<PAGE>
Registration No. 333-00884
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
PRE-EFFECTIVE AMENDMENT NO. 5
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.
- -------------------------------------------------------------------------------
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
----------------------------
Cross-Reference Between Items in Part I of Form S-4 and the Prospectus
<TABLE>
FORM S-4 LOCATION IN
ITEM NUMBER AND CAPTION PROSPECTUS
- --------------------------------------- ------------------------------------
<S> <C>
1. Forepart of Registration Statement Cover Page
and Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Inside Front Cover Page;
Cover Pages of Prospectus Back Cover Page
3. Risk Factors, Ratio of Earnings to Summary, Risk Factors and Other
Fixed Charges and Other Special Considerations, Selected
Information Financial Information
4. Terms of the Reorganization Summary, The Organization
5. Pro Forma Financial Information Summary Information About the Plan
8. Interests of Named Experts and Legal Opinions; Experts
Counsel
9. Disclosure of Commission Position Limited Liability
on Indemnification for Securities
Act Liabilities
14. Information with Respect to Summary, Risk Factors and Other
Registrants Other Than S-3 or S-2 Special Considerations,
Registrants Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management;
Principal Owners and Ownership of
Management, Financial Statements
17. Information with Respect to Summary, Risk Factors and Other
Companies Other Than S-3 or S-2 Special Considerations,
Registrants Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Management;
Principal Owners and Ownership of
Management, Financial Statements
18. Information if Proxies, Consents, Summary, Risk Factors and Other
or Authorizations are to be Special Considerations, Certain
Solicited Federal Income Tax Considerations,
Summary Comparison of Units and
Common Stock and CSC Shares and
Common Stock, Description of Common
Stock
</TABLE>
_____________________
*Items 6, 7, 10, 11, 12, 13, 15,
16, and 19 are not applicable to
this Registration Statement
ii
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
<PAGE>
PROSPECTUS
CORPORATE SYSTEMS HOLDING, INC.
5,922,814 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 fair value of the net assets
(the Partnership's total liabilities minus its total assets) will be
a liquidating fair value rather than a value based upon cash flow,
comparable market data, or other similar factors related to an ongoing
business. 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. Because the liquidating cash
distribution will be based upon the net assets of the Partnership
upon dissolution, Management anticipates that the liquidating cash
distribution per Unit will be less than the appraised value of a
Holding Company Share after the Reorganization and may be less than
the price at which Units have traded in the past.
- 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 12, 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 fair value of the net assets (the Partnership's total
liabilities minus its total assets) will be a liquidating fair
value rather than based on cash flow, comparable market data, or
other similar factors related to an ongoing business. 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.
- 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. Because the
liquidating cash distribution will be based upon the net assets
of the Partnership upon dissolution, Management anticipates that the
liquidating cash distribution per Unit will be less than the
appraised value of the Holding Company Shares after the
Reorganization and may be less than the price at which the Units
have traded in the past.
- 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.
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
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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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<PAGE>
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."
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<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. Management anticipates that the liquidating cash
distribution per Unit will be less than the appraised value per Holding
Company Share after the Reorganization and may be less than the price for
which Units have traded in the past. 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.
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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 fair value of the net assets (the Partnership's total
liabilities minus its total assets) will be a liquidating fair
value rather than a value based upon cash flow, comparable market
data or other similar factors related to an ongoing business.
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. Because the liquidating cash distribution will be based upon the net
assets of the Partnership upon dissolution, Management anticipates that the
liquidating cash distribution per Unit will be less than the appraised value
of the Holding Company Shares after the Reorganization and may be less than
the price at which the Units have traded in the past.
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
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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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<PAGE>
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
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<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.
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<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.
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<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.
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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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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.
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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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<PAGE>
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
45
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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
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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.
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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.
52
<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.
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<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.
57
<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 Nine 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 19,090,491
Installations and programming 2,243,355 1,741,356
Computer access and equipment rental fees 2,325,425 2,677,691
Special project fees 6,964,347 9,713,662
Other 1,666,370 1,322,626
------------ ----------
Total operating revenues 30,967,004 34,545,826
Operating expenses:
Cost of services 21,833,175 24,895,361
Selling, general and administrative 5,825,225 5,148,352
------------ ----------
Total operating expenses 27,658,400 30,043,713
------------ ----------
Operating income 3,308,604 4,502,113
------------ ----------
Other income (expense):
Interest income 169,914 129,305
Interest expense (178,213) (157,905)
Other, net 252,036 444,984
------------ ----------
Total other income 243,737 416,385
------------ ----------
Earnings before cumulative
effect of change in accounting for
postretirement benefits 3,552,341 4,918,498
Cumulative effect of change in accounting
for postretirement benefits - (590,000)
------------ ----------
Net earnings $ 3,552,341 4,328,498
------------ ----------
------------ ----------
Net earnings allocated to:
General partner $ 1,608,880 1,978,268
Limited Partners 1,943,461 2,350,230
------------ ----------
$ 3,552,341 4,328,498
------------ ----------
------------ ----------
Proforma unaudited net earnings
per Common Share (Note 5) $ 0.38
------------
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. The pro forma unaudited net earnings per
Common Share of $0.38 for the nine months ended September 30, 1996 is
calculated as if the proposed conversion had been consummated on
January 1, 1995 and considers all significant adjustments to the statement
of income necessary to appropriately reflect the anticipated corporate
form of business.
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
----------- ---------- ----------
----------- ---------- ----------
Pro forma unaudited net earnings
per Common Share (note 10) $ 0.46
-----------
</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. The pro forma unaudited net earnings per common
share of $0.46 for the year ended December 31, 1995 is calculated as if
the proposed conversion had been consummated on January 1, 1995 and
considers all significant adjustments to the statement of income necessary
to appropriately reflect the anticipated corporate form of business.
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 12, 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 12, 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>
INDEPENDENT AUDITORS' CONSENT
The Partners
Corporate Systems, Ltd.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
December 12, 1996
<PAGE>
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Corporate Systems Holding, Inc.:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
December 12, 1996
<PAGE>
STRASBURGER & PRICE, L.L.P.
CONSENT OF SPECIAL TAX COUNSEL
We hereby consent to the use of our tax opinion and to all references to
our firm in the Registration Statement on Form S-4 of Corporate Systems Holding,
Inc.
STRASBURGER & PRICE, L.L.P.
/S/ Strasburger & Price, L.L.P.
Dallas, Texas
November 27, 1996
