<PAGE>
Registration No. 333-00884
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
PRE-EFFECTIVE AMENDMENT NO. 4
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 $1.67(1) $9,909,663(1) $3,273.87
- -------------------------------------------------------------------------------
(1) Based on book value of assets and securities as of September 30, 1996,
to be received in exchange for the Securities to be Registered.
- -------------------------------------------------------------------------------
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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.
5,922,814 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 Holding
Company's Exchange Offer will remain open for not less than twenty (20) days
from the date the Exchange Offer is sent to the limited partners and to the
shareholders of the General Partner. The Holding Company may extend the
termination date from time to time up to a maximum of 120 days.
The Plan provides for the following transactions:
STEP 1--The Holding Company will issue one of its shares to each of
the 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 (or a larger percentage if some Limited Partners do not
accept the Exchange Offer) of the Holding Company that he or she
formerly owned of the Partnership.
STEP 2--The Holding Company will transfer 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 be dissolved by the Operating Company, then
serving as the general partner of the Partnership, pursuant to the
Partnership Agreement, as amended, and applicable Texas law. In the
dissolution, the Operating Company, as the Partner holding a substantial
majority of the Units, will receive the assets of the Partnership
in-kind and will assume all liabilities of the Partnership. Each
Limited Partner who does not tender his or her Units to the Holding
Company pursuant to the Plan will receive a liquidating cash
distribution in an amount determined by the General Partner to be equal
to such Limited Partner's participating percentage in the fair value of
the net assets of the Partnership. The dissolution will not cause any
Limited Partner to incur personal liability for any Partnership
obligations or liability.
After the Reorganization, a newly formed Employee Stock Ownership Trust
("ESOT") will offer to purchase up to ten percent of each shareholder's
Holding Company Shares and will purchase up to $2,800,000 but no more than
400,000 shares of authorized but unissued shares from the Holding Company.
The Holding Company will use the proceeds to pay off existing debt related to
construction and renovation of certain facilities.
The Reorganization will not dilute 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 provided that all the Limited Partners accept the Exchange Offer.
THE REORGANIZATION INVOLVES CERTAIN RISK FACTORS AND OTHER SPECIAL
CONSIDERATIONS SUCH AS:
<PAGE>
- TAX CONSIDERATIONS. As a corporation, the Holding Company will be
taxed as a separate entity and will be subject to corporate federal
and state income taxes and state franchise taxes. Shareholders of
the Holding Company will also be subject to income tax on receipt of
any dividends. 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.
- EFFECT ON REMAINING LIMITED PARTNERS. The winding up and liquidation
of the Partnership will result in taxable gain or loss to any Limited
Partners who do not accept the Holding Company's Exchange Offer.
- UNCERTAINTY REGARDING MARKET PRICE AND COMMON STOCK. The Common Stock
will be a new security and will not be publicly traded. There will be
no established resale market for the Common Stock.
- NO INDEPENDENT FAIRNESS DETERMINATION. 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.
- UNCERTAINTY REGARDING AMOUNT OF LIQUIDATING DISTRIBUTION. Upon
dissolution of the Partnership after the completion of the Exchange
Offer, any Limited Partners who do not accept the Exchange Offer will
receive a liquidating cash distribution. The amount of the cash
distribution cannot be determined prior to the Exchange Offer or the
dissolution because it is based on the net assets of the Partnership
as of the date of the dissolution.
- NO APPRAISAL RIGHTS. The limited partners do not have appraisal,
dissenters', or similar rights under Texas law or the partnership
agreement of the Partnership.
- NO PREDETERMINED PURCHASE PRICE OF HOLDING COMPANY SHARES. After the
completion of the Exchange Offer, a newly formed Employee Stock
Ownership Trust will offer to purchase up to ten percent of each
shareholder's Holding Company shares. The purchase price that the
Employee Stock Ownership Trust will pay for these shares cannot be
determined prior to the Exchange Offer. An independent evaluation of
the Holding Company stock will be obtained after the Exchange Offer.
The purchase price offered by the Employee Stock Ownership Trust will
be based upon this independent evaluation.
- INABILITY TO DETERMINE OWNERSHIP PERCENTAGE. Because it is possible
that some Limited Partners may not accept the Holding Company's
Exchange Offer, it is impossible for limited partners or
shareholders of the General Partner to determine what their
percentage of ownership will be if they accept the Exchange Offer.
- DILUTION FROM ESOT'S PURCHASE OF HOLDING COMPANY UNISSUED
SHARES. When the ESOT purchases up to $2,800,000 (but no more than
400,000 shares) of unissued Holding Company shares from the Holding
Company, it will dilute the percentage ownership of all the Holding
Company shareholders.
The Limited Partners and CSC Shareholders should carefully review the
section entitled "Risk Factors and Other Special Considerations" which begins on
page 16 of this Prospectus.
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
______________________________
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.
______________________________
December 6, 1996
2
<PAGE>
TABLE OF CONTENTS
PAGE PAGE
---- ----
AVAILABLE INFORMATION. . . 4 MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL
SUMMARY. . . . . . . . . . 5 CONDITION AND RESULTS OF
OPERATIONS . . . . . . . 36
SUMMARY INFORMATION ABOUT BUSINESS AND PROPERTIES. . 45
CORPORATE SYSTEMS. . . . 5 Background . . . . . . . 45
The Partnership and
SUMMARY INFORMATION ABOUT The Holding Company . 45
THE PLAN . . . . . . . . 6 General Business . . . . 45
Material Customers . . . 46
ORGANIZATIONAL CHARTS. . . 15 Research and Development 46
Business Plan. . . . . . 47
RISK FACTORS AND OTHER Competition . . . . . . 47
SPECIAL CONSIDERATIONS . 16 Properties . . . . . . . 47
Tax Considerations. . 16 LEGAL PROCEEDINGS . . . . 47
Disadvantages of MANAGEMENT - BEFORE AND
Reorganizing to AFTER THE REORGANIZATION 49
Corporate Form. . . 16 EXECUTIVE COMPENSATION . . 51
Conflicts of Interest 16 PRINCIPAL OWNERS AND
Uncertainty Regarding OWNERSHIP OF MANAGEMENT 53
Market Price and SUMMARY COMPARISON OF UNITS
Common Stock. . . . 17 AND COMMON STOCK . . . . 55
Effect on Taxation . . . . . . . . 55
Non-Transferring Distributions and
Limited Partners. . 17 Dividends . . . . . . 55
Management . . . . . . . 56
THE REORGANIZATION . . . . 18 Voting Rights. . . . . . 56
Background of the Special Meetings . . . . 57
Reorganization. . . . 18 Liquidation Rights . . . 57
Reasons for the Right to Compel
Reorganization. . . . 18 Dissolution . . . . . 57
Terms of Reorganization. 21 Limited Liability. . . . 57
Allocation of Common Liquidity and
Stock . . . . . . . . 22 Marketability . . . . 58
Recommendation of the Transferability. . . . . 58
General Partner . . . 23 Continuity of Existence 58
Effective Time . . . . . 25 Financial Reporting. . . 58
Issuance of Certificates 26 Certain Legal Rights . . 58
Conditions to the Right to List of
Reorganization. . . . 26 Holders; Inspection
Termination. . . . . . . 26 of Books and Records 59
No Appraisal Rights for Issuance of Additional
Limited Partners Who Equity. . . . . . . . 59
Do Not Accept Exchange Preemptive Rights. . . . 60
Offer . . . . . . . . 27 Duties Owed to Equity
Consequences If Owners. . . . . . . . 60
Reorganization Is Compensation to
Terminated. . . . . . 27 Management. . . . . . 60
Fiduciary Duties . . . . 27 DESCRIPTION OF COMMON
Accounting Treatment . . 27 STOCK. . . . . . . . . . 61
Fees and Expenses. . . . 28 LEGAL OPINIONS . . . . . . 63
EXPERTS. . . . . . . . . . 63
CERTAIN FEDERAL INCOME TAX INDEX TO FINANCIAL
CONSEQUENCES . . . . . . 28 STATEMENTS. . . . . . . F-1
MARKET PRICES AND GLOSSARY . . . . . . . . . G-1
DISTRIBUTIONS. . . . . . 34
SELECTED FINANCIAL
INFORMATION OF THE
PARTNERSHIP. . . . . . . 35
3
<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
4
<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.
5
<PAGE>
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
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 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
- The Partnership will be dissolved by the Operating Company, then
serving as the general partner of the Partnership, pursuant to the
Partnership Agreement, as amended, and applicable Texas law. In
the dissolution, the Operating Company, as the Partner holding a
substantial majority of the Units, will receive the assets of the
Partnership in-kind and will assume all liabilities of the
Partnership. Each Limited Partner who does not tender his or her
Units to the Holding Company pursuant to the Plan will receive a
liquidating cash distribution in an amount determined by the
General Partner to be equal to such Limited Partner's participating
percentage in the fair value of the net assets of the Partnership.
The dissolution will not cause any Limited Partner to incur any
personal liability for any Partnership obligation or liability.
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. After the dissolution of
the Partnership by the Operating Company, the Operating Company will
continue the business of Corporate Systems and assume and be responsible
for all liabilities of the Partnership.
6
<PAGE>
The Holding Company will own 100 percent of the Operating Company. The
former CSC Shareholders and the former Limited Partners who accepted the
Exchange Offer will own 100 percent of the outstanding capital stock of the
Holding Company in the same percentages (or larger percentages if some
Limited Partners do not accept the Exchange Offer) 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":
- TAX CONSIDERATIONS. As a corporation, the Holding Company will be
taxed as a separate entity and will be subject to corporate federal
and state income taxes and state franchise taxes. Shareholders of
the Holding Company will also be subject to income tax on receipt
of dividends. 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.
- EFFECT ON REMAINING LIMITED PARTNERS. The winding up and liquidation
of the Partnership will result in taxable gain or loss to any Limited
Partners who do not accept the Holding Company's Exchange Offer.
- UNCERTAINTY REGARDING MARKET PRICE AND COMMON STOCK. The Common Stock
will be a new security and will not be publicly traded. There will be
no established resale market for the Common Stock.
- NO INDEPENDENT FAIRNESS DETERMINATION. 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.
DISADVANTAGES OF CONVERTING TO CORPORATE FORM.
The primary 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 income 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. After the Reorganization, the Holding Company will form a
leveraged ESOP.
After the Reorganization, the dividends paid by the Holding Company to
its shareholders could potentially be less than the net after tax
distributions paid by the Partnership to its Unitholders. The cash required
to fund annual principal and interest payments on the ESOP loan, combined
with the cash required to fund operations and fuel growth, could potentially
result in less cash available for the payment of dividends than was available
to the Partnership in the past for the payment of after tax distributions.
7
<PAGE>
REASONS FOR THE REORGANIZATION.
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:
ESOP. Corporate Systems has approved the formation of an employee
stock ownership plan for the benefit of its employees and to
provide a limited market for the sale of Holding Company Shares
by former Limited Partners and CSC Shareholders. Corporate
Systems cannot form an ESOP if it remains as a partnership.
An ESOP may only be formed if Corporate Systems is a corporation.
RETENTION OF 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 need to retain capital to
fuel growth, 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.
Management does not anticipate a return to a partnership form even
if the need for capital returns to previous levels.
EQUITY MARKETS. Although Corporate Systems has no current
intentions of seeking any additional equity through capital markets,
as a corporation, Corporate Systems will in the future have better
access to equity capital markets if equity is needed. 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 RECOGNIZABLE FORM. From time to time, Corporate Systems
encounters delays in negotiating and completing revenue and vendor
contracts because the customer, vendor or other contracting party is
unfamiliar with the laws governing rights and obligations of limited
partnerships. Management believes that the corporate form is more
commonly recognized by its customers and vendors and that a
8
<PAGE>
corporate form would eliminate the need for Corporate Systems'
business contacts to familiarize themselves with partnership law.
TAX REPORTING. A change from partnership form to corporate form
would simplify Corporate Systems' investors' tax reporting.
STOCK TRANSFERABILITY. Shares of Common Stock of the Holding
Company will be freely transferrable, thereby increasing the market
available for the sale of a Limited Partner's and CSC Shareholder's
investment in Corporate Systems. However, like the Units and CSC
Shares, the Common Stock of the Holding Company will not be listed on
any exchange and Limited Partners and CSC Shareholders who accept the
Exchange Offer may continue to experience a limited market for the
resale of their shares of the Holding Company Common Stock.
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.
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.
VOTING RIGHTS. The Reorganization will not adversely affect the voting
rights of the Limited Partners or the CSC Shareholders. Except for the
enhanced voting rights relating to the election of directors discussed above
in "Reasons For the Reorganization -- Enhanced Voting Rights," the voting
rights of the shareholders of the Holding Company will be substantially the
same as the voting rights of the Limited Partners and 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
9
<PAGE>
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.
RIGHTS OF SHAREHOLDERS. 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:
- 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."
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 to fuel growth. Corporate Systems will be using
net cash flows generated from operations to fund its cash requirements for
growth it anticipates and for the payment of the principal and interest on
the loan used to fund the leveraged ESOP. Because of these cash requirements,
the amount of dividends received by the shareholders of the Holding Company
could, in the future, be less than the net after tax distributions received
in the past by the Unitholders. When determining the amount of any dividends,
the Holding Company's board of directors will consider substantially the same
factors as those considered by the General Partner in determining the amount
of distributions to the Unitholders. These factors include cash requirements
for operations, growth and debt payments as well as other factors relevant to
the viability of Corporate Systems.
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 between
the General Partner and the Limited Partners 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. 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.
There are no conflicts of interest between the CSC Shareholders and the
Limited Partners. The rights and benefits of the CSC Shareholders and the
Limited Partners are materially the same. There are no circumstances where
Limited Partners receive any benefit or assume any risk that is not also
received or assumed by the CSC Shareholders, including distributions, court
judgments or
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bankruptcy proceedings, and visa versa. CSC Shareholders and Limited
Partners each have limited liability.
Management, as well as other employees who benefit from the
Partnership's profit sharing plan and who will benefit from the ESOP, may
receive a benefit from the Reorganization that is not received by other CSC
Shareholders and Limited Partners. If the Holding Company contributes funds
to the ESOP in excess of the funds that would have been contributed
to the Partnership's profit sharing plan, management and other employees
would receive a benefit from the Reorganization that won't be received by
non-management Limited Partners and CSC Shareholders. Payment of the ESOP
principal and interest will be substituted for contributions to the profit
sharing plan. Other than the potential benefit received from contributions to
the ESOP, the Reorganization will not materially affect any rights or
liabilities of Management and Management will continue to receive
substantially the same compensation from the Operating Company as it did from
the Partnership.
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."
11
<PAGE>
RECOMMENDATION OF 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. See, "Recommendation of
General Partner."
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 under "Reasons for the Reorganization." On the
other hand, the General Partner also considered the tax disadvantages
discussed under "Disadvantages of Reorganizing to Corporate Form." The
General Partner recommends the Reorganization because it believes the
advantages outweigh the disadvantages.
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."
Upon the dissolution of the Partnership by the Operating Company, the
winding up and liquidation of the Partnership will result in taxable gain or
loss to any Limited Partners who do not exchange their Units for Holding
Company Common Stock. See "Certain Federal Income Tax Consequences - Effect
on Remaining Limited Partners."
After the Reorganization, the group of Corporations consisting of the
Holding Company and the Operating 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.
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<PAGE>
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.
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<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.
Nine Months Year Ended
Ended September 30, 1996 December 31, 1995
------------------------ -----------------
THE PARTNERSHIP
Historical per Unit data:
Net Income (loss) per:
General Partner Unit (1) 0.60 0.73
Limited Partner Unit (2) 0.60 0.73
Distributions per:
General Partner Unit 0.30 0.67
Limited Partner Unit 0.30 0.67
Book Value per:
General Partner Unit (3) 1.45 1.16
Limited Partner Unit 1.86 1.50
THE NEW COMPANY
Pro forma per share data:
Net income per share 0.38 0.46
Cash dividends per share 0.30 0.67
Book value per share 1.18 1.12
- ----------
(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.
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<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, 45.02% CSC General Partner,
Ltd. ------ Inc., holding
2,666,672 Partner-
ship 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)
---------------------------
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<PAGE>
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 taxes 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 and state
franchise 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." The tax effects to any Limited
Partners that fail to transfer their Units to the Holding Company are
described under "Certain Federal Income Tax Consequences - Effect on
Remaining Limited Partners."
Upon dissolution of the Partnership by the Operating Company, the
winding up and liquidation of the Partnership will result in taxable gain or
loss to the Limited Partners who do not accept the Exchange Offer. See
"Certain Federal Income Tax Consequences - Effect on Remaining Limited
Partners."
Limited Partners and CSC Shareholders should carefully review the
information contained in "Certain Federal Income Tax Consequences."
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 income tax, and its partners pay
income 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. The
state franchise taxes to which the Operating Company will be subject is
estimated to be approximately $140,000 more than that paid by the Partnership
based on 1995 earnings.
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.
After the Reorganization, the dividends paid by the Holding Company to
its shareholders could potentially be less than the net after tax
distributions paid by the Partnership to its Unitholders. The cash required
to fund annual principal and interest payments on the ESOP loan, combined
with the cash required for operations and sustained growth, could potentially
result in less cash available for the payment of dividends than was available
to the Partnership in the past for the payment of distributions.
CONFLICTS OF INTEREST. The General Partner believes there are no
conflicts of interest between the General Partner and the Limited Partners 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. 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.
There are no conflicts of interest between the CSC Shareholders and the
Limited Partners. The rights and benefits of the CSC Shareholders and the
Limited Partners are materially the same. There are no circumstances where
Limited Partners receive any benefit or assume any risk that is not also
received or assumed by the CSC Shareholders, including distributions, court
judgments or bankruptcy proceedings, and visa versa. CSC Shareholders and
Limited Partners each have limited liability.
Management, as well as other employees who benefit from the
Partnership's profit sharing plan, could receive a benefit from the
Reorganization that is not received by other CSC Shareholders or Limited
Partners. If the Holding Company contributes funds to the ESOP in excess of
the funds that would have been contributed to the Partnership's profit
sharing plan, Management and other employees would receive a benefit from the
Reorganization that won't be received by non-management Limited Partners or
CSC Shareholders. Payment of the principal and interest payments on the ESOP
debt will be substituted for contributions to the profit sharing plan. The
benefit received by Management employees and other employees could be
material. For example, if the Holding Company borrows $7,500,000 (the maximum
amount allowed under a commitment letter issued by an area bank) and loans
that money to the ESOT for (a) the purchase by the ESOT of up to ten percent
of the outstanding Holding Company Shares from the shareholders, and (b) the
purchase by the ESOT of authorized but unissued shares from the Holding
Company (the proceeds of which the Holding Company will use to pay off
current debt relating to the construction costs of a new building) then in
order for the ESOT to have enough money to make the required annual principal
payments on the $7,500,000 loan, the Holding Company would have to contribute
$1,071,428 per year to the ESOT. In comparison, the Partnership
contributed $672,000 to its profit sharing plan for its employees in 1996.
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<PAGE>
Other than the potential benefit received from contributions to the ESOP, the
Reorganization will not materially affect any rights or liabilities of
Management and Management will continue to receive substantially 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(1), and will continue to have no liability after the
Reorganization due to their ownership of Common Stock.
In addition, the Reorganization will not adversely 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 OF 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 any lower
than the prices at which the Units have changed hands in the past. However,
even though there will be no established market for the resale of the Common
Stock, the Holding Company will pursuant to the terms of the ESOP have an
independent appraisal performed annually which will appraise the value of the
Common Stock.
EFFECT ON NON-TRANSFERRING LIMITED PARTNERS. Under the Plan, the
Partnership will be dissolved by the Operating Company. Under the
Partnership Agreement, as amended (see "Conditions to the Reorganization,"
below), each Limited Partner who does not tender his or her Units to the
Holding Company pursuant to the Plan will receive a liquidating cash
distribution in an amount determined by the General Partner to be equal to
such Limited Partner's participating percentage in the fair value of the net
assets of the Partnership, and will recognize a taxable gain or loss upon
such distribution. The amount of the liquidating cash distribution cannot be
quantified prior to the Exchange Offer. The amount is based on a Limited
Partner's participating percentage in the Partnership's net assets as of the
date of the dissolution. See "Certain Federal Income Tax Consequences--Effect
on Remaining Limited Partners."
NO APPRAISAL RIGHTS. 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 by the
Operating Company. Upon dissolution, the Limited Partners who do not accept
the Exchange Offer will receive a liquidating cash distribution determined by
the General Partner to be equal to such Limited Partner's participating
percentage in the fair value of the net assets of the partnership.
UNCERTAINTY REGARDING AMOUNT OF LIQUIDATING DISTRIBUTION. Upon
dissolution of the Partnership after the completion of the Exchange Offer,
any Limited Partners who do not accept the Exchange Offer will receive a
liquidating cash distribution. The amount of the cash distribution cannot be
determined prior to the Exchange Offer or the dissolution because it will be
based on the net assets of the Partnership as of the date of the dissolution.
In determining the amount of the liquidating cash distribution, the General
Partner will comply with the terms of the Partnership Agreement, as amended.
The amendment to the Partnership Agreement that allows the General Partner to
make such a liquidating cash distribution was approved at the annual
partner's meeting of the Partnership by 98% of the outstanding Units which
were voted at the meeting. At the meeting 5,072,587 of the 5,922,814 Units
outstanding (87%) were voted by proxy or in person. Therefore, a substantial
majority of the Limited Partners approved the methodology of determining the
liquidating cash distribution.
NO PREDETERMINED PURCHASE PRICE OF HOLDING COMPANY SHARES. After the
completion of the Exchange Offer, a newly formed Employee Stock Ownership
Trust will offer to purchase up to ten percent of each shareholder's
Holding Company shares. The purchase price that the Employee Stock Ownership
Trust will pay for these shares cannot be determined prior to the Exchange
Offer. An independent evaluation of the Holding Company stock will be
obtained after the Exchange Offer. The purchase price offered by the Employee
Stock Ownership Trust will be based upon this independent evaluation.
INABILITY TO DETERMINE OWNERSHIP PERCENTAGE. Because it is possible that
some Limited Partners may not accept the Holding Company's Exchange Offer, it
is impossible for limited partners or shareholders of the General Partner to
determine what their percentage of ownership will if they accept the Exchange
Offer.
DILUTION FROM ESOT'S PURCHASE OF HOLDING COMPANY UNISSUED SHARES. After
the completion of the Exchange Offer, the ESOT will borrow money from the
Holding Company and purchase up to $2,800,000 (but no more than 400,000
shares) of unissued Holding Company shares from the Holding Company. The
Holding Company will use the proceeds from the sale of these shares to the
ESOT to pay-off currently existing debt relating to the construction of a
building at its mail offices in Amarillo, Texas. The sale of the authorized
but unissued shares to the ESOT will dilute the percentage ownership of the
Holding Company shareholders. The amount of the dilution cannot be determined
prior to the Exchange Offer because the General Partner cannot know how many
Holding Company shares will be outstanding after the Exchange Offer because
some Limited Partners may not accept the Exchange Offer and the General
Partner cannot determine the purchase price which the ESOT will pay for the
shares.
- ----------
(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.
17
<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. 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 employee stock ownership
trust ("ESOT"), borrows money from a bank or other lender to purchase the
employer's securities, which provides a limited market for the sale of
Holding Company shares to those owners who choose to sell a portion of their
shares to the ESOT. After the Reorganization and dissolution of the
Partnership, a newly formed ESOT will offer to purchase up to ten percent
18
<PAGE>
of each shareholder's Holding Company Shares.
The Trustee of the ESOT will comply with all applicable tender offer
rules under the Securities Act. The purchase price that the ESOT will pay
for these shares cannot be determined prior to the Exchange Offer. Although
Management has no reason to believe that the market value of the Holding
Company shares will be less than the market value of the Units, there is the
potential that the price paid for the Holding Company shares by the ESOT will
be below the shareholder's expectations.
Although the purchase price cannot be determined prior to the Exchange
Offer, the ESOT will offer to buy the Holding Company Common Stock at a price
which will be determined by an independent appraiser. Corporate Systems has
retained a firm to perform the appraisal of the value of the Holding Company
Common Stock after the Reorganization. In determining the value of the
Holding Company Common Stock after the Reorganization, the appraiser will
value the Common Stock based on a combination of the following approaches:
- DISCOUNTED NET CASH FLOW (OR EARNINGS CAPACITY) APPROACH. An
approach based on the premise that the value of the business interest is the
present value of the future economic income to be derived by the owners of
the business. The approach uses the following analyses: revenue analysis,
expense analysis, investment analysis, residual value analysis, and discount
rate analysis.
- MARKET DATA COMPARABLE (OR TRANSACTIONAL ANALYSIS) APPROACH. In this
approach the value of the business interest is determined by comparing the
subject to comparable firms that were bought or sold during a reasonably
recent time period. The appraiser will access several proprietary databases
for acquisition activity in the United States and abroad to obtain market
data transactions.
- CAPITAL MARKET (OR MARKET MULTIPLE) APPROACH. This method utilizes
the premise that the value of the business interest should be determined
based on what astute and rational capital market investors would pay to own
the equity interest of the subject company. Capital market ratios of publicly
traded comparable companies will be utilized to represent the value of the
subject interest.
Each shareholder of the Holding Company will have the opportunity to
sell up to 10% of his or her shares to the ESOT. If one or more shareholders
of the Holding Company do not elect to sell any of his or her shares to the
ESOT or elects to sell less than 10% of their shares, the ESOT may offer to
purchase the shares from one or more other shareholders. The aggregate
amount of shares that the ESOT will purchase is ten percent of the shares
outstanding as of the date of its offer.
A local national bank has extended a commitment to provide the funds
necessary for the ESOT to purchase the Holding Company shares from the
shareholders. The exact amount of the loan cannot be determined until the
ESOT determines the purchase price it will pay for the shares. However, a
bank has committed to loan the Holding Company up to $4,700,000, which the
Holding Company will loan to the ESOT for the purchase of the shares. The
bank will also loan the Holding Company an additional $2,800,000, which the
Holding Company will loan to the ESOT for the purchase of up to 400,000 of
the authorized but unissued shares of Holding Company common stock from the
Holding Company. The Holding Company will use the proceeds from the sale of
these new shares to pay-off existing debt relating to the construction costs
of a new building. The loan to the Holding Company will have a seven year
maturity and require annual installments of principal and interest to fully
amortize the original note amount over a seven year period. The loan from
the bank to the Holding Company will be secured by a pledge of the promissory
note from the ESOT to the Holding Company and the stock pledged by the ESOT
to secure payment of the note payable to the Holding Company.
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 market for the
sale of 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
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. 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 need to retain capital to fuel growth,
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. Management does not anticipate a
return to a partnership form even if the need for capital returns to previous
levels.
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. Currently, the transferability of both the Units and CSC Shares
is restricted. Under the Partnership Agreement, the Units are not freely
transferrable. If a Limited Partner assigns his or her Units, 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. 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. The laws
restrict the number of shareholders to 35 (75 after January 1, 1997) and
restrict the type of entity which may own the shares. After the
Reorganization, the Holding Company's Common Stock will be freely
transferable by the Shareholders subject only to applicable securities laws.
Therefore, Management anticipates that the Holding Company will have greater
potential access to equity capital markets by way of a public offering of its
securities because the Holding Company shares will be transferrable without
the current restrictions applicable to the Units and CSC Shares. Although
Management does not have any current plans to access any equity market or to
list the Holding Company shares on an exchange, 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.
Management has no plans to issue additional equity securities at the present
time. 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.
19
<PAGE>
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 taxed as an S corporation makes it a complex process to prepare tax
returns for the Partnership, the Limited Partners, and the CSC Shareholders.
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' tax returns and uncertainties about the adequacy of estimated
tax payments. 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 as taxable income any dividends they
may actually receive. Preparation of corporate income tax returns is also
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 which require amending
returns filed for income tax purposes, 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
market available for the sale 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,
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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 adversely affect any 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 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
- The Partnership will be dissolved by the Operating Company, then
serving as the general partner of the Partnership, pursuant to the
Partnership Agreement, as amended, and applicable Texas law. In the
dissolution, the Operating Company, as the Partner holding a
substantial majority of the Units, will receive the assets of the
Partnership in-kind and will assume all liabilities of the
Partnership. Each Limited Partner who does not tender his or her
Units to the Holding Company pursuant to the Plan will receive a
liquidating cash distribution in an amount determined by the
General Partner to be equal to such Limited Partner's participating
percentage in the fair value of the net assets of the Partnership.
The Limited Partners will not incur any personal liability for
Partnership obligations from the dissolution.
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. When the Partnership is
dissolved by the Operating Company, the Operating Company will continue the
business of Corporate Systems and assume and be responsible for all
liabilities of the Partnership.
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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 (or larger percentages if some Limited Partners do not accept the
Exchange Offer) 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.
In the allocation of Common Stock of the Holding Company, 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 Shareholders. The relative rights
of the Limited Partners and the CSC Shareholders are materially the same.
There are no circumstances where Limited Partners receive any benefit or
assume any risk that is not also received or assumed by the CSC Shareholders,
including distributions, court judgments or bankruptcy proceedings, and visa
versa. CSC Shareholders and Limited Partners each have limited liability and
are not personally liable for any Partnership obligation under the applicable
law governing shareholders and limited partners.
The relative rights of the Limited Partners and CSC Shareholders are
materially the same because 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. The General Partner
has no assets other than the Units it holds in the Partnership, has no
liabilities, and has no expenses that are not directly related to the
Partnership and are passed through to the Partnership. Therefore, Corporate
Systems has always deemed a holder of CSC Shares 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 5,922,814; 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
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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. Also, see "Recommendation of the General Partner."
RECOMMENDATION OF THE GENERAL PARTNER.
The General Partner believes that the Plan is fair to Limited Partners
and CSC Shareholders and recommends that they accept the Holding Company's
Exchange Offer. The General Partner believes that the Reorganization will
result in benefits to Limited Partners, the CSC Shareholders and to Corporate
Systems. The Reorganization will benefit the Limited Partners and CSC
Shareholders by providing them an increased marketability of their
investment through the ESOP's purchase of 10% of the outstanding shares of
the Holding Company. The General Partner also believes that the
simplification of tax reporting will benefit the Unitholders. The
Reorganization will benefit Corporate Systems by allowing it to retain the
cash necessary for growth and continued operations without its shareholders
incurring tax liability on the earnings. As a partnership, the Limited
Partners and CSC Shareholders incurred tax liability on the retained earnings
regardless of whether any distributions were made by Corporate Systems. In
addition, a change to corporate form may benefit Corporate Systems in the
future by allowing better access to equity capital markets if equity is
needed. See "Reasons to Convert to Corporate Form."
The General Partner believes that the benefits gained by the Limited
Partners, CSC Shareholders and Corporate Systems from the Reorganization
outweigh the disadvantages resulting from the Reorganization. The General
Partner believes the only disadvantage of reorganizing to corporate form are
tax related. The principal tax disadvantage is the double taxation of
distributed corporate income, which is not expected to have any significant,
immediate or near term economic effect on the Holding Company Shareholders.
However, it may 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. See "Disadvantages of Converting to
Corporate Form."
Because the Limited Partners and the CSC Shareholders will be treated
the same in the Plan and neither the General Partner nor its shareholders
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. Any risks assumed by the
Limited Partners will also be assumed by the General Partner. See "Summary
Comparison of Units and Common Stock."
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.
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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. 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 Partners and the CSC Shareholders. Historically,
a CSC Shareholder has been deemed to be the beneficial owner of the same number
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."
In its determination that the Reorganization is fair to the
Limited Partners, the General Partner considered the following risk
factors associated with the Reorganization: (a) the fact that the
winding up and liquidation of the Partnership will result in taxable
gain or loss to any Limited Partners who do not accept the Exchange
Offer; (b) the fact that the common stock of the Holding Company will
be a new security and will not be publicly traded; (c) the fact that
it is unable to calculate the amount of the liquidating cash
distribution to any Limited Partners who do not accept the Exchange
Offer; (d) the lack of dissenters rights for Limited Partners who do
not accept the Exchange Offer; (e) the fact that the purchase price
that the ESOT will pay for shares of the Holding Company cannot be
determined until after the Reorganization is complete and an
independent evaluation of the shares is obtained; and (f) the inability
of a limited partner to assess his or her ownership percentage of the
Holding Company prior to the Exchange Offer.
The General Partner determined that the benefits from the
Reorganization outweighed the potential risks to the Limited Partners.
Although the Holding Company common stock will have no established
market, the General Partner has no reason to believe that the Holding
Company common stock will sell at prices any lower than the Units or
CSC Shares. Regarding its inability to determine the liquidating cash
distribution prior to the Exchange Offer, the General Partner will
comply with the terms of the Partnership Agreement, as amended,
regarding the determination of the amount of the liquidating cash
distribution. The amendment to the Partnership Agreement which allows
the General Partner to make such a liquidating cash distribution was
approved at the annual partner's meeting of the Partnership by 98% of
the outstanding Units which were voted at the meeting. Therefore, a
substantial majority of the Limited Partners approved the methodology
of determining the liquidating cash distribution even though the
amount of the distribution cannot be ascertained prior to the Exchange
Offer.
The General Partner believes the Reorganization is fair to the
Limited Partners even though the purchase price that the ESOT will pay
for shares of the Holding Company cannot be determined until after the
Reorganization is completed. The price will be based upon an
independent evaluation of the Holding Company common stock. A
shareholder not satisfied with the price may keep the shares of common
stock rather than sell them to the ESOT.
Albeit the CSC Shareholders and the Limited Partners cannot determine
their percentage of ownership of the Holding Company after the Reorganization
prior to making their decision to accept or reject the Exchange Offer, the
Reorganization will not reduce the percentage ownership of any CSC Shareholder
or Limited Partner. If some Limited Partners do not accept the Exchange
Offer, the ownership percentage of the Limited Partners and CSC Shareholders
who accept the Exchange Offer will increase. Shareholders who sell up to ten
percent of their shares to the ESOT may suffer some dilution if some
shareholders sell a smaller percent of their shares.
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. However,
as discussed above, Management and other employees may receive a benefit from
the Reorganization not received by other Limited Partners or other CSC
Shareholders if the Holding Company contributes funds to the ESOP in an
amount greater than the funds contributed by the Partnership to its profit
sharing plan. Although Management employees may receive a benefit (the ESOT)
from the Reorganization which the other Limited Partners and CSC Shareholders
will not receive, the General Partner believes that the benefit to such
employees will ultimately benefit all shareholders of the Holding Company
through increased employee retention and loyalty. 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(1)
- Right to Call Special Meetings
- Rights upon Dissolution
- Derivative Action Rights
- Right to Inspect Books and Records
- Preemptive Rights
- Limited Liability
_______________________
(1) However, with respect to 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, with respect to 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.
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See "Summary Comparison of Units and Common Stock and CSC Shares and Common
Stock."
Other than the benefit that Management could potentially receive from
increased contributions to the ESOP, 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 set forth above which the General Partner
considered for a determination of the substantive fairness of the
Reorganization, the General Partner also considered 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, which they may either accept or not. Each CSC
Shareholder and Limited Partner may assess the fairness of the
Reorganization and Exchange Offer. If any Limited Partner does not
accept the Exchange Offer, he or she will receive a liquidating cash
distribution from the Partnership when it is dissolved.
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
material conflicts of interest and because it believes the Reorganization is
fair to the Limited Partners and CSC Shareholders and that 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.
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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) at the Partnership annual meeting to be held on November 16,
1996, the Limited Partners approve an amendment of the Partnership
Agreement that will allow the General Partner to make liquidating
distributions to the then existing Partners as follows:
- the General Partner, as the Partner holding a substantial
majority of the Units will receive the assets of the
Partnership in-kind and the will assume all liabilities of
the Partnership; and
- Each Limited Partner who does not tender his or her Units to
the Holding Company pursuant to the Plan will receive a
liquidating cash distribution determined by the General
Partner to be equal to such Limited Partner's participating
percentage in the fair value of the net assets 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 has no actual knowledge that any
particular Limited Partner will refuse to accept the Exchange Offer, as a
practical matter a few Limited Partners may fail to exchange their Units for
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 some
Limited Partners have not accepted the Exchange Offer, the General Partner
may terminate and abandon the Plan. The Plan does not establish the exact
number of Units which must be tendered by the Limited Partners in order for
the Reorganization to be consummated. However, as a practical matter, a
substantial majority of the Units must be tendered by Limited Partners in
order for the Reorganization to occur. In contrast, the General Partner will
not terminate or abandon the Reorganization if a few Limited Partners do not
exchange their Units for Holding Company Common Stock unless the Limited
Partners who do not accept the Exchange Offer own a substantial number of
Units. Because the Partnership will be dissolved after the Reorganization
and any Limited Partner who does not exchange his or her Units for shares of
the Holding Company 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, the General Partner must determine whether or not
the Partnership has sufficient cash available to make the liquidating
distribution to the Limited Partners who do not exchange their Units for
Holding Company shares. 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.
The General Partner may terminate and abandon the Reorganization at any
time before the Exchange Offer is completed and the Holding
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Company issues its shares of Common Stock to subscribing Unitholders. Any
provision of the Plan may be waived at any time by the party that is entitled
to the benefits thereof.
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 by the Operating Company. Upon dissolution,
the Limited Partners who did not accept the Exchange Offer will receive a
liquidating cash distribution determined by the General Partner to be equal
to such Limited Partner's participating percentage in the fair value of the
net assets of the Partnership.
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 includes 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 also includes 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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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 140,000
Accounting fees and expenses 95,000
Printing, engraving, and mailing expenses 35,000
Blue Sky filing fees 9,699
--------
Total $282,973
--------
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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
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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 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) the assumption that the
Exchanges will be consummated as described in the Plan and this Registration
Statement, and (ii) various representations by the managements of the
Partnership, the Holding Company and the General Partner, including
representations that, except for the CSC Shareholders and Limited Partners
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 (the
"ESOT Offer"), such managements know of no plan or intention by any CSC
Shareholder or Limited Partner to sell or otherwise dispose of any shares of
Holding Company Common Stock they receive as a result of participating in the
Exchanges. 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. The opinion of
Strasburger & Price, L.L.P., together with a Certificate setting forth the
representations of the managements of the Partnership, the Holding Company
and the General Partner on which the opinion is based, is included in this
Prospectus as Annex B.
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
29
<PAGE>
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 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 15% 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 date of the exchange.
In the event a holder of shares of Holding Company Common Stock should
sell any of such shares, such shareholder should recognize capital gain or
loss on the transaction, assuming such shares constitute capital assets
in the shareholder's hands at the time of the sale. The capital gain or
loss will be long-term capital gain or loss if the shareholder has a
holding period for his or her shares of more than one year, and will be
short-term if the shareholder's holding period is of shorter duration.
In the event such shares were received by the shareholder in exchange
for Units as a result of participating in the Exchanges, the
shareholder would have a separated holding period for the shares as
described in the preceding paragraph. In such event, based on the
estimate in the preceding paragraph, (i) approximately 85% of the gain
or loss will be determined to be short or long-term capital gain or
loss based on a holding period for such shares that includes the
holding period of the Units that were exchanged for such shares, and
(ii) approximately 15% of such gain or loss will be determined to be
short or long-term capital gain or loss based on a holding period for
such shares that begins on the day following the exchange of the Units
for Holding Company Common Stock. As a result, if such shares should be
sold within one year of the Exchanges, approximately 15% of the
resulting gain or loss will constitute short-term capital gain or loss,
even if the remaining 85% of the gain or loss qualifies for treatment
as long-term capital gain or loss.
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
30
<PAGE>
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 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 at the
time of the termination, 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 $.83 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 $.83 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 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.
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, especially in view of the dissolution and liquidation of
the Partnership that will occur coincident with or shortly after the
described termination of the Partnership.
31
<PAGE>
DISSOLUTION AND LIQUIDATION OF PARTNERSHIP. Under the Plan, the
Partnership is to be dissolved and liquidated after consummation of the
Exchanges. The federal income tax consequences to any Remaining Limited
Partners, as a result of the dissolution and liquidation of the Partnership,
will 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
the Partners and is reported by them on their individual returns. Because
of these flowthroughs, the 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. When 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.
32
<PAGE>
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. Such gain will
be recognized at the time of the distribution that results in the gain
recognition. 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 the value of certain long-term
contracts with customers) 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 the value of certain long-term
contracts with customers) 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.
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
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.
33
<PAGE>
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
9-30-96 6.00 5.00
The price ranges listed above reflect actual trades of Units during the
periods indicated.
HOLDERS.
The number of record 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 of
record 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.
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.
34
<PAGE>
Recent distributions to Unitholders have been as follows(1):
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
9-30-96 .10
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>
NINE MONTHS
ENDED SEPTEMBER 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 $30,967 $34,546 $46,095 $39,747 $31,769 $26,363 $27,283
Research and development, net 2,475 1,941 4,081 2,129 245 472 259
Operating income 3,309 4,502 4,648 5,120 4,852 1,389 2,758
Net earnings (loss) 3,552 4,328 4,277 5,335 5,351 (4,325) 1,800
Net earnings (loss) per:
General partner 1,609 1,978 1,953 2,453 2,460 (1,997) 859
Limited partners 1,943 2,350 2,324 2,882 2,891 (2,328) 941
Net earnings (loss) per unit:
General partner 0.60 0.74 0.73 0.92 0.92 (0.75) 0.33
Limited partners 0.60 0.74 0.73 0.92 0.92 (0.75) 0.33
Distributions per unit 0.30 0.51 0.67 0.49 0.14 0.09 0.34
BALANCE SHEET:
Working capital (deficit) $ 5,209 $ 3,437 $ 2,606 $ 2,695 $ 2,277 $(2,287) $(3,103)
Total assets 18,498 18,230 18,365 15,515 13,200 9,016 13,349
Long-term obligations,
including current maturities 32 531 118 1,575 3,310 5,092 7,036
Total partners' equity 9,910 8,892 7,901 7,175 4,681 142 3,053
Total number of units outstanding 5,923 5,873 5,876 5,800 5,800 5,800 5,380
Book value per unit 1.67 1.51 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.
______________
(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>
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), installations and
programming of $.56 million (31 percent), special project fees of $3.55
million (41 percent) and other operating revenues of $.56 million (44
percent). Growth in risk management claims administration services was
attributed to increases in the volume of risk management claims
administration services, as well as the Partnership's ability to obtain
several new customer contracts during fiscal 1995. The volume of medical cost
management bills processed increased due to one customer catching up on its
backlog during the year increasing this customer's revenue by $1.96 million
over the same period in 1994. Also included in this component are revenue
generated from the Partnership's teleclaim product which showed an increase
of $.24 million over the same period in 1994. The increase in installations
and programming revenue over the same period in 1994 mainly consists of
license and set up fees generated from a new product, CS knowlEDGE, in the
amount of $.23 million and an increase in programming fees of $.20 million.
The increase in special project fees is partly due to an increase of
$.22 million over the same period in 1994 due to the full ramp up in 1995 of
a special operations customer obtained in 1994. Special operations customers
have a full-time dedicated customer service staff and this revenue is
expected to be ongoing in future years. Also included in special project
fees are revenues that are one-time in nature and are expected to fluctuate
from year to year. From time to time, the Partnership may be requested to
assist a current customer or may be contracted by a noncustomer to develop a
set of software programs designed specifically for that entity and within the
scope of the Partnership's expertise. The Partnership receives these project
requests and secures the business on an ad hoc basis and does not anticipate
revenues from this source in its annual planning process. For the year ended
December 31, 1995, revenue generated from these contracts was $3.27 million
compared to $2.11 million during the same period in 1994. Offsetting these
increases in revenue was a decrease in computer access and equipment rental
fees 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.
36
<PAGE>
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
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, cost of
services increased $2.84 million (11 percent) in 1995 over 1994. This
increase is primarily due to increases in the volume of services provided to
customers which required the Partnership to employ additional people
increasing salary and benefit expense by $.86 million (7 percent), contract
temporary workers increasing expense by $.48 million (120 percent) and enter
into various new computer and equipment contracts increasing cost by $1.94
million (31 percent). The new computer and equipment contracts were
necessary to allow the Partnership to keep pace with changing technology and
business growth.
Selling, general and administrative expenses increased $.46 million (8
percent) in 1995 over 1994. This increase is mainly attributable to increases
in salaries and wages of $.23 million and deferred compensation of $.38
million in 1995 over 1994. An overall $.15 million decrease was realized in
the other components of general and administrative expense that includes
depreciation, materials and supplies, travel and other expenses.
NET EARNINGS.
Partnership net earnings for fiscal 1995 decreased from fiscal 1994 by
$1.06 million ($.19 per Unit). The revenue increase of $6.35 million was
reduced primarily due to planned increases in product development ($3.53
million), upgrades in technology tools used by employees ($1.9 million), and
recognition of the cumulative effect of the change in accounting for
postretirement benefits ($.59 million).
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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 services, as well as the Partnership's
ability to obtain several new significant customer contracts in both revenue
components during fiscal 1994. Risk management claims administration
services increase is primarily due to a $4.7 million increase in medical
claims management processing revenue over the amount earned in fiscal 1993.
Special project fees increase is primarily due to increases in claims
processing by special operations customers. Offsetting these increases in
revenue was a decrease in computer access and equipment rental fees 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:
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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
---------- --------
---------- --------
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 that
increased salaries and benefits $2.3 million in 1994 over the same period in
1993. 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.
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NINE MONTHS ENDED SEPTMEBER 30, 1996, COMPARED TO THE NINE MONTHS ENDED
SEPTMEBER 30, 1995.
OPERATING REVENUES
Operating revenues for the nine-month period ended September 30, 1996,
decreased $3.58 million (10 percent) over the same period in 1995.
Risk management claims administration services revenue decreased $1.32
million (7 percent) from 1995 to 1996. The main components of risk management
claims administration services revenue are medical claims management
processing fees, claims administration service fees, teleclaim fees, and risk
management reporting service fees. Medical claims management processing fees
decreased $.94 million in 1996 compared to the same nine month period in
1995. This decrease is mainly due to additional revenue totaling $.79 million
generated during the nine month period ended September 30, 1995 by one
customer that increased its volume of claims to catch up on its backlog.
Another component of risk management claims administration services decreased
was claims administration service fees by $.56 million in 1996 over the same
period in 1995 due to continued competitive considerations and certain
contract price concessions given to customers purchasing stand-alone systems
and terminating existing service agreements with the Partnership.
During the nine-month period ended September 30, 1996, installations and
programming revenue were up $.50 million (29 percent) from the same period in
1995 partly due to new sales to the Partnership's existing customers of a new
product, CS knowlEDGE that increased the total by $.18 million. Programming
reimbursements and file construction fees also increased over 1995 by $.24
million. The remainder of the increase is due to license fees generated from
sales of products ($.08 million).
Computer access and equipment rental fees revenue declined $.35 million
(13 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.
Special project fees revenue decreased $2.75 million (28 percent) mainly
due to the near completion of a one-time project in 1996 of product development
performed under a contract for a customer which was in progress throughout 1995.
This project produced $.38 million and $1.46 million of revenue for the nine
month periods ended September 30, 1996 and 1995, respectively, which accounts
for a decrease of $1.08 million. Another one-time project generated $1.5 million
of revenue for the Partnership's research and development efforts on the
teleclaim product during the nine month period ended September 30, 1995.
Other operating revenue increased $.34 million (26 percent) due to an
increase from reimbursed time ($.18 million) and software support from the
Partnership's Prism products ($.25 million) for the nine month period ended
September 30, 1996 over the nine month period ended September 30, 1995.
The Partnership had revenues from four customers in 1996 and 1995
totaling $16.53 million and $15.83 million during the nine month periods
ended September 30, 1996 and 1995, respectively. Such revenues from
significant customers represent individually over 5 percent of total
operating revenues and in the aggregate approximate 53 percent and 46 percent
of total operating revenues during the periods ended September 30, 1996 and
1995, respectively. For the nine month periods ended September 30, 1996 and
1995, material customers representing over 10 percent of total operating
revenues were Travelers, American International Group Technical Services, and
ITT Hartford. At September 30, 1996 and 1995, the Partnership also had $3.30
million and $4.23 million, respectively, of unsecured trade accounts
receivable due from customers which operate primarily in the insurance
industry.
At September 30, 1996 the Partnership was operating with a revenue
backlog of approximately $.63 million.
OPERATING EXPENSES
Operating expenses decreased $2.39 million (8 percent) in the nine month
period ended September 30, 1996 as compared to the nine month period ended
September 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 87 percent, respectively.
Within the components of operating expenses there was a shift of expense
from cost of services to selling, general, and administrative expense.
Selling, general, and administrative expense increased 13 percent and cost of
services decreased 12 percent for the nine month period ended September 30,
1996 when compared to the nine month period ended September 30, 1995. Cost of
services as a percent of revenues was 71 percent and 72 percent for the nine
month periods ended September 30, 1996 and 1995, respectively.
Cost of services includes new product development which is defined as
research and development, product development performed under contracts for
others and other development efforts. Net research and development
expenditures for the nine month periods ended September 30, 1996 and 1995,
were $2.48 million and $1.94 million, respectively. The net new product
development expense totaled $2.75 million and $2.16 million for the nine
month periods ended September 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
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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 PERIOD ENDED FOR PERIOD ENDED
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
------------------ ------------------
OPERATING REVENUES
Research and development $ -- 1,500,000
Product development performed
under contract for others 384,000 1,456,000
---------- ---------
SPECIAL PROJECT FEES 384,000 2,956,000
---------- ---------
OPERATING EXPENSES
Research and development 2,475,040 3,441,640
Product development performed
under contract for others 293,544 1,461,678
Other development costs 370,026 215,595
---------- ---------
COST OF SERVICES 3,138,610 5,118,913
---------- ---------
NET NEW PRODUCT DEVELOPMENT $2,754,610 2,162,913
---------- ---------
---------- ---------
When the effects of new product development are removed from cost of
services, cost of services decreased $1.08 million (5 percent). Permanent
employees were hired in the nine month period ended in 1996 which decreased
temporary salaries by $.46 million over the same nine month period ended in
1995. Most other expense categories decreased during the nine month period
ended September 30, 1996 as compared to the same period ended in 1995;
computer and other equipment expense ($.45 million) due to the expiration of
leases, depreciation expense ($.14 million) due to fully depreciating assets,
and travel ($.08 million).
Selling, general, and administrative expenses increased $.68 million (13
percent) in the nine month period ended September 30, 1996, over the same
period in 1995. The increase can mainly be attributed to increased costs
incurred for professional fees ($.47 million) related to internal
restructuring, legal and accounting costs related to the legal form of the
organization, and consulting services for quality improvements. The new
customer service building increased depreciation expense for the nine month
period ended September 30, 1996 over the same period in 1995 by $.24 million.
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.
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.
There was only a slight decrease in accounts receivable at
December 31, 1995 to $6.79 million from $6.92 million at December 31, 1994.
Accounts receivable turnover remained fairly consistent at 54 days and 51
days at December 31, 1995 and 1994, respectively. An analysis of the aging
of the accounts receivable indicates a reduction in the percentage of
accounts receivable over 60 days or more past due to 7.1 percent from 14.1
percent at December 31, 1995 and 1994, respectively.
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. The Partnership expects to spend approximately $1 million on
capitalizable items in 1996. These expenditures will be for replacement of,
upgrades to, and expansion of equipment and software necessary to support
the Partnership's business.
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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 line 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 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.
Accounts receivable increased to $4.16 million at December 31, 1994 from
$2.81 million at December 31, 1993. Accounts receivable turnover slowed as a
result of such increase to 51 days from 40 days at December 31, 1994 and
1993, respectively. An analysis of the aging of the accounts receivable
reflected an increase in the percentage of accounts receivable past due 60
days or more to 14.1% from 7.1% at December 31, 1995 and 1994,
respectively. Such increase is primarily attributed to one individual
account having a balance of approximately $.37 million being past due in
excess of 60 days. Such account was fully collected during 1995.
During fiscal 1994, the Partnership expended $2.82 million for property,
plant, and equipment and paid $2.84 million in distributions to partners.
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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.
SEPTEMBER 30, 1996, COMPARED TO DECEMBER 31, 1995.
Cash and cash equivalents increased from December 31, 1995, to September
30, 1996, by approximately $1.15 million. The current ratio increased from
1.28 at December 31, 1995, to 1.69 at September 30, 1996, primarily due to
decreases in current liabilities.
Net cash provided by operating activities was $4.38 million for the nine
month period ended September 30, 1996. In addition to earnings, $1.58 million
in cash was provided by collections of trade accounts receivable, which was
offset by payment of $2 million in cash for accounts payable and accrued
expenses.
Accounts receivable decreased $1.25 million at September 30, 1996 from
$6.78 million at December 31, 1995. The turnover of accounts receivable
remained level at 54 days at September 30, 1996 and December 31, 1995. An
analysis of the aging of the accounts receivable at September 30, 1996
revealed little fluctuation in the percentage of accounts past due more than
60 days from that reflected at December 31, 1995.
During the nine month period ended September 30, 1996, the Partnership
expended $.67 million for property, plant, and equipment. Additionally, the
Partnership paid $2.72 million in distributions to Partners and made
principal payments on capital lease obligations of $.09 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 nine month periods ended September 30, 1996 and 1995,
research and development costs were approximately $2.48 million and $1.94
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
borrowing 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 Partnership
recognized the entire transition obligation as a cumulative effect of change
in accounting in 1995.
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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.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION (Statement 123), which
encourages, but does not require, a method of accounting for employee
equity based awards which results in compensation expense being recognized
when awards are granted based on their fair value. Entities which elect
not to adopt the new method for the financial statements are required to
disclose in the notes to the financial statements the pro forma effect on
net income as if the fair value method of accounting had been applied.
The Partnership will continue to account for the equity-based awards using
the requirements of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and will provide the required
fair value disclosures in the notes to the consolidated financial
statements. Statement 123 is effective for fiscal years beginning after
December 15, 1995.
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
44
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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 the
infrastructure for a variety of automated products and services directed
toward the property/casualty, workers
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compensation and disability insurance industry. These services fall into the
following core competencies: data collection, information management and
knowledge reporting.
Data collection includes the ability to reconstruct, consolidate, and
validate all forms of risk management data including incidents, claims,
premiums, policies, exposure base (payroll, man hours, revenues, milage driven,
etc.) and properties. This data is provided from diverse sources such as
insurers, state funds, claims administrators, corporations, and governmental
entities.
Information management includes the processing of risk data via claims
administration systems, retrospective medical review, litigation tracking, and
check processing for workers compensation, liability, property, marine, crime
and disability claims.
Knowledge reporting provides a risk data warehouse and facilities to
communicate risk information to insurance companies, insurance agents and
brokers, corporations, claims administrators and governmental entities.
Services include a batch reporting facility, report writing and risk management
problem solving tools.
Corporate Systems provides these core products and services primarily
through leasing online systems via a remote computing facility located in
Amarillo, Texas and secondarily by licensing software operating in the client's
offices. Trained customer service teams located in Amarillo, Texas and Lisle,
Illinois provide documentation, implementation, training and ongoing consulting
for the client base.
Corporate Systems has approximately 435 employees with its principal
office in Amarillo, Texas and a branch service office in Lisle, Illinois.
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
46
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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.
Although there is no published data regarding Corporate Systems' competitor's
market shares, Corporate Systems believes its major competitors include: Risk
Sciences Group, Dorn Technology Group, Inc., David Corporation, and Pyramid
Services.
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.
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
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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 no trial date has been set. 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.
48
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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
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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EXECUTIVE COMPENSATION
The following table contains certain information regarding compensation
earned by the six (6) most highly compensated executive officers of the
Partnership for services rendered to the Partnership during the last three
fiscal years.
COMPENSATION -----------ANNUAL-----------
======================================================================
Name and Principal Year Salary Bonus Other
Position Annual
Compensa-
tion
======================================================================
Guyon H. Saunders, 1995 120,000 - 7,393(1)
Founder
- ----------------------------------------------------------------------
1994 115,200 - 12,180(1)
- ----------------------------------------------------------------------
1993 112,897 - 7,658(1)
- ----------------------------------------------------------------------
Johnny E. Mize, 1995 160,992 80,500(2) 310,492(3)
President and CEO
- ----------------------------------------------------------------------
1994 121,968 144,900(4) 20,480(1)
- ----------------------------------------------------------------------
1993 95,729 139,410 6,587(1)
- ----------------------------------------------------------------------
Charles Scott 1995 108,504 29,603(2) 9,492(1)
Gilmour, Vice
President, Sales
and Marketing
- ----------------------------------------------------------------------
1994 104,040 50,000(4) 20,480(1)
- ----------------------------------------------------------------------
1993 87,611 48,832 6,082(1)
- ----------------------------------------------------------------------
John S. Champlin, 1995 88,500 33,484(2) 8,764(1)
Vice President
- -Client Services
- ----------------------------------------------------------------------
1994 82,000 50,000(4) 11,130(1)
- ----------------------------------------------------------------------
Michael D. Unruh, 1995 104,000 32,563(2) 9,492(1)
Vice President -CFO
- ----------------------------------------------------------------------
1994 90,090 54,820(4) 19,343(1)
- ----------------------------------------------------------------------
1993 68,216 52,950 4,874(1)
- ----------------------------------------------------------------------
Bob Holeman, 1995 102,000 10,000(2) 9,238(1)
Vice-President-
Technology
- ----------------------------------------------------------------------
1994 98,004 44,000(4) 17,614(1)
- ----------------------------------------------------------------------
1993 90,117 31,770 6,067(1)
======================================================================
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(1) Amounts contributed on behalf of the named employee under the
Corporate Systems Self-Employed Profit Sharing Plan and Trust and its 401(K)
Savings Plan.
(2) Bonus was paid in 1996 for employees' performance in 1995.
(3) Of this amount, $9,492 was awarded under the Corporate Systems
Self-Employed Profit Sharing Plan and Trust, the remainder, $301,000, was a
cash bonus awarded pursuant to an incentive award plan; under the terms of
the plan, Mr. Mize purchased 42,140 Units at a cost of $5 per Unit for a
total of $210,700; the balance of the award, $90,300 is to be used for
personal taxes.
(4) Management reinvested substantially all this bonus in Units. The
number of Units purchased with the bonus was: Johnny E. Mize - 17,388,
Michael D. Unruh -4,385, John S. Champlin - 4,000, Charles Scott Gilmour -
4,000, and Bob Holeman -3,520. The percentage of cash (after payment of
taxes) that each executive actually received from the bonus was: Johnny E.
Mize - 0.00%, Michael D. Unruh -20.79%, John S. Champlin - 20.96%, Scott
Gilmour - 53.47%, and Bob Holeman -23.45%. Even though this bonus was
awarded for performance in 1994, it was not paid until 1995 and management
did not purchase their Units until 1995.
LONG TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Awards Granted 1996 Payout of 1997 Payout of
Name in 1995 Awards Awards
- ----------------------------------------------------------------------------
Johnny E. Mize $301,000 $150,500(2) $150,500
- ----------------------------------------------------------------------------
Charles Scott Gilmour $111,800 $ 55,900(3) $ 55,900
- ----------------------------------------------------------------------------
John S. Champlin $ 10,000 $ 5,000(4) $ 5,000
- ----------------------------------------------------------------------------
Micheal D. Unruh $223,600 $111,800(5) $111,800
- ----------------------------------------------------------------------------
Bob Holeman $ 10,000 $ 10,000(6) -0-
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
(1) In March of 1995, the Partnership adopted a long-term incentive award
and option plan for key employees. Under the plan, key employees are awarded
with "cash equivalent awards" representing the right to receive cash payments
equal to Units valued at $5 each and an option to purchase Units at $5 per
Unit. Under the plan, one-half of the awards were paid on March 16, 1996. The
remaining one-half of the awards shall be paid on March 16, 1997. A condition
precedent to the payment of an award is that each recipient must be employed
by Corporate Systems on the payout date in order to receive the cash
equivalent award. In the event of death or disability, all awards become
fully vested and payable as soon as practicable. The following schedule
reflects the cash equivalent awards granted under the plan:
Cash Cash No. of
Equivalent Equivalent Unit
Title Award Units Options
----- ---------- --------- -------
President/CEO $301,000 60,200 42,140
Chief Financial Officer $223,600 44,720 31,304
VP Marketing $111,800 22,360 15,652
VP Technology $ 10,000 2,000 2,000
VP Client Services $ 10,000 2,000 2,000
(2) One-half of the cash equivalent award was paid to Mr. Mize on March
16, 1996. On March 16, 1996, Mr. Mize purchased 21,070 Units at $5 per Unit
for a total purchase of $105,350; the balance of the award, $45,150 is to be
used for payment of personal taxes.
(3) One-half of the cash equivalent award was paid to Mr. Gilmour on March
16, 1996. On March 16, 1996, Mr. Gilmour purchased 7,826 Units at $5 per Unit
for a total purchase of $39,130; the balance of the award, $19,565 is to be
used for payment of personal taxes.
(4) One-half of the cash equivalent award was paid to Mr. Champlin on
March 16, 1996. On March 16, 1996, Mr. Champlin purchased 1,000 Units at $5
per Unit for a total purchase of $5,000.
(5) One-half of the cash equivalent award was paid to Mr. Unruh on March
16, 1996. On March 16, 1996, Mr. Unruh purchased 15,652 Units at $5 per Unit
for a total purchase of $78,260; the balance of the award, $33,540 is to be
used for payment of personal taxes.
(6) One-half of the cash equivalent award was paid to Mr. Holeman on March
16, 1996. Mr. Holeman purchased 1,000 Units at $5 per Unit for a total
purchase of $5,000. The remaining cash equivalent award of $5,000 was vested
upon Mr. Holeman's death, which will be paid as soon as practicable.
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<PAGE>
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.
No. of CSC No. of
Shares Bene- Units Bene- Percentage
Name and Address ficially ficially of
of Beneficial Owner Owned Owned Ownership
- ------------------- ------------ ----------- ---------
Guyon H. Saunders - 833,000 13.90%
DIRECTOR
P.O. Box 31780
Amarillo, Texas 79120
Edward A. Fancher, Jr. 776,512 - 13.11%
DIRECTOR
3204 South Lipscomb
Amarillo, Texas 79109
Max R. Sherman 359,640 43,200(1) 6.80%
DIRECTOR
3505 Greenway
Austin, Texas 78705
Joe C. Richardson, Jr. - 300,000(2) 5.07%
P.O. Box 8246
Amarillo, Texas 79114
Jess Latham, Jr. 79,056 - 1.33%
DIRECTOR
P.O. Box 229
Amarillo, Texas 79105
Johnny E. Mize 4,500 80,598 1.44%
DIRECTOR, PRESIDENT AND CEO
P.O. Box 31780
Amarillo, Texas 79120
Charles Scott Gilmour - 12,220 .21%
DIRECTOR AND VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
- ----------
(1) Includes 11,200 Partnership Units registered in the name of
Mr. Sherman's wife.
(2) Includes 10,000 General Partner Shares registered in the name of
Mr. Richardson's wife.
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<PAGE>
No. of CSC No. of
Shares Bene- Units Bene- Percentage
Name and Address ficially ficially of
of Beneficial Owner Owned Owned Ownership
- ------------------- ------------ ----------- ---------
John S. Champlin 8,960 .15%
VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
Michael D. Unruh 20,262(3) .34%
VICE PRESIDENT
P.O. Box 31780
Amarillo, Texas 79120
All Directors and Officers(4) 2,217,948 37.44%(5)
- ----------
(3) Includes 60 Units registered in the name of Mr. Unruh's wife.
(4) Figures do not include Joe Richardson, who is not a director or
officer.
(5) 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.
54
<PAGE>
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
55
<PAGE>
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
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
56
<PAGE>
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 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. Pursuant to the amendment to the Partnership Agreement
that was approved at the Partnership's annual meeting, after the
Reorganization is consummated and upon the winding up and liquidation of
the Partnership, each Limited Partner who does not accept the Exchange
Offer 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.
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.
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<PAGE>
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.
HOLDING COMPANY COMMON STOCK. There will be a limited market for
the sale of the Common Stock.
TRANSFERABILITY.
UNITS. 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.
CSC SHARES. 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. The laws
restrict the number of shareholders to 75 as well as restrict the type
of entity which may own the shares.
HOLDING COMPANY COMMON STOCK. The Holding Company's Common Stock will
be freely transferable by the Shareholders subject only to applicable
securities laws.
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 which will include financial statements
audited by an independent public accountant in accordance with generally
accepted accounting principles.
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
58
<PAGE>
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.
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.
59
<PAGE>
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 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 Partner-
60
<PAGE>
ship 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 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.
61
<PAGE>
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.
62
<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.
63
<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 Nine Months Ended September 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 Nine Months Ended September 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.
The pro forma information also reflects the establishment of a leveraged ESOP.
The ESOP will be a qualified plan designed to invest primarily in the Company's
common stock and provide the plan participants with an ownership interest in
their employer. As a leveraged ESOP, a trust (ESOT) will be established,
pursuant to the ESOP, to borrow money to purchase the Company's common stock.
The ESOT will be authorized to offer to purchase up to ten percent of each
shareholders' common stock and the Company will issue shares previously
authorized but not outstanding.
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
nine-month period ended September 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 September 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
SEPTEMBER 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 $ 5,492 $ - $ 5,492
Trade accounts receivable, net 5,534 - 5,534
Prepaid expenses and supplies 1,642 - 1,642
Current portion of prepaid airline passes 57 - 57
--------- --------- ---------
12,725 - 12,725
Property, plant and equipment, net 5,627 - 5,627
Other assets:
Prepaid airline passes, excluding current portion 41 - 41
Deferred income taxes - 1,023 (a) 1,023
Other, net 105 - 105
--------- --------- ---------
$ 18,498 $ 1,023 $ 19,521
--------- --------- ---------
--------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Interim construction loan $ 2,668 $ (2,668) $ -
Current maturities of long-term obligations 32 1,076 (c) 1,108
Accounts payable 1,034 - 1,034
Accrued expenses 1,626 (132) 1,494
Lease incentive 239 - 239
Deferred income 1,917 - 1,917
--------- --------- ---------
7,516 (1,724) 5,792
Long-term obligations, excluding current maturities - 6,462 (c) 6,462
Lease incentive - noncurrent 249 - 249
Deferred income - noncurrent 117 - 117
Accumulated postretirement benefit obligation 706 - 706
Partners' equity 9,910 (9,910) (b) -
Shareholders' equity - 6,195 (d) 6,195
--------- --------- ---------
$ 18,498 $ 1,023 $ 19,521
--------- --------- ---------
--------- --------- ---------
</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
NINE MONTHS ENDED SEPTEMBER 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 $17,768 - 17,768 $26,031 - 26,031
Installations and programming 2,243 - 2,243 2,407 - 2,407
Computer access and equipment rental fees 2,326 - 2,326 3,583 - 3,583
Special project fees 6,964 - 6,964 12,235 - 12,235
Other 1,666 - 1,666 1,839 - 1,839
------- --------- ------ ------- --------- -------
30,967 - 30,967 46,095 - 46,095
Expenses:
Cost of services 21,833 247(C) 22,080 35,631 301(C) 35,932
Selling, general and administrative 5,825 - 5,825 5,816 - 5,816
------- --------- ------ ------- --------- -------
27,658 274 27,905 41,447 301 41,748
------- --------- ------ ------- --------- -------
Operating income 3,309 (247) 3,062 4,648 (301) 4,347
------- --------- ------ ------- --------- -------
Other income (expense):
Interest income 170 - 170 159 - 159
Interest expense (178) (259)(c) (437) (144) (398)(c) (542)
Other, net 252 - 252 204 - 204
------- --------- ------ ------- --------- -------
244 (259) (15) 219 (398) (179)
------- --------- ------ ------- --------- -------
Earnings before cumulative effect
of change in accounting 3,553 (506) 3,047 4,867 (699) 4,168
Cumulative effect of change in accounting - - - (590) - (590)
------- --------- ------ ------- --------- -------
Net earnings $ 3,553 (506) 3,047 $ 4,277 (699) 3,578
------- -------
------- -------
Income tax expense (975)(a) (975) (1,145)(a) (1,145)
--------- ------ --------- -------
Net earnings (1,481) 2,072 (1,844) 2,433
--------- ------ --------- -------
--------- ------ --------- -------
Net earnings per common share $ 0.38 $ 0.46
Weighted average shares outstanding 5,493 5,313
</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 and related
assumptions:
(a) To provide income taxes and state franchise taxes for the periods
presented, as the Company's income would be subject to taxation. Income
taxes are provided in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109).
The pro forma expense is calculated by applying the expected tax rate of
34% to taxable income. The resulting amount is then adjusted for the
change in the net deferred tax asset between the beginning of the year
and the end of the year. The net deferred tax asset is the result of
temporary differences in the tax bases of assets and liabilities and
their reported amounts in the financial statements. Such temporary
differences are primarily attributed to differences in depreciating
property, plant and equipment, providing for bad debts and accounting
for certain lease transactions between tax and financial reporting
purposes.
(b) To eliminate the existing partners' equity in exchange for Company
common stock for equal value.
(c) To reflect the establishment of the leveraged ESOP through the
purchase of 592,281 shares from existing shareholders financed
through bank debt of $4,738,000. Additionally, shares with a
value equivalent to $2,800,000 will be issued from authorized
shares through the issuance of bank debt. The proceeds received
will be used to pay down the interim construction loan and related
accrued interest.
It is assumed the debt will be payable over seven years and will bear
interest at 9%. Contributions to the ESOP will be partially offset by
all of the contributions currently being made to the Company's existing
profit sharing plan.
(d) To record the initial shareholders' equity resulting from the pro forma
adjustments as follows:
Increase (decrease) in shareholders' equity:
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 $ 9,910
To reflect sale of shares to ESOP 2,800
To reflect unearned ESOP shares (2,800)
To record the initial application of SFAS No. 109
which resulted in the establishment of a net
deferred tax asset 1,023
To record the initial impact of the establishment
of the leveraged ESOP which will be funded by the
issuance of bank debt (4,738)
-------
$ 6,195
-------
-------
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
September 30, 1996 and 1995
The accompanying consolidated financial statements of the Partnership reflect
the financial position as of September 30, 1996 and December 31, 1995 and the
results of operations and cash flows for the nine-month periods ended September
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
September 30, 1996 and December 31, 1995
<TABLE>
September 30, December 31,
ASSETS 1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents, including interest-bearing
assets of $5,300,000 at September 30, 1996 and
$3,200,000 at December 31, 1995 $ 5,492,091 4,343,196
Trade accounts receivable, less allowance for doubtful
accounts of $175,717 at September 30, 1996 and $501,111
at December 31, 1995 5,533,839 6,788,414
Prepaid expenses and supplies 1,641,528 681,106
Current portion of prepaid airline passes 57,350 26,858
------------ ----------
Total current assets 12,724,808 11,839,574
------------ ----------
Property, plant and equipment:
Land and office buildings 4,087,620 4,072,265
Computer equipment 2,405,661 2,233,720
Leased computer equipment under capital leases 733,672 733,672
Furniture and fixtures 2,164,246 1,871,489
Computer software 1,097,284 911,756
------------ ----------
10,488,483 9,822,902
Less accumulated depreciation and amortization (4,861,232) (3,492,357)
------------ ----------
Net property, plant and equipment 5,627,251 6,330,545
------------ ----------
Prepaid airline passes, excluding current portion 40,950 43,066
Other assets, net 105,476 151,342
------------ ----------
$ 18,498,485 18,364,527
------------ ----------
------------ ----------
</TABLE>
F-10
(Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Consolidated Balance Sheets, Continued
<TABLE>
September 30, December 31,
LIABILITIES AND PARTNERS' EQUITY 1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
Current liabilities:
Interim construction loan $ 2,668,088 2,668,088
Current maturities of obligations under capital leases 31,741 95,792
Accounts payable 1,033,622 1,574,492
Accrued expenses:
Employee commissions and bonuses 320,717 694,964
Profit sharing 625,502 682,370
Distributions payable - 940,202
Other 679,785 764,304
Lease incentive 239,166 239,166
Deferred income 1,917,261 1,574,497
------------ ----------
Total current liabilities 7,515,882 9,233,875
------------ ----------
Obligations under capital leases, excluding current maturities - 21,965
Lease incentive - noncurrent 248,708 375,834
Deferred income - noncurrent 117,500 161,563
Accumulated postretirement benefit obligation 706,732 669,864
------------ ----------
Total liabilities 8,588,822 10,463,101
------------
Partners' equity:
General partner 3,889,831 3,080,953
Limited partners 6,019,832 4,820,473
------------ ----------
9,909,663 7,901,426
------------ ----------
Commitments and contingencies ------------ ----------
$ 18,498,485 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
Nine months ended September 30, 1996 and 1995
1996 1995
------------ ----------
(unaudited)
Operating revenues:
Risk management claims administration services $ 17,767,507 15,409,398
Installations and programming 2,243,355 1,110,773
Computer access and equipment rental fees 2,325,425 1,852,040
Special project fees 6,964,347 5,558,368
Other 1,666,370 958,885
------------ ----------
Total operating revenues 30,967,004 24,889,464
Operating expenses:
Cost of services 21,833,175 17,360,285
Selling, general and administrative 5,825,225 3,163,539
------------ ----------
Total operating expenses 27,658,400 20,523,824
------------ ----------
Operating income 3,308,604 4,365,640
------------ ----------
Other income (expense):
Interest income 169,914 81,180
Interest expense (178,213) (92,185)
Other, net 252,036 125,902
------------ ----------
Total other income 243,737 114,897
------------ ----------
Earnings before cumulative
effect of change in accounting for
postretirement benefits 3,552,341 4,480,537
Cumulative effect of change in accounting
for postretirement benefits - (590,000)
------------ ----------
Net earnings $ 3,552,341 3,890,537
------------ ----------
------------ ----------
Net earnings allocated to:
General partner $ 1,608,880 1,786,924
Limited Partners 1,943,461 2,103,613
------------ ----------
$ 3,552,341 3,890,537
------------ ----------
------------ ----------
Earnings per unit before cumulative effect $ .60 .77
Cumulative effect per unit - 10
------------ ----------
Net earnings per unit $ .60 .67
------------ ----------
------------ ----------
Distributions per unit $ .30 .32
------------ ----------
------------ ----------
Average units outstanding:
General partner 2,666,672 2,666,672
Limited partner 3,221,232 3,138,669
------------ ----------
5,887,904 5,805,341
------------ ----------
------------ ----------
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
Nine months ended September 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 1,608,880 1,943,461 3,552,341
Distributions to partners (800,001) (976,843) (1,776,844)
Sale of partnership units (46,548 units) - 232,740 232,740
----------- --------- ----------
Partners' equity, September 30, 1996 $ 3,889,831 6,019,832 9,909,663
----------- --------- ----------
----------- --------- ----------
</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
Nine months ended September 30, 1996 and 1995
1996 1995
---- ----
(unaudited)
Cash flow provided by operating activities $ 4,384,798 2,693,279
----------- ----------
Cash flows used by investing activities - additions
to property, plant and equipment (665,581) (2,107,144)
----------- ----------
Cash flows from financing activities:
Borrowings under interim construction loan - 1,658,135
Principal payments under capital lease obligations (86,016) (170,760)
Principal payments of long-term debt - (583,238)
Distributions to partners (2,717,046) (1,879,064)
Sale of partnership units 232,740 383,416
----------- ----------
Net cash used by financing activities (2,570,322) (591,511)
----------- ----------
Net increase (decrease) in cash 1,148,895 (5,376)
Cash and cash equivalents at beginning of period 4,343,196 3,354,842
----------- ----------
Cash and cash equivalents at end of period $ 5,492,091 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
September 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 September 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
September 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 for services to analyze and contain medical costs associated
with worker's compensation claims. The plaintiff has alleged the
Partnership misrepresented and/or failed to provide quality medical cost
containment services and seeks 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 maintains an errors and omissions insurance policy with coverage
of $5,000,000 per error and $5,000,000 per policy year general insurance.
The Partnership believes such insurance coverage is available to cover 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, liquidity or results of operations.
F-15
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(4) Accounting Pronouncements
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.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION (Statement 123), which
encourages, but does not require, a method of accounting for employee
equity based awards which results in compensation expense being recognized
when awards are granted based on their fair value. Entities which elect
not to adopt the new method for the financial statements are required to
disclose in the notes to the financial statements the pro forma effect on
net income as if the fair value method of accounting had been applied.
The Partnership will continue to account for the equity-based awards using
the requirements of Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and will provide the required
fair value disclosures in the notes to the consolidated financial
statements. Statement 123 is effective for fiscal years beginning after
December 15, 1995.
(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 access and equipment rental fees
(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
<TABLE>
General Limited
partner partners Total
----------- ---------- ----------
<S> <C> <C> <C>
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
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
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
------------ ----------- -----------
------------ ----------- -----------
</TABLE>
(Continued)
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 overnight in U.S. Treasury Notes.
(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.
(l) HEALTH INSURANCE
The Partnership self-insures group health care for employees up to
$50,000 in claims per employee each year. The Partnership's provision
for such claims includes the estimate of the ultimate costs for both
reported claims and claims incurred but not reported. Claims expense
was approximately $840,000, $1,154,000 and $759,000 in 1995, 1994 and
1993, respectively.
F-27 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(m) 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.
(n) 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
--------- ------- -------
--------- ------- -------
The credit provision of $478,075 reflected during 1995 was primarily
attributed to the full collection of an individual account receivable
totaling approximately $376,000 which was fully reserved during 1994 due to
significant uncertainties surrounding its collection and the recovery of
certain other accounts receivable during 1995 that had been charged-off
during 1994.
(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.
F-28 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(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.
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:
Capital Operating
leases leases
-------- ---------
Year ending December 31:
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
--------
--------
F-29 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
Certain computer equipment leased by the Partnership under long-term leases
is subleased to its customers on a month-to-month basis.
(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
F-30 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
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.
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.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, ACCOUNTING FOR STOCK BASED COMPENSATION (Statement 123), which
encourages, but does not require, a method of accounting for employee
equity based award which results in compensation expense being recognized
when awards are granted based on their fair value. Entities which elect
not to adopt the new method for the financial statements are required to
disclose in the notes to the financial statements the pro forma effect on
net income and earnings per share as if the fair value method of accounting
had been applied. The Partnership will continue to account for the equity-
based awards using the requirements of Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and will provide the
required fair value disclosures in the notes to the consolidated financial
statements. Statement 123 is effective for fiscal years beginning after
December 15, 1995.
(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.
F-31 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
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
--------
--------
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.
F-32 (Continued)
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
(a Texas limited partnership)
Notes to Consolidated Financial Statements
(9) CONTINGENCIES
The Partnership is a defendant in a lawsuit alleging nonperformance relating
to a contract for services to analyze and contain medical costs associated
with worker's compensation claims. The plaintiff has alleged the
Partnership misrepresented and/or failed to provide quality medical cost
containment services and seeks 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 maintains an errors and omissions insurance policy with coverage
of $5,000,000 per error and $5,000,000 per policy year general insurance.
The Partnership believes such insurance coverage is available to cover 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, liquidity or results of operations.
(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>
ANNEX A
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
G - 1
<PAGE>
Partner that sets forth the terms of the
Reorganization.
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>
Annex B
[LETTERHEAD]
NOVEMBER 27, 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.
T-1
<PAGE>
STRASBURGER & PRICE, L.L.P.
NOVEMBER 27, 1996
PAGE 2
- ------------------------------
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" 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.
T-2
<PAGE>
STRASBURGER & PRICE L.L.P.
NOVEMBER 27, 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: /s/ JACK DUGAN
---------------------------
Jack Dugan
T-3
<PAGE>
CERTIFICATE OF CORPORATE SYSTEMS, LTD.,
CORPORATE SYSTEMS HOLDING, INC., AND
CSC GENERAL PARTNER, INC. IN CONNECTION
WITH OPINIONS OF COUNSEL
To: Strasburger & Price, L.L.P.
901 Main St., Suite 4300
Dallas, Texas 75202
Re: Plan of Exchange; Transfers to New Holding Company
- -----------------------------------------------------------------------------
On behalf of Corporate Systems, Ltd., a Texas limited partnership (the
"Partnership"), and its general partner, CSC General Partner, Inc., a Texas
corporation (the "Operating Company"), the Board of Directors of the Operating
Company has approved 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 Operating Company ("Operating Stock") to be transferred to the
Holding Company by the holders of Operating Stock that accept the Exchange Offer
(the "Transferring Shareholders"), 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 that accept the Exchange Offer (the
"Transferring Limited Partners"). The transfers to the Holding Company of (i)
the shares of Operating Stock by the Transferring Shareholders, and (ii) Units
by the Transferring Limited Partners, 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.
1
<PAGE>
The Exchanges would be carried out pursuant to the terms of the Plan of
Reorganization dated as of July 2, 1996 (the "Plan") 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").
You have been asked to render certain opinions regarding the Federal income
tax consequences of the proposed Exchanges. In connection with such opinions,
and recognizing that you will rely on this letter in rendering said opinions,
the undersigned, duly authorized officers of the Partnership, the Holding
Company, and the Operating Company, and acting as such, hereby certify that, to
the best knowledge of the management of the Partnership, the Holding Company,
and the Operating Company, the facts relating to the Exchanges as described in
the prospectus included as part of the Registration Statement (the
"Prospectus"), including attachments thereto, are true, correct, and complete in
all material respects and hereby certify, to the best knowledge of the
management of the Partnership, the Holding Company, and the Operating Company,
to the following as of the date hereof. Except as otherwise provided herein,
each capitalized term used in this Certificate shall have the meaning assigned
to such term in the Plan of Exchange. Insofar as such certification pertains to
any person other than the Partnership, the Holding Company, or the Operating
Company, such certification is only as to the knowledge of the undersigned
without specific inquiry. We understand that you will reaffirm your opinions at
the time of the incorporation, and that, in connection with such reaffirmation,
you will require that we reaffirm this certification as of such time.
1. The Exchanges will be consummated in compliance with the material
terms of the Plan, none of the material terms and conditions of the Plan
have been waived or modified, and the Partnership, the Holding Company, and
the Operating Company have no plan or intention to waive or modify any such
material condition.
2. The Operating Stock transferred to the Holding Company in the
Exchanges will not be subject to any liabilities, and the Holding Company
will not assume any liabilities in connection with such transfers of
Operating Stock.
2
<PAGE>
3. The Units transferred to the Holding Company in the Exchanges
will not be subject to any liabilities, and the Holding Company will not
assume any liabilities in connection with such transfers of Units.
4. Except for the Holding Stock issued to the Transferring
Shareholders and the Transferring Limited Partners in the Exchanges, no
other stock will be issued by the Holding Company at the time of the
Exchanges. Furthermore, no Holding Stock will be issued for services
rendered to or for the benefit of the Holding Company in connection with
the Exchanges.
5. At the time of the Exchanges, the Limited Partnership will have
no nonrecourse liabilities. A Partnership liability is a nonrecourse
liability to the extent that no partner or related person, as defined in
Treas. Reg. Section 1.752-4(b) (1991), bears the economic risk of loss for
that liability under Treas. Reg. Section 1.752-2 (1991).
6. Immediately after the Exchanges, the Transferring Shareholders
and the Transferring Limited Partners, considered together as a group, will
own all of the issued and outstanding shares of the capital stock of the
Holding Company.
7. The managements of the Partnership, the Holding Company and the
Operating Company have no knowledge of any agreement or binding commitment
under which any Transferring Shareholder or Transferring Limited Partner
would dispose of, by sale, exchange, transfer by gift, or any other type of
disposition, any shares of Holding Stock to be received in the Exchanges.
8. Considering that (i) the Holding Company plans to adopt an
employee stock ownership plan ("Stock Plan") at some point after the
Exchanges, and (ii) such Stock Plan may offer to purchase from the
shareholders of the Holding Company up to 10% of the outstanding shares of
the Holding Stock, except for some or all of the Transferring Shareholders
and the Transferring Limited Partners possibly accepting such an offer, the
managements of the Partnership, the Holding Company and the Operating
Company know of no plan or intention by any Transferring Shareholder or any
Transferring Limited Partner
3
<PAGE>
to sell, exchange, transfer by gift, or otherwise dispose of any of the
shares of Holding Stock to be received by them in the Exchanges.
9. Taking into account (i) any issuance of shares of Holding Stock
for services, (ii) the exercise of any stock rights, warrants or
subscriptions with respect to shares of Holding Stock, (iii) the sale,
exchange, transfer by gift, or other disposition of Holding Stock to be
received in the Exchanges, and (iv) the prospect that, after the Exchanges,
the Stock Plan will offer to purchase from the Holding Company up to
400,000 authorized but unissued shares of Holding Stock, the Transferring
Shareholders and the Transferring Limited Partners, considered together as
a group, will be in control of the Holding Company, within the meaning of
Section 368(c) of the Internal Revenue Code. Section 368(c) defines
control as owning stock possessing at least 80% of the combined voting
power of all classes of voting stock and at least 80% of the total number
of shares of all classes of non-voting stock.
10. Except for (i) the shares of Holding Stock to be issued in the
Exchanges, and (ii) the prospect that the Stock Plan will purchase from the
Holding Company up to 400,000 authorized but unissued shares of Holding
Stock, the Holding Company has no other plan or intention to issue any
additional shares of its stock.
11. Each of the parties to the Exchanges will pay his, her or its own
expenses, if any, incurred in connection with the Exchanges. For this
purpose, a Transferring Shareholder's or Transferring Limited Partner's own
expenses shall refer to expenses such as such party's investment or estate
planning fees, personal legal, accounting, investment advisory or tax
advisory fees in evaluating whether to participate in the Exchanges.
12. The Holding Company has no plan or intention to redeem or
reacquire any shares of Holding Stock issued to the Transferring
Shareholders and the Transferring Limited Partners in the Exchanges.
13. After the Exchanges, the Holding Company will remain in existence
as a holding company and retain the stock of
4
<PAGE>
Corporate Systems, Inc., the successor to the Operating Company.
14. No plans exist for the Operating Company to be merged with or
liquidated into the Holding Company, nor for the assets and business
operations of either entity to be combined or consolidated with those of
the other.
15. Valid business reasons, other than federal tax considerations,
exist for the continued separate existence of both the Holding Company and
the Operating Company, including without limitation the desire to protect
the assets of the Holding Company from the potential claims of creditors of
the Operating Company.
16. Immediately prior to the merger of the Operating Company with and
into the new Nevada corporation to be named Corporate Systems, Inc. (the
"Reincorporation Merger"), the adjusted basis and fair market value of the
assets to be transferred to the new Nevada corporation in such merger will
be equal to or exceed the sum of the liabilities to be assumed by the new
Nevada corporation in such merger plus any liabilities to which the
transferred assets are subject.
17. The liabilities of the Operating Company to be assumed to by the
new Nevada corporation in the Reincorporation Merger were incurred in the
ordinary course of business and are associated with the assets to be
transferred.
18. In rendering your opinions, you are authorized to rely on the
descriptions in the Registration Statement, and each of the representations
and warranties made by the Partnership, the Holding Company, and the
Operating Company in the Plan and in this Certificate. In rendering your
opinions, you are further authorized to rely on all representations and
warranties made by the Shareholders and the Limited Partners in their
respective Subscription Agreements.
5
<PAGE>
Executed November 27, 1996.
"PARTNERSHIP"
CORPORATE SYSTEMS, LTD
By:
-------------------------------
Its:
-------------------------
"OPERATING COMPANY"
CSC GENERAL PARTNER, INC.
By:
-------------------------------
Its:
-------------------------
"HOLDING COMPANY"
CORPORATE SYSTEMS HOLDING, INC.
By:
-------------------------------
Its:
-------------------------
6
<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 (i) Software License, Development Services and Maintenance
Agreement between Partnership and Hartford Fire Insurance
Company (Redacted for Confidentiality)*
10 (ii) CS-MCM Management System Agreement for Computer Services
between Partnership and Travelers Insurance Company (Redacted
for Confidentiality)*
10 (iii) Agreement for Information Management Services between AEtna
Casualty and Surety Company, AEtna Technical Services, Inc.
and Partnership (Redacted for Confidentiality)*
10 (iv) Commitment from Amarillo National Bank for ESOP Loan
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
* Filed herewith
(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 DECEMBER 6, 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)
December 6, 1996
II-3
<PAGE>
INDEX TO 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 (i) Software License, Development Services and Maintenance
Agreement between Partnership and Hartford Fire Insurance
Company (Redacted for Confidentiality)*
10 (ii) CS-MCM Management System Agreement for Computer Services
between Partnership and Travelers Insurance Company (Redacted
for Confidentiality)*
10 (iii) Agreement for Information Management Services between AEtna
Casualty and Surety Company, AEtna Technical Services, Inc.
and Partnership (Redacted for Confidentiality)*
10 (iv) Commitment from Amarillo National Bank for ESOP Loan
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
<PAGE>
EXHIBIT 10(i)
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
By and Between
Corporate Systems Ltd.
and
Hartford Fire Insurance Company
* Certain portions of this contract have been redacted for confidentiality.
Redacted portions are marked [ ]. The registrant has filed the redacted
portions with the SEC as required pursuant to Rule 406.
<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. The purchase price will be [ ] with CS
for maintenance of the System [ ] 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
[ ] Material redacted for confidentiality
<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 CS will provide Hartford with telecommunications access to any CS
system that Hartford requires pursuant to the terms and conditions
of this contract. In the event that Hartford should request that CS
put in a telecommunications line, there will be an additional
reasonable charge agreed upon by both Parties in advance. Hartford
reserves the right to provide at its own expense private leased
line facilities connecting to and communicating with CS systems.
CS will provide space, power and environmental requirements for
Hartford's telecommunications equipment at the CS location.
CS will allow vendors who have maintenance contracts with Hartford
access to Hartford equipment located at CS sites during hours of
operation.
4.2 Hartford and CS will be jointly responsible for establishing and
maintaining the electronic interfaces necessary for the transmission
of required data, including but not limited to payment record and
claim rates data between Hartford's claim system and the MCM System.
These interfaces and the joint capacity to transmit and receive the
data to support the medical bill processing activities will allow
for: (i) the daily transmission of basic claim data elements from
Hartford's systems to the CS data-processing system and (ii) the
daily transmission of the completed medical payment transactions
from CS's data-processing system to Hartford's claim systems.
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. The
Parties shall mutually agree in advance to the cost of such
Disaster Plan, but if Hartford does not agree with the cost,
Hartford shall have the right to cancel this 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.
8
<PAGE>
SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
- --------------------------------------------------------------------------------
(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 Hartford shall provide CS with Hartford's user requirement
specifications for the Custom Programming which shall be included
as part of Schedule B. CS shall analyze such Specifications and
respond to Hartford with a written plan within a reasonable time
period as mutually agreed to by CS and Hartford. If the complexity
of the proposed Customization allows, the design specifications
(the rough documentation from a technical perspective) will be
delivered at the same time. Stages and tasks in the development
and implementation of the specifications and associated costs,
if any, with respect to each Customization, together with time
frames in which such stages and tasks are to be completed will
be established jointly by CS and Hartford and will be set forth
from time to time in Supplements to Schedule B. The software
Development Services to develop Customizations covered in each
such Supplement shall be referred to as a Project. The Parties
shall agree in advance of commencement of work on any one Project
whether the Customizations shall be free of charge or subject
to a charge and shall specify this information in the applicable
Supplement to Schedule B for such Project. CS will routinely
keep Hartford advised of the status of the Project while being
programmed and will notify Hartford when the Customization is
ready for testing. After the completion of all testing and
correction the parties will agree on a time frame for installation
of the Customization. CS will complete documentation of the
Customization and deliver it to Hartford prior to such
installation. CS agrees not to commence work on any Project
until such time as Hartford has given prior written approval
of both the time schedule as well as any associated costs as
specified in Schedule O.
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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. Upon Hartford's
receipt of notice from CS that an Integrated Customization is
ready to be tested, Hartford shall have the option to test the
Integrated Customization together with CS at the CS Computer
Facility, in accordance with the Documentation within ten (10)
days of receipt of notice from CS. The test of such Integrated
Customization shall be in accordance with the standards set forth
in Section 5.8.1 above and in this Section 5.8.2 to ensure that
such Integrated Customization performs in accordance with the
Specifications and meets the following Performance Criteria: (i)
it does not adversely affect the capabilities of the current
accepted Release of the MCM System; and (ii) that the Integrated
Customization, as an individual program and together with the
current accepted Release of the MCM System functions as a
totality and performs in accordance with the Specifications in
Schedule B and operates with internal consistency. If, at such
test, Hartford discovers that the Integrated Customization does
not perform in accordance with the Specifications and/or does not
meet the Performance Criteria, Hartford shall notify CS. Hartford
will provide a written evaluation of the Integrated Customization
with the results of such Acceptance Test. The necessary changes
to assure that the Release, which includes the Integrated
Customization, performs in accordance with the Specifications and
the Performance Criteria shall be prioritized by both Parties and
shall be completed in accordance with a mutually agreed-upon time
schedule set forth in the Supplement to Schedule B for such
Project. After its receipt of the corrected Integrated
Customization, and the current Release of the MCM System if
appropriate, together with all necessary Documentation, Hartford,
in accordance with the time frames in the Supplement to Schedule B
for such Project, 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 Integated 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.
5.8.3 ON-GOING ACCEPTANCE TESTING OF EACH RELEASE. With respect to each
and every new Release which Hartford exercises its option to
acceptance test, Hartford shall have thirty (30) days (unless a
longer time period has been mutually agreed to by the Parties) to
test such Release, either at the CS Computer Facility or from a
Hartford location to the CS Computer Facility via
telecommunications, in accordance with the standards for the
Acceptance Tests set forth in Section 5.8.1 and 5.8.2 and the
following Performance Criteria: (i) All capabilities are carried
forward from the prior accepted Release; (ii) there are no
regressions from such prior accepted Release and (iii) that the
Release, as a totality and with components, performs in
accordance with the Specifications in Schedule B and operates with
internal consistency. If, during this period, Hartford discovers
that such new Release does not meet said Performance Criteria,
Hartford shall notify CS. Hartford will provide a written
evaluation of such Release to CS with the results of such
Acceptance Test. The necessary changes to assure that this
Release meets said Acceptance Test standards and said Performance
Criteria shall be prioritized by both Parties and shall be
completed within fifteen (15) days (unless a longer time period
has been mutually agreed upon by both Parties). After receipt of
the corrected Release and all related Documentation, Hartford
shall have ten (10) days (unless a longer time period has been
mutually agreed upon by both Parties) to conduct the Acceptance
Test. Any such Release 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, made between
the time reported and the agreed upon sign off time, or (iii) if
the necessary changes, as determined by Hartford, which must be
compatible with prior Releases, are scheduled, with Hartford's
prior approval, for the next Release or a specified future date.
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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.
5.9.1 CS will routinely advise Hartford on the status of general MCM
Enhancements, [as well as any changes to the Operating System,]
which are being programmed and will give Hartford a timeline on
all major developments and Enhancements being planned. CS will
notify Hartford weekly of all Enhancements which are currently
being tested. Depending on the complexity of the project and
particularly the impact on end-users of the MCM System, CS will
deliver to Hartford documentation for all Enhancements from one
(1) to thirty (30) days prior to installation of the
Enhancements. The parties will agree on a time frame for such
installation.
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 of all problems under this Section 7.2.2 to assure that
the MCM System and/or Customizations conform to the Specifications
in Schedule D and/or Schedule B shall be provided to Hartford by
CS as follows:
(i) For all problems that prohibit the entire MCM System or a
Customization from operating - two (2) hours following receipt of
notice from Hartford;
(ii) for all problems which cause the hardware to hang or cause a
complete function of the MCM System to fail or to cause an
Application Failure - four (4) hours following notice thereof by
Hartford to CS;
(iii) for all problems which cause the MCM System or Customization
to produce significant erroneous data - eight (8) hours following
said notice; and
(iv) for all problems (other than those which come under
subsections (i), (ii) and (iii) of this Section 7.2.2.1) which
cause a feature of a function to fail, which can be avoided by a
procedural change, or which are cosmetic or otherwise trivial in
nature - thirty (30) days following said notice.
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 Enhancements shall be provided to Hartford no less frequently than
quarterly. A maintenance schedule for CS installation of the new
Enhancements and Releases within thirty (30) days of the issuance
of the Enhancement or Release will be adhered to. Furthermore, CS
will provide Hartford with further specifics in the maintenance
schedule and will advise in detail of the impact of each Enhancement
on the MCM System.
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 CS agrees to include all PPOs and HMOs specified in Schedule L,
attached hereto and incorporated herein by reference and as it
may be changed from time to time. CS will load each PPO and HMO
file and will integrate each such PPO and HMO processing into the
adjudication process in accordance with the contractual
arrangements between Hartford and each such PPO and HMO. CS will
verify that the PPO and HMO discounts and fee arrangements are
being processed in accordance with each such Hartford-PPO/HMO
agreement. In order to fulfill this requirement, CS will
establish the appropriate interface software to receive the
PPO/HMO file data, maintenance updates and PPO/HMO adjudicated
data, if appropriate, from each PPO/HMO and will return the
appropriate information to each PPO/HMO.
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 Hartford shall participate in the establishment of the MCM System
priorities and in the continued design evolution of the MCM System
process. CS agrees to provide Hartford with an updated MCM System
project/priorities list on a monthly basis. The basis of Hartford's
participation in the process will be proportionate to the use of
the MCM System by Hartford in relation to the use of the MCM
System by other users, measured by the number of invoices processed
by each user on the MCM System.
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
[ ] Material redacted for confidentiality
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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 It is the express intention of the Parties that CS is an
independent contractor and not an employee, agent, joint venturer
or partner of Hartford. CS warrants and represents that it has
complied, is in compliance with, and covenants that during the
term of this Agreement, CS will comply with all laws, rules
and regulations required by appropriate government authorities of
independent contractors.
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 CS represents, warrants and covenants that during the course of this
Agreement it will be solely responsible for the withholding and
payment of all employment-related taxes, including, but not limited
to, Workers' Compensation, disability and unemployment insurance.
CS represents, warrants, and covenants that with respect to all CS
employees assigned to perform services under this Agreement, it
will comply with all state, local and federal laws, statutes and
regulations relating to employment. CS agrees to defend, indemnify
and hold harmless Hartford and its employees from any and all loss,
costs, damages, expenses or liabilities (including attorney's fees),
arising out of the breach of the provisions of this Section 10 and
all subsections thereto by CS.
10.1.8 Upon Hartford's request, CS shall provide Hartford, within thirty (30)
days of said request, proof in a form reasonably requested by
Hartford that as an employer of such employees as are assigned to
provide Services pursuant to this Agreement, CS has complied with
all laws, rules, and regulations applicable to an employer,
including appropriate tax withholding and filings and payments for
all insurance, including but not limited to, employment related
taxes, workers' compensation, disability and unemployment insurance
for CS and CS's employees.
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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 CS will indemnify and hold harmless Hartford and its employees,
from any and all loss, costs, damages, expenses and liabilities
(including attorney's fees) with respect to: (a) any injury to,
or death of any employee of CS while such person is present on the
premises of Hartford; and (b) any damage to CS property or that of
any of its employees which may occur while at the premises of
Hartford, unless and except to the extent that such injury, death,
loss or damage is caused by the negligence or willful misconduct
of Hartford, its employees or agents.
10.1.11 CS will indemnify and hold harmless Hartford and its employees
from any and all loss, costs, damages, expenses and liabilities
(including attorney's fees) by reason of personal injury or
property damage of whatsoever nature or kind arising, in whole
or in part, out of, as a result of, or in connection with the
acts or omissions of CS or CS Personnel. Furthermore, CS agrees
to maintain comprehensive general liability insurance and any
other appropriate insurance covering CS's obligations contained
herein.
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 CS agrees that it will provide Hartford with all Documentation
for the MCM System (including all Releases thereof) and
Customizations before or at the same time as the MCM System
and any Customizations have been installed and placed in
production at the CS Computer Facility. Documentation for
Enhancements will be provided at least quarterly.
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 CS warrants that it will accumulate all data necessary for
regulatory agency reporting, and comply, on behalf of Hartford,
with all state requirements for reporting medical payments. Said
reports are to be filed electronically where feasible and manually
where not, in formats approved by the regulatory agencies.
12.12.3 CS warrants that new requirements/form types will be incorporated
into the MCM System and Customizations, as appropriate, by the
effective date of requirement or at least no later than 30 (thirty)
days whenever reasonably possible from notification in the event
that the notification period does not allow for implementation on
the effective date.
12.12.4 CS warrants that the MCM System can fulfill the regulatory
reporting requirements of Florida, Texas, and Oregon. CS will
review and evaluate each additional state as requirements become
available and will exert reasonable efforts to cause the MCM
System to support automated compliance with such additional state's
repricing and reporting requirements.
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 If errors not attributable to Hartford, shall result in the
imposition of State penalties against Hartford, CS shall reimburse
Hartford for the total amount of such penalties.
13.2 CS warrants that the repricing is correct and is in accordance with
the applicable rules and regulation 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 Hartford. This
warranty covers only those fee schedules and repricing rules of the
States which CS maintains in its MCM System.
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13.3 CS agrees to employ due care and attention in processing medical
claims according to the terms of this Agreement. CS 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 Hartford due directly
to actions or information supplied by CS to Hartford. CS shall
indemnify, defend with counsel of Hartford's choice, and hold
harmless Hartford from and against all claims, losses, costs,
expenses or other liabilities, including reasonable attorney's
fees, that Hartford shall incur or suffer arising out of or
resulting from such negligence or willful misconduct by CS. The
extent of CS's liability to Hartford for the purposes of this
Seciton 13 shall be no more than the policy limits of all
applicable CS insurance policies, if such liability is covered by
insurance, and, if not, no more than $1,000,000 during any
consecutive twelve-month period.
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 CS shall secure and maintain, at all times during the course of
this agreement, comprehensive general liability insurance and
professional liability and/or malpractice or errors and omissions
insurance in the amount of at least $1,000,000 per occurrence,
$5,000,000 aggregate, to cover all responsibilities and obligations
of indemnity of CS under this Agreement. CS will designate
Hartford as an additional insured. CS will notify Hartford at
least thirty (30) days in advance before amending, modifying,
replacing, terminating or permitting to lapse without renewal any
such insurance in order to maintain the terms of this Agreement.
13.5.1 CS will also add Hartford as a loss payee on its property insurance
coverage so that CS's property insurer shall indemnify Hartford for
the costs of restoring any of Hartford's data and records which are
maintained on CS's premises.
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 CS shall update the Source Code and Documentation at least every
(4) four months and provide DSI with the updated Source Code and
Documentation.
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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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.
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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 CS agrees that it will not use data, materials, or information for
any purposes other than for the processing of medical claims
pursuant to this Agreement, except that (i) CS may provide blind
medical bill data to third party technology vendors and (ii) CS may
use the data on a blind or anonymous basis, aggregated with all of
CS's other data, for CS product development studies and marketing.
CS agrees that if CS uses any of this data for marketing purposes,
CS will provide Hartford with related marketing materials.
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.
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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 CS and Hartford will conduct an intensive investigation of software
costs to ascertian a realistic cost structure for the MCM System.
This investigation will include a base-line assessment of
non-computer costs in the CS Service Centers. Similarly,
Hartford's Information Management organization will work with CS to
determine the cost of executing OS software in Hartford's data
center, including but not limited to: (i) an assessment of software
leasing costs of non-CS software, such as database software; (ii)
special adaptations to Hartford's operating environment, if needed;
and (iii) such other costs as are indentified by Hartford. In
order to conduct this assessment, Hartford will be provided with
access to CS's Resource Management Facility ("RMF") and System
Management Facility ("SMF") data sets and with data regarding CS's
on-line and batch transaction volumes and response time. This
continuing assessment will be done no more frequently than once
each calendar year.
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.
[ ] Material Redacted for Condidentiality
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17.3 Hartford agrees to reimburse CS for any reasonable travel and
accommodation expense incurred by CS directly related to training
and consulting services hereunder, but only if such expenses have
been approved in writing in advance by Hartford. CS agrees to send
to Hartford a detailed monthly report stating the expenses incurred
to date, who performed the work, the date the work was performed
and the type of work performed, accompanied by actual receipts.
Hartford agrees to reimburse CS for such expenses within thirty
(30) days of its receipt of such report.
17.4 The prices set forth in the attached Schedule O do not include
sales taxes. Hartford agrees to pay CS in a timely manner the
amount of any such taxes which CS is required to collect, unless
Hartford provides CS with an exemption certificate or other form of
documentation as may be required by state law which would have the
effect of alleviating CS's duty to collect some part or all of such
tax, or provides CS with appropriate rights to indemnification to
have CS not collect some part or all of such tax. Hartford shall
have no obligations to CS for any other taxes, including franchise,
income or occupational taxes, which are not specifically levied on
the individual transactions herein contemplated, nor for any
interest or penalties resulting from anything but the gross
negligence or willful misconduct of Hartford.
17.5 CS represents and warrants that the amounts of any charges for the
MCM System and/or the Services provided by CS to Hartford hereunder
shall be no greater than the lowest comparable price, and that the
terms and conditions hereof are no less favorable to Hartford than
those at which CS from time to time offers to provide or provides
to other customers for the MCM System and/or any such related
services which are reasonably comparable in volume and scope. In
the event that during the term of this Agreement, CS provides to
another party the MCM System and/or any such related services which
are reasonably comparable in scope or lower in volume than those
included herein, at a price less than that charged to Hartford
hereunder or on terms or conditions more favorable to another party
than hereunder provided, then CS shall immediately inform Hartford
in writing and this Agreement shall automatically be amended to
provide such prices and terms and conditions to Hartford beginning
with the next billing month.
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.
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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.
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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.
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19.6 OBLIGATIONS UPON TERMINATION
19.6.1 Upon termination of this Agreement, in whole or in part, CS agrees
that it will, as a part of the services to be provided under this
Agreement, and at no extra cost or expense to Hartford except as
noted below, fully cooperate and assist Hartford in making an
orderly transition so that the services provided by CS under this
Agreement may be provided directly by Hartford or by another
contractor designated by Hartford. CS's cooperation and assistance
under this Agreement shall include, but not be limited to, the
following:
(i) Train Hartford's staff and/or the staff of a Hartford
contractor, upon request by Hartford, with pre-approved
reasonable training costs and travel expenses to be billed
to Hartford at CS's then current rates;
(ii) Deliver to Hartford, upon its written request, of all written
records maintained by CS in connection with the services
provided to Hartford under this Agreement, with any reasonable
costs of reproduction or shipping to be billed to the Hartford;
(iii) Deliver to Hartford, upon its written request, any and all
computerized data in the formats specified by Hartford, with
any reasonable direct costs associated with reprogramming
and/or data preparation based on Hartford requirements and
shipping will be billed to Hartford.
19.7 LIQUIDATED DAMAGES
19.7.1 In the event of the occurrence of any of the following events, CS
acknowledges that Hartford will have sustained damage and therefore
CS agrees to pay Hartford, within thirty (30) days of CS's receipt
of Hartford's notice therefor, the dollars specified below, which
shall constitute liquidated damages, not penalties:
(i) BREACH OF ON-LINE AVAILABILITY. In the event that online
availability for a given month falls below the minimum
requirement [ ].
(ii) SYSTEM RESPONSE TIME. CS will provide the System response time
in accordance with the commitment specified in Schedule J. In the
event that systems response time for a given month falls below
the [ ] time as specified in
Schedule J, [ ].
(iii) FAILURE BY CS TO IMPLEMENT DISASTER RECOVERY PLAN. In the event
CS fails to implement or to execute the Disaster Recovery Plan in
accordance with Section 4.7 above, CS shall refund Hartford for
the total amount paid for the cost of Disaster Recovery as
specified in Schedule O. Said amount shall be payable within
thirty (30) days of the on-set of the disaster.
[ ] Material redacted for confidentiality
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(iv) FAILURE TO COMPLY WITH SECTION 12.12. In the event that CS fails
to comply with the provisions in Section 12.12 above, CS shall:
(a) Reprocess free of charge all invoices that were not
processed in compliance with the state's requirements.
Such reprocessing shall include all the activities
required to adjudicate each such invoice.
(b) FAILURE TO MEET AGREED UPON TIME SCHEDULE FOR SOFTWARE
DEVELOPMENT. CS will [ ] for the
Software Development Project at issue [ ]
provided that the delay was solely caused by CS.
20.0 RELATIONSHIP BETWEEN THE PARTIES
20.1 In order to assure the efficient implementation of the efforts
hereunder, a close relationship must be established between CS and
Hartford. CS and Hartford will maintain a responsive working
relationship at all times by maintaining strict adherence to the
established communications channels.
20.2 Each of the Parties will act as an independent contractor under the
terms of this Agreement and neither is now, or in the future, an agent
or a legal representative of the other for any purpose. Neither Party
has any right or authority to supervise or control the activities of
the other Party's employees in connection with the performance of this
agreement or to assign or create any application of any kind, express
or implied, on behalf of the other Party or to bind it in any way, to
accept any service of process upon it or to receive any notice of any
nature whatsoever on its behalf.
20.3 [THIS SECTION INTENTIONALLY OMITTED]
20.4 EXECUTIVE REVIEW
20.4.1 CS and Hartford shall adhere to the following internal escalation
procedures within CS and Hartford in order to expeditiously resolve
any problems arising while this Agreement is in effect: (i) One
individual who is authorized to speak for each Party will be nominated
and will attempt to resolve the problem; and (ii) if a resolution is
not reached between these individuals within two (2) days after
referral to them of the problem, the dispute shall be escalated to
Executive Review as specified in Section 20.4.2 below.
20.4.2 Executive Review shall be conducted as follows: Within thirty (30)
days of any Party's request for Executive Review, an executive level
employee of each Party shall be designated by the Party to meet with
his counterpart to attempt to settle the dispute. Initially, the
designee of CS is MIMI WAYNE and the designee of Hartford is ANTHONY
RETARTHA. If said executives are unable to resolve the dispute, then,
within ten (10) days of the conclusion of said first level of
Executive Review, either Party may request that the problem be
escalated to a second level of Executive Review. Within ten (10) days
of any Party's request for said second level of Executive Review, the
Chief Executive Officer, or Chairman of the Board of CS and the head
of Hartford's Information Management Department shall meet to attempt
to settle the dispute. Initially, the designee of CS for such second
level is JOHNNY MIZE and the designee of Hartford is JACK CRAWFORD.
[ ] Material redacted for confidentiality
31
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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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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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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.
33
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SOFTWARE LICENSE, DEVELOPMENT SERVICES AND MAINTENANCE AGREEMENT
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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: /s/ BY: /s/
---------------------------- ---------------------------
(Authorized Signature) (Authorized Signature)
Calvin Hudson Johnny Mize
---------------------------- ---------------------------
(Name) (Name)
Assistant Vice President President and CEO
---------------------------- ---------------------------
(Title) (Title)
34
<PAGE>
EXHIBIT 10(ii)
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 CS + Managed Care 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 CS + Managed Care 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 CS + Managed Care System
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
December 21 of 1992, the Pilot Implementation phase, Exhibit C, of the
Agreement shall begin on January 25, 1993. 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. Prior to this, the parties shall
by mutual agreement determine the total development costs. 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.
* Certain portions of this contract have been redacted for confidentiality.
Redacted portions are marked [ ]. The registrant has filed the redacted
portions with the SEC as required pursuant to Rule 406.
<PAGE>
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 3 years 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 180 days written
notice. If neither party exercises its option to terminate, this Agreement
shall continue in successive 1 year terms 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 labor, computer time, printing, shipping, and expenses
reasonably incurred for travel and lodging as well as art services,
mailing or delivery expenses, shall be paid by Customer on a time
and/or material basis.
C. Invoices requesting payment for items described in Exhibit B and
subsection B above will be sent to Customer for goods and services
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, one and one-half (1-1/2%) percent interest is
charged monthly [eighteen 18% percent annually] from invoice 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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<PAGE>
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 other ninety (90) days prior
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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<PAGE>
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. [ ]
[ ] Material Redacted for Confidentiality
-4-
<PAGE>
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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<PAGE>
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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<PAGE>
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
Attn: Lana Pentore
One Tower Square - 1GS
Hartford, Connecticut 06183-9076
cc to: Michael Costigar
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:
7:00 a.m. to 10:00 p.m., EST Monday - Friday
7:00 a.m. to 5:00 p.m., EST Saturday
No access on Sunday, and the following holidays observed by Customer.
These include New Year's Day, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas.
Questions by Customer's Customer Services Representatives about the
system's availability shall be answered by CS Network Operations
representatives during the access hours stated above via a toll free
"800" number, which CS will provide to Customer.
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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Accepted : Accepted:
THE TRAVELERS INSURANCE COMPANY CORPORATE SYSTEMS, LTD ("CS")
By: CSC GENERAL PARTNER, INC.
Signature: /s/ Michael R. Costigar Signature:
------------------------ ----------------------
Name: Michael R. Costigar Name: Johny Mize
---------------------------- ---------------------------
Title: Vice President Title: President
--------------------------- --------------------------
Date: 2/24/93 Date: 2-19-93
---------------------------- ---------------------------
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<PAGE>
EXHIBIT 10(iii)
AGREEMENT FOR INFORMATION MANAGEMENT SERVICES
BETWEEN
THE AETNA CASUAL AND SURETY COMPANY,
AETNA TECHNICAL SERVICES, INC.
AND
CORPORATE SYSTEMS
AGREEMENT NO.
----------
DATED December 16, 1987
-----------------
* Certain portions of this contract have been redacted for confidentiality.
Redacted portions are marked [ ]. The registrant has filed the redacted
portions with the SEC as required pursuant to Rule 406.
<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 16th day of December, 1987 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 be
for ten (10) years. AEtna shall have an option to renew this
Agreement under the same terms and conditions set forth herein
for two additional five (5) year terms (the "Option Terms") by
giving CS at least thirty (30) days advance written 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 first two (2) years of the
Agreement and each succeeding two (2) years up to a percentage
equal to the lesser of: (a) ten percent, or the percentage
increase in the National Consumer Price Index during the
preceeding two (2) years.
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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
Salaries: CS personnel assigned full time to AEtna's
account may include system managers, customer
service personnel, programmers, and other direct
personnel assigned full time at AEtna request.
Salary expense shall include all payroll taxes,
employee benefits, and profit sharing expenses.
Crossover Time: CS personnel assigned on an occasional
part-time basis at the request of AEtna may include
CS management, installation and training specialists,
and other staff at the request of AEtna. Crossover
time is billed at 75% of the then current, published
hourly CS personnel billing rates.
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[ ] Material redacted for confidentiality
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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. The
allocated expense charge is computed by dividing the
total amount of all Corporate Systems allocated expense
by the total number of claims and policies on the
Corporate Systems data base as of the end of the month.
This computed claim/policy rate is then multiplied by
the total number of claims/policies which AEtna has on
the data base at the same date. Categories of allocated
expense are:
Salary expense for system software management and
programmers, application programmers and management,
computer operations management and operators, tape
exchange processing department, and financial records
and administration department
Computer equipment and system software rental and
amortization expense.
Computer forms and supplies,
Building and furniture and equipment rent and
amortization expense.
Casualty and property insurance expense.
Building utilities.
Interest expense on building and equipment.
Telephone equipment rental and amortization.
Legal and accounting expense.
Personal and real property taxes
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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
CS operates its data network on an at-cost basis for all clients.
Rates for direct lines and CS Local dial-up services are reviewed
regularly by Project Managers.
E. SOFTWARE USAGE AND INFORMATION SERVICE MANAGEMENT FEES
Compensation for use of CS software and information services
management is calculated on a sliding scale of rates per claim/
policy in AEtna data base at the end of each month. A minimum
software and management fee [ ]
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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[ ] Material redacted for confidentiality
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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.
On occasion, it may be mutually advantageous for certain CS employees to
work on the AEtna's project on a temporary part-time basis (cross-over
staff). In this event, accurate time records shall be kept and expense
allocated accordingly.
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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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
In the event accounts receiving risk information services through
AEtna's agreement choose to add non-AEtna coverages directly with CS,
CS will provide AEtna the same price quotation which it delivers to
the AEtna account.
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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[ ] Material redacted for confidentiality
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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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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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Agreement For Information Management Services Page 10
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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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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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
Attention: Steve Mulready
with copy to: Director - Acquisition Services/CTS, C14D
If to CS: Corporate Systems
1212 Ross Street
P.O. Box 31780
Amarillo, Texas 79120
Attention: Guyon Saunders
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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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: /s/ By: CSC General Partner Inc.
---------------------------- its Sole General Partner
Title: Sr. Vice President By: Guyon Saunders
------------------------- -------------------------------
Title: President
----------------------------
AETNA TECHNICAL SERVICES, INC.
By: /s/
----------------------------
Title: President
-------------------------
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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 transfer the System to or allow it to be operated by anyone
other than its authorized employees and by the authorized employees of its
designated customers for Aetna's or such customers' internal use. Customers
of Aetna must obtain the necessary software license from CS to access the
System. If a local area network ("LAN") version of the System becomes available
to Aetna under this Addendum, Aetna shall have the right to use one or more
licensed copies of a multi-user PC program on a LAN in which the copies are
installed on a server and are accessed by workstations comprising the LAN.
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>
1.3 SYSTEM INSTALLATION. CS shall provide the following services to Aetna
in connection with the installation of the System:
(a) DATA CONVERSION. CS will convert Aetna's data for use in the
System, and will install the converted data in an appropriate CS
computer (the "server") where it may be accessed by the user's PC (the
"client"). CS will ensure that Aetna's data converted from the CS
mainframe to the CS "server" will balance database to database at the
point of staging.
(b) INSTALLATION. Unless otherwise agreed, CS will install the
necessary software part of the System on the PC's designated by Aetna
and will assure that the hardware and software are configured to
properly interface with the System.
(c) TRAINING. CS will train the persons to operate the System who are
designated by Aetna to be users of the System.
1.4 WARRANTY OF SYSTEM. CS warrants for 90 days from the delivery date that
the System will operate in accordance with the then current documentation
provided by CS. If the System fails to so operate, CS will, at its option,
replace the application or make such changes to the System as are necessary
to cause it to conform to the then current System documentation. CS warrants
that it has the right to license the System to Aetna and to its designated
users.
CS warrants that it has successfully tested the System to determine
whether the System contains threats known as software viruses, salamis,
time bombs, logic bombs, Trojan horses, trap doors, or other malicious
computer instructions, intentional devices or techniques that can or were
designed to infect, attack, vandalize, defraud, disrupt, damage or disable a
computer system or any component of such computer system, including its
security or user data (here after "Disabling Devices"). CS further warrants
that the System, as delivered to Aetna, will contain no Disabling Devices to
the best of CS's knowledge. CS will maintain master copies of the System
that are free and clear of Disabling Devices. Upon Aetna's request, CS shall
provide master copies to Aetna for Aetna's comparison with and correction of
copies of the System in Aetna's custody or possession, or, if introduction of
a Disabling Device is traced to the System as delivered to Aetna by CS, CS
shall correct the copies of the System in Aetna's custody or possession.
CS warrants that all Improvements (enhancements, upgrades, new releases)
will be compatible with, the specifications, and will not diminish the
features or functions, of the System as they existed at the time Aetna placed
the order for the System, and that the System will be compatible with the
Aetna computer platforms meeting the minimum hardware and software criteria
set forth at the time that Aetna initially licensed the System. If CS is
unable to meet this warranty due to third party product constraints, or other
causes beyond CS's reasonable control, CS will provide Aetna not less that
six (6) months' notice in advance of release of the incompatible
Improvements. Unless CS notifies Aetna in writing to the contrary, all third
party product which may from time to time be incorporated into the System
will be subject to all of the terms and conditions of this Addendum,
including but not limited to those pertaining to use, restriction on use,
indemnification, warranty and support.
THE ABOVE IS A LIMITED WARRANTY AND IT IS THE ONLY WARRANTY MADE BY CS.
CS MAKES AND AETNA RECEIVES NO OTHER WARRANTY EXPRESSED OR IMPLIED. ALL
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE ARE
EXPRESSLY EXCLUDED. CS SHALL HAVE NO LIABILITY WITH RESPECT TO ITS
OBLIGATIONS UNDER THIS ADDENDUM FOR
PAGE 2
<PAGE>
CONSEQUENTIAL, EXEMPLARY, OR INCIDENTAL DAMAGES EVEN IF IT HAS BEEN ADVISED
OF THE POSSIBLIITY OF SUCH DAMAGES. LICENSORS OF THIRD PARTY PROGRAMS USED
IN THE SYSTEM SHALL NOT HAVE ANY LIABILITY FOR ANY DAMAGES, WHETHER DIRECT,
INDIRECT, INCIDENTAL OR CONSEQUENTIAL ARISING FROM THE USE OF SUCH LICENSOR'S
PROGRAMS. CS'S LIABILITY FOR DAMAGES HEREUNDER SHALL IN NO EVENT EXCEED THE
INITIAL LICENSE FEE PAID BY AETNA UNDER THIS ADDENDUM. THIS EXPRESS WARRANTY
IS IN LIEU OF ALL LIABILITIES OR OBLIGATIONS OF CS FOR DAMAGES ARISING OUT OF
OR IN CONNECTION WITH THE DELIVERY, USE, OR PERFORMANCE OF THE SYSTEM.
The provisions of this Section 1.4 allocate risks under this addendum
between CS and Aetna. CS's pricing reflects this allocation of risk and the
limitation of liability specified herein.
PART 2
SYSTEM SUPPORT
2.1 GENERAL. CS agrees to provide the support functions described in this
Part to Aetna for the term set forth in the Schedules, unless sooner
terminated as provided herein, and for year to year thereafter until either
party gives the other thirty days written notice of termination. Aetna shall
pay CS the Annual Support Fee set out in the Schedules. The Annual Support
Fee payable for the initial year of this Addendum will be prorated to achieve
a January 1 anniversary date and will be payable in monthly increments, due in
advance, upon expiration of the System warranty period. The Annual Support
Fee for each subsequent year will be payable in monthly increments, due in
advance, commencing upon January 1 of each year.
2.2 ENHANCEMENTS AND IMPROVEMENTS. CS will provide enhancements and
improvements in the System from time to time to maintain and enhance the
applicability and competitive marketability of the System. CS will enhance
the System to be compatible with the most current form of computer operating
systems software that is supported by the System at the time of the original
license. CS will use reasonable efforts to furnish these enhancements to
Aetna withing 6 months after the operating system software becomes generally
available. CS will provide all enhancements and improvements to Aetna with
written instructions concerning implementation.
CS is not obligated to provide Aetna new System software which may
result from CS's rewriting the basic software or development of additional
functions. CS alone shall determine whether the work product of CS
constitutes new System software (which will not be provided to Aetna
hereunder) or an improvement or an enhancement of the System (which will be
provided to Aetna). CS software releases that are renumbered or renamed
versions of the System with additional components which were not included in
the System as originally licensed to Aetna will be furnished to Aetna as a
general enhancement to the System, without additional charge, if (i) Aetna
currently receives System support from CS, (ii) the current System licensed
to Aetna no longer supports the most current form of computer operating
system software that it supported at the time of the original license, and
(iii) the new release does support the most current form of such operating
system. CS agrees to negotiate in good faith with Aetna the amount of any
additional license fee, if any, to be paid by Aetna if the new release
incorporates additional third party product which requires an additional
license fee.
PAGE 3
<PAGE>
2.3 SUPPORT. CS will provide periodic written or telephone service
instructions and Help Desk support to the users of the System who are trained
pursuant to the Addendum. CS will use reasonable efforts to assist the users
of the system in identifying and detecting problems, errors or malfunctions
arising from use of the System, and, when possibie, to correct such problems,
errors or malfunctions. CS will assist the users of the System by telephone
if problems occur in their operations of the System. CS will provide program
and documentation corrections at no charge for errors in fact. Aetna (or
customer's of Aetna who are designated by Aetna to use the System to access
the customer's policy and claim data included in the database on the CS
server) shall designate a specific person(s) to be trained in the full
operation of the System and to serve as the person(s) authorized to request
support from the Help Desk. The Corporate Systems Help Desk is dedicated to
providing technical support and to tracking reported System problems and
their resolution. The Help Desk is responsible for handling questions
related to the System and other new EDGE products which CS may release. If
excessive training related support calls (more than two hours per user per
month) are made, CS may recommend additional training. Telephone training,
customer site training, CS University training, consultation, custom
documentation, custom programming, and reports done on request by CS, are
available from CS, upon request, at the then current rates published by CS.
Help Desk support is an additional service to that provided by the dedicated
Aetna Unit.
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
3.1 NON-COMPETE. During the term of the License and for a period of three
years thereafter, Aetna will not, directly or indirectly, market to any party
other than Aetna customers a product competitive with the System or any
application thereof.
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: /s/ STEPHEN M. MULREADY By: /s/ JOHNNY MIZE
------------------------------- --------------------------------
Authorized Signature Authorized Signature
Stephen M. Mulready Johnny Mize
- ---------------------------------- -----------------------------------
Name Name
Senior Vice President President & CEO
- ---------------------------------- -----------------------------------
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
1. 486/25 MHz processor
2. 12 MB RAM
3. 100 MB available on hard disk (5MB for BO, Oracle SQL/Net. TCP/IP
and 95 MB for data)
4. VGA color monitor
5. LAN card or available slot
B. Software installed
1. DOS 5.0 or later
2. Windows 3.1
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
-------- ----------
Oracle Corporation Oracle SQL/Net Oracle
Business Objects, Inc. LICENSEE Module
Batch Option
Procedure Module
Business Analyzer
ACCEPTED BY: ACCEPTED BY:
AETNA CASUALTY & SURETY COMPANY CORPORATE SYSTEMS, LTD.
and AXIA SERVICES, INC. CSC General Partner, Inc.,
its General Partner
By: /s/ STEPHEN M. MULREADY By: /s/ JOHNNY MIZE
------------------------------- --------------------------------
Authorized Signature Authorized Signature
Stephen M. Mulready Johnny Mize
- ---------------------------------- -----------------------------------
Name Name
Senior Vice President President & CEO
- ---------------------------------- -----------------------------------
Title Title
10/1/95 10/7/95
- ---------------------------------- -----------------------------------
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 CS KNOWLEDGE to do Ad Hoc reporting
against CS databases for all information collected by the LICENSEE.
SYSTEM DESCRIPTION
CS Knowledge is a Microsoft Windows-TM- based decision support system which
allows Aetna to create management reports and graphics in a Windows-TM-
environment. 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 convert raw data into knowledge for Aetna.
KEY COMPONENTS OF THE SYSTEM
- Dynamic Data Exchange (DDE)
- Object Linking and Embedding (OLE)
- Graph Generation
- Report Generation and Customization
- Business Analyzer
- Detail and Summary Information from a single report
THE PROCESS
The user of the System attaches to the CS Oracle-Registered Trademark-
database from a PC with the licensed System software to access Aetna's claim
and policy data. To accomplish this, the user generates a Query to select
the data desired. CS KNOWLEDGE then generates an optimized SQL statement to
extract the desired information from the CS Oracle-Registered Trademark-
server. This information is then brought to the PC for further manipulation.
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
<PAGE>
The user will have the ability to create any Ad Hoc report requests that are
needed as well as to choose from a standard library of reports created by CS.
The user can also utilize the DDE option to automatically bring query
information into other Windows-TM- Dynamic Data Exchange (DDE) capable
applications such as EXCEL-TM- or Lotus 123-TM-. Object Linking and
Embedding (OLE) can also be utilized to "add-in" information created in other
Windows-TM- applications.
Oracle is a registered trademark of Oracle Corp.
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 (One Time)
CS KNOWLEDGE [ ]
3. ACCOUNT SET-UP:
(Set-up time is included in the monthly allocation expense fee.) [ ]
4. SOFTWARE FEE: (one-time for each PC on which installed)
Includes Business Objects, TCP/IP, SQLNet, and configuration. [ ]
5. MAINTENANCE FEE
The portion of the maintenance fee based on PC software will be prorated
for the first year based on when the software fee is incurred. Thereafter
it will be included in the maintenance fee billed in advance. [ ]
[ ] Material Redacted for Confidentiality
6. INSTALLATION OF SOFTWARE:
7. ACCESS FEE:
AETNA CS KNOWLEDGE PAGE 11
SEPTEMBER 1995
<PAGE>
The access charge will be [ ]. The access charge is based upon
number of users [ ] plus processing cost for accessing the UNIX
database.
8. TRAVEL EXPENSES: Billed as Incurred
ACCEPTED BY: ACCEPTED BY:
AETNA CASUALTY & SURETY COMPANY CORPORATE SYSTEMS, LTD.
and AXIA SERVICES, INC. CSC General Partner, Inc.,
its General Partner
By: /s/ STEPHEN M. MULREADY By: /s/ JOHNNY MIZE
------------------------------- --------------------------------
Authorized Signature Authorized Signature
Stephen M. Mulready Johnny Mize
- ---------------------------------- -----------------------------------
Name Name
Senior Vice President President & CEO
- ---------------------------------- -----------------------------------
Title Title
10/1/95 10/7/95
- ---------------------------------- -----------------------------------
Date Date
[ ] Material Redacted for Confidentiality
AETNA CS KNOWLEDGE PAGE 12
SEPTEMBER 1995
<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
November 27, 1996
