1. Within ten (10) days of
Hartford's receipt of such notice from CS, the Parties shall
perform the Acceptance Test on Authorized Hardware, using Hartford
data and test cases to ensure that the Stand-Alone Customization
is complete and that it performs in accordance with the
Specifications and produces the expected results. If, at such
test, Hartford discovers that the
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Stand-Alone Customization does not perform in accordance with the
Specifications, Hartford shall notify CS. Hartford will provide a
written evaluation of the Stand-Alone Customization with the
results of such Acceptance Test. The necessary changes to assure
that the Stand-Alone Customization performs in accordance with the
Specifications shall be prioritized by both Parties and shall be
completed in accordance with a mutually agreed-upon time schedule
which shall be set forth in the Supplement to Schedule B which
covers the particular Project. After its receipt of the corrected
Customization, together with all necessary Documentation,
Hartford, in accordance with the time frames in Schedule B, shall
re-conduct the Acceptance Test either at the CS Computer Facility
or from any Hartford location to the CS Computer Facility via
telecommunications, as the Parties shall mutually agree. Such
Customization shall not be considered accepted by Hartford until
signed off by Hartford which will occur: (i) if, in Hartford's
sole written opinion, no changes are necessary, (ii) if the
necessary changes, as determined by Hartford, are made between the
time reported and the agreed upon sign-off time, or (iii) if the
necessary changes, as determined by Hartford, are scheduled, with
Hartford's prior approval, for a later time.
5.8.2 ACCEPTANCE TESTING OF INTEGRATED CUSTOMIZATIONS.
5.8.3 ON-GOING ACCEPTANCE TESTING OF EACH RELEASE.
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5.8.3.1 REINSTALLATION OF PRIOR RELEASE. CS agrees that if, at any time
after the installation of a new Release, Hartford and CS
reasonably determine that a Release does not perform in accordance
with the Performance Criteria and Specifications or with the
Service Level Agreement to the extent that the previous Release
did, CS will either restore such performance in the new Release or
will restore and reinstall the immediately prior Release at the CS
Computer Facility and keep it installed until such time as the new
Release performs in accordance with the Specifications and the
Performance Criteria and the Service Level Agreement
5.8.4 CS warrants that any change it makes in any Integrated
Customization or Release of the MCM System shall not negatively
impact the functionality available in an earlier Release. CS
agrees that in order to prevent such negative impact, CS will
always as a routine procedure, after making a change in the MCM
System, do regression testing of the prior Release of the MCM
System. Each new Release will be integrated with and will include
the entire MCM System.
5.8.5 In addition to meeting all Acceptance Test standards set forth in
Section 5.8 above, the MCM System and all Integrated
Customizations shall meet the standards set forth in the Service
Level Agreement, attached hereto as Schedule J and incorporated
herein by reference.
5.8.6 CS shall bear all direct and indirect costs associated with
correcting Nonconformance, including but not limited to the cost
of reinstallation of a prior release, as specified in this Section
5.8, in the MCM System and all Customizations thereto.
5.9 SYSTEM CHANGES. CS will establish a formal systems release process
for communicating status on any systems changes ("Systems
Changes") that could create any vulnerability in Hartford's use of
the MCM System. Systems Changes include but are not limited to
general MCM Enhancements, Integrated Customizations, Stand-Alone
Customizations and Third Party
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Software as well as any changes to the Operating System. CS will
advise Hartford when any requested Customization is delivered to
the programmers.
5.9.2 If any Release will contain new or substantially revised input
screens or other details which reasonably can be expected to
require Hartford's employees to need additional instruction or
training, CS will not place such Release in production at the CS
Computer Facility until after it has delivered Documentation of
the Release to Hartford, and Hartford shall have had a reasonable
time to conduct the necessary instruction and training of its
employees.
5.10 TIME SCHEDULE
5.10.1 TIME IS OF THE ESSENCE. CS shall use its best efforts to perform
its obligations hereunder in accordance with the Time Schedule set
forth in Schedules B. Notwithstanding the foregoing sentence, CS
shall not be deemed to have breached the provisions of this
Section 5.10.1 for reasonable delays contemplated by the
provisions of this Agreement.
5.11 The Development Services will be rendered at the locations agreed
upon by CS and Hartford. The primary location will be the CS
Computer Facility in Amarillo, Texas.
6.0 REPORT SERVICES
6.1 CS agrees to develop report capabilities requested by Hartford in
accordance with the provisions in Section 5 above.
6.2 CS agrees to maintain and produce on a timely basis, in accordance
with the report time schedule in Schedule K, all the reports
available based on the computer software capability developed by
CS pursuant to Section 5 above to generate such reports.
7.0 MAINTENANCE SERVICES
7.1 In accordance with the provisions of this Section 7, CS agrees to
provide at no additional charge the following Maintenance Services
("Maintenance") to Hartford: (i) Problem Resolution as specified
in Section 7.2 below, including but not limited to daily system
checking, balancing, trouble shooting backup and database recovery
in the case of system failure; and (ii) Enhancements and Releases
as specified in Section 7.3 below.
7.1.1 In the event that there is a dispute between the Parties regarding
Problem Resolution, the Parties agree to submit the dispute to
Executive Review, pursuant to Section 20.4 below, no later than
five (5) working days after the Parties have failed to agree on a
resolution.
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7.2 PROBLEM RESOLUTION. The objective of the Problem Resolution is to
ensure that recovery and resolution activity is initiated in a
planned, organized and timely manner so as to minimize disruption
of the production of Hartford business on the MCM System.
7.2.1 Upon Hartford's notification to CS of a problem encountered in the
use by Hartford of the MCM System or any Customization, CS will
investigate any such problem to determine the nature and origin of
the problem, and, upon the completion of such investigation,
outline to Hartford the procedures to be followed in reaching a
resolution to such problem. CS may request additional information
from Hartford, in the form of problem description of system test
results, as may be reasonably necessary for CS to fully diagnose
the reported problem. Hartford may also call CS for the purpose of
clarification and discussion of a problem and/or to give advance
information to CS prior to CS's receipt of the notice. CS warrants
that it will begin Problem Resolution of any problem, as
specified in Section 7.2.2, within a reasonable period of time
(based on the significance on the problem) after notification
thereof by Hartford.
7.2.2 RESOLUTION OF ALL NONCONFORMANCE IN THE MCM SYSTEM AND FAILURE OF
THE MCM SYSTEM TO PERFORM IN ACCORDANCE WITH THE SPECIFICATIONS
AND SERVICE LEVEL AGREEMENT
7.2.2.1
Resolution by CS of problems as stated in this Section 7.2.2.1
shall be carried out and completed during regular business hours
as well as during non-business hours.
In the event CS fails to resolve a problem in accordance with the
provisions of Section 7.2.2.1 (i), (ii) or (iii) (or with respect
to a problem which cannot be resolved within thirty (30) days, to
have begun all necessary efforts to resolve such problem as
diligently as practicable), then CS agrees to diligently pursue
Problem Resolution by dedicating at least one (1) of its employees
who has knowledge and experience with the MCM System and the
Customizations on a full-time extraordinary basis, free of charge
to Hartford until such problem has been resolved.
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7.2.2.2 CS agrees that a CS operations representative will be available to
Hartford via phone from 7 a.m. until 11 p.m. Monday through Friday
EST, 8 a.m. through 5 p.m. Saturdays and during other hours of
on-line system. At all other times, a CS representative will be
made available, on an exception basis, at Hartford's cost,
providing Hartford has given two (2) day's advance notification,
except that CS shall provide emergency service on a twenty-four
(24) basis by the CS computer operations representative.
7.2.2.3 (THIS SECTION INTENTIONALLY OMITTED).
7.3 Right to Enhancements and Releases
7.3.1 As part of the Maintenance Services, CS shall provide to Hartford
all Enhancements and Releases as they become generally available
for delivery to other CS customers, and CS warrants that such
Enhancements and Releases shall work with MCM System. These
Enhancements and Releases shall be made available to Hartford
together with all related Documentation. Hartford shall have the
right to conduct an Acceptance Test pursuant to Section 5.8.3 for
each Release. Enhancements and Releases shall be deemed to be part
of the MCM System.
7.3.1.1
8.0 TRAINING AND CONSULTATION SERVICES
8.1 CS agrees to provide such training as is requested by Hartford at
any Hartford site specified by Hartford for Hartford employees
regarding the use of the MCM System. Such training shall occur at
a time mutually agreed upon by the Parties. Hartford shall pay CS
for such training at CS's then current charges for training, and
Hartford shall reimburse CS for reasonable expenses for travel and
hotel provided such expenses have been approved in advance by
Hartford.
9.0 OTHER SERVICES
9.1 GOVERNMENT COMPLIANCE
9.1.1 CS agrees that at least one (1) qualified CS employee will be
dedicated to continuous review of state requirements in order to
maintain the highest level of government compliance.
9.2 INCLUSION OF PPOs/HMOs
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9.2.1
9.2.2
9.3 MCM SYSTEM DEVELOPMENT PLAN
9.3.1 CS will establish a formal MCM System Development Plan.
9.3.2 CS will establish an MCM System users' group and will conduct priority
planning sessions with such users' group at least two times each year.
9.3.3
CS at its sole discretion may dedicate additional resources to take
care of items it deems appropriate regardless of the priority
determined by the users group.
9.3.4 CS will provide Hartford's senior management at Hartford's site in
Hartford, Connecticut with a project review on an annual basis,
including an overview of development schedules and strategic MCM
System initiatives.
9.4 HARTFORD MARKETING
9.4.1 Upon Hartford's request, CS shall provide information and guidance
concerning CS's products and product capabilities to be used by
Hartford in developing Hartford marketing materials.
9.5 There shall be no charge for any of the Other Services specified in
this Section 9, with the exception of charges indicated in
Section 9.2.2.
10.0 PERSONNEL
10.1 CS PERSONNEL
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10.1.1 CS shall assign one individual as the CS Director who shall manage
other CS personnel ("Personnel") throughout the term of this Agreement
as is necessary to complete all Services and obligations hereunder.
10.1.2 The CS Director shall prepare written progress report on a periodic
basis as agreed to by both Parties. Hartford and CS will jointly
review each progress report promptly to ensure mutual understanding
of progress achieved and problems encountered and to determine the
action necessary to accomplish the set goals.
10.1.3 Because the progress of projects specified in this Agreement may be
dependent on the continuity of individual employees assigned by CS
to such project, CS agrees that it shall not reassign or substitute
for any employee without prior discussion with Hartford.
10.1.4 In the event of prolonged illness of a CS employee, or other causes
beyond CS's control, such CS employee may be replaced from time to
time with other CS Personnel of equal or superior experience,
competence and professional level.
10.1.5
10.1.6 CS represents and warrants that each and every employee assigned by
it to perform services under this Agreement shall be an employee of
CS and not of Hartford.
10.1.7
10.1.8
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10.1.9 CS agrees that it and its employees will at all times comply with all
reasonable regulations regarding security, assigned parking, usage of
Hartford equipment, facilities and personnel and safety generally
applicable to Hartford's employees and invitees, in effect from time
to time at Hartford's premises and externally for materials belonging
to Hartford. Further, CS agrees that it and its employees will be
subject to reasonable restrictions imposed by Hartford in connection
with areas of their premises at which CS employees may be present
during the course of the performance of this Agreement.
10.1.10
10.1.11
10.1.12 CS agrees that all CS employees, consultants and agents working on
the Project shall sign CS's standard Nondisclosure Agreement,
substantially in the form of Schedule M, which is attached hereto and
is incorporated herein by reference. CS agrees that Hartford shall be
an intended third party beneficiary of each such Agreement.
10.2 HARTFORD PERSONNEL
10.2.1 Hartford will provide one (1) Hartford employee as the Hartford
Director. Such Hartford Director shall be the contact person for CS.
The Hartford Director shall be familiar with Hartford's installed
insurance and claims procedures and the user requirements for the
Customizations.
10.2.2 Hartford agrees that all Hartford employees and consultants working
on a Project shall sign Hartford's standard Nondisclosure Agreement,
substantially in the form of Schedule N, which is attached hereto and
incorporated herein by reference. Hartford agrees that CS shall be
an intended third party beneficiary of each such Agreement.
10.2.3 Hartford represents and warrants that each and every employee assigned
by it to perform services under this Agreement shall be an employee
of Hartford and not of CS.
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11.0 DOCUMENTATION
11.1
11.1.1 Such Documentation will specify in detail the functionality and use of
each Enhancement Release and Customization and the interrelationship
of each Enhancement, Release and Customization to the rest of the
MCM System.
11.1.2 Hartford shall have the right to reproduce all Documentation supplied
hereunder for Hartford's business use, subject to the terms and
conditions of this Agreement.
11.2 CS agrees to maintain full Documentation for the MCM System and all
Customizations, updated quarterly, on system replication requirements
(including but not limited to a listing of vendors, products, and
releases) in accordance with Section II of Schedule B, Schedule D,
Schedule E and Schedule I. The Documentation is to be included with
the quarterly updates to the software held in escrow.
12.0 WARRANTIES
12.1 CS warrants that the MCM System is designed to and will perform in
accordance with the Specifications set forth in Schedule D and that
such Specifications are a complete and accurate description of the
functional capabilities of the MCM System.
12.2 CS represents that it is a software development company with the
necessary expertise, capability, experience, tools and personnel to
provide the Development Services entailed by the scope of this
Agreement. CS warrants that each and every Integrated Customizations
and Stand-Alone Customization is designed to and will perform in
accordance with the Specifications set forth in Schedule B and that
such Specifications are a complete and accurate description of the
functional capabilities of the Integrated and Stand-Alone
Customizations.
12.3 CS agrees that it will provide a continuously stable processing
environment for Hartford's business, in both on-line and batch mode,
with the MCM System and the Customizations and that the MCM System
and the Customizations will perform in every respect in accordance
with the terms of the Service Level Agreement as specified in
Schedule J, which is attached hereto and is incorporated herein by
reference.
12.4 CS will on a continuous basis while this Agreement is in effect
provide Maintenance Services with respect to the MCM System and
Customizations pursuant to Section 7 above so that the MCM System and
the Customizations will perform as documented in the Specifications.
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12.5 CS warrants that the appropriate Release of the MCM System (and all
Third Party Software) and any Customization will, at all times, be
fully compatible with and run on the Authorized Hardware, the
interface software and the appropriate version of the operating
system. CS further warrants that the capacity of the Hardware, the
interface software and operating software will be sufficient to
maintain the level of response that is specified in the Specifications
in Schedules B and D and in the Service Level Agreement in Schedule J.
12.6 CS represents and warrants that it has and will continue to have and
maintain the necessary facilities, equipment and personnel to perform
its duties and obligations pursuant to this Agreement to give
Hartford access to and full use of the MCM System and Customizations
and to maintain and adequately safeguard all information and data
stored at the CS Computer Facility and at an approved backup site in
accordance with Section 4 above.
12.7 [THIS SECTION OMITTED INTENTIONALLY]
12.8 VIRUS REPRESENTATION AND WARRANTY
12.8.1 CS covenants, warrants and represents that it has taken reasonable
steps to test the MCM System and all Customizations for "Disabling
Code" and that the MCM System and Customizations are free of Disabling
Code as of the date of delivery by CS, and that CS will continue to
take such steps with respect to future Enhancements or modifications
to the MCM System and Customizations. Disabling Code is defined as
computer instructions that alter, destroy or inhibit the MCM System,
the Customizations and/or Hartford's processing environment,
including, but not limited to, other programs' data storage and
computer libraries. Disabling Code includes, but is not limited to,
programs that self-replicate without manual intervention, instructions
programmed to activate at a pre-determined time or upon a specified
event, and/or programs purporting to do a meaningful function but
designed for a different function. CS further warrants that it will
maintain a master copy of each Enhancement of the MCM System and each
Customization free and clear of any Disabling Code.
12.9 THIRD PARTY SOFTWARE INTEGRATION. CS warrants that the MCM System is
applying the agreed upon Third Party Software analytical tools in a
manner that is appropriate for each tool and which allows for
efficient and effective interrelationship of the tools.
12.10 The warranties provided pursuant to this Section 12 shall apply to
the MCM System (including all Third Party Software) and all
Enhancements thereto and all subsequent Releases thereof and to each
and every Customization.
12.11 CS warrants and represents, that except for the Third Party Software,
it is the owner of the MCM System and that the MCM System is the sole
and exclusive property of CS, and that CS has full power and
authority to grant the rights herein granted, including but not
limited to the right to sublicense all Third Party Software for use
in the MCM System at the CS Computer Facility, without the consent of
any other person and will indemnify and hold Hartford harmless from
and against any loss, cost, liability and expense arising out of any
breach of this warranty.
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12.12 GOVERNMENT REQUIREMENTS
12.12.1 CS warrants that it will comply with all applicable federal, state
and local laws and statutes, as well as the rules and regulations of
all relevant regulatory boards, agencies and commissions relating to
the rendering of services under this Agreement.
12.12.2
12.12.3
12.12.4
13.0 LIABILITY AND INDEMNITIES
13.1 CS warrants any processing or storage services, including the
repricing services furnished under this Agreement against
malfunctions, errors, or loss of data which are due to errors on the
part of CS, its equipment, or its employees. If Hartford notifies CS
in writing and furnishes adequate documentation of any malfunction,
error, or loss of data covered by this warranty within twenty (20)
days after it occurrence or if CS discovers any malfunction, error,
or loss of such data, then;
(i) With respect to such malfunction or error, CS shall without
charge reprocess reports designated by Hartford which fall
within reasonable check point intervals; and
(ii) With respect to lost data, CS shall either (a) regenerate without
charge any lost data if Hartford provides adequate backup
materials in machine readable form, or (b) if Hartford does not
provide such backup materials, grant Hartford a credit in an
amount equal to the CS estimated cost of regeneration, such
estimate to be made as if such backup materials were available.
13.1.1
13.2
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13.3
13.4 Hartford may adopt such measures as it deems appropriate to limit its
exposure with respect to potential losses and damages caused by CS,
as described above. CS shall comply with all reasonable measures
adopted by Hartford.
13.5
13.5.1
13.5.2 Prior to execution of this Agreement by the Parties, CS will provide
Hartford with copies of all policies or endorsements evidencing
compliance with this section.
13.6 Hartford shall be liable for all losses due to its errors, omissions,
or delays, caused by its negligence or willful misconduct,
including but not limited to administrative fines and penalties
imposed on CS due directly to actions or information supplied by
Hartford to CS. Hartford shall indemnify, defend and hold harmless
CS from and against all claims, losses, costs, expenses or other
liabilities, including reasonable attorney's fees, that CS shall
incur or suffer arising out of or resulting from such negligence or
willful misconduct by Hartford, or resulting from action taken or
permitted by CS in good faith with due care and without negligence
in reliance upon written instructions received from Hartford.
13.7 Hartford shall bear sole responsibility for any administrative fines,
penalties or civil/criminal actions resulting from any direct
actions on the part of Hartford that delays the timely processing of
medical bills by CS according to the requirements of any appropriate
regulatory agencies.
13.8 The terms of Section 13 shall survive the termination of this
Agreement.
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14.0 SOURCE CODE ESCROW
14.1 CS will place and maintain a copy of the Source Code and Documentation
for the MCM System, excluding source code for third party systems,
and the Hartford data files, including but not limited to all
Integrated Customizations in escrow for Hartford with Data Security
International ("DSI"). Hartford agrees to pay DSI all fees for said
escrow.
14.2
14.3 In the event of the occurrence of any of the events specified below in
this Section 14.3 and subject to Section 14.3.1, Hartford shall have
the right to demand that DSI provide Hartford with all of the MCM
System and Software Source Code and Documentation, (together with a
copy of the most recent MCM System Object Code) and any and all
Hartford data resident on the MCM System that in Hartford's opinion
is required or helpful to sustain operation of the MCM System and
continue to conduct its business:
(i) the failure of CS to provide the Services described in Sections 4
and 12.12 above over a period of three (3) months which were not
remedied by CS within such period of time;
(ii) the failure of CS to provide the Services described in
Sections 5, 6, and 7 above over a period of six (6) months which
were not remedied by CS within such period of time;
(iii) the filing of Chapter 7 with respect to CS, and/or;
(iv) the acquisition by a third party that is a competitor of Hartford
in insurance and/or insurance services, in Hartford's reasonable
opinion, (through purchase, merger or otherwise) of more than
fifty (50%) control of CS).
14.3.1 If Hartford's right to acquire the MCM System and Software Source Code
arises under Section 14.3 (i) or (ii), but not under (iii) or (iv),
the exercise of such right is subject to Hartford's payment to CS of
the purchase price options set forth in Section 2.2.1, reduced by
twenty-five percent.
14.4 When Hartford shall come into possession of the Source Code for MCM
System as described in Section 14.3 above, Hartford shall thereafter
have the right to modify such Source Code to perform any functions
which Hartford deems desirable, including but not limited to making
modifications, Enhancements and Customizations to the MCM System and
Report capabilities thereto, and to merging it or any part thereof
into other computer software, limited, however, to use in Hartford's
insurance, claims, insurance administration, including but not
limited to third party administration, or insurance service
businesses only, and the Source Code as so modified shall,
nonetheless, remain subject to the same restrictions on use,
reproduction and disclosure as are contained in this Agreement.
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
14.4.1 Hartford may not use the MCM System Source Code or any modifications
thereof to compete with CS. Hartford may not sell or license the use
of the MCM System to any other party. Hartford may utilize the MCM
System and the source code for such System, however acquired, solely
to process claims and data in the ordinary course of its insurance,
claims, insurance administration, including but not limited to third
party administration and insurance service businesses.
15.0 INTELLECTUAL PROPERTY INDEMNITY
15.1 CS warrants that the MCM System and the Customizations hereby furnished
do not infringe upon or violate any patent, copyright, trade mark,
trade secret or any other proprietary right of any third party. CS
represents and warrants that it is under no obligation or
restriction, nor will it assume any such obligation or restriction,
which would in any way interfere or be inconsistent with the MCM
System and/or Customizations and Services to be furnished by it
under this Agreement.
15.2 Hartford shall notify CS of any claim, action or suit against Hartford
arising with respect to the MCM System and/or the Customizations and
alleging infringement of any patent, trademark, copyright, trade
secret or other proprietary right of any third party. CS agrees to
indemnify Hartford against and hold Hartford harmless from any and
all loss, damage or liability assessed against Hartford or incurred
by Hartford arising out of or in connection with any such claim,
action or suit provided: (i) CS has been notified promptly and in
writing that any such claim, action, or suit is threatened or has
been brought; (ii) CS has the right to assume the defense of such
claim, action or suit with counsel selected by CS and to compromise
or settle such action, suit or claim; and (iii) CS receives
Hartford's cooperation, at CS's sole cost, in the defense of such
claim, action, or suit After notice from CS to Hartford that CS has
assumed such defense, CS will not be liable to Hartford for any
legal or other expenses subsequently incurred by Hartford in
connection with such defense, other than (a) reasonable costs of
investigation, (b) in the event that CS does not diligently defend
such action, in which case Hartford shall have the right to assume
sole control of the defense and CS agrees to pay all legal expenses
associated with such defense and the full amount of any judgment or
settlement, or (c) unless incurred at the written request of CS, in
which event such legal or other expenses shall be borne by CS.
15.3 In the event any such claim, action or suit the MCM System and/or
Customizations ("Infringing Product") is held to constitute an
infringement and its use is enjoined, CS shall have the right to
either (i) procure for Hartford the right to continue using the
Infringing Product (ii) with the prior written consent of Hartford,
modify the Infringing Product so that it is non-infringing, or (iii)
with the prior written consent of Hartford, substitute for the
Infringing Product with a non-infringing and functionally equivalent
replacement
15.4 The provisions of this Section 15 shall survive any termination of
this Agreement.
24
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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16.0 CONFIDENTIALITY
16.1 The Parties acknowledge that during the course of this Agreement one
Party ("Confidant") may acquire the proprietary or confidential
information, so designated in writing, or which, from the
circumstances, in good faith and good conscience ought to be treated
as confidential, of the other ("Discloser"). All such information
(regardless of its embodiment and/or of the media upon which any of
it may now or hereafter reside) is and shall remain exclusively the
property and (possibly) the valuable trade secret of the Discloser
who shall retain all title, right and interest therein except as
specified herein. For the purposes of this Agreement, proprietary
and confidential information includes but is not limited to business
plans, customer or client list, medical and claims history of
Hartford's insureds, and any programs, descriptions, forms,
instructions or related information relating thereto, regardless of
the "designation in writing" requirement, above.
16.2 Confidant shall hold all such information in confidence and shall
safeguard it all, as though the same were its own valuable trade
secret, and Confidant shall make use of any such information solely
for the purposes permitted by this Agreement or as otherwise agreed
between the Parties in writing. Confidant shall use its best efforts
not to disclose any such information to any person except such of
its employees who need said information to accomplish purposes
permitted by this Agreement and who have been properly advised of
the obligations of the Confidant hereunder.
16.2.1 CS specifically agrees to maintain in strict confidence, and not to
disclose to any party, except as authorized in writing by Hartford:
(i) data and materials furnished by Hartford for processing medical
claims under this Agreement, or
(ii) confidential or privileged patient medical information obtained
in the course of processing medical claims under this Agreement,
or
16.2.2
16.3 Confidant shall maintain conspicuously on all such information such
copyright, proprietary notices and/or legends as shall be included
by the Discloser, or otherwise permitted by this Agreement.
16.4 Confidant shall not reproduce, copy or appropriate any such information
in whole or in part without the express permission of Discloser,
except as provided in this Agreement.
16.5 If Confidant breaches any provision of this Section 16, Discloser shall
be entitled to seek all remedies and relief available at law or
equity from its appropriation of proprietary information, including
reasonable attorney's fees.
25
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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16.6 Information received from Discloser shall not be deemed to be
proprietary information and/or confidential information, and the
Confidant shall have no obligations with respect to such information
which is: (i) Already known to the Confidant; or (ii) becomes
publicly known through no wrongful act of The Confidant; or (iii)
received by The Confidant from a Third party without similar
restriction and without breach of This Agreement; or (iv)
independently developed by the Confidant; or (v) approved for
release by written authorization of Discloser; or (vi) disclosed
pursuant to the lawful requirement or a request of a court of
competent jurisdiction or government agency.
16.7 In the event any confidential or proprietary information is lost or
comes into the hands of an unauthorized person, whether due to
negligence or intentional acts or omissions on Confidant's behalf,
Confidant will indemnify Discloser for all losses and expenses
incurred. Further Confidant agrees, at its expense, to use its best
efforts in attempting to promptly retrieve and deliver to Discloser
all such material coming into the hands of such unauthorized person,
agency, firm or corporation.
16.8 The provisions of this Section 16 shall survive termination of this
Agreement.
17.0 FEES, PAYMENT, CHARGES AND TAXES
17.1 All fees and charges hereunder shall be paid in accordance with the
Payment Schedule in Schedule O.
17.1.1
17.1.2
17.2 With respect to Development Services for Customizations, the Parties
may agree to time and materials charges instead of a fiat fee on a
Project basis. Changes to time and material charges shall be
effective with regard to Hartford ninety (90) days after Hartford
receives notice of any such changes. Before CS commences any work on
any Customizations, whether priced on a Project basis or on a time
and materials basis, Hartford must have given prior written approval
to proceed with such Customizations in accordance with a formal
plan, including the fee schedule and time frames.
26
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
17.3
17.4
17.5
17.5.1 The Parties agree that Section 17.5 shall only apply with respect
agreements with CS's other customers which are dated on or after May
1, 1993. Section 17.5 shall not apply to agreements between CS and
other CS customers entered into before May 1, 1993, including
renewals on the same terms after May 1, 1993. However, if a CS
customer that entered into an agreement with CS prior to May 1,
1993, either renews such a agreement on different terms after May 1,
1993 or enters into a new agreement with CS after May 1, 1993, then
Section 17.5 shall apply.
18.0 AUDITING
18.1 CS shall maintain complete and accurate books of account with respect
to all the fees charged and shall provide such detailed accounts to
Hartford at Hartford's request. Hartford, at its request shall, at
no cost to CS, have the right to audit those portions of CS'
financial records directly related to the fees charged.
27
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
18.2 CS will provide Hartford and/or auditors, retained by Hartford at
Hartford's cost, access to assessment information regarding the
operating performance of the MCM System as it relates to Hartford.
18.3 The Parties also acknowledge that certain federal and state agencies
may require access to facilities of CS to audit the performance of
the Services provided by CS to Hartford under this Agreement, and CS
agrees to cooperate with respect to all such governmental audits.
19.0 TERM AND TERMINATION AND LIQUIDATED DAMAGES
19.1 The initial term of this Agreement shall be for two (2) years from
the Effective Date, except as provided in Sections 19.1.1 and 19.1.2
below. Thereafter the Agreement shall be renewed for consecutive one
(1) year terms provided that both Parties agree to such renewal
within thirty (30) days of the end of the prior term.
19.1.1 Hartford shall have the right to terminate the Agreement at any time,
without cause and for any reason, upon a one (1) year written notice
of its intent to terminate measured from the date of receipt of such
termination notice by CS.
19.1.2 CS shall have the right to terminate the Agreement at any time, without
cause and for any reason, upon two (2) years written notice of its
intent to terminate measured from the date of receipt of such
termination notice by Hartford.
19.2 Hartford may terminate this Agreement, in whole or in part, due to any
state or federal regulatory change which has the effect of
eliminating the need for repricing and analysis services for
Workers' Compensation and any other lines of coverage that are
involved.
19.3 Either Party may terminate this Agreement upon the occurrence of any
event of breach or default provided that the Party not in default
shall give the Party deemed to be in default written notice of such
default and such Party in default shall have sixty (60) days from
receipt of such notice to correct the alleged default, or a longer
period of time if the party not in default agrees in its sole
discretion in writing to extend the cure period for such breach. In
the event that the default is not cured within such sixty (60) day
period, or if an Extension has been granted, within the time period
for such an Extension specified by the party not in breach, this
Agreement shall, at the option of the Party not in default, be
immediately terminated and such Party shall be entitled to seek any
remedies provided herein and under applicable law.
19.3.1 With respect to Hartford the only material breaches of this Agreement
which would entitle CS to terminate this Agreement pursuant to this
Section 19.3 shall be the following: (i) The failure of Hartford to
remit payments to CS due from Hartford to CS hereunder on a timely
basis, excluding any permissible offset pursuant to this Agreement,
and excluding any such failure with respect to a good faith dispute
between the Parties with respect to a payment; or (ii) the failure
of Hartford to fulfill its confidentiality obligations as provided
in Section 16 above which were not remedied by Hartford.
28
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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19.3.2 With respect to CS the only material breaches of the Agreement which
would entitle Hartford to terminate this Agreement pursuant to this
Section 19.3 shall be the following:
(i) the failure of CS to provide the Services described in Sections 4
and 12.12 above;
(ii) the failure of CS to provide the Services described in
Sections 5, 6, and 7 above;
(iii) the failure of CS to fulfill its confidentiality obligations as
provided in Section 16 above which was not remedied by CS;
(iv) the failure of CS to fulfill its obligations to indemnify
Hartford as provided in Sections 13 and 15 above;
(v) the filing of Chapter 7 with respect to CS; or
(vi) the acquisition by a third party (through purchase, merger or
otherwise) of more than fifty percent (50%) control of CS.
19.4 Each of the following events shall constitute an event of Default by
either of the Parties hereunder and shall permit the other to
terminate this Agreement pursuant to this Section 19: (i) If a Party
to this Agreement ceases to do business as a going concern; (ii) the
filing by a Party to this Agreement of a voluntary petition in
bankruptcy or a voluntary petition or an answer seeking
reorganization, an arrangement, the adjustment of its debts, or for
any relief under the applicable bankruptcy or insolvency laws, now
or hereafter existing, or any other action by said Party or said
Party indicating consent to, approval of, or acquiescence in, any
such similar petition or proceedings; the application by said Party
for, or the appointment by consent or acquiescence of said Party of
a receiver or trustee for itself or for all or substantial part of
its properties; the making by said Party of an assignment for the
benefit of creditors; or the inability of said Party, or the
admission by said Party in writing of its inability to pay debts as
they mature; or (iii) filing of involuntary petition against a Party
to this Agreement in bankruptcy or seeking reorganization, an
arrangement, readjustment of its debts or for any relief under the
applicable bankruptcy or other insolvency laws, now or hereafter
existing; or the involuntary appointment of a receiver or a trustee
for said Party or for all or a substantial part of its property; and
any one of the same remains undismissed or undischarged for ninety
(90) days.
19.5 TERMINATION OF DEVELOPMENT SERVICES
19.5.1 Hartford, in its sole discretion, may at any time terminate any
Development Services Project pursuant to Section 5 above or any
portion thereof by sending written notice of such termination to CS.
Hartford shall pay CS for the Development Services performed on such
Project prior to termination on a pro rata basis in accordance with
the payment schedule in Schedules B and/or O.
29
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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20.5 ARBITRATION
20.5.1 Any controversy relating to this Agreement or the breach thereof shall
be determined by arbitration in the city of Hartford, Connecticut in
accordance with the Commercial Arbitration rules of the American
Arbitration Association (except as otherwise specified in this
Section 20.5) using arbitrators who are experienced commercial
litigators admitted before the bar of any state of the United
States. Arbitrators shall be compensated for their services at the
standard hourly rate charged in their private professional
activities. The Parties acknowledge that the United States District
Court for the District of Connecticut has jurisdiction over the
Parties for the purpose of enforcing this Section 20.5. Connecticut
rules of civil procedure and evidence shall apply with respect to
any arbitration hereunder. The award may be made solely on the
default of a Party. The arbitrator(s) shall follow substantive
rules of law. The arbitrator(s) shall make its award in strict
conformity with this Agreement and shall have no power to depart
from or change any of the provisions thereof. The award of the panel
shall be accompanied by findings of fact and a written statement of
reasons for the decision. The Parties agree to be bound by the
results of this arbitration; judgment upon the award so rendered may
be entered and enforced in any court of competent jurisdiction. To
the extent reasonably practicable, both Parties agree to continue
performing their respective obligations under this Agreement while
the dispute is being resolved.
20.5.2 In the event that either Party initiates litigation involving any
disputes arising under this Agreement prior to submitting the
dispute to arbitration, the other Party shall be entitled to obtain
an order referring the case to arbitration pursuant to Section 20.5
above and shall be entitled to reimbursement for legal fees and
costs incurred up through the date of the issuance of said order.
21.0 ASSIGNMENT
21.1 CS may not assign this Agreement and any rights and duties thereunder
except upon prior written consent of Hartford. For purposes of this
Agreement, the acquisition by a third party (through purchase,
merger or otherwise) of more than fifty (50%) of control of CS will
be considered to be an assignment and grounds for termination in
accordance with Section 19.3.2.
21.2 Hartford shall have the right to assign this Agreement and any and all
rights and duties thereunder to any affiliated company or entity
without the consent of CS and to any entity to which Hartford in the
future may sell part of all of the insurance business which is
processed on the MCM System, provided, however, in the latter case
CS shall have the right to terminate this agreement by giving 180
days written notice of it intent to do so. Any other assignment by
Hartford must receive prior written consent from CS.
21.1 This Agreement shall be binding upon and inure to the benefit of the
Parties hereto, their successors (including by merger) and permitted
assigns.
22.0 GENERAL
22.1 This Agreement can only be modified by a written agreement duly signed
by the persons authorized to sign agreements on behalf of CS and of
Hartford and no other variance from the terms and conditions of this
Agreement will be of no effect.
32
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22.2 If any provision or provisions of this Agreement shall be held to be
invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or be impaired thereby.
22.3 This Agreement is the complete and exclusive statement of the agreement
between the Parties as to the subject matter hereof which supersedes
all proposals or agreements, oral or written, and all other
communications between the Parties related to the subject matter of
this Agreement
22.4 This Agreement shall be governed and construed in accordance with the
laws of the State of Connecticut. Hartford and CS agree that all
litigation arising with respect to the subject matter of this
Agreement will be litigated in the courts of the State of
Connecticut, including the United States courts located therein.
22.5 CS agrees that it will not directly or indirectly, without the prior
written consent of Hartford, use for the purposes of advertising,
promotion, or publicity, or otherwise, the name of Hartford or of
any of its affiliates, or any trademarks, logos or similar
designations of Hartford or any of its affiliates. CS agrees that
it will not make any official press release, announcement or other
form of publicity relating to the transactions which are subject to
this Agreement without first obtaining in each case the agreed prior
written consent of Hartford. CS shall not use Hartford's name,
trademarks or logo or the name of any affiliated company in any way
or manner not specifically authorized in writing in advance by
Hartford. CS may include Hartford's name in its list of customers.
22.6 A waiver of a breach or default under this Agreement shall not be a
waiver of any other or subsequent breach or default. The failure or
delay by either Party in enforcing compliance with any term or
condition of this Agreement shall not constitute a waiver of such
term or condition unless such term or condition is expressly waived
in writing.
22.7 Captions contained in this Agreement are for reference purposes only
and do not constitute part of this Agreement
22.8 Neither Party shall be deemed to have breached this Agreement by
reason of any delay or failure in its performance arising from acts
beyond its control. Such acts shall include, but will not be limited
to: act of God; act of war; riot; epidemic; fire; flood or other
disaster; act of government, including governmental regulations
superimposed after the fact; & traffic control caused delays, strike
or lockout; communication line failure; power failure, except that
any such disaster shall not excuse CS from carrying out its disaster
recovery obligations pursuant to Section 4.7 above, including but
not limited to having made adequate up-to-date back-up copies and
having provided Hartford with complete access to the fully
operational MCM System at the Warm Site within forty-eight (48)
hours after CS has knowledge of such disaster.
22.9 In the event of a breach or threatened breach by either Party of any
of the provisions of this Agreement, the injured Party, in addition
to any other remedies available to it under law, shall be entitled
to seek all equitable relief available including an injunction
restraining the other Party from the performance of acts which
constitute a breach of this Agreement, and such other Party agrees
not to raise adequacy of legal remedies as a defense thereof.
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22.10 In any litigation or arbitration between the Parties, the prevailing
Party shall be entitled to reasonable attorney's fees and all costs
of proceeding incurred in enforcing this Agreement.
22.11 All notices which are required to be given or submitted pursuant to
this Agreement shall be in writing and shall be sent by registered
or certified mail, return receipt requested, to the address set
forth herein or to such other address as CS or Hartford may from
time to time designate.
22.12 Each Party agrees to perform its obligations hereunder in accordance
with all applicable laws, rules, and regulations now or hereafter in
effect.
22.13 CS will comply with all applicable laws and statutes, as well as the
rules and regulations of all relevant regulatory boards, agencies
and commissions relating to the rendering of services under this
contract.
22.14 Duplicate originals of this Agreement shall be executed, each of which
shall be deemed an original but both of which together shall
constitute one and the same instrument.
22.15 Each Party represents that it has full power and authority to enter
into and perform this Agreement, and the person signing this
Agreement on behalf of it has been properly authorized and empowered
to enter into this Agreement.
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AGREEMENT AND UNDERSTAND AND
AGREE TO BE BOUND BY ITS TERMS, CONDITIONS, AND PRICES.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement effective
the day and year first above written.
Hartford CS
BY: BY:
---------------------------- ---------------------------
(Authorized Signature) (Authorized Signature)
---------------------------- ---------------------------
(Name) (Name)
---------------------------- ---------------------------
(Title) (Title)
34
<PAGE>
CORPORATE SYSTEMS, LTD
------------------
1995 Addendum
to
AGREEMENT FOR COMPUTER SERVICES
This Agreement ("Addendum") is between CORPORATE SYSTEMS LTD., a Texas
limited partnership ("CS"), and THE AETNA CASUALTY AND SURETY COMPANY AND
AXIA SERVICE:, INC. (both, "Aetna").
CS and Aetna are parties to the Agreement for Computer Services
effective between them as of December 16, 1987 (the "Existing Agreement"). CS
and Aetna now wish to supplement their Existing Agreement to license
additional software and define support services. If the Existing Agreement
and this Addendum conflict with respect to the license of the additional
software, this Addendum shall control.
PART 1
SYSTEM LICENSE
1.1 LICENSE OF SYSTEM. CS grants to Aetna, and Aetna accepts from CS, a
non-transferable and non-exclusive license (the "License") to use (including
the right to copy for backup purposes) the computer software programs (the
"System") described in the Schedules accompanying this Addendum or which are
added to this Addendum from time to time. This license will terminate when
the support functions described in Section 2.1 terminate.
Aetna may use the licensed System only for the purposes described in the
Schedules and may not use any component of the System for any other purpose.
Aetna may not remove or alter proprietary
notices, logos, or other distinguishing marks of CS (or of any third party
software included in or as part of the System) on any part of the System,
including documentation and other materials associated with the System.
1.2 PRICE, PAYMENT AND TAXES. Aetna shall pay to CS for the License fees
the amounts on the terms set out in the Schedules. CS will invoice Aetna for
the License fees, Annual Support Fee payments and other amounts payable
hereunder and Aetna shall pay proper invoices within thirty (30) days of
receipt. Aetna shall, in addition to the other amounts payable under this
Addendum, pay all sales and other taxes, federal, state, or otherwise,
however designated, which are levied or imposed by reason of the transactions
contemplated by this Addendum, but not including any taxes based upon CS's
income. Without limiting the foregoing, Aetna must promptly pay to CS any of
such items actually paid, or required to be collected or paid by CS.
AETNA CS KNOWLEDGE PAGE 1
SEPTEMBER 1995
<PAGE>
2.3 SUPPORT.
2.4 LIMITATION OF CS OBLIGATIONS. CS shall provide only the services
specified herein and shall have no support service requirements or
obligation, expressed or implied, other than those specifically set forth
herein. The total liability of CS to Aetna arising from or related to its
support services hereunder shall in no event exceed the total amount paid by
Aetna to CS for such support services for the current year.
2.5 OBLIGATIONS OF AETNA. In connection with the maintenance service to be
provided by CS, Aetna will:
(a) Implement and abide by CS's written and telephone service instructions.
(b) Add, at its own expense and in the manner instructed by CS, each error
correction and each enhancement and improvement provided to Aetna by CS. CS
shall not be responsible for failure of any normal function of the System
if such failure would not have occurred had Aetna installed all error
corrections, enhancements and improvements to the System previously provided
to Aetna by CS.
(c) If requested by CS, provide written documentation and details to CS to
substantiate problems and to assist CS in the identification and detection
of problems, errors and malfunctions; and Aetna agrees that CS shall have
no obligation or liability until it has received such documentation and
details from Aetna.
(d) Provide a method whereby CS can remotely access the System installed
under the Addendum and provide a user profile and password for use by CS
for such support which will give CS access to all commands and object
authority in libraries containing the System's software, data files, or
related objects.
(e) Pay or reimburse CS its reasonable (and verified) out-of-pocket
expenses, that are authorized by Aetna in advance, incurred in providing
such support services, including, without limitations, travel, meals,
lodging and local transportation expenses; and all taxes, however
designated, arising from or based upon the support services, or payments
made by CS for such services, including, for example, all applicable sales,
use and excise taxes, but not including any taxes based upon CS's net
income.
AETNA CS KNOWLEDGE PAGE 4
SEPTEMBER 1995
<PAGE>
(f) Aetna shall have no liability with respect to its obligations under
this Addendum for consequential, exemplary, or incidental damages even if
it has been advised of the possibility of such damages.
PART 3
GENERAL PROVISIONS
3.2 ATTORNEYS' FEES. The prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred in any action attempting
to enforce the terms of this Addendum.
3.3 EXCLUSIVE STATEMENT. This Addendum supersedes all prior agreements,
letters of intent, negotiations, representations and proposals, written or
oral. No change or waiver of the provisions of this Addendum shall be valid
or enforceable unless in writing and executed by both parties.
3.4 SEVERABILITY. If any provision of this Addendum shall be held to be
invalid, illegal or unenforceable for any reason, the validity, legality or
enforceability of the remaining provisions shall not in any way be affected
or impaired thereby.
3.5 BINDING EFFECT. This Addendum shall be bind and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
3.6 EFFECTIVE DATE. This Addendum shall become effective on the date it is
accepted by an authorized officer of CS at its offices in Amarillo, Texas.
3.7 OUT-OF-POCKET EXPENSES. Unless otherwise noted in this Addendum and
Schedules, all reasonable and verifiable out-of-pocket expenses, including
travel, are to be paid by Aetna.
3.8 SCHEDULES AS PART OF THIS ADDENDUM. Any Schedule, whether referred to
herein or executed by both parties and attached to this Addendum after its
effective date, form an integral part of this Addendum. They are by reference
incorporated herein to the same effect as if set out at length. CS and Aetna
acknowledge and agree that this Addendum may be modified, amended or extended
by the addition, deletion or substitution of Schedules, if such Schedules are
executed by both parties.
3.9 GENERAL. This Addendum, all attached Schedules, the documents
incorporated by reference, and the Existing Agreement (with all prior
Addenda) evidences the complete understanding and agreement of the parties
with respect to the subject matter hereof and supersedes and merges any prior
understandings or agreements and this Addendum may not be modified except by
a writing subscribed to by both parties.
3.10 COMPLETE AGREEMENT. Unless changed in this Addendum, the Existing
Agreement remains unchanged and, together with this Addendum (and any prior
Addenda), constitutes the entire Agreement between the parties. Unless the
context otherwise dictates, the Existing Agreement and this Addendum shall be
read as one agreement.
AETNA CS KNOWLEDGE PAGE 5
SEPTEMBER 1995
<PAGE>
ACCEPTED BY: ACCEPTED BY:
AETNA CASUALTY & SURETY COMPANY CORPORATE SYSTEMS, LTD.
and AXIA SERVICES, INC. CSC General Partner, Inc.,
its General Partner
By: By:
------------------------------- --------------------------------
Authorized Signature Authorized Signature
- ---------------------------------- -----------------------------------
Name Name
- ---------------------------------- -----------------------------------
Title Title
10-1-95 10-7-95
- ---------------------------------- -----------------------------------
Date Date
AETNA CS KNOWLEDGE PAGE 6
SEPTEMBER 1995
<PAGE>
CORPORATE SYSTEMS, LTD.
------------------
1995 Addendum
to
AGREEMENT FOR COMPUTER SERVICES
___
SCHEDULE 1
1. REFERENCES:
LICENSOR: Corporate Systems, Ltd. ("CS")
1200 Corporate Systems Center
Post Office Box 31780
Amarillo, Texas 79120
LICENSEE: Aetna Casualty & Surety Company and
Axia Services, Inc. ("USER")
151 Farmington Avenue
Hartford, Connecticut 06156
2. LICENSED SYSTEM:
The System is described in the Addendum to this Schedule.
3. EQUIPMENT REQUIREMENTS:
A. Hardware Minimums
B. Software installed
4. FEE SCHEDULE - See Schedule 2 to this Addendum.
AETNA CS KNOWLEDGE PAGE 7
SEPTEMBER 1995
<PAGE>
5. THIRD PARTY TECHNOLOGY INCORPORATED IN SYSTEM
uses and incorporates the following third party programs
and its licensors are third party beneficiaries of this Addendum:
LICENSOR TECHNOLOGY
-------- ----------
ACCEPTED BY: ACCEPTED BY:
AETNA CASUALTY & SURETY COMPANY CORPORATE SYSTEMS, LTD.
and AXIA SERVICES, INC. CSC General Partner, Inc.,
its General Partner
By: By:
------------------------------- --------------------------------
Authorized Signature Authorized Signature
- ---------------------------------- -----------------------------------
Name Name
- ---------------------------------- -----------------------------------
Title Title
- ---------------------------------- -----------------------------------
Date Date
AETNA CS KNOWLEDGE PAGE 8
SEPTEMBER 1995
<PAGE>
CORPORATE SYSTEMS, LTD.
------------------
1995 Addendum
to
AGREEMENT FOR COMPUTER SERVICES
___
ADDENDUM TO SCHEDULE 1
SCOPE OF LICENSE
CS licenses LICENSEE to use the to do Ad Hoc reporting
against CS databases for all information collected by the LICENSEE.
SYSTEM DESCRIPTION
support system which allows Aetna
This system integrates Third
Party Technologies within the CS system to access data from relational data
bases provided by CS. The purpose of this product is to
KEY COMPONENTS OF THE SYSTEM
THE PROCESS
The user of the System attaches to the with the licensed
System software to access Aetna's claim and policy data.
Once the query is complete, any number of reports and
graphs can be produced from a single query.
AETNA CS KNOWLEDGE PAGE 9
SEPTEMBER 1995
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AETNA CS KNOWLEDGE PAGE 10
SEPTEMBER 1995
<PAGE>
CORPORATE SYSTEMS, LTD.
_____________
1995 Addendum
to
AGREEMENT FOR COMPUTER SERVICES
___
SCHEDULE NO. 2
FEE SCHEDULE
1. REFERENCES:
LICENSOR: Corporate Systems, Ltd. ("CS")
1200 Corporate Systems Center
Post Office Box 31780
Amarillo, Texas 79120
LICENSEE: Aetna Casualty & Surety Company and
Axia Services, Inc. ("USER")
151 Farmington Avenue
Hartford, Connecticut 06156
2. LICENSE FEES
3. ACCOUNT SET-UP:
(Set-up time is included in the monthly allocation expense fee.)
4. SOFTWARE FEE:
5. MAINTENANCE FEE
6. INSTALLATION OF SOFTWARE:
7. ACCESS FEE:
AETNA CS KNOWLEDGE PAGE 11
SEPTEMBER 1995
<PAGE>
The access charge will be
A MONTHLY EVALUATION OF THE NUMBER OF CLAIMS AND PAYMENTS WILL BE PERFORMED
BY CS ON THE SAME BASIS USED BY CS TO DETERMINE THE INITIAL ACCESS CHARGE
AND THE MONTHLY ACCESS FEE WILL CHANGE ACCORDINGLY.
8. TRAVEL EXPENSES:
ACCEPTED BY: ACCEPTED BY:
AETNA CASUALTY & SURETY COMPANY CORPORATE SYSTEMS, LTD.
and AXIA SERVICES, INC. CSC General Partner, Inc.,
its General Partner
By: By:
------------------------------- --------------------------------
Authorized Signature Authorized Signature
- ---------------------------------- -----------------------------------
Name Name
- ---------------------------------- -----------------------------------
Title Title
- ---------------------------------- -----------------------------------
Date Date
AETNA CS KNOWLEDGE PAGE 12
SEPTEMBER 1995
<PAGE>
EXHIBIT 10(iii)
CS - MCM MANAGEMENT SYSTEM AGREEMENT, FOR COMPUTER SERVICES
THIS AGREEMENT ("Agreement") is made effective as of the date executed by
Corporate Systems Ltd. ("CS"), a Texas Limited Partnership, having a principal
place of business at 1212 Ross Street, Post Office Box 31780, Amarillo, Texas,
79120 and The Travelers Insurance Company including its subsidiaries, affiliates
and agents ("Customer"), a Connecticut corporation having a principal place of
business at One Tower Square, Hartford, Connecticut 06183.
WHEREAS, it is the desire of the Customer to utilize Workers' Compensation
medical cost management software program known as a software
product owned by CS, which incorporated several certain third-party
technologies, as identified in EXHIBIT G attached hereto and incorporated
herein and certain software modules owned by CS and incorporated as a part of
its claims administration system, herein referred to as "Third-Party
Programs," and collectively referred to as the "Computer Services"; CS shall
notify Customer as additional third party technology partners are contracted
with and;
WHEREAS, it is the desire of CS to grant to Customer a non-exclusive license
for Customer's access to remote direct on-line interactive processing and/or
batch processing capabilities utilizing and the requested
Customer specific modifications, as described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION OF THE OBLIGATIONS, MUTUAL COVENANTS AND
AGREEMENTS CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS:
1. Description of Property and Services:
A. CS shall provide to Customer access to the remote direct
on-line interactive processing and/or batch processing capabilities
necessary to facilitate the Computer Services as described in
EXHIBIT F (The Work Flow), and with such custom designs otherwise
provided in this Agreement.
B. In preparation for the commencement of the above identified services,
the parties have by mutual assent developed Design Requirements for
the Pilot Implementation of the Contract, attached hereto and
incorporated herein as Exhibit C.
Provide that the Design Requirements of Exhibit C are implemented by
, the Pilot Implementation phase, Exhibit C, of the Agreement
shall begin on . At Customer's option, given the successful
completion of the Pilot Implementation in Dallas, Quincy and Morris
Plains and Country Wide Implementation, Customer at its option, may
request a design and development plan of an and or all items listed
in Day 2 and/or Day 3. If such
price is satisfactory to Customer, Customer will authorize CS to
complete the work. The parties shall, by agreement, establish the
order in which the Day 2 components shall be completed. The Day 3
portion, (EXHIBIT E), shall be provided to Customer at Customer's
request, subject to CS's ability to develop the necessary components.
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The parties, however, agree that some or all of the Day 3 components
as described in Exhibit E can be developed before any or all of the
Day 2 portions are completed.
C. Customer reserves the right to use these Computer Services for the
repricing of medical bills other than Workers' Compensation bills,
specifically, automobile medical bills and automobile no-fault medical
bills. The Pricing Schedule, described herein on Exhibit A, shall
apply to these additional services. The implementation of these
additional services shall begin when the parties have, in a signed
writing, provided for their implementation.
2. Term of Agreement:
No termination of this Agreement, other than for cause, shall be effective
earlier than from the date of execution. Either party may however
give notice of its intention to terminate this Agreement, effective at the
end of the initial term, by providing the other party written notice.
If neither party exercises its option to terminate, this Agreement shall
continue or such other terms as agreed to in writing by the
parties.
3. Prices and Payment Terms:
A. Customer agrees to pay for the comprehensive Computer Services
furnished by CS at the prices specified in Exhibit A, "PRICING
SCHEDULE" attached hereto and incorporated herein by reference, or if
none are specified, at published prices in effect on the date of
usage.
B. All expenses incurred as a result of a Customer request for goods
and/or services, other than those set out in Exhibit A, including but
not limited to mailing or delivery expenses, shall be
paid by Customer on a basis.
C. Invoices requesting payment for items described in Exhibit B and
subsection B above will be sent to Customer for provided.
Terms are net cash payable within thirty (30) days after date of
invoice, unless notified otherwise by CS in writing. After thirty
(30) days, from this date.
4. Title:
A. Customer information retained on CS data files is the sole property of
the Customer, and such information may not be used, disclosed to third
parties, transferred or altered without the written approval of the
Customer, except as required to provide regulatory reporting or
analysis or to meet the aggregate reverse data feed requirements of
the Third-Party Programs.
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B. CS retains title to and reserves all rights in the programs, data,
information, or other property developed by CS hereunder.
5. Revisions:
(A) Either party, by giving to the other reasonable notice, may request
reasonable revisions of the goods and services offered, method of
operation, documentation provided, and equipment used. Any verbal
notices shall be followed up by a written notice of such change. In
no case will service or goods be less than agreed without
renegotiation of this Agreement. If the parties cannot agree after
attempting to renegotiate the agreement, then either arty may
terminate this agreement by giving the written notice of
its intention to terminate.
(B) The initial load of the Provider File will be furnished by CS. Such
Provider File revision shall be performed by Customer through the
utilization of CS' realtime and Managed Care production screens.
6. Security:
Precautions have been taken by CS to prevent the loss or alteration of or
improper access to Customer programs, data, information, or other property.
Customer is responsible for utilizing, as desired, those features of the CS
system which enhance the security of Customer programs, data, information,
and materials.
In the event that either party discovers improper access, such party will
notify the other, and the parties will cooperate with each other to
identify the person or persons responsible and to prevent future
occurrences.
7. Property:
A. Customer in its use of any CS property in accordance with this
Agreement; shall not misuse or modify, and shall otherwise protect and
maintain such property; shall maintain any labels which identify
ownership; shall not retain such property as a set-off or in full or
partial satisfaction of any claim against CS, and shall return such
property upon termination of usage in accordance with CS' instructions
and in the same condition as received, normal wear and tear excepted.
B. The compatibility of Customer's interfacing equipment and methods
shall be identified by the parties prior to the Pilot Program. After
this identification, should the Customer modify or revise its
interfacing equipment or methods, thereby causing CS to modify its
interfacing equipment or methods in order to continue the repricing
service, all costs to do so will be the responsibility of the
Customer.
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8. Audits and Governmental Examinations:
CS agrees to permit auditors retained by Customer to audit the procedures
for handling and processing data hereunder upon reasonable notice and
compliance with CS's reasonable security procedures. The parties also
acknowledge that certain federal and state agencies may require access to
facilities and records of CS to audit the performance of the Computer
Services by CS for Customer under this Agreement, and CS will cooperate
with respect to all such governmental audits.
9. Disposition of Customer Programs, Data, Information, or other Property:
If Customer fails to remove or instruct CS in writing on the disposition of
Customer program, data, information, or other property on CS premises
within thirty (30) days after termination of this Agreement, or after
written notice from CS, CS may destroy or otherwise dispose of same.
Customer information retained on CS data files is the sole property of the
Customer and upon termination of this Agreement will be available to
Customer in the form of one hard copy and one magnetic tape copy at an
additional cost to Customer and upon Customer's remittance to CS of such
reasonable fees to cover such final servicing and handling of materials.
10. Default:
Any of the following shall constitute an event of default:
1) If either party shall petition for relief under any chapter of the
Federal Bankruptcy Act, as amended, or if any involuntary petition
thereunder should be filed against either party, and is not set aside
within thirty (30) days, or if either party is adjudicated bankrupt,
or if a receiver is appointed for either party's business and if CS as
a debtor-in-possession, or a trustee in bankruptcy in a case under the
Bankruptcy Code rejects this Agreement or any agreement supplementary
hereto,
2) If either party makes an assignment for the benefit of creditors, or
admits in writing its inability to pay its debts generally as they
become due; or
3) If either party breaches this Agreement and fails to cure such breach
within a minimum of 30 days, or such other mutually agreeable
extension of time after receipt of written notice of such breach from
the non-defaulting party. If CS fails to cure such breach(es) within
the cure period, Customer may at its option terminate this Agreement.
In cases where such breach(es) amounts to a failure by CS to provide
the Computer Services as contemplated by the parties, and Customer can
no longer utilize the Computer Services on behalf of its clientele,
Customer may, at its option, terminate this Agreement and require CS
to reimburse Customer the amount of Customer's then provable monthly
expenses in excess of what Customer would have paid to CS. Such
reimbursement by CS shall not exceed and is payable for only
the following default.
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If CS breaches this Agreement but only a diminishment of the Computer
Services occurs, then Customer will have the option of continuing its
use of the Computer Services but at a reduced rate in proportion to
the diminished services.
11. Warranties, Remedies, and Disclaimers:
A. CS warrants any processing or storage services including the repricing
services furnished hereunder against malfunctions, errors, or loss of
data which are due to errors on the part of CS, its equipment, or its
employees. If Customer notifies CS in writing and furnishes adequate
documentation of any malfunction, error, or loss of data covered by
the above warranty within twenty (20) days after its occurrence or if
CS discovers any malfunction, error, or loss of such data, then:
(1) With respect to malfunction or error, CS shall without charge
reprocess reports designated by the Customer which fall within
reasonable check point intervals; and
(2) With respect to lost data, CS shall either (i) regenerate without
charge any lost data if Customer provides adequate backup materials in
machine readable form, or (ii) if Customer does not provide such
backup materials, grant Customer a credit in an amount equal to the CS
estimated cost of regeneration, such estimate to be made as if such
backup materials were available.
(3) If such errors not attributable to Customer, shall result in the
imposition of State(s) penalties against Customer, CS shall reimburse
Customer for the total amount of such penalties. If requested,
Customer will provide evidence of the imposition of such penalties to
CS.
B. CS warrants that the repricing is correct and is in accordance with
the applicable rules and regulations of the States, and CS will pay
any penalties that may occur if the repricing is found to be incorrect
and such error is not attributable to Customer. The warranty covers
only those fee schedules and repricing rules of the States which CS
has available in its Managed Care System.
C. THE COMPUTER SERVICES REQUIRES THE USE OF THIRD PARTY SOFTWARE
PROGRAMS OBTAINED BY CS FROM VARIOUS THIRD PARTY LICENSORS AND OTHER
SOURCES. CS WARRANTS THAT THE THIRD PARTY PROGRAMS AND DATA RECEIVED
BY AND THROUGH THE THIRD PARTY PROGRAMS IS RELIABLE AND CS AGREES TO
RUN REASONABLE CONTROL CHECKS THEREON. CS WARRANTS THAT IT OWNS THE
SOFTWARE NECESSARY TO PROVIDE THE COMPUTER SERVICES AND/OR HAS THE
AUTHORITY TO ALLOW CUSTOMER TO USE THE SOFTWARE WHICH IS THE SUBJECT
OF THIS AGREEMENT INCLUDING ANY THIRD-PARTY SOFTWARE."
D. CS agrees to defend, indemnify and hold Customer harmless from any
loss, cost, expenses, damage or liability resulting from any action
brought or threatened against Customer based on an allegation that the
Computer Services or any component part thereof, or Customer's proper
use of the Computer Services or any component part thereof,
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supplied under this Agreement infringes a patent, copyright, or any
other proprietary rights of a third party, provided Customer shall
promptly notify CS in writing of such action, and gives CS
authority, information and assistance at CS's expense for the
defense of such suit or proceedings. In the event any such claim
of infringement is made or threatened or injunctive relief is
granted to a claimant, CS shall (a) obtain the right for Customer
to continue use of the Computer Services; or (b) substitute another
product of like capability; or (c) replace or modify the Computer
Services product to render it non-infringing while retaining like
capability; or (d) refund to Customer all sums rendered to CS to
date for the use of the Computer Services or any such part affected
by a claim or lawsuit; or (e) in the event any such claims or
infringement results in injunctive relief relative to a portion of
the Computer Services so that such claims for infringement relief
results in only a diminishment of the Computer Services provided by
CS occurs, then Customer shall, at its option, elect to continue
its use of the Computer Services but at a reduced rate in
proportion to the diminished services. Such rate to be determined
by mutual written agreement of the parties. The protections
afforded by this paragraph shall survive the cancellation,
termination or expiration of this Agreement.
E. CS shall defend, indemnify and hold Customer harmless from and against
all cost, claims, expenses, damages, and liability which Customer may
suffer or be required to pay arising out of any act or omission of CS,
its employees or agents, including but not limited to injuries to
person (including death) or damage to property in connection with
services rendered under this Agreement. The extent of CS' liability
to Customer for purposes of this Section shall be no more than the
policy limits of all applicable CS insurance policies, but in no event
shall the aggregate limit of such policies provide less than
$5,000,000.00 (five million dollars) coverage.
12. Claim Payment Decisions:
Customer understands that it is responsible for making all claim payment
decisions, and that Computer Services, as defined under this Agreement,
provides only data files and/or information to the Customer's staff.
13. Professional Services; Service Bureaus:
Customer is authorized to utilize the Computer Services in the course of
processing Customer's workers' compensation claims or other Property
Casualty claims or rendering professional advice to Customer's clients or
customers; provided, however, that Customer is expressly prohibited without
prior written consent of CS from (i) giving any person, including without
limitation, its clients and customers, direct access to the Computer
Services, or (ii) operating at anytime on a regular basis an on-line or
off-line customer service bureau involving the Computer Services' programs.
A customer service bureau is defined as providing medical bill processing
as an unbundled service to clients for whom Customer is not the insurer or
claims administrator.
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14. Confidentiality; Non-Competition:
A. CS and any assignees agree to hold in confidence any and all
information about Customer's business that may be provided to it, or
that it may be exposed to, during the performance of this Agreement.
B. Customer shall not sell, transfer, publish, disclose, display, or
otherwise make available any computer program, systems specifications,
systems documentation, flow charts, or other information, (all herein
referenced as "Proprietary and Confidential Information") including
but not limited to all such information in oral, written, or other
form. Both parties will exercise the same degree of care with respect
to the use, confidentiality and protection of any Proprietary and
Confidential Information as the other exercises with respect to its
own information of like importance. Both parties' obligations as set
forth in this Agreement will not apply to any Proprietary and
Confidential Information which (i) already was in either parties'
possession without restriction and without breach of any standard of
confidentiality at the time it was received from the other party, (ii)
was in or enters into the public domain through no wrongful act of
either party, (iii) was rightfully received by either party from a
third party without restriction on disclosure, or (iv) was
independently developed or acquired by either party without reference
to such Proprietary and Confidential Information.
C. Customer shall not use the Computer Services or any Proprietary and
Confidential Information disclosed by CS under this Agreement, to
compete with, or otherwise unduly take advantage of CS.
15. Enhancements and Customization of Computer Services:
A. From time to time, CS may create enhancements to the Computer
Services, but CS will have no obligation to do so. CS shall make
available without charge to Customer any available enhancements
generally provided to other subscribers of CS's Computer Services.
B. From time to time, Customer may request specific customization or
modifications to the Computer Services in addition to the
customization contemplated by the parties in Exhibits C, D, and E. CS
agrees to negotiate in good faith towards the development of such
customization upon mutually agreeable prices, terms, and conditions.
16. Termination Rights:
Either arty shall have the right to terminate this Agreement
written notice in the event that either party, its officers or employees
violate any other provision of this Agreement. Termination of this
Agreement shall be in addition to, and not in lieu of any equitable
remedies available to either party. Either party's duties under this
Article 16 shall survive any termination of any other provision of this
Agreement.
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<PAGE>
17. Taxes:
Customer shall pay all applicable state, local and federal sales, use and
service taxes, (exclusive of personal ad valorem property taxes and taxes
based on the net income of CS.) Customer shall not be liable and shall have
no obligation to pay any penalties, interest, or late charges imposed as a
result of CS's failure to pay its taxes on a timely basis, unless such late
payment is attributable to Customer's non-payment of applicable sales and
service taxes. CS shall notify Customer, in writing, within sixty (60)
days after CS has knowledge of a State sales tax audit which can cause
Customer's obligation to pay additional taxes hereunder. Failure of CS to
so notify Customer shall release Customer of any obligation to pay any
additional taxes assessed as a result of such audit. All CS invoices to
Customer shall separately state on the invoice in which they apply all
applicable taxes. Where permitted by law, Customer shall pay its taxes
directly to the appropriate taxing authority.
19. Force Majeure; Excused Performance:
Either party shall not be liable for, and is excused from any failure to
deliver or perform or for delay in delivery or performance due to a cause
beyond its reasonable control, including, but not limited to, acts of
nature, governmental actions, fire, labor difficulty, shortages, civil
disturbances, transportation problems, interruption of power or
communications, failure of either party suppliers or subcontractors, or
natural disasters.
In the event of the inability of CS to perform due to Force Majeure,
Customer will have the option to terminate this Agreement, or substitute
CS' services for that of another if the condition which excuses non-
performance or late performance causes a delay in excess of five (5) days.
20. Assignment or Transfer:
CS may with prior written notice to Customer assign or transfer its rights
or obligation under this Agreement to a successor of Corporate Systems,
Ltd. The Travelers Insurance Company may transfer the right to use the
services as detailed under this Agreement to any subsidiary, affiliate,
department or division specifically for a period up to one year after it
ceases to be a subsidiary, affiliate, department or division of the
Customer, This assignment or transfer does not relieve the Customer of any
of its obligations hereunder. Notwithstanding the foregoing, Customer may
after receipt of such notice from CS, terminate this Agreement if assignee
of CS is a competitor of Customer and the disclosure of Customer's claims
data to such assignee will in Customer's opinion compromise the proprietary
and/or confidentiality of Customer's profits data, and business and trade
secrets.
21. Publicity:
Neither party shall use the name of the other in publicity releases,
advertising, or similar activity without the prior written consent of the
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<PAGE>
other, except Customer will permit CS to include Customer name in its
client list.
22. Notices:
All notices, demands or other communications hereunder shall be in writing
and shall be deemed to have been duly given if delivered in person, or by
United States mail, certified or registered, postage prepaid, return
receipt requested, or otherwise actually delivered to the appropriate party
as follows:
If to CS: Johnny Mize
Corporate Systems
1212 Ross Street
Amarillo, TX 79102
cc to: Director - MCM Services
Corporate Systems
3030 Warrenville Road
Lisle, IL 60532
If to Customer: The Travelers Insurance Company
One Tower Square - 1GS
Hartford, Connecticut 06183-9076
cc to:
P.C. Claim - 8PB
One Tower Square
Hartford, CT 06183
23. Enforcement:
In the event that any provision of this Agreement is determined to be
invalid or unenforceable, the remainder of this Agreement shall be valid
and enforceable to the maximum extent possible.
24. Headings:
The headings at the beginning of the Articles of this Agreement are for
identification purposes and shall not, by themselves, determine the
interpretation or construction of this Agreement.
25. Waiver:
The waiver or failure of either party to exercise in any respect any rights
provided for herein shall not be deemed a waiver of any further right
hereunder.
26. Arbitration:
Any controversy or claim, legal or equitable, arising out of or relating
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to this Agreement, or the breach thereof, shall be settled by binding
arbitration in accordance with the Commercial Arbitration Rules of the
American Arbitration Association, and judgement upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
Notwithstanding the above, any party may seek provisional relief pending
arbitration, including a temporary restraining order or preliminary
injunction, from any court of competent jurisdiction, either prior to,
during, or subsequent to the filing of any arbitration proceeding. Such
arbitration shall be conducted in Texas, pursuant to the Commercial
Arbitration Rules of the American Arbitration Association, which are
incorporated by reference herein, and the law of evidence of the State of
Texas shall govern the presentation of evidence and discovery therein,
unless the arbitrator shall for good cause determine otherwise. The
decision of the arbitrator shall be final and binding on all parties to the
proceeding. The prevailing party in the arbitration proceeding shall be
awarded reasonable attorney's fees, expert witness costs and expenses, and
all other costs and expenses incurred directly or indirectly in connection
with the proceedings, unless the arbitrator shall for good cause determine
otherwise.
27. Multiple Copies:
For the convenience of the Parties hereto, this Agreement may be executed
simultaneously in one or more originals, each of which shall be deemed an
original, but all of which shall constitute one and the same instrument,
without necessity of production of the others.
28. Software Lockup:
CS warrants that it will not install, trigger or in any intentional manner
restrict the Customer from access to the Computer Services as described in
this Agreement, except if Customer breaches this Agreement in accordance
with Section 10, Subsection 3 and fails to cure such breach within thirty
(30) days of receipt of written notice from CS.
29. Availability of Backup System and Disaster Recovery System
CS warrants that it has a data Recovery System whereby copies of all data
generated by Company's business with CS is copied on magnetic tape and
located off site of CS's facilities. When CS has developed a Backup System
located at a site other than a CS place of business comprised of hardware
and software capable of providing Customer with the direct on-line
interactive services described herein, then CS will give Customer access.
Requests for such access shall be provided to Customer at fees to be agreed
to by the parties.
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30. Operational Performance
a. Systems Access
CS will provide systems access as follows:
b. System Availability
After execution of this Agreement, CS shall, by way of written
Warranty Addendum, provide Customer with reasonable estimates of CS
System availability percentages in relation to the total systems
access hours as stated above, excluding availability related to
Section 19, Force Majeure. Failure of CS to meet such percentages
shall constitute a default in accordance with Section 10(3).
c. CS' Host Response Time
After execution of this Agreement, CS shall by way of written Warranty
Addendum provide a reasonable estimate of the percentage of real time
transactions that shall execute at one seconds or less within the
Corporate Systems host computer. CS' failure to meet these
requirements shall constitute a default in accordance with Section
10(3).
31. Entire Agreement:
This Agreement constitutes the entire agreement between CS and Customer,
and supersedes all prior contracts, agreements, proposals, understandings,
representations, correspondence, or communications relative to the subject
hereof. This Agreement may be modified only by a written instrument
executed by authorized representatives of CS and Customer.
32. Choice of Laws:
The parties agree that this Agreement shall be construed in accordance with
the laws of Texas.
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<PAGE>
Accepted : Accepted:
THE TRAVELERS INSURANCE COMPANY CORPORATE SYSTEMS, LTD ("CS")
By: CSC GENERAL PARTNER, INC.
Signature: Signature:
----------------------- ----------------------
Name: Name:
---------------------------- ---------------------------
Title: Title:
--------------------------- --------------------------
Date: Date:
---------------------------- ---------------------------
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EXHIBIT 10(iv)
AGREEMENT FOR INFORMATION MANAGEMENT SERVICES
BETWEEN
THE AETNA CASUAL AND SURETY COMPANY,
AETNA TECHNICAL SERVICES, INC.
AND
CORPORATE SYSTEMS
AGREEMENT NO.
---------
DATED
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<PAGE>
Agreement For Information Management Services Page 2
AGREEMENT FOR COMPUTER SERVICES
THIS AGREEMENT FOR INFORMATION MANAGEMENT SERVICES (hereinafter referred to as
"Agreement") entered into as of the day of and between Corporate
Systems, a Texas Limited Partnership, P.O. Box 31780, Amarillo, Texas 79120
(hereinafter "CS") and The AEtna Casualty and Surety Company, and AEtna
Technical Services, Inc. (the later two entities are hereinafter referred to
as "AEtna)
WITNESSETH:
In consideration of the mutual covenants set forth herein, the parties here
agree as follows:
1. DESCRIPTION OF PROPERTY AND SERVICES
Corporate Systems (CS) shall provide computer property, communication
lines and access to program libraries and data files to operate an
information management service for AEtna's National Accounts
Department. CS program libraries and data files available for
information management service use are set forth in current
publications, documentation and supplemental product announcements.
AEtna shall own all property rights of the data contained in the
services included in this Agreement. CS employees, officers, partners,
or customers may not use AEtna data for any purpose without the
specific written consent of AEtna.
At the discretion of AEtna, other customer reporting and internal
information management services may be implemented under this
Agreement.
2. CONTRACT TERMS AND RENEWAL OPTIONS
2.1 Term of Contract
The initial term of this Agreement (the "initial Term") shall
AEtna shall have an option to renew this Agreement under the same
terms and conditions set forth herein (the "Option Terms")
by giving CS at least notice prior to the end of the Initial
Term, or the first Option Term.
2.2 Adjustment in Software and Management Fee
Software and Management fees as defined in Section 3.2.1E may be
increased by CS at the end of the Agreement and (a) or the
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LEADERSHIP IN RISK INFORMATION TECHNOLOGY CORPORATE
SYSTEMS
<PAGE>
Agreement For Information Management Services Page 3
Increases or decreases to Software and Management fees may be proposed
in writing by either AEtna or CS up to sixty (60) days prior to the next
fee adjustment date to become effective on the next yearly anniversary
date. Both AEtna and CS shall negotiate such proposals in good faith.
Failure to reach agreement on a proposal to increase or decrease fees
within sixty (60) days of the delivery of the proposal shall not
invalidate or terminate this Agreement and the software and management
fee then in effect shall remain in effect for the succeeding year.
3. FINANCIAL CONSIDERATIONS
3.1 Program Fee - Information Management Service
Selected modules of CS on line and batch programs shall be designated by
AEtna for modification to fit AEtna data file requirements in the operation
of the information management service. A program fee to utilize these
programs for the term of the Agreement, and renewals thereof,
3.2 Service Operations And Report Production Costs
CS and AEtna will agree upon a costing arrangement which will allow
flexibility in budgeting and funding operating expenses while allowing CS
to recover direct and indirect costs of operating the information
management service in accordance with the budget as annually approved by
AEtna.
3.2.1 Direct and Indirect Expense Definitions
A. DIRECT EXPENSE
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LEADERSHIP IN RISK INFORMATION TECHNOLOGY CORPORATE
SYSTEMS
<PAGE>
Agreement For Information Management Services Page 4
Travel Expense: Reasonable and verified actual cost for AEtna
approved travel.
Supplies & Miscellaneous: Reasonable and verified actual cost for
office supplies and equipment and other miscellaneous expenses
directly used in performance of work for AEtna.
Telephone: Reasonable and verified long-distance charges for
calls in performance of work for AEtna.
B. ALLOCATED EXPENSE
Allocated expense will be budgeted annually and billed monthly
based upon actual costs for the categories listed below.
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<PAGE>
Agreement For Information Management Services Page 5
C. REPORT PRINTING & MAILING
Report assembly, binding, and shipping costs are allocated on a per-
printed-page basis plus actual shipping and mailing costs.
D. COMMUNICATION COSTS
E. SOFTWARE USAGE AND INFORMATION SERVICE MANAGEMENT FEES
3.2.2 Funding of Operating and Management Fees
Operating costs and management fee expenses are paid on the 10th
of each month based upon monthly accruals of estimated annual
budget requirements approved by AEtna with quarterly adjustments
to true-up the estimate. Detailed operating statements and
management reports shall be provided to AEtna on a monthly basis.
3.3 AEtna Designates Information Management Services
CS shall serve AEtna customers in an information services support role only
under the management and control of AEtna. AEtna retains the rights to
continue or to terminate services to selected AEtna customers throughout
the term of this Agreement.
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<PAGE>
Agreement For Information Management Services Page 6
AEtna shall exercise the right to designate levels of information services
CS provides to AEtna customers. Service levels include, but are not limited
to, the times of day or night AEtna data bases are available.
4. INFORMATION SERVICE PROJECT MANAGEMENT AND STAFF
4.1 Project Managers
CS and AEtna shall each appoint a Project Manager, who shall have the
authority and responsibility to provide management decisions for his/her
respective company provided, the AEtna Project Manager shall have the
ultimate authority in all matters relating to means and methods to
accomplish marketing, public relations, the setting of objectives and all
other administrative or operating aspects relating to the services provided
hereunder.
4.2 General Staffing
Both AEtna and CS will furnish the staff necessary to accomplish the level
of professional service required by this Agreement.
5. RIGHTS TO CORPORATE SYSTEMS TECHNOLOGY
5.1 All Operations Under Corporate Systems Name
Operations of the information management service shall at all times be
conducted under the name Corporate Systems and all output reports will
clearly indicate the name Corporate Systems.
5.2 AEtna Systems and Additional Products
In the event AEtna develops additional products which are to be operated by
CS under this agreement, these products will be defined in writing in the
development stage by the Project Managers and retained exclusively for use
by AEtna and owned by AEtna.
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<PAGE>
Agreement For Information Management Services Page 7
5.3 Corporate Systems General Enhancements
General enhancements, fixes, and upgrades to the total CS package of
services will be made available at no additional charge to AEtna at the
same time they are released to other customers of CS.
5.4 No Transfer of Corporate Systems Technology
Corporate Systems shall not, either directly or indirectly, transfer its
technology to AEtna during the term of this Agreement except under the
specific conditions defined in Section 7.8 Business Termination.
6. EXISTING CS/AETNA ACCOUNTS - OTHER ACCOUNTS NON-AETNA
COVERAGES
6.1 Explanation of Current Service Relationships
6.2 Other Accounts Non-AEtna Coverages
7. MISCELLANEOUS
7.1 Performance by Corporate Systems
CS warrants that the services it will perform pursuant to this Agreement
and any products or materials delivered shall be of the highest
professional standards and shall meet any specifications agreed to by the
parties prior to performance.
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<PAGE>
Agreement For Information Management Services Page 8
7.2 Indemnification
7.2.1 Negligent or Wrongful Acts
Each party shall indemnity the other, except as otherwise provided
herein, against all loss, cost or liability including reasonable
attorney's fees which the other party may incur as a result of any
negligent or wrongful act of the other party, its agents, employees,
partners officers.
7.2.2 CS Conflict With Other Customers
CS shall indemnify AEtna against any loss, cost or liability including
reasonable attorney's fees which AEtna may incur as a result of early
termination of this Agreement resulting from any conflict between CS
and any of its other customers.
7.2.3 Patent and Copyright Indemnification
CS agrees, at its own expense, to hold AEtna harmless and to defend,
or settle at its option, any action at law against AEtna arising from
a claim that AEtna's use of the product(s) and services provided under
this Agreement when used within the scope of this Agreement infringe
any patent, trade secret, copyright or other proprietary right. CS
shall control the defense of any suit, including appeals, and all
negotiations to effect settlement.
7.3 Confidentiality
All information and data under this Agreement or in connection therewith
communicated by one party to the other, shall for the duration of this
Agreement and thereafter be treated by the respective recipient of such in-
formation and data in the strictest confidence and shall not disclose such
in-formation and data to others, except as may be required by law, for
accounting purposes, or in respect of regulatory requirements beyond the
reasonable control of the party in question.
Should AEtna disclose to CS certain information which is proprietary to
AEtna and/or its affiliated companies, or should CS learn of Aetna
proprietary information, CS covenants that such proprietary information
will be protected, and CS agrees not to sell or disclose such information
to any third party, or use such proprietary information for any purpose
other than specifically provided for in this Agreement. Such proprietary
information shall include the business affairs and procedures of AEtna and
its affiliated companies and all information and data developed and
delivered under this Agreement.
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Agreement For Information Management Services Page 9
7.4 No Subcontract
CS shall not subcontract nor permit anyone other than its personnel to
perform any of the work service, or other performance required under this
Agreement without the prior written consent of AEtna.
7.5 Right to Audit
CS shall keep and make available for audit and inspection during normal
business hours, by AEtna or its agents, all equipment, facilities,
documents, books, and records specifically involving the costs, expenses,
and operations associated with this Agreement, including time sheets of
CS's staff, substantiating the costs of any and all expenditures and
receipts.
7.6 Termination
7.6.1 Ordinary Termination
AEtna may terminate this Agreement at any time with sixty (60) days
prior written notice to CS.
7.6.2 Termination For Uncured Breach of Agreement
In the event either party breaches any term or provision of this
Agreement and such breach remains uncured for thirty (30) days
following receipt of written notice from the other party, then the
nondefaulting party may, at its option, terminate this Agreement.
7.6.3 Orderly Termination
Upon any termination of this Agreement, each party shall forthwith
return to the other all papers, materials, and other properties of the
other held by each for purposes of performance under this Agreement.
In addition, each party shall assist the other party in orderly
termination of this Agreement and the transfer of all aspects hereof,
tangible and intangible, as may be necessary for the orderly,
nondistupted business continuation of each party.
7.7 Consistency Of Operations Of The Essence
CS's consistent operations of the information management service are of the
essence to AEtna. CS stipulates that in the event of any management change
occasioned by merger, buy-out, transfer, or sale of CS ownership units, the
new operating management or ownership must agree to assume CS's obligations
as defined under this contract at the same operating terms and financial
considerations.
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<PAGE>
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7.8 Business Termination - Technology Transfer to AEtna
In the event that CS shall cease conducting business in the normal course,
become insolvent, make a general assignment for the benefit of creditors,
suffer or permit the assignment of a receiver for its business or assets,
or shall avail itself of, or become subject to, any proceeding relating to
insolvency or the protection of rights of creditors, then (at the option of
Aetna) this Agreement shall immediately terminate and any property or
rights of AEtna, tangible or intangible, shall forthwith be returned to
AEtna.
In addition, it is agreed that all necessary computer programs, source code
(which will include, but not be limited to, program source code, analysis
and design specs, data base layouts (physical and logical), file layouts,
job control language with procs and sysin, data base and file data, and
operating manuals and procedures pertinent to AEtna) data files, training
and documentation manuals and other property necessary to the operation of
the information management service be transferred to AEtna and placed on
computers of AEtna's choice. It is further agreed that compensation for all
necessary computer programs shall be equal to the immediately preceding 6
months of software and management fees.
AEtna may offer employment to CS employees who operated the information
management service.
7.9 Force Majeure
Neither party shall be responsible for delays or failures in performance
resulting from acts beyond its control. Such acts shall include but not be
limited to acts of nature, strike, lockouts, riots, acts of war, epidemics,
governmental regulations superimposed after the fact, fire, communication
line failures, power failures, earthquakes, or other disasters. AEtna shall
have the right, however, to cancel this Agreement without penalty after a
delay of forty-five (45) days due to such acts.
7.10 Status of Employees
Each party shall at all times be the employer of its personnel engaged in
the performance of this Agreement. Such employees shall not be considered
to be the agents or employees of the other in any respect. Each party shall
arrange directly with such employees for all salary and other payments and
for collection and reporting of all taxes, Social Security and pensions.
Each party shall provide reasonable amounts of liability insurance covering
such employees for damages caused, or contributed to, by its employees, and
provide all medical coverage, unemployment insurance, and workmen's
compensation insurance and other coverage required by any applicable law or
regulation. Each party, if requested by the other, shall provide the other
with Cer-
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LEADERSHIP IN RISK INFORMATION TECHNOLOGY CORPORATE
SYSTEMS
<PAGE>
Agreement For Information Management Services Page 11
tificates of Insurance and copies of policies of insurance reflecting this
coverage.
7.11 Compliance With All Laws
Each party agrees that it shall perform its obligations hereunder in
accordance with all applicable laws, rules, and regulations now or
hereafter in effect. If any term or provision of this Agreement shall be
found to be illegal or unenforceable then, notwithstanding, this Agreement
shall remain in full force and effect and such term or provision shall be
deemed stricken.
7.12 Time of the Essence
Time is of the essence as to this Agreement.
7.13 Governing Laws
This Agreement shall be governed by and construed in accordance with the
laws of the State of Texas.
7.14 Use Of Name
Neither party shall use the name of the other in publicity releases,
advertising or similar activity without written consent of the other.
7.15 Dispute Resolution
If a controversy should arise out of this Agreement or the claimed breach
thereof, the individuals executing this Agreement on behalf of each party,
or their respective successors, will attempt to resolve the matter. In the
event that the parties are unable to resolve the dispute through informal
discussion, they will participate in mediation in accordance with the
Center for Public Resources Model Procedure for Mediation of Business
Disputes. In the event that the dispute is not resolved through mediation,
the parties will submit the dispute to arbitration. If the parties are
unable to agree upon such rules and procedures, the arbitration will be
conducted in accordance with the Commercial Arbitration Rules of the
American Arbitration Association. Judgement upon the award rendered by the
arbitrator may be entered in any court having jurisdiction thereof.
7.16 Headings Not Controlling
Headings used in this Agreement are for reference purposes only and shall
not be deemed a part of this Agreement.
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<PAGE>
Agreement For Information Management Services Page 12
7.17 All Amendments In Writing
No amendment to this Agreement shall be effective unless it is in writing
and signed by duly authorized representatives of both parties.
7.18 Assignment
AEtna may assign in whole or in part any or all of its rights hereunder to
its parent corporation or affiliates and subsidiaries, but otherwise
neither party shall assign any rights or interest herein without the prior
express written consent of the other.
7.19 Notices
Any notices hereunder shall be in writing and shall be deemed duly given if
mailed to the addressee by Certified or Registered Mail, return receipt
requested, to the addresses herein designate.
If to AEtna: AEtna Casualty and Surety Company
National Accounts Department
151 Farmington Avenue
Hartford, CT 06156
with copy to: Director - Acquisition Services/CTS, C14D
If to CS: Corporate Systems
1212 Ross Street
P.O. Box 31780
Amarillo, Texas 79120
7.20 Entire Agreement
This Agreement constitutes the entire Agreement between the parties with
respect to the subject matter; all prior agreements, representations,
statements, negotiations, and undertakings are superseded hereby.
7.21 Survival
Upon termination of this Agreement, the obligations set forth in Sections
7.2.1, 7.2.2, 7.2.3, 7.3, 7.5, 7.63, 7.8, 7.10, 7.13, 7.15, and 7.19 shall
survive.
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<PAGE>
Agreement For Information Management Services Page 13
IN WITNESS HEREOF, the parties hereto have executed this Agreement as of the
day, month, and year written above.
THE AETNA CASUALTY AND SURETY CORPORATE SYSTEMS
COMPANY A Limited Partnership
By: By: CSC General Partner Inc.
---------------------------- its Sole General Partner
Title: By: [Illegible]
------------------------- -------------------------------
Title: President
----------------------------
AETNA TECHNICAL SERVICES, INC.
By:
----------------------------
Title:
-------------------------
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LEADERSHIP IN RISK INFORMATION TECHNOLOGY CORPORATE
SYSTEMS
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Corporate Systems Holding, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
August 26, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Partners
Corporate Systems, Ltd.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
August 26, 1996
<PAGE>
STRASBURGER & PRICE, L.L.P.
CONSENT OF SPECIAL TAX COUNSEL
We hereby consent to the use of our tax opinion and to all references to
our firm in the Registration Statement on Form S-4 of Corporate Systems Holding,
Inc.
STRASBURGER & PRICE, L.L.P.
/S/ Strasburger & Price, L.L.P.
Dallas, Texas
August 15, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FOUND IN THE F-SERIES OF THE
FORM S-4 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> JUN-30-1996 DEC-31-1995
<CASH> 5,390,772 4,343,196
<SECURITIES> 0 0
<RECEIVABLES> 5,023,530 7,289,525
<ALLOWANCES> 248,680 501,111
<INVENTORY> 0 0
<CURRENT-ASSETS> 11,624,889 11,839,574
<PP&E> 10,196,334 9,822,902
<DEPRECIATION> 4,427,156 3,492,357
<TOTAL-ASSETS> 17,566,724 18,364,527
<CURRENT-LIABILITIES> 6,919,376 9,233,875
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,494,227 7,901,426
<TOTAL-LIABILITY-AND-EQUITY> 17,566,724 18,364,527
<SALES> 0 0
<TOTAL-REVENUES> 21,246,816 46,094,864
<CGS> 0 0
<TOTAL-COSTS> 18,835,883 41,446,861
<OTHER-EXPENSES> (133,690) (219,112)
<LOSS-PROVISION> (216,431) (478,075)
<INTEREST-EXPENSE> 116,194 144,391
<INCOME-PRETAX> 2,544,623 4,867,115
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 2,544,623 4,867,115
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 590,000
<NET-INCOME> 2,544,623 4,277,115
<EPS-PRIMARY> .43 .73
<EPS-DILUTED> .43 .73
</TABLE>
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
SUBSCRIPTION AGREEMENT
TO: CORPORATE SYSTEMS HOLDING, INC.
The undersigned (hereinafter referred to as "SUBSCRIBER") hereby subscribes
for the number of shares of common stock ("HOLDING COMPANY SHARES") in CORPORATE
SYSTEMS HOLDING, INC., a Nevada Corporation (the "HOLDING COMPANY") equal to the
sum of (a) the number of units of partnership interest ("UNITS") the undersigned
holds in Corporate Systems, Ltd. (the "PARTNERSHIP"), plus (b) the number of
shares of common stock ("GENERAL PARTNER SHARES") the undersigned owns in CSC
General Partner, Inc. (the "GENERAL PARTNER"), as set forth below, pursuant to
the terms of the Plan of Reorganization (the "PLAN") contained in the Prospectus
of the Partnership (the "PROSPECTUS"). Under the Plan, each Limited Partner of
the Partnership will exchange his, her, or its Units for Holding Company Shares;
and each Shareholder of the General Partner will exchange his, her, or its
General Partner Shares for Holding Company Shares (the "EXCHANGES"). The
undersigned hereby tenders (a) all of his, her, or its Units in the Partnership,
and (b) all certificates evidencing all of his, her, or its General Partner
Shares in exchange for Holding Company Shares. Subscriber must tender all his,
her or its Units and General Partner Shares. The Holding Company will not
accept any subscription agreements under which the Subscriber tenders only a
portion of his, her or its Units or General Partner Shares.
The subscription agreement must be returned to the Holding Company within the
Acceptance Period. The Acceptance Period is 30 days from the date the Holding
Company delivers this agreement to the limited partners of Corporate Systems,
Ltd. and to the shareholders of the General Partner or such longer period of
time as the Holding Company may determine.
Subscriber warrants and represents that:
1. Subscriber has received the Prospectus.
2. Subscriber has read and reviewed the Prospectus. Subscriber
understands the federal income tax aspects of the Exchanges and the other
transactions involved in the Reorganization and understands that the Partnership
and the General Partner have advised Subscriber to seek such tax advice relating
to such matters from such qualified sources as an attorney, accountant, or tax
advisor as Subscriber deems necessary. Subscriber understands that the
Partnership has obtained a tax opinion regarding the federal income tax
consequences of the Exchanges; however, the opinion does not and cannot cover
the specific tax effects of the Exchanges to each Limited Partner and
Shareholder of the General Partner. Subscriber understands that the Partnership
has not requested a ruling from the Internal Revenue Service as to the federal
income tax consequences of the Exchanges or the Reorganization.
1
<PAGE>
3. Subscriber, if executing this Subscription Agreement in a
representative or fiduciary capacity, has full power and authority to execute
and deliver this Subscription Agreement on behalf of the subscribing individual,
ward, partnership, trust, estate, corporation, or other entity for whom
Subscriber is executing this Subscription Agreement; and such individual, ward,
partnership, trust, estate, corporation, or other entity has full right and
power to exchange his, her, or its Units and General Partner Shares for Holding
Company Shares pursuant to this Subscription Agreement.
4. Subscribers understands and agrees that the Exchanges are intended to
be treated as tax free transactions for federal income tax purposes. Subscriber
has been informed that for the Exchanges to constitute tax free transactions for
federal income tax purposes, those Limited Partners transferring their Units to
the Holding Company and those Shareholders transferring their General Partner
Shares to the Holding Company, considered together as a group, must be "in
control" of the Holding Company immediately after the Exchanges. For purposes
of determining the tax consequences of the Exchanges, "control" means owning at
least 80 percent of the issued and outstanding shares of the common stock of the
Holding Company. In determining the existence of such "control," sales,
exchanges, transfers by gift, or other dispositions of any of the shares of the
common stock of the Holding Company to be received in the Exchanges must be
taken into account. Subscriber understands that the representations and
warranties Subscriber makes in this Subscription Agreement will be relied upon
by the Holding Company, the General Partner, the Partnership, their counsel and
accounting firms, and all of the parties participating in the Exchanges; and
Subscriber consents to such reliance.
5. Subscriber represents and warrants that Subscriber is under no binding
commitment, and Subscriber is not subject to any agreement under which
Subscriber would sell, exchange, or otherwise dispose of any of the shares of
common stock of the Holding Company that Subscriber will receive as a result of
participation in the Exchanges. Subscriber understands that the Holding Company
plans to adopt an employee stock ownership plan ("Stock Plan"). Subscriber also
understands that such Stock Plan may offer to purchase from the Shareholders of
the Holding Company up to ten percent of the outstanding shares of the common
stock of the Holding Company. Except for the possibility that Subscriber might
accept such an offer, Subscriber represents and warrants that Subscriber has no
present plan or intention, and at the time of the Exchanges will not have any
present plan or intention, to sell, exchange, transfer by gift, or otherwise
dispose of any of the shares of the common stock of the Holding Company that
Subscriber will receive as a result of participation in the Exchanges.
Please complete the information on the following page:
2
<PAGE>
Name of Owner(s):
----------------------------------------------------------
Address:
-------------------------------------------------------------------
Social Security or Tax Identification Number:
------------------------------
1. Total amount of Units owned
----------
2. Total amount of General Partner Shares owned
----------
Total amount of Subscription (1+2)
----------
Signature:
-----------------------------------------------------------------
Date: , 1996
--------------------
ACCEPTED:
CORPORATE SYSTEMS HOLDING, INC.
By:
------------------------------------------
Date: , 1996
---------------
3
