<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
For the transition period from ______________ to _______________
Commission file number 33-30084
--------------------------------------------
CORPORATE SYSTEMS HOLDING, INC.
(Exact name of registrant as specified in its charter)
NEVADA 75-2666600
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1200 CORPORATE SYSTEMS CENTER, AMARILLO, TEXAS 79102
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (806) 376-4223
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. /X/ Yes / / No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. /X/
At December 31, 1996, the aggregate market value of the registrant's Common
Stock, $.001 par value (the only class of voting stock), held by non-affiliates
was $1,000.
At December 31, 1996, one share of the registrant's Common Stock, $.001 par
value (the only class of common stock), was outstanding.
The Company's Registration Statement on Form S-4 and accompanying exhibits
filed with the Securities and Exchange Commission is incorporated by reference
in Item 1 and Item 3 of Part 1 and Item 14 of Part IV.
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
FORM 10-K
For the Fiscal Year Ended December 31, 1996
Table of Contents
ITEM DESCRIPTION PAGE
- ---- ----------- ----
Part I
1. Business........................................................ 1
2. Properties...................................................... 3
3. Legal Proceedings............................................... 3
4. Submission of Matters to a Vote of Security Holders............. 4
Part II
5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................... 5
6. Selected Financial Data......................................... 7
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 8
8. Financial Statements and Supplementary Data..................... 15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 37
Part III
10. Directors and Executive Officers of the Registrant.............. 38
11. Executive Compensation.......................................... 41
12. Security Ownership of Certain Beneficial Owners and Management.. 44
13. Certain Relationships and Related Transactions.................. 46
Part IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K....................................................... 46
15. Supplemental Information to be furnished with Reports filed
pursuant to Section 15(d) of the Act by Registrants which
have not registered securities pursuant to 12 of the Act........ 47
Signatures............................................................... 48
ii
<PAGE>
DEFINITIONS
The following defined terms are used frequently in this Form 10-K.
CSC Shares Shares of common stock of CSC General Partner, Inc.
CSC Shareholders Holders of the General Partner Shares.
Common Stock Common Stock, par value $.001 per share, of the Company.
Company Corporate Systems Holding, Inc., a Nevada corporation,
formed to become the Partnership's corporate successor.
Corporate Systems The Partnership prior to Reorganization or the Company
after the Reorganization, or both.
Exchange Offer The offer made by the Company to the Limited Partners
and the CSC Shareholders to exchange Units or CSC
Shares for Company Stock.
General Partner CSC General Partner, Inc., a Texas corporation, the
general partner of the Partnership.
Limited Partner A Unitholder who is not the General Partner.
Management The officers and directors of the General Partner.
Operating Company Corporate Systems, Inc., a Nevada corporation.
Partner The General Partner and all Limited Partners,
collectively, where no distinction is required by the
context in which the term is used herein. Reference to
a "Partner" will be to any one of the Partners.
Partnership Corporate Systems, Ltd., a Texas limited partnership.
Plan A plan prepared by the General Partner that sets forth
the terms of the Reorganization.
Registration Statement The Registration Statement on Form S-4 (Registration
No. 33-30084) of the Company filed with the SEC,
together with all amendments thereto.
Reorganization The reorganization of the Partnership to corporate form.
SEC The Securities and Exchange Commission.
iii
<PAGE>
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.
iv
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
The Company was formed pursuant to the Plan developed by the General
Partner for the purpose of reorganizing the Partnership as a corporation. As
of December 31, 1996, the reorganization of Corporate Systems from a
partnership to a corporation had not been completed and the Company had
nominal assets. As of the end of 1996, the Company had not taken any
substantial action since its incorporation on August 7, 1996, other than in
connection with the Plan. The Company filed the Registration Statement with
respect to the offer of its shares of common stock to the Limited Partners
and to the CSC Shareholders pursuant to the Exchange Offer and Plan. For a
discussion of the terms of the Plan, please see "The Reorganization" section
of the Registration Statement.
The Company's registration statement became effective December 20, 1996.
Pursuant to the Plan, the Exchange Offer remained open for 30 days from the date
the prospectus was sent to the Limited Partners and to the CSC Shareholders. As
1
<PAGE>
of December 31, 1996, the Company had not accepted any subscriptions for its
shares of common stock, the Plan had not been completed, and Corporate Systems
remained operating as a Partnership. For a discussion of the other factors
relating to the Exchange Offer and Plan, please see "Risk Factors and Other
Special Considerations" and "The Reorganizations" sections of the Registration
Statement.
The reorganization of Corporate Systems from a limited partnership to a
corporation was completed on February 1, 1997. Upon completion of the
reorganization, all the assets and liabilities of Corporate Systems were
transferred to Corporate Systems, Inc., a wholly owned subsidiary of the
Company. As of February 1, 1997, there were 5,922,814 shares of the
Company's common stock issued and outstanding.
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 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.
2
<PAGE>
MATERIAL CUSTOMERS.
Corporate Systems had revenues from five customers totaling $21.64
million and $21.56 million during fiscal 1996 and 1995, respectively. The
revenues from significant customers represent individually over 5 percent of
total operating revenues and in the aggregate approximately 52 and 47 percent
of total operating revenues for 1996 and 1995, respectively. For the year
ended 1996, material customers representing over 10 percent of total
operating revenues were American International Group, The Travelers Insurance
Company and ITT Hartford and for the year ended December 31, 1995 such were
The Travelers Company and ITT Hartford. At December 31, 1996 and 1995, the
Partnership also had $3.51 million and $4.56 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, 1996 and 1995, were
$2.45 million and $4.08 million, respectively. The total net amount of new
product development expenditures, which includes development performed under
contracts for others, and other development costs, totaled $2.82 million and
$4.44 million in fiscal 1996 and 1995, respectively. The increase in new
product development expenses is in support of the Partnership's new and
existing product development initiatives. For more information regarding
research and development see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS
The Partnership is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the Partnership's consolidated financial position or liquidity.
3
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of the Company's security holders
during the fourth quarter of the Company's 1996 fiscal year.
Remainder of page intentionally left blank
4
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION.
Prior to the Reorganization, there was not an established public trading
market for the Units nor will there be for the shares of Common Stock of the
Company after the Reorganization. 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
12-31-96 5.25 5.00
The price ranges listed above reflect actual trades of Units during the
periods indicated.
HOLDERS.
As of December 31, 1996, the number of record holders of Units were 256,
this number includes counting as one the ownership of the General Partner who
had 28 shareholders. There were 5,922,814 Units outstanding of which the
General Partner owned 2,666,672. After the Reorganization was completed on
February 1, 1997, there were 277 shareholders of record and 5,922,814 shares
of Common Stock outstanding.
5
<PAGE>
DISTRIBUTIONS.
Prior to the Reorganization, it was the policy of Corporate Systems to
distribute to the Unitholders sufficient cash that was necessary for them to
pay the tax liability on the Partnership's annual earnings.
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
12-31-96 .30
- --------------
(1)The table reflects the distributions declared by the Partnership
in the respective quarters. Once declared, the distributions were
generally paid in the following quarter.
After the Reorganization, the amount of dividends, if any, will be
dependent upon the Company's results of operations, financial position, legal
and contractual limitations and other factors and will be evaluated on a
regular basis by the Company's board of directors.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth summary selected financial and operating
information of the Partnership for the years indicated (dollar amounts and
number of units in thousands, except per unit data).
<TABLE>
YEAR ENDED
DECEMBER 31,
- --------------------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Operating revenues $41,773 $46,095 $39,747 $31,769 $26,363
Research and development, net 2,451 4,081 2,129 245 472
Operating income 4,296 4,648 5,120 4,852 1,389
Net earnings (loss) 4,635 4,277 5,335 5,351 (4,325)
Net earnings (loss) per:
General partner 2,091 1,953 2,453 2,460 (1,997)
Limited partners 2,544 2,324 2,882 2,891 (2,328)
Net earnings (loss) per unit:
General partner 0.78 0.73 0.92 0.92 (0.75)
Limited partners 0.78 0.73 0.92 0.92 (0.75)
Distributions per unit 0.60 0.67 0.49 0.14 0.09
BALANCE SHEET:
Working capital (deficit) $ 4,563 $ 2,606 $ 2,695 $ 2,277 $(2,287)
Total assets 17,862 18,365 15,515 13,200 9,016
Long-term obligations,
including current maturities 22 118 1,575 3,310 5,092
Total partners' equity 9,215 7,901 7,175 4,681 142
Total number of units outstanding 5,923 5,876 5,800 5,800 5,800
Book value per unit 1.56 1.34 1.24 0.81 0.02
</TABLE>
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
References to "fiscal" in this discussion pertain to the Partnership's
fiscal years that 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, workers'
compensation medical bill repricing system, an incident reporting system, data
conversion 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 in fiscal
1996 and 1995 totaling $21.64 million and $21.56 million, respectively. Such
revenues from significant customers represent individually over 5 percent of
total operating revenues and in the aggregate approximately 52 percent and 47
percent of total operating revenues during the fiscal years ended in 1996 and
1995, respectively. For the fiscal year ended in 1996, material customers
representing over 10 percent of total operating revenues are American
International Group, The Travelers Insurance Company and ITT Hartford and for
the fiscal year ended 1995, such were The Travelers Insurance Company and ITT
Hartford. At December 31, 1996 and 1995, the Partnership also had $3.51
million and $4.56 million, respectively, of unsecured trade accounts
receivable due from customers that operate primarily in the insurance
industry.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996, COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
OPERATING REVENUES
Operating revenues for fiscal 1996 decreased $4.32 million (9 percent) over
the same period in 1995.
Special project fees revenue decreased $3.23 million (26 percent) mainly
due to the near completion of a one-time project in 1996 of product
development performed under a contract for a customer that was in progress
throughout 1995. This project produced $.45 million and $1.78 million of
revenue in fiscal 1996 and 1995, respectively, which accounts for a decrease
of $1.32 million. Another one-time project generated $1.5 million of revenue
for the Partnership's research and development efforts on the teleclaim
product during fiscal 1995.
Risk management claims administration services decreased $1.04 million (4
percent) from fiscal 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 information
reporting service fees. Medical claims management processing fees decreased
$.97 million in 1996 compared to fiscal 1995. This decrease is
8
<PAGE>
mainly due to additional revenue totaling $.82 million generated during 1995
by one customer that increased its volume of bills to catch up on its
backlog. Another component of risk management claims administration services
that decreased was service fees by $.43 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. These
decreases were somewhat offset by increases in risk information reporting
service fees of $.25 million in fiscal 1996 over the same period in 1995.
During fiscal 1996, installations and programming revenue were up $.37
million (15 percent) from the same period in 1995 partly due to new sales to the
existing client base of the Partnership's new product, CS KnowlEDGE that
increased the total by $.16 million. The remainder of the increase is due to
programming and file construction fee increase of $.26 million over the same
period in 1995. The increase is offset by a decrease of $.05 million in license
fees generated from sales of other products.
Computer access and equipment rental fees declined $.51 million (14
percent) due to continued competitive considerations and certain contract price
concessions given to customers, as well as customers purchasing stand-along
systems and terminating existing service agreements with the Partnership.
Other operating income increased $.09 million (5 percent) due to an
increase in revenue from reimbursed time ($.04 million) and software support
from the Partnership's Prism products and special service fees ($.16 million)
for fiscal 1996 over fiscal 1995.
At December 31, 1996, the Partnership was operating with a revenue backlog
of approximately $.39 million.
OPERATING EXPENSES
Operating expenses decreased $3.97 million (11 percent) in fiscal 1996 as
compared to fiscal 1995. However, as a percent of operating revenues,
operating expenses remained flat in 1996 compared to the same period in 1995
at approximately 90 percent.
Within the components of operating expenses there was a decrease in cost
of services of $5.67 million (16 percent) and an increase in selling,
general, and administrative expense of $1.71 million (29 percent) in fiscal
1996 when compared to fiscal 1995.
9
<PAGE>
Cost of services as a percent of revenues was 72 percent and 77 percent for
the fiscal years 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 fiscal years 1996 and 1995, were $2.45 million and $4.08
million, respectively. The net new product development expense totaled $2.82
million and $4.44 million for the fiscal years 1996 and 1995, respectively. New
product development expense is in support of the Partnership's new and existing
product development initiatives. New product development costs are expensed as
incurred and are reflected as components of costs of services in the financial
statements. The following table sets forth the amounts related to new product
development included in the financial statements under the following captions:
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
OPERATING REVENUES
Research and development $ - $1,500,000
Product development performed
under contract for others 448,896 1,767,441
---------- ----------
SPECIAL PROJECT FEES 448,896 3,267,441
---------- ----------
OPERATING EXPENSES
Research and development 2,451,375 5,581,390
Product development performed
under contract for others 545,876 1,841,332
Other development costs 273,108 285,480
---------- ----------
COST OF SERVICES 3,270,360 7,708,202
---------- ----------
NET NEW PRODUCT DEVELOPMENT $2,821,464 $4,440,761
---------- ----------
---------- ----------
Net new product development decreased $1.62 million mainly due to the
completion of the teleclaim project during 1996.
When the effects of new product development are removed from cost of
services, cost of services decreased $1.24 million (4 percent). Permanent
employees were hired in fiscal 1996, which decreased temporary salaries by
$.63 million over fiscal 1995. Substantially all other expense categories
decreased during fiscal 1996 as compared to fiscal 1995, which includes
depreciation expense ($.25 million) due to fully depreciated assets and other
miscellaneous expense ($.40 million).
Selling, general, and administrative expenses increased $1.71 million (29
percent) in fiscal 1996 over the same period in 1995. The increase can
mainly be attributed to increased costs incurred for professional fees ($.49
million) related to internal restructuring, legal and acounting costs related
to the legal form of the organization.
10
<PAGE>
Depreciation expense and occupancy costs increased in fiscal 1996 by $.29
million over the same period in 1995 mainly due to the new customer service
building. Other expense categories increasing include compensation ($.25
million), property taxes ($.18 million), and sales tax ($.23 million).
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 significant 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 is revenue generated from the
Partnership's teleclaim product, which showed an increase of $.24 million over
the same period in 1994.
The increase installations and programming revenue of $.56 million in 1995
over fiscal 1994 mainly consists of license and set up fees generated from a new
produce, 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
11
<PAGE>
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.
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, 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:
12
<PAGE>
YEAR YEAR
ENDED ENDED
DECEMBER 31, DECEMBER 31,
1995 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 $ 4,182,013
------------ ------------
------------ ------------
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 that
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 entering 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 decrease of $.15 million 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 have 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 ($1.9 million), and
recognition of the cumulative effect of the change in accounting post retirement
benefits ($.59 million).
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
DECEMBER 31, 1996, COMPARED TO DECEMBER 31, 1995
Cash and cash equivalents increased from December 31, 1995, to December 31,
1996, by approximately $1.44 million. The current ratio increased from 1.28 at
December 31, 1995, to 1.60 at December 31, 1996, primarily due to decreases in
current liabilities.
Net cash provided by operating activities was $6.84 million for the year
ended December 31, 1996. In addition to earnings, $43.98 million in cash was
provided by collections of trade accounts receivable, which was offset by
payment of $37.14 million in cash for accounts payable and accrued expenses.
Accounts receivable decreased $1.81 millin at December 31, 1996, from
December 31, 1995. Such decrease resulted in an improvement in the
percentage of accounts due within 60 days of 93 percent at December 31, 1996,
from 57 percent at December 31, 1995.
During the year ended December 31, 1996, the Partnership expended $1.04
million for property, plant, and equipment. Additionally, the Partnership paid
$4.49 million in distributions to Partners. These transactions were financed
with internally generated funds.
The Partnership has several noncancelable operating leases for equipment
and office space that expire over the next three years. The Partnership has
several operating leases for certain computer equipment that required monthly
rental payments that are charged to operations as incurred.
During the year ended December 31, 1996 and 1995, net research and
development costs were approximately $2.45 million and $4.08 million,
respectively. Due to the nature of the Partnership's business, research and
development costs may 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.
EFFECT OF NEW ACCOUNTING STANDARDS
Effective in 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which encouraged, but did 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 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. Appropriate
disclosures have been added to the notes to the 1996 consolidated financial
statements.
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.
CONVERSION TO CORPORATE FORM
As more fully discussed in note 1 to the 1996 Consolidated Financial
Statements, effective February 1, 1997, the Partnership reorganized from a
partnership to corporate form and the Partnership was renamed as Corporate
Systems, Inc. As a result of such conversion, the Company will be subject to
Federal income taxes, and accordingly, the level of dividends paid to
shareholders is expected to decrease. Additionally, the Company established
a leveraged employee stock ownership plan (ESOP) through the purchase of
existing shares and additional shares issued by the Company. Such purchases
were financed by the issuance of bank debt. The Company will cease to make
contributions to the existing employee profit sharing plan to service the
debt associated with the ESOP.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
1. Financial Statements:
A. Corporate Systems Holding Inc.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . 16
Balance Sheet as of December 31, 1996 . . . . . . . . . . . . . . . . 17
Note to Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . 18
B. Corporate Systems, Ltd.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . 19
Consolidated Balance Sheets as of December 31, 1996
and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Income for each of
the years in the three-year period ended December 31, 1996. . . . . 22
Consolidated Statements of Changes in Partners' Equity
for each of the years in the three-year period ended
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . 23
Consolidated Cash Flows for each of the years
in the three-year period ended December 31, 1996. . . . . . . . . . 24
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 26
15
<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 December 31, 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 December 31, 1996, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1997
16
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
Balance Sheet
December 31, 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
------
$1,000
------
------
See accompanying note to balance sheet.
17
<PAGE>
CORPORATE SYSTEMS HOLDING, INC.
Note to Balance Sheet
December 31, 1996
ORGANIZATION
Corporate Systems Holding, Inc. (the Company), a Nevada corporation, was
incorporated on August 7, 1996 and conducted no business activity through
December 31, 1996.
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 remained unissued at December 31,
1996, pending consummation of the reorganization of Corporate Systems, Ltd. from
a partnership structure to a corporation which became effective February 1,
1997. Such reorganization was implemented through an exchange offer whereby
owners of 5,922,814 units of Corporate Systems Ltd. were exchanged for an equal
number of the Company's common stock. All of the assets and liabilities of
Corporate Systems, Ltd. were transferred to Corporate Systems, Inc. as of the
effective date. Corporate Systems, Inc. then became a wholly owned subsidiary of
the Company.
18
<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,
1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1 and 6, 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.
KPMG Peat Marwick LLP
Dallas, Texas
February 6, 1997
19
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
Pro forma
at December 31,
ASSETS 1996 (NOTE 1) 1996 1995
------ --------------- ---- ----
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents, including interest-bearing
assets of $3,200,000 in 1995 $ 5,879,304 $ 5,785,640 $ 4,343,196
Trade accounts receivable, less allowance for doubtful
accounts of $419,967 in 1996 and $501,111 in 1995
(notes 2 and 7) 5,067,385 5,067,385 6,788,414
Prepaid expenses and supplies 1,273,184 1,273,184 681,106
Current portion of prepaid airline passes 60,546 60,546 26,858
----------- ----------- -----------
Total current assets 12,280,419 12,186,755 11,839,574
----------- ----------- -----------
Property, plant and equipment (notes 3 and 4):
Land and office buildings 3,305,418 3,305,418 4,072,265
Computer equipment 2,704,263 2,704,263 2,233,720
Leased computer equipment under capital leases 137,128 137,128 733,672
Furniture and fixtures 1,961,715 1,961,715 1,871,489
Computer software 1,037,326 1,037,326 911,756
----------- ----------- -----------
9,145,850 9,145,850 9,822,902
Less accumulated depreciation and amortization (3,599,964) (3,599,964) (3,492,357)
----------- ----------- -----------
Net property, plant and equipment 5,545,886 5,545,886 6,330,545
----------- ----------- -----------
Deferred tax asset (note 1) 1,536,000 - -
Prepaid airline passes, excluding current portion 37,300 37,300 43,066
Other assets, net 91,861 91,861 151,342
----------- ----------- -----------
Total assets $19,491,466 $17,861,802 $18,364,527
----------- ----------- -----------
----------- ----------- -----------
(Continued)
</TABLE>
20
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Balance Sheets, Continued
<TABLE>
Pro forma at
December 31,
LIABILITIES AND PARTNERS' EQUITY 1996 (Note 1) 1996 1995
-------------------------------- ------------- ---- ----
(unaudited)
<S> <C> <C> <C>
Current liabilities:
Interim construction loan (note 4) $ - $ 2,668,088 $ 2,668,088
Current maturities of long-term debt (note 4) 1,071,429 - -
Current maturities of obligations under capital
leases (note 3) 21,735 21,735 95,792
Accounts payable 563,076 563,076 1,574,492
Accrued expenses:
Employee commissions and bonuses 576,102 576,102 694,964
Profit sharing (note 5) 850,000 850,000 682,370
Distributions payable - - 940,202
Vacation 442,222 442,222 403,728
Other 359,025 359,025 360,576
Lease incentive (note 3) 237,655 237,655 239,166
Deferred income 1,906,091 1,906,091 1,574,497
----------- ----------- -----------
Total current liabilities 6,027,335 7,623,994 9,233,875
----------- ----------- -----------
Long-term debt, excluding current maturities (note 4) 6,428,571 - -
Obligations under capital leases, excluding
current maturities (note 3) - - 21,965
Lease incentive -noncurrent (note 3) 170,833 170,833 375,834
Deferred income - noncurrent 102,813 102,813 161,563
Accumulated postretirement benefit obligation (note 6) 749,066 749,066 669,864
----------- ----------- -----------
Total liabilities 13,477,618 8,646,706 10,463,101
Partners' equity (note 1):
General partner - 3,571,626 3,080,953
Limited partners - 5,643,470 4,820,473
----------- ----------- -----------
- 9,215,096 7,901,426
Shareholders' equity (note 1):
Common stock 5,922 - -
Additional paid-in capital 13,545,174 - -
Unearned ESOP shares (7,538,248) - -
----------- ----------- -----------
6,012,848 - -
----------- ----------- -----------
Commitments and contingencies (notes 3, 5 and 8) ----------- ----------- -----------
$19,491,466 $17,861,802 $18,364,527
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Operating revenues (note 7):
Risk management claims administration services $24,987,451 $26,030,942 $23,838,381
Installations and programming 2,778,844 2,407,139 1,840,008
Computer access and equipment rental fees
(note 3) 3,067,888 3,582,708 4,104,387
Special project fees 9,004,860 12,234,711 8,685,108
Other 1,934,055 1,839,364 1,278,735
----------- ----------- -----------
Total operating revenues 41,773,098 46,094,864 39,746,619
----------- ----------- -----------
Operating expenses (notes 1, 3 and 5):
Cost of services 29,955,809 35,630,595 29,268,495
Selling, general and administrative 7,521,407 5,816,266 5,357,658
----------- ----------- -----------
Total operating expenses 37,477,216 41,446,861 34,626,153
----------- ----------- -----------
Operating income 4,295,882 4,648,003 5,120,466
----------- ----------- -----------
Other income (expense):
Interest income 239,313 159,812 151,794
Interest expense (238,729) (144,391) (205,304)
Other, net 338,152 203,691 267,935
----------- ----------- -----------
Total other income 338,736 219,112 214,425
----------- ----------- -----------
Earnings before cumulative
effect of change in accounting for
postretirement benefits 4,634,618 4,867,115 5,334,891
Cumulative effect of change in accounting
for postretirement benefits (note 6) - 590,000 -
----------- ----------- -----------
Net earnings $ 4,634,618 $ 4,277,115 $ 5,334,891
----------- ----------- -----------
----------- ----------- -----------
Net earnings allocated to:
General partner $ 2,090,676 $ 1,952,931 $ 2,453,004
Limited Partners 2,543,942 2,324,184 2,881,887
----------- ----------- -----------
$ 4,634,618 $ 4,277,115 $ 5,334,891
----------- ----------- -----------
----------- ----------- -----------
Pro forma unaudited net earnings per common share
(note 1) $0.47
-----
-----
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Statements of Changes in Partners' Equity
Years ended December 31, 1996, 1995 and 1994
General Limited
Partner Partners Total
----------- ----------- -----------
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
Net earnings 2,090,676 2,543,942 4,634,618
Distributions to partners (1,600,003) (1,953,685) (3,553,688)
Sale of partnership units (46,548 units) - 232,740 232,740
----------- ----------- -----------
Partners' equity, December 31, 1996 $ 3,571,626 $ 5,643,470 $ 9,215,096
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to consolidated financial statements.
23
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995 and 1994
<TABLE>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 43,975,039 $ 47,400,707 $ 37,221,604
Cash paid to suppliers and employees (37,135,549) (42,008,185) (31,473,775)
Interest received 239,313 159,812 151,794
Interest paid (238,729) (222,610) (205,304)
----------- ----------- -----------
Net cash provided by
operating activities 6,840,074 5,329,724 5,694,319
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from the sale of property, plant and
equipment 4,414 60,786 300
Additions to property, plant and equipment (1,044,872) (3,617,340) (2,819,987)
----------- ----------- -----------
Net cash used by investing
activities (1,040,458) (3,556,554) (2,819,687)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under interim construction loan - 2,668,088 -
Principal payments under capital lease
obligations (96,022) (317,937) (426,764)
Cash received from lease incentive - 615,000 -
Principal payments of long-term debt - (1,139,076) (1,285,680)
Distributions to partners 4,493,890 (2,995,556) (2,840,378)
Sale of partnership units 232,740 384,665 -
----------- ----------- -----------
Net cash used by financing
activities (4,357,172) (784,816) (4,552,822)
----------- ----------- -----------
Net increase (decrease) in cash 1,442,444 988,354 (1,678,190)
Cash and cash equivalents at beginning of year 4,343,196 3,354,842 5,033,032
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,785,640 $ 4,343,196 $ 3,354,842
----------- ----------- -----------
----------- ----------- -----------
(Continued)
24
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Consolidated Statements of Cash Flows, Continued
1996 1995 1994
---- ---- ----
Reconciliation of net earnings to net cash
provided by operating activities:
Net earnings $ 4,634,618 $ 4,277,115 $ 5,334,891
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,879,299 1,860,126 1,654,283
Amortization of lease incentives (206,512) - -
Provision (credit) for losses on
accounts receivable (93,871) (478,075) 664,982
(Gain) loss on sale of assets 279 (7,834) 5,033
Change in assets and liabilities:
Trade accounts receivable 1,814,900 605,963 (3,420,760)
Prepaid expenses and supplies (592,078) (372,219) (187,101)
Prepaid airline passes (27,922) 103,022 54,726
Other assets 5,020 (15,874) 33,014
Accounts payable (1,011,416) (786,076) 445,738
Accrued expenses 85,711 (463,952) 581,714
Deferred income 272,844 (62,336) 527,799
Accumulated postretirement benefit
obligation 79,202 669,864 -
----------- ----------- -----------
Net cash provided by
operating activities $ 6,840,074 $ 5,329,724 $ 5,694,319
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY - During 1995,
distributions to partners totaling $940,202 were declared and recorded as
a liability. This amount was paid in 1996.
See accompanying notes to consolidated financial statements.
25
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
December 31, 1996, 1995 and 1994
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
The principal business of Corporate Systems, Ltd. (the Partnership),
now known as Corporate Systems, Inc. (see below), 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, workers'
compensation services, computer outsourcing services, software development
project management services, a disability claims administration system, and
risk information reporting.
Through January 1997, the Partnership operated under a Texas limited
partnership agreement which provided for an initial term of 30 years,
beginning in 1976. Under the agreement, the maximum amount of any limited
partner's individual liability could not exceed the contributions of such
partner plus related undistributed profits. Profits and losses of the
Partnership were allocated among the partners in proportion to the
Partnership units owned by each partner. The Partnership had 6,000,000
units authorized at December 31, 1996, 1995 and 1994 and 5,922,814,
5,876,266 and 5,799,583 outstanding at December 31, 1996, 1995 and 1994,
respectively.
The general partner of the Partnership was CSC General Partner, Inc.
The general partner was responsible for management of the operations of the
Partnership. The general partner received no management fees for its
services but was reimbursed for all expenses incurred in performing
services for the Partnership. Such reimbursed expenses were not
significant during 1996, 1995 and 1994.
Effective February 1, 1997, the Partnership reorganized from a
partnership to corporate form and the Partnership was renamed as Corporate
Systems, Inc. (the Company). The pro forma consolidated balance sheet as
of December 31, 1996 gives effect to certain transactions which occurred
upon the effective date of the reorganization. The transactions reflected
in the pro forma adjustments include the following:
- Establishment of a net deferred tax asset resulting from temporary
differences in the tax bases of assets and liabilities and their
reported amounts in the consolidated financial statements. As a
corporation, income will be subject to taxation and income taxes will
be provided in accordance with Statement of Financial Accounting
Standards No. 109, "ACCOUNTING FOR INCOME TAXES" (SFAS No. 109).
Based on the historical ability to generate future taxable income
exclusive of reversing temporary differences, management believes it
is more likely than not that the Company will realize the benefits of
the net deferred tax asset in future periods.
(Continued)
26
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
- Elimination of existing partners' equity in exchange for common stock
of equal value.
- Establishment of a leveraged employee stock ownership plan (ESOP)
through the purchase of 592,281 shares from existing shareholders
financed through bank debt of $4,738,248. Additionally, 350,000
shares with a value equivalent to $2,800,000 were issued from
authorized shares through the issuance of bank debt. The proceeds
received were used to repay the interim construction loan (see note
4). Due to the establishment of the ESOP, the Company will not
continue to make contributions to the existing profit sharing plan
(see note 5) and will use such funds to repay the debt associated with
the ESOP.
A summary of the initial shareholders' equity resulting from the pro
forma adjustments is as follows:
To reflect initial capitalization through the issuance
of 5,922,814 shares of common stock, $.001 par value,
in respect of the outstanding units of the
Partnership $ 9,215,096
To reflect sale of shares to ESOP 2,800,000
To reflect unearned ESOP shares (2,800,000)
To reflect initial application of SFAS No. 109 which
resulted in a net deferred tax asset 1,536,000
To record the initial impact of the establishment of
the leveraged ESOP which will be funded by the
issuance of bank debt (4,738,248)
-----------
$ 6,012,848
-----------
-----------
The pro forma unaudited net earnings per common share of $0.47 for the
year ended December 31, 1996 is calculated as if the conversion to
corporate form had been consummated on January 1, 1996 and considers all
significant adjustments to the consolidated statement of income necessary
to appropriately reflect the corporate form of business and the above
described ESOP transactions. Such adjustments include the recognition of
income tax expense and interest expense on ESOP debt and a reduction in
cost of services due to the discontinuance of contributions to the profit
sharing plan.
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.
(Continued)
27
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(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.
(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 1996, 1995 and 1994, the Partnership removed
approximately $1,125,000, $2,080,000 and $1,123,000, 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. The Partnership did not capitalize any
interest costs in 1996 or 1994.
Effective January 1, 1996, the Partnership adopted the provisions of
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 asset, an impairment loss
(Continued)
28
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
is recognized. The adoption of Statement 121 had no 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 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 access and equipment rental
fees represent amounts charged to customers for dedicated telephone lines
and "dial-up" access fees, and amounts related to 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. Also included in special project fees are
revenues that are one-time in nature as a result of requests to assist a
customer or noncustomer in the development of a set of software programs
designed specifically for that entity and within the scope of the
Partnership's expertise. 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
access and 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
(Continued)
29
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 the 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.
(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 consolidated 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 1996, 1995 and 1994.
(j) CASH EQUIVALENTS
Cash equivalents of $3,200,000 at December 31, 1995 consist of
investments in U.S. Treasury Notes and money market funds. The Partnership
periodically invested overnight in U.S. Treasury Notes. There were no such
cash equivalents at December 31, 1996.
(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 1996, 1995 and 1994 were approximately
$2,451,000 $4,081,000 and $2,129,000, respectively.
30
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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 1996,
1995 and 1994, revenues totaling approximately $449,000 $1,767,000
and $1,907,000, respectively, were recognized as a result of such
reimbursements.
(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 $922,000 $840,000 and $1,154,000 in 1996, 1995 and
1994, respectively.
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires that the Partnership disclose estimated fair values for its
financial instruments. Fair value estimates at December 31, 1996 and
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 1995 and 1994 consolidated financial statements
have been reclassified to conform to the 1996 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, 1996, 1995 and 1994:
1996 1995 1994
-------- --------- --------
Balance at beginning of year $501,111 $ 904,366 $276,608
Provisions charged (credited)
to expense (93,871) (478,075) 664,982
Charge-offs (66,709) (360) (94,978)
Recoveries 79,436 75,180 57,754
-------- --------- --------
Balance at end of year $419,967 $ 501,111 $904,366
-------- --------- --------
-------- --------- --------
(Continued)
31
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
The credit provisions in 1996 and 1995 of $93,871 and $478,075,
respectively, can be attributed to the recovery of certain accounts
receivable during such years that had been charged-off in previous
years. A significant portion of the credit provision reflected in
1995 can be attributed to one account receivable totaling approximately
$376,000 which was fully reserved for in 1994 due to significant
uncertainties surrounding its collection, but was ultimately collected
during 1995.
(3) LEASES
The Partnership is obligated under various capital leases for certain
computer equipment and furniture that expire over the next year. At
December 31, 1996 and 1995, computer equipment and furniture having a
cost of approximately $137,000 and $734,000, respectively, and
accumulated depreciation of approximately $119,000 and $636,000,
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 three 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 of the Partnership's operating leases
totaled approximately $4,630,000, $4,986,000 and $4,187,000 for 1996, 1995
and 1994, 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 represented 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 sheets at December
31, 1996 and 1995 and is being amortized over the three year lease term
which began 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 such loss realized in 1995.
(Continued)
32
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
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, 1996:
Capital Operating
Year ending December 31: leases leases
------- ----------
1997 $22,554 $2,737,412
1998 - 1,724,870
1999 - 33,660
------- ----------
Total minimum lease payments 22,554 $4,495,942
----------
----------
Less amount representing interest (819)
-------
Present value of net minimum capital
lease payments 21,735
Less current maturities of obligations
under capital leases 21,735
-------
$ -
-------
-------
Certain computer equipment leased by the Partnership under long-term leases
is subleased to its customers on a month-to-month basis.
(4) BORROWINGS
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, 1996 and 1995, $2,668,088 had been
advanced under the interim construction loan. The interim loan agreement,
which was renewed and extended several times, required monthly payments of
interest at the bank's prime rate of 8.25% at December 31, 1996, and was
due March 31, 1997. Additionally, the Partnership was required to maintain
a compensating balance on deposit at the bank equal to 20% of the
outstanding interim construction loan balance.
Subsequent to December 31, 1996, the Company obtained a promissory note
from a bank in the amount of $7,500,000 secured by 942,281 shares of the
Company's common stock sold to the ESOP (see note 1). Such loan bears
interest at the bank's base rate less .5% and requires annual principal
payments of $1,071,429 plus accrued interest. A portion of the proceeds
obtained from this note were used to pay off the interim construction loan.
Additionally, at December 31, 1996, the Partnership has a commitment from
the Amarillo Economic Development Corporation to lend approximately
$1,400,000. Such borrowings would be secured by certain facilities.
(Continued)
33
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(5) EMPLOYEE BENEFIT PLANS
The Partnership has a 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 1996, 1995
and 1994 was approximately $272,000, $237,000 and $253,000,
respectively. The provision for discretionary profit sharing
contributions was approximately $850,000, $682,000 and $1,000,000 for
1996, 1995 and 1994, respectively. As described in note 1, the
Partnership does not anticipate making future contributions to the
profit sharing plan due to the establishment of the ESOP in 1997.
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 93,096 unit options were granted. Of this total, 50% became
vested and 46,548 units were exercised during 1996 with the remainder
vesting in 1997. Such options for units were converted to options for
common stock as a result of the conversion described in note 1. The
Partnership expensed and paid out approximately $332,000 in 1996 under
the incentive award plan. Also during 1995, the Partnership expensed
and paid out approximately $301,000 under a similar incentive plan.
Under this plan, 42,140 options for units were granted and exercised.
The per unit weighted-average fair value of the unit options granted
during 1996 and 1995 is not significant due to the lack of volatility in
the fair value of units and the relatively short period between grant
dates and exercise dates.
Effective in 1996, 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 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.
The Partnership applies APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, in accounting for its unit options and, accordingly, no
compensation cost has been recognized for its unit options in the
consolidated financial statements. Had the Partnership determined
compensation cost based on the fair value at the grant date for its unit
options under Statement No. 123, there would not have been a significant
impact on the Partnership's net earnings as noted above and therefore,
no pro forma disclosure has been made.
(Continued)
34
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(6) 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. 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 $115,000
and $98,000 for the years ended December 31, 1996 and 1995,
respectively. 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 have not been
restated.
Summary information on the Partnership's plan as of and for the years
ended December 31, 1996 and 1995 is as follows:
1996 1995
-------- --------
Accumulated postretirement benefit
obligation at January 1:
Actives eligible to retire $139,513 $115,191
Retired participants 176,899 260,801
Actives not yet eligible to retire 353,452 214,433
-------- --------
Accrued postretirement
benefit costs 669,864 590,425
Postretirement benefit cost 115,082 98,165
Benefit payments made (35,880) (18,726)
-------- --------
Obligation at December 31 $749,066 $669,864
-------- --------
-------- --------
A summary of the service cost and interest cost components for the
Partnership's plan for 1996 and 1995 and the effect of a one-percentage-
point increase for 1996 in the assumed health care cost trend rate is
as follows:
1996 1995
--------------------------- ------------
Current Current
Medical Current Medical
Trend Assumptions Trend
Assumptions Plus 1% Assumptions
----------- ----------- -----------
Service cost $ 70,082 $ 84,000 $55,165
Interest cost 45,000 50,000 43,000
-------- -------- -------
$115,082 $134,000 $98,165
-------- -------- -------
-------- -------- -------
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.5% for 1996 and 1995. The assumed health care
cost trend rate was 9% and 10% for 1996 and 1995, respectively, graded
down to 4.5% after ten years for 1996 and 1995.
(Continued)
35
<PAGE>
CORPORATE SYSTEMS, LTD. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(7) 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:
1996 1995 1994
----------- ----------- -----------
Customer "A" $ 6,185,268 $ 5,854,233 $ 5,536,087
Customer "B" 5,820,795 5,670,300 6,925,341
Customer "C" 3,531,959 4,139,768 3,697,641
Customer "D" 4,247,647 3,824,381 -
Customer "E" - 2,070,013 2,316,742
Customer "F" 1,855,918 - -
----------- ----------- -----------
$21,641,587 $21,558,695 $18,475,811
----------- ----------- -----------
----------- ----------- -----------
At December 31, 1996 and 1995, the Partnership had approximately $3,506,000
and $4,560,000, respectively, of unsecured trade accounts receivable due
from customers which operate in the insurance industry.
(8) CONTINGENCIES
The Partnership is involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Partnership's consolidated financial position or liquidity.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Corporate Systems had no changes in or disagreements with accountants on
accounting and financial disclosure.
37
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
At December 31, 1996, the Board of Directors of CSC General Partner,
Inc., the corporate general partner of the Partnership, was composed of six
persons. Prior to reorganizing Corporate Systems into a corporate form, the
General Partner had 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, 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.
38
<PAGE>
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
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
Mark Sollosy (43) November 1996 - Present, Vice President and Chief
Information Officer; 1994 - November 1996,
Director/Senior Consultant of Transamerica
Occidental Life Insurance Companies; 1991 - 1994,
Senior Vice President, Chief Information and Chief
Operation Officer of Imperial Industries; 1988 -
1991 Self Employed as Independent Consultant.
39
<PAGE>
Effective with the Reorganization completed February 1, 1997, the Company
is managed by a Board of Directors composed of six persons, each of whom was
director of the General Partner. Each director of the Company is also a
director of the Operating Company. Each executive officer of the Partnership
has continued his respective position for the Company. All directors of the
Company will hold office until the next annual meeting of the shareholders of
the Company and until their successors are duly elected and qualified. All
officers of the Company will hold office until the next annual meeting of the
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 Company will continue to receive
compensation at the same rate as they received as a director of the General
Partner.
In 1996, 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.
40
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table contains certain information regarding compensation
earned by the six (6) most highly compensated executive officers of Corporate
Systems for services rendered during the last three fiscal years.
COMPENSATION ----------------ANNUAL--------------
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Other
Name and Principal Annual
Position Year Salary Bonus Compensation
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
Guyon H. Saunders,
Founder 1996 124,000 - 7,593(1)
- -------------------------------------------------------------------------
1995 120,000 - 7,393(1)
- -------------------------------------------------------------------------
1994 115,000 - 12,180(1)
- -------------------------------------------------------------------------
Johnny E. Mize,
President and CEO 1996 172,998 80,500(2) 9,492(1)
- -------------------------------------------------------------------------
1995 160,992 80,500(3) 310,492(4)
- -------------------------------------------------------------------------
1994 121,968 144,900(5) 20,480(1)
- -------------------------------------------------------------------------
Charles Scott Gilmour,
Vice President, Sales
and Marketing 1996 114,000 26,314(2) 9,492(1)
- -------------------------------------------------------------------------
1995 108,504 29,603(3) 9,492(1)
- -------------------------------------------------------------------------
1994 104,040 50,000(5) 20,480(1)
- -------------------------------------------------------------------------
John S. Champlin,
Vice President -
Client Services 1996 97,500 33,500(2) 8,764(1)
- -------------------------------------------------------------------------
1995 88,500 33,484(3) 8,764(1)
- -------------------------------------------------------------------------
1994 82,000 50,000(5) 11,130(1)
- -------------------------------------------------------------------------
Michael D. Unruh,
Vice President - CFO 1996 104,000 32,892(2) 9,492(1)
- -------------------------------------------------------------------------
1995 104,000 32,563(3) 9,492(1)
- -------------------------------------------------------------------------
1994 90,090 54,820(5) 19,343(1)
- -------------------------------------------------------------------------
Marc Sollosy,
Vice-President -
Chief Information Officer 1996 27,952 - -
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
41
<PAGE>
(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 awarded in 1997 for employees' performance in 1996.
(3) Bonus was awarded in 1996 for employees' performance in 1995.
(4) Of this amount, $9,492 was awarded under the Corporate Systems
Self-Employee 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.
(5) 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%, and Scott
Gilmour - 53.47%. 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.
Remainder of page intentionally left blank
42
<PAGE>
LONG TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
Name Awards Granted 1996 Payout 1997 Payout
in 1995(1) of Awards of Awards
- ---------------------------------------------------------------------
Johnny E. Mize $301,000 $150,500(2) $150,500(2)
- ---------------------------------------------------------------------
Charles Scott Gilmour $111,800 $ 55,900(3) $ 55,900(3)
- ---------------------------------------------------------------------
John S. Champlin $ 10,000 $ 5,000(4) $ 5,000(4)
- ---------------------------------------------------------------------
Michael D. Unruh $223,600 $111,800(5) $111,800(5)
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
(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 were 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
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 was used for
payment of personal taxes. The balance of the award was paid out on March 16,
1997 with an equal number of shares as reflected for 1996 in the Company
being acquired.
(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 was
used for payment of personal taxes. The balance of the award was paid out on
March 16, 1997 with an equal number of shares as reflected for 1996 in the
Company being acquired.
(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. The balance of the award was paid out on
March 16, 1997 with an equal number of shares as reflected for 1996 in the
Company being acquired.
(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 was used for
payment of personal taxes. The balance of the award was paid out on March 16,
1997 with an equal number of shares as reflected for 1996 in the Company
being acquired.
43
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 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 was
the same as the number of Units (2,666,672) owned by the General Partner.
Prior to the Reorganization, a holder of CSC Shares was deemed to be the
beneficial owner of the same number of Units owned by the General Partner.
The beneficial ownership of the Company after the Reorganization effective as
of February 1, 1997 was 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 805,000 - 13.59%
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 27,200(1) 6.53%
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 4,394 7,826 .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.
44
<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) 2,173,948 36.70%
- -----------
(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.
Remainder of page intentionally left blank
45
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Does Not Apply
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Financial Statement Schedules
All schedules have been omitted because the information required is
included in the consolidated financial statements or the notes thereto.
2. Exhibits
Incorporated in this form by reference (all exhibits other than exhibit
no. 27 were filed in Registration Statement):
EXHIBIT
NUMBER DESCRIPTION
2 Plan of Reorganization
3 (i) Articles of Incorporation of Holding Company
(iii) Articles of Incorporation by General Partner
(iv) Bylaws of General Partner
(v) Partnership Agreement of Partnership
4 Instrument defining the rights of security holders (see Articles
of Incorporation)
10 (i) Software License, Development Services and Maintenance Agreement
between Partnership and Hartford Fire Insurance Company (Redacted
for Confidentiality)*
46
<PAGE>
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) Incentive Award Plan of Corporate Systems for Key Employees
10 (v) Agreements relating to Awards Pursuant to 1995 Incentive Award
Plan
- Johnny Mize
- Scott Gilmour
- Mike Unruh
- John Champlin
24 Power of Attorney**
27 Financial Data Schedule**
99 Form of Subscription Agreement
The Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.
(b) Reports on Form 8-K
None.
* Confidential Treatment has been granted as to certain portions of these
Exhibits.
** Filed herewith.
ITEM 15. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
No annual report or proxy material covering the Company's 1996 fiscal
year has been sent to the Company's security holders.
47
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 31st day of
March, 1997.
Corporate Systems Holding, Inc.
By:
----------------------------------
(Johnny E. Mize, President and CEO)
(Signature and Title)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the persons in the capacities and on the date
indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Johnny E. Mize
- ----------------------- President, CEO May 31, 1997
(Johnny E. Mize) (Principal Executive Officer
and Director)
/s/ *
- ------------------------ (Principal Financial and May 31, 1997
(Michael D. Unruh) Accounting Officer)
/s/ *
- ------------------------ (Chairman of the Board of May 31, 1997
(Max R. Sherman) Directors)
/s/ *
- ------------------------ (Director) May 31, 1997
(Guyon H. Saunders)
/s/ *
- ------------------------ (Director) May 31, 1997
(Edward A. Fancher, Jr.)
/s/ *
- ------------------------ (Director) May 31, 1997
(Jess Latham, Jr.)
/s/ *
- ------------------------ (Director) May 31, 1997
(Charles Scott Gilmour)
* By /s/ Johnny E. Mize
---------------------------
(Johnny E. Mize
Attorney-in-fact)
48
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
2 Plan of Reorganization
3 (i) Articles of Incorporation of Holding Company
(iii) Articles of Incorporation by General Partner
(iv) Bylaws of General Partner
(v) Partnership Agreement of Partnership
4 Instrument defining the rights of security holders (see Articles
of Incorporation)
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) Incentive Award Plan of Corporate Systems for Key Employees
10 (v) Agreements relating to Awards Pursuant to 1995 Incentive Award
Plan
- Johnny Mize
- Scott Gilmour
- Mike Unruh
- John Champlin
24 Power of Attorney**
27 Financial Data Schedule**
99 Form of Subscription Agreement
Incorporated in this form by reference (all exhibits other than exhibit
no. 27 were filed in Registration Statement):
The Exhibits include the management contracts and compensatory plans or
arrangements required to be filed as exhibits to this Form 10-K by Item
601(10)(iii) of Regulation S-K.
* Confidential Treatment has been granted as to certain portions of these
Exhibits.
** Filed herewith.
<PAGE>
POWER OF ATTORNEY
Each director and/or officer of Corporate Systems Holding, Inc. whose
signature appears herein appoints Johnny E. Mize and Michael D. Unruh, and
each of them severally, as his attorney-in-fact to sign in his name and
behalf, in any and all capacities stated herein, and to file with the
Securities and Exchange Commission, Corporate Systems Holding, Inc.'s annual
report on Form 10-K and any and all amendments thereto.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Johnny E. Mize President, CEO
--------------------------- (Principal Executive Officer March 24, 1997
(Johnny E. Mize) and Director)
/s/ Michael D. Unruh (Principal Financial and
--------------------------- Accounting Officer) March 24, 1997
(Michael D. Unruh)
/s/ Max R. Sherman (Chairman of the Board of
--------------------------- Directors) March 24, 1997
(Max R. Sherman)
/s/ Guyon H. Saunders
--------------------------- (Director) March 24, 1997
(Guyon H. Saunders)
/s/ Edward A. Fancher, Jr.
--------------------------- (Director) March 24, 1997
(Edward A. Fancher, Jr.)
/s/ Jess Latham, Jr.
--------------------------- (Director) March 24, 1997
(Jess Latham, Jr.)
/s/ Charles Scott Gilmour
--------------------------- (Director) March 24, 1997
(Charles Scott Gilmour)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,785,640
<SECURITIES> 0
<RECEIVABLES> 5,487,352
<ALLOWANCES> 419,967
<INVENTORY> 0
<CURRENT-ASSETS> 12,186,755
<PP&E> 9,145,850
<DEPRECIATION> 3,599,964
<TOTAL-ASSETS> 17,861,802
<CURRENT-LIABILITIES> 7,623,994
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 9,215,096
<TOTAL-LIABILITY-AND-EQUITY> 17,861,802
<SALES> 0
<TOTAL-REVENUES> 41,773,098
<CGS> 0
<TOTAL-COSTS> 37,477,216
<OTHER-EXPENSES> (338,152)
<LOSS-PROVISION> (93,871)
<INTEREST-EXPENSE> 238,729
<INCOME-PRETAX> 4,634,618
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,634,618
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,634,618
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
