<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1998
REGISTRATION NO. 333-67611
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
DST SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8721 43-1581814
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
OF INCORPORATION OF
ORGANIZATION)
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
(816) 435-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
ROBERT C. CANFIELD, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY
DST SYSTEMS, INC.
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
(816) 435-1000
FAX (816) 435-8630
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
JOHN F. MARVIN, ESQ. JAMES E. LARAMY, ESQ. GILLES S. ATTIA, ESQ.
DIANE M. BONO, ESQ. USCS INTERNATIONAL, INC. KEVIN A. COYLE, ESQ.
SONNENSCHEIN NATH & 2969 PROSPECT PARK DRIVE WILLIAM W. BARKER, ESQ.
ROSENTHAL RANCHO CORDOVA, CA 95670 GRAHAM & JAMES LLP
4520 MAIN STREET, SUITE (916) 636-4500 400 CAPITOL MALL, 24TH
1100 FAX (916) 636-4561 FLOOR
KANSAS CITY, MO 64111 SACRAMENTO, CA 95814
(816) 932-4400 (916) 558-6700
FAX (816) 531-7545 FAX (916) 441-6700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of the Registration Statement and the
effective time of the merger of a subsidiary of DST Systems, Inc. and USCS
International, Inc. as described in the Agreement and Plan of Merger, dated as
of September 2, 1998 (the "Merger Agreement"), included as Appendix A to the
Joint Proxy Statement-Prospectus forming a part of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
November 25, 1998
Dear Stockholder:
You are hereby notified and cordially invited to attend a Special Meeting of
Stockholders of DST Systems, Inc., a Delaware corporation ("DST"), to be held
at the offices of DST, 333 West 11th Street, Kansas City, Missouri, at 11:00
a.m., Central Standard Time, on Monday, December 21, 1998.
The reason for this Special Meeting is to consider and approve a proposed
merger, including the issuance of common stock of DST in connection with such
proposed merger, and to approve an amendment to DST's stock option plan to
increase the number of shares authorized for issuance under that plan.
DST has entered into an Agreement and Plan of Merger, dated September 2,
1998 (the "Merger Agreement"), with USCS International, Inc., a Delaware
corporation ("USCS"), providing for the merger (the "Merger") of a wholly-
owned subsidiary of DST with and into USCS. The Merger is structured so that
DST will be the surviving publicly-traded company and USCS will become a
wholly-owned subsidiary of DST. USCS stockholders (other than DST, USCS or
their subsidiaries) will have the right to receive .62 of a share of DST
common stock for each share of USCS common stock that they own, and DST
stockholders will continue to own their existing shares. We estimate that the
shares of DST common stock to be issued to USCS stockholders will represent
approximately 22% of the outstanding common stock of DST after the Merger.
In connection with the meeting, you are being asked to approve the Merger,
including the issuance of shares of DST common stock in connection with the
Merger. The Merger cannot be completed unless the stockholders of both DST and
USCS approve it. YOUR VOTE IS VERY IMPORTANT.
THE BOARD OF DIRECTORS OF DST HAS DETERMINED THAT THE MERGER IS FAIR TO DST
AND IN THE BEST INTERESTS OF DST STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS OF DST HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND
THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MERGER, INCLUDING THE ISSUANCE OF
SHARES OF DST COMMON STOCK IN CONNECTION THEREWITH.
In addition, you are being asked to approve an amendment to DST's 1995 Stock
Option and Performance Award Plan, as amended (the "DST Plan") to increase the
number of shares of DST common stock authorized for issuance under the DST
Plan. The need for such increase results from the fact that, as a result of
the Merger, DST will have a larger base of key employees eligible for periodic
stock option grants. The Merger is not dependent upon the approval of the
amendment of the DST Plan.
THE BOARD OF DIRECTORS OF DST HAS UNANIMOUSLY APPROVED AN AMENDMENT TO THE
DST PLAN TO INCREASE THE NUMBER OF SHARES OF DST COMMON STOCK AUTHORIZED FOR
ISSUANCE UNDER THE DST PLAN AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR
OF SUCH AMENDMENT.
<PAGE>
It is important that your shares be represented at the meeting. A proxy card
is enclosed for those of you who hold shares directly. If you are a
participant in the DST Employee Stock Ownership Plan, an instruction card is
enclosed to permit you to direct the vote of shares allocated to you under
that Plan. Please date the card, sign it and promptly return it in the
enclosed envelope, which requires no postage if mailed in the United States.
Alternatively, you may cast your votes electronically as described on the
enclosed card.
If you own shares registered in the name of a broker, you should receive
instructions from that broker permitting you to direct the broker to vote
those shares.
The accompanying Joint Proxy Statement-Prospectus provides you with detailed
information about the proposed Merger and the related stock issuance and about
the proposed amendment to increase the number of shares authorized for
issuance under the DST Plan. We encourage you to read all of the accompanying
materials.
_____________________________________
Thomas A. McDonnell
President and Chief Executive
Officer
<PAGE>
DST SYSTEMS, INC.
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 21, 1998
To the Stockholders of DST Systems, Inc.:
A Special Meeting of Stockholders of DST Systems, Inc., a Delaware
corporation ("DST"), will be held at the offices of DST, 333 West 11th Street,
Kansas City, Missouri, on Monday, December 21, 1998 at 11:00 a.m. (CST) (the
"Special Meeting"), for the following purposes:
1. To consider and vote on a proposal to approve the merger (the "Merger")
of DST Acquisitions, Inc., a Delaware subsidiary of DST, with and into USCS
International, Inc., a Delaware corporation ("USCS"), including the issuance
of up to 14,291,378 shares of DST common stock, $.01 par value, pursuant to an
Agreement and Plan of Merger, dated September 2, 1998 (the "Merger
Agreement"), by and among DST, DST Acquisitions, Inc., and USCS. The
consummation of the Merger will result in, among other things, the conversion
of each outstanding share of common stock of USCS (except those shares held by
DST, USCS or their subsidiaries) into the right to receive .62 of a share of
common stock of DST. As a result, DST will become the holder of all the
outstanding shares of common stock of USCS, and the holders of shares of
common stock of USCS outstanding immediately prior to the Merger (other than
DST, USCS or their subsidiaries) will become holders of shares of common stock
of DST, all as more fully described in the accompanying Joint Proxy Statement-
Prospectus. A copy of the Merger Agreement is included as Appendix A to the
accompanying Joint Proxy Statement-Prospectus;
2. To approve an amendment to DST's 1995 Stock Option and Performance Award
Plan, as amended (the "DST Plan") to increase the number of shares of DST
common stock authorized for issuance under the DST Plan; and
3. To transact such other business as may properly come before the Special
Meeting with respect to matters to be presented which are presently unknown to
DST.
DST has fixed the close of business on November 6, 1998, as the record date
for the determination of the holders of DST common stock entitled to notice
of, and to vote at, the Special Meeting and adjournments or postponements
thereof. In order for any of the proposals to be approved at the Special
Meeting, a quorum of DST stockholders must be present at the meeting, either
in person or through a proxy, regardless of whether such stockholders vote
their shares. A majority of the shares of DST common stock outstanding on the
record date constitutes a quorum. To approve the first and second proposals
listed above, the DST stockholders present at the meeting in person or by
proxy must vote a majority of their shares for the proposal.
It is important that your shares be represented at the meeting. A proxy card
is enclosed for those of you who hold shares directly. If you are a
participant in the DST Employee Stock Ownership Plan, an instruction card is
enclosed to permit you to direct the vote of shares allocated to you under
that Plan. REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE DATE THE CARD, SIGN IT AND PROMPTLY RETURN IT IN THE ENCLOSED ENVELOPE,
WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. ALTERNATIVELY, YOU
MAY CAST YOUR VOTES ELECTRONICALLY AS DESCRIBED ON THE ENCLOSED CARD. EVEN IF
YOU HAVE PREVIOUSLY RETURNED A PROXY, YOU MAY ATTEND THE SPECIAL MEETING AND
VOTE IN PERSON.
<PAGE>
Information regarding these proposals and related matters is contained in the
accompanying Joint Proxy Statement-Prospectus including the Appendices thereto.
BY ORDER OF THE BOARD OF DIRECTORS
_____________________________________
Thomas A. McDonnell
President and Chief Executive
Officer
Dated: November 25, 1998
<PAGE>
2969 PROSPECT PARK DRIVE
RANCHO CORDOVA, CALIFORNIA 95670
November 25, 1998
Dear Stockholder:
You are hereby notified and cordially invited to attend a Special Meeting of
Stockholders of USCS International, Inc., a Delaware corporation ("USCS"), to
be held at the offices of USCS, 2969 Prospect Park Drive, Rancho Cordova,
California, at 9:00 a.m., Pacific Standard Time, on Monday, December 21, 1998.
At this important meeting, you are being asked to approve and adopt the
Agreement and Plan of Merger, dated September 2, 1998 (the "Merger
Agreement"), by and among DST Systems, Inc., a Delaware corporation ("DST"),
DST Acquisitions, Inc., a Delaware corporation (and a wholly-owned subsidiary
of DST), and USCS, providing for the merger (the "Merger") of DST
Acquisitions, Inc. with and into USCS. The Merger is structured so that DST
will be the surviving publicly-traded company and USCS will become a wholly-
owned subsidiary of DST. USCS stockholders (other than DST, USCS or their
subsidiaries) will receive .62 of a share of DST common stock for each share
of USCS common stock that they own. We estimate that the shares of DST common
stock to be issued to USCS stockholders will represent approximately 22% of
the outstanding common stock of DST after the Merger.
THE BOARD OF DIRECTORS OF USCS HAS DETERMINED THAT THE MERGER IS FAIR TO
USCS AND IN THE BEST INTERESTS OF USCS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF
DIRECTORS OF USCS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER
AND THE OTHER TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND
UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF USCS VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT AND APPROVAL OF THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT.
The Merger cannot be completed unless the stockholders of both USCS and DST
approve it. YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the meeting, please take the time to vote
by completing and mailing the enclosed proxy card.
If you own shares registered in the name of a broker, you should receive
instructions from that broker permitting you to direct the broker to vote
those shares.
This Joint Proxy Statement-Prospectus provides you with detailed information
about the proposed Merger and the related stock issuance. We encourage you to
read this entire document carefully.
_____________________________________
James C. Castle
Chairman and Chief Executive Officer
<PAGE>
USCS INTERNATIONAL, INC.
2969 PROSPECT PARK DRIVE
RANCHO CORDOVA, CALIFORNIA 95670
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD DECEMBER 21, 1998
To the Stockholders of USCS International, Inc.:
The Special Meeting of Stockholders of USCS International, Inc., a Delaware
corporation ("USCS"), will be held at the offices of USCS, 2969 Prospect Park
Drive, Rancho Cordova, California on Monday, December 21, 1998 at 9:00 a.m.
(PST) (the "Special Meeting"), for the following purposes:
1. To consider and vote on a proposal to approve and adopt the Agreement and
Plan of Merger, dated September 2, 1998 (the "Merger Agreement"), by and among
DST Systems, Inc., a Delaware corporation ("DST"), DST Acquisitions, Inc. and
USCS, providing for the merger (the "Merger") of DST Acquisitions, Inc., a
Delaware subsidiary of DST, with and into USCS, and to authorize the Merger
and the other transactions contemplated by the Merger Agreement. The
consummation of the Merger will result in, among other things, the conversion
of each outstanding share of common stock of USCS (except those shares held by
DST, USCS or their subsidiaries) into the right to receive .62 of a share of
common stock of DST. As a result, DST will become the holder of all the
outstanding shares of common stock of USCS, and the holders of shares of
common stock of USCS outstanding immediately prior to the Merger (other than
DST, USCS or their subsidiaries) will become holders of shares of common stock
of DST, all as more fully described in the accompanying Joint Proxy Statement-
Prospectus. A copy of the Merger Agreement is attached as Appendix A to the
accompanying Joint Proxy Statement-Prospectus; and
2. To transact such other business as may properly come before the Special
Meeting with respect to matters to be presented which are presently unknown to
USCS.
USCS has fixed the close of business on November 6, 1998, as the record date
for the determination of holders of common stock of USCS entitled to notice
of, and to vote at, the Special Meeting and adjournments or postponements
thereof. Approval and adoption of the Merger Agreement and authorization of
the Merger and the other transactions contemplated by the Merger Agreement
requires the affirmative vote of a majority of the outstanding shares of USCS
common stock entitled to vote at the Special Meeting.
Information regarding the proposed Merger, the Merger Agreement and related
matters is contained in the accompanying Joint Proxy Statement-Prospectus
including the Appendices thereto.
PLEASE DATE, SIGN AND PROMPTLY RETURN THE PROXY CARD IN THE ENCLOSED
ENVELOPE, WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF YOU HAVE PREVIOUSLY
RETURNED A PROXY.
BY ORDER OF THE BOARD OF DIRECTORS
_____________________________________
James C. Castle
Chief Executive Officer and Chairman
of the Board
Dated: November 25, 1998
PLEASE DO NOT SEND ANY USCS STOCK CERTIFICATES TO BE EXCHANGED FOR DST STOCK
CERTIFICATES UNTIL REQUESTED TO DO SO AFTER THE MERGER IS COMPLETED.
<PAGE>
November 25, 1998
Dear 401(k) Participant,
A Special Meeting of Stockholders of the Company will be held on December
21, 1998, and you have the right to provide instructions to the 401(k) Trustee
on how to vote the Company shares allocated to your 401(k) Account as of the
record date of November 6, 1998.
The shares of USCS International, Inc. stock in the 401(k) are held in a
trust, and the 401(k) Trustee, CG Trust Company, is the owner of record of the
shares for purposes of voting the shares. The 401(k) Trustee is a "directed'
trustee; a directed trustee cannot take action unless directed in writing by
an authorized person or entity. Each 401(k) participant with Company shares in
their account as of the record date has the opportunity to direct the 401(k)
Trustee how to vote such shares with respect to all matters that stockholders
vote on.
Details of the business to be conducted at the annual meeting on which you
will be instructing the 401(k) Trustee how to vote shares allocated to your
account are given in the enclosed Notice of Special Meeting and Joint Proxy
Statement-Prospectus.
PLEASE FILL OUT AND SIGN THE ENCLOSED "CONFIDENTIAL INSTRUCTIONS TO THE
401(K) TRUSTEE" AND RETURN IT TO PRICEWATERHOUSECOOPERS NO LATER THAN 5 PM PST
ON DECEMBER 14, 1998. The "Confidential Instructions to the 401(k) Trustee"
ballots will be tallied by PricewaterhouseCoopers and the aggregate results
provided to the 401(k) Trustee. No disclosure of your individual voting
instructions will be made to USCS.
Sincerely,
James C. Castle
Chairman and Chief Executive Officer
<PAGE>
CONFIDENTIAL INSTRUCTIONS TO THE 401(K) TRUSTEE
HOW TO VOTE THE SHARES ALLOCATED TO MY 401(K)
ACCOUNT AT THE COMPANY'S SPECIAL MEETING OF
STOCKHOLDERS
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TO THE TRUSTEE OF USCS INTERNATIONAL, INC. 401(K) PLAN:
I INSTRUCT THE 401(K) TRUSTEE TO VOTE THE SHARES OF COMMON STOCK OF USCS
INTERNATIONAL, INC. ALLOCATED TO MY USCS INTERNATIONAL, INC. 401(K) ACCOUNT AS
OF THE RECORD DATE OF NOVEMBER 6, 1998 AT A SPECIAL MEETING OF STOCKHOLDERS OF
USCS INTERNATIONAL, INC. TO BE HELD DECEMBER 21, 1998 AT 9 A.M. AS FOLLOWS:
1.APPROVE AND ADOPT THE AGREEMENT AND PLAN OF MERGER DATED SEPTEMBER 2, 1998,
BY AND AMONG DST SYSTEMS, INC., DST ACQUISITIONS, INC. ("DST ACQUISITIONS"),
AND USCS INTERNATIONAL, INC. ("USCS") PROVIDING FOR THE MERGER OF DST
ACQUISITIONS WITH AND INTO USCS.
[ ] FOR
[ ] NOT FOR
[ ] ABSTAIN
2.TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL
MEETING WITH RESPECT TO MATTERS TO BE PRESENTED WHICH ARE PRESENTLY UNKNOWN TO
USCS.
[ ] FOR
[ ] NOT FOR
[ ] ABSTAIN
Print Name: __________________________
Signature: ___________________________ Date: ___________________________
<PAGE>
DST SYSTEMS, INC. AND
USCS INTERNATIONAL, INC.
---------------
JOINT PROXY STATEMENT
---------------
DST SYSTEMS, INC. PROSPECTUS
---------------
DST Systems, Inc., a Delaware corporation ("DST"), and USCS International,
Inc., a Delaware corporation ("USCS"), have entered into an Agreement and Plan
of Merger, dated as of September 2, 1998 (the "Merger Agreement"), among DST,
USCS and DST Acquisitions, Inc., a wholly-owned subsidiary of DST
("Acquisition Sub"). In accordance with the Merger Agreement, Acquisition Sub
will merge with and into USCS, USCS will become a wholly-owned subsidiary of
DST and each outstanding share (except for shares of USCS common stock held by
DST, USCS or their respective subsidiaries) of common stock of USCS ("USCS
Common Stock"), will be converted into the right to receive .62 (the "Exchange
Ratio") of a share of common stock of DST ("DST Common Stock") (all such
actions collectively, the "Merger").
This Joint Proxy Statement-Prospectus is being furnished to stockholders of
DST in connection with the solicitation of proxies by the DST Board of
Directors (the "DST Board") for use at the Special Meeting of DST stockholders
to be held on December 21, 1998 at the offices of DST, 333 West 11th Street,
Kansas City, Missouri 64105, commencing at 11:00 a.m., local time, and at any
adjournment or postponement thereof (the "DST Special Meeting") for the
purposes set forth herein and in the accompanying Notice of Special Meeting of
Stockholders.
This Joint Proxy Statement-Prospectus is also being furnished to
stockholders of USCS in connection with the solicitation of proxies by the
USCS Board of Directors (the "USCS Board") for use at the Special Meeting of
USCS stockholders to be held on December 21, 1998, at the offices of USCS,
2969 Prospect Park Drive, Rancho Cordova, California 95670, commencing at 9:00
a.m., local time, and at any adjournment or postponement thereof (the "USCS
Special Meeting") for the purposes set forth herein and in the accompanying
Notice of Special Meeting of Stockholders.
This Joint Proxy Statement-Prospectus constitutes the Prospectus of DST with
respect to up to 14,291,378 shares of DST Common Stock to be issued in the
Merger in exchange for outstanding shares of USCS Common Stock. All
information contained in this Joint Proxy Statement-Prospectus relating to DST
has been supplied by DST, and all information contained herein relating to
USCS has been supplied by USCS.
DST Common Stock is listed on the New York Stock Exchange (the "NYSE") and
the Chicago Stock Exchange under the symbol "DST", and, following the Merger,
DST Common Stock is expected to continue to be traded under such symbol. It is
a condition of the obligations of DST and USCS to the consummation of the
Merger that the shares to be issued in the Merger will be approved for listing
on the NYSE and the Chicago Stock Exchange, upon official notice of issuance.
Following consummation of the Merger, USCS Common Stock will be removed from
registration under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and will no longer be listed for quotation on the NASDAQ
National Market ("Nasdaq").
On September 2, 1998, the last full trading day prior to the public
announcement of the execution and delivery of the Merger Agreement, the
closing sale price of the DST Common Stock on the NYSE was $60.50 per share
and the closing sale price of the USCS Common Stock on Nasdaq was $26.00 per
share. On November 19, 1998, the closing sale price of the DST Common Stock on
the NYSE was $51.75 per share and the closing sale price of the USCS Common
Stock on Nasdaq was $30.3125 per share.
---------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY STATEMENT-
PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE STOCKHOLDERS OF
DST AND USCS ARE URGED TO READ AND CONSIDER CAREFULLY THIS JOINT PROXY
STATEMENT-PROSPECTUS IN ITS ENTIRETY, INCLUDING THE MATTERS REFERRED TO
BEGINNING ON PAGE 15 UNDER "RISK FACTORS."
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------
The date of this Joint Proxy Statement-Prospectus is November 25, 1998.
This Joint Proxy Statement-Prospectus and the accompanying proxy or
instruction card are first being mailed to stockholders of DST and USCS on or
about November 25, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<C> <S> <C>
PART I. CERTAIN BACKGROUND, SUMMARY AND RISK INFORMATION................ 5
QUESTIONS AND ANSWERS ABOUT THE PROPOSALS....................... 5
SUMMARY......................................................... 8
RISK FACTORS.................................................... 15
Caution With Respect to Forward-Looking Statements.............. 15
Risks Related to the Merger..................................... 15
Risks Related to DST............................................ 16
Risks Related to USCS........................................... 19
Other Risk Factors Related to DST and USCS...................... 23
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA........................................................... 24
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA............ 26
COMPARATIVE PER SHARE DATA...................................... 27
COMPARATIVE MARKET PRICE DATA................................... 28
THE COMPANIES................................................... 29
DST............................................................. 29
DST Acquisitions, Inc........................................... 29
USCS............................................................ 29
PART II. THE PROPOSALS BEFORE THE DST AND USCS STOCKHOLDERS.............. 30
GENERAL INFORMATION ABOUT THE PROPOSALS AND MEETINGS............ 30
SUMMARY OF PROPOSALS AND BOARD RECOMMENDATIONS.................. 30
THE SPECIAL MEETING OF DST STOCKHOLDERS......................... 31
THE SPECIAL MEETING OF USCS STOCKHOLDERS........................ 33
MERGER PROPOSALS FOR DST AND USCS STOCKHOLDERS.................. 34
THE MERGER...................................................... 34
Background of the Merger........................................ 34
DST's Reasons for the Merger; Recommendation of the DST Board... 39
USCS' Reasons for the Merger; Recommendation of the USCS Board.. 40
Opinion of USCS' Financial Advisor.............................. 42
Certain Information Provided Among the Parties and to Merrill
Lynch.......................................................... 48
Terms of the Merger............................................. 49
Effective Time of the Merger.................................... 50
Exchange of Certificates in the Merger.......................... 50
Listing of the DST Common Stock on the NYSE and the Chicago
Stock Exchange................................................. 50
Representations and Warranties.................................. 51
Business of USCS Pending the Merger............................. 51
Certain Additional Covenants of USCS............................ 52
No Solicitation................................................. 52
Certain Covenants of DST........................................ 53
Conditions; Waivers............................................. 53
Amendment; Termination.......................................... 55
Termination Fee................................................. 56
Other Filings................................................... 56
Material United States Federal Income Tax Consequences of the
Merger......................................................... 57
Regulatory Approvals............................................ 58
Federal Securities Laws Consequences; Stock Transfer Restriction
Agreements..................................................... 58
Accounting Treatment............................................ 58
Interests of Certain Persons in the Merger...................... 59
Management and Operations of USCS After the Merger.............. 60
Expenses and Fees............................................... 60
No Appraisal Rights............................................. 60
</TABLE>
2
<PAGE>
<TABLE>
<C> <S> <C>
OTHER AGREEMENTS............................................... 61
Stockholder Agreements......................................... 61
Registration Rights Agreement.................................. 62
BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS, DIRECTORS AND
MANAGEMENT.................................................... 64
DST............................................................ 64
USCS........................................................... 66
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS.... 68
COMPARATIVE RIGHTS OF USCS STOCKHOLDERS AND DST STOCKHOLDERS... 77
Business Combinations.......................................... 77
Amendments to Charters......................................... 77
Amendments to By-laws.......................................... 78
Preemptive Rights.............................................. 78
Redemption of Capital Stock.................................... 78
Stockholder Action by Consent.................................. 78
Special Stockholders Meetings.................................. 78
Cumulative Voting.............................................. 78
Number and Election of Directors............................... 79
Removal of Directors........................................... 79
Vacancies...................................................... 79
Indemnification of Directors and Officers...................... 80
Limitation of Personal Liability of Directors.................. 81
INFORMATION REGARDING MANAGEMENT OF DST........................ 82
INFORMATION REGARDING MANAGEMENT OF THE SURVIVING SUBSIDIARY... 83
Directors and Executive Officers............................... 83
Executive Compensation......................................... 85
Employment and Severance Agreements............................ 87
Certain Relationships and Related Transactions................. 87
PROPOSAL 2 FOR DST STOCKHOLDERS--AMENDMENT OF THE DST PLAN..... 89
Background of Amendment to DST Plan............................ 89
DST Plan Proposal; Recommendation of the DST Board............. 89
Summary of the DST Plan........................................ 89
PART III. GENERAL INFORMATION ABOUT DST AND USCS......................... 93
BUSINESS OF DST................................................ 93
BUSINESS OF USCS............................................... 93
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF DST.................................. 93
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF USCS................................. 93
ADDITIONAL INFORMATION REGARDING DST........................... 94
Financial Statements........................................... 94
ADDITIONAL INFORMATION REGARDING USCS.......................... 94
Financial Statements........................................... 94
PART IV. MISCELLANEOUS.................................................. 95
EXPERTS........................................................ 95
LEGAL OPINIONS................................................. 95
WHERE YOU CAN FIND MORE INFORMATION............................ 95
INDEX OF DEFINED TERMS......................................... 96
</TABLE>
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APPENDICES
<TABLE>
<C> <S> <C>
APPENDIX A Agreement and Plan of Merger, dated as of September 2, 1998,
among DST, DST Acquisitions, Inc. and USCS................... A-1
APPENDIX B Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated. B-1
APPENDIX C DST's Annual Report on Form 10-K for the year ended December
31, 1997..................................................... C-1
APPENDIX D DST's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998............................................... D-1
APPENDIX E DST's Quarterly Report on Form 10-Q for the quarter ended June
30, 1998..................................................... E-1
APPENDIX F DST's Current Report on Form 8-K/A-2 dated August 4, 1998..... F-1
APPENDIX G DST's Quarterly Report on Form 10-Q/A for the quarter ended
September 30, 1997........................................... G-1
APPENDIX H USCS' Annual Report on Form 10-K for the year ended December
31, 1997..................................................... H-1
APPENDIX I USCS' Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998............................................... I-1
APPENDIX J USCS' Quarterly Report on Form 10-Q for the quarter ended June
30, 1998..................................................... J-1
APPENDIX K DST's Notice and Proxy Statement for the Annual Meeting of
Stockholders, Tuesday, May 12, 1998.......................... K-1
APPENDIX L DST's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998........................................... L-1
APPENDIX M USCS' Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998........................................... M-1
</TABLE>
The above appendices are included as part of the Joint Proxy Statement-
Prospectus.
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PART I. CERTAIN BACKGROUND, SUMMARY AND RISK INFORMATION
QUESTIONS AND ANSWERS
ABOUT THE PROPOSALS
Q. WHAT IS THE PROPOSED TRANSACTION?
A. We are proposing that USCS become a wholly-owned subsidiary of DST through
the merger of a subsidiary of DST with and into USCS. As a result, USCS
stockholders will exchange their USCS shares for DST shares.
Q. WHY IS THE TRANSACTION BEING PROPOSED?
A. Both DST and USCS provide sophisticated information processing and computer
software services and products. DST primarily serves mutual funds,
insurance companies, banks and other financial services organizations. USCS
primarily serves cable television and multi-service providers and
telecommunications companies. The combined knowledge and expertise of both
companies in information processing, customer care, billing and statement
solutions should result in the combined companies having increased service
capabilities and product offerings and should facilitate more rapid
expansion into new markets.
We also believe that the combined companies may achieve increased
efficiencies in their business operations. The peak demand periods for
DST's output production business and the peak demand periods for USCS'
output production business occur at different times of the month. The
ability to use both DST's and USCS' facilities should provide for more
efficient use of equipment and, collectively, should require less peak
capacity at each company's facilities. In addition, both DST and USCS are
currently engaged in the development of electronic billing technology.
Joint development of this technology should be more efficient and should
result in more rapid introduction of new products and services.
Please note that achieving these benefits is subject to important factors
that may affect the future results of DST and USCS. For a discussion of
these factors, please see "Risk Factors" beginning on page 15.
Q. HOW WILL I BENEFIT?
A. We believe that stockholders of DST and USCS will benefit from the combined
companies' expanded service capabilities and product offerings. We believe
that, together, DST and USCS will have a significant presence in terms of
market share in three growing industries: mutual fund shareowner
processing, subscriber management services and output processing. In
addition, the combined companies will have the potential to generate
substantial operational savings through economies of scale, coordinated
product efficiencies and elimination of duplicate costs associated with
operating two public companies. While it is not possible to quantify with
precision the amount of expected synergies, they have been estimated by DST
to aggregate from $5 million to $15 million on a pretax basis by the end of
2000. See "Risk Factors--Risks Related to the Merger--Integration of the
Two Companies."
Please note that achieving these benefits is subject to important factors
that may affect the future results of DST and USCS. For a discussion of
these factors, please see "Risk Factors" beginning on page 15.
Q. WHAT DO I NEED TO DO NOW?
A. Vote and sign your proxy or instruction card and mail it in the enclosed
return envelope as soon as possible so that your shares may be represented
at your company's Special Meeting. The USCS Special Meeting and the DST
Special Meeting will take place on December 21, 1998. The USCS Board
unanimously recommends voting in favor of the proposed Merger. The DST
Board unanimously recommends voting in favor of the Merger, including the
issuance of DST Common Stock in connection with the Merger. See "Summary--
Interests of USCS Management and Directors in the Merger" and "Interests of
Certain Persons in the Merger."
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Q. IF I AM A USCS STOCKHOLDER, SHOULD I SEND IN MY USCS STOCK CERTIFICATES
NOW?
A. No. After the Merger is completed, USCS stockholders will receive written
instructions for exchanging their stock certificates. DST stockholders will
keep their current certificates.
Q. HOW WAS THE EXCHANGE RATIO DETERMINED?
A. The Exchange Ratio is a result of negotiation between DST and USCS. Both
the DST Board and the USCS Board voted unanimously to approve the Merger,
including the Exchange Ratio. See "The Merger--Background of Merger"
beginning on page 34.
Q. IF I AM A USCS STOCKHOLDER, WHAT EFFECT WILL THE MERGER HAVE ON MY
STOCKHOLDINGS?
A. If you are a USCS stockholder, each share of USCS Common Stock that you own
will be converted into the right to receive .62 of a share of DST Common
Stock. You will receive a cash payment for any fractional share of DST
Common Stock you would have otherwise received. For example, if you own 10
shares of USCS Common Stock, you have the right to receive the equivalent
of 6.2 shares of DST Common Stock. You will receive 6 shares of DST Common
Stock plus cash equal to the market value of .2 of a share of DST Common
Stock at the time of the Merger (that would have amounted to $10.35 on
November 19, 1998 based on DST's trading price on that date, but the actual
amount you will receive cannot be determined at this time). If you own 100
shares of USCS Common Stock you have the right to receive 62 shares of DST
Common Stock, but because you are not owed the equivalent of a fraction of
a share, you will not receive a cash payment.
Q. WHY ARE THE DST STOCKHOLDERS BEING ASKED TO VOTE?
A. Although DST is not merging directly with USCS, because of the number of
shares of DST Common Stock to be issued in the transaction, the rules of
the New York Stock Exchange require the approval of DST stockholders.
Q. IF I AM A DST STOCKHOLDER, WILL I EXCHANGE MY DST SHARES?
A. No. If you are a DST stockholder, at the time of the Merger you will
continue to hold the same number of shares as you did before the Merger.
Q. IF I AM A USCS STOCKHOLDER, WILL THE FRACTION OF A SHARE OF DST COMMON
STOCK I WILL RECEIVE FOR EACH SHARE OF USCS COMMON STOCK I HOLD CHANGE
BETWEEN NOW AND THE TIME THAT THE MERGER IS COMPLETED?
A. No. The .62 Exchange Ratio is a fixed exchange ratio, which means that it
will not change even if the trading price of DST Common Stock changes.
However, the market value of the DST Common Stock you will receive in the
Merger will increase or decrease as the market price of DST Common Stock
increases or decreases.
Q. WILL DST BE PAYING DIVIDENDS IN THE FUTURE?
A. As public companies, neither DST nor USCS has paid cash dividends. DST does
not currently plan to pay cash dividends and it currently intends to retain
its earnings for use in its business.
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A. We are working toward completing the Merger as quickly as possible, and
hope to complete it before the end of 1998. The closing of the Merger
could, however, be delayed by a number of factors, including the timing of
a proposed spin-off transaction by Kansas City Southern Industries, Inc., a
major DST stockholder. To review this and other conditions to the
completion of the Merger, see pages 53 through 55.
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Q. WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO DST STOCKHOLDERS AND USCS
STOCKHOLDERS?
A. We have been advised that the Merger will be tax-free to DST stockholders
and to USCS stockholders for federal income tax purposes, except for the
receipt of cash payments by USCS stockholders for any fractional shares. To
review the tax consequences to stockholders in greater detail, see page 57.
Q. WHAT ARE THE ACCOUNTING CONSEQUENCES OF THE MERGER?
A. The Merger will be accounted for under the pooling-of-interests accounting
method, which means that we will treat our companies as if they had always
been combined for accounting and financial reporting purposes. This means
that the historical book value of the assets, liabilities and stockholders'
equity of USCS will be carried over to the consolidated balance sheet of
DST (after adjustments to conform accounting policies and certain other
items), and no new goodwill will be recorded as a result of this
transaction.
Q. WHY IS PROPOSAL 2 INCLUDED FOR DST STOCKHOLDERS?
A. After the Merger, there will be a larger base of key employees eligible for
periodic stock option grants under DST's stock option plan. The DST Board
believes an increase in the number of shares authorized for stock option
grants is appropriate to ensure an adequate number of shares are available
for future stock option grants.
7
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand fully
the Merger, including the legal terms of it, and the proposals to be voted on,
you should read carefully this entire document including the Appendices.
An index of capitalized terms used in this Joint Proxy Statement-Prospectus
is included at the end of this document, prior to the Appendices.
THE COMPANIES
DST Systems, Inc.
333 West 11th Street
Kansas City, Missouri 64105
(816) 435-1000
DST is a company providing sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance companies,
banks and other financial services organizations. See "The Companies" on page
29.
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, California 95670
(916) 636-4500
USCS is a company providing customer management software to cable television
and multi-service providers worldwide, and bill processing services to cable
television, telecommunications, financial services, utilities and other service
industries. See "The Companies" on page 29.
CERTAIN STOCKHOLDERS OF DST AND USCS
Kansas City Southern Industries, Inc. ("KCSI") owns beneficially
approximately 41% of the outstanding shares of DST Common Stock. Concurrent
with the execution of the Merger Agreement, KCSI executed a Stockholder
Agreement pursuant to which it agreed to vote its shares of DST Common Stock in
favor of the Merger, the adoption of the Merger Agreement and the approval of
the terms thereof. On February 3, 1998, KCSI announced plans to distribute to
its common stockholders in a spin-off its financial services operations, which
include its ownership of DST Common Stock. To prevent the timing of that
transaction from affecting adversely the intended accounting treatment of the
Merger, DST and KCSI agreed to certain restrictions on when the spin-off and
the Merger could occur (see "Other Agreements--Stockholder Agreements--DST
Stockholder Agreement"). On October 20, 1998, KCSI announced that the spin-off
would be delayed, pending amendment and resubmission of a ruling request to the
Internal Revenue Service, and will not occur this year.
George L. Argyros, Sr., a director of USCS, owns beneficially approximately
33% of the outstanding shares of USCS Common Stock. Concurrent with the
execution of the Merger Agreement, Mr. Argyros, James C. Castle, the Chief
Executive Officer of USCS, and Charles D. Martin, a director of USCS, have
executed Stockholder Agreements pursuant to which they have agreed to vote
their shares of USCS Common Stock (in the aggregate approximately 36% of the
outstanding shares) in favor of the Merger, the adoption of the Merger
Agreement and approval of the terms thereof. See "Other Agreements--Stockholder
Agreements--USCS Stockholder Agreements." In addition, DST owns approximately
4.7% of the outstanding USCS Common Stock, which it intends to vote for
approval and adoption of the Merger Agreement and approval of the Merger and
the other transactions contemplated by the Merger Agreement.
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REASONS FOR THE MERGER
We regard the products, services and capabilities of DST and USCS as
complementary, and believe that the Merger will enable the combined enterprise
to have a broader product line and to service a broader spectrum of customers.
We also believe that the stockholders of DST and USCS will be benefitted by the
greater strength of the combined enterprise, which will be better positioned to
pursue new opportunities and to meet competitive challenges. The DST Board
believes that DST's competitive position and overall performance will benefit
from the combined companies' products, production capabilities, technology and
customer base. The USCS Board believes that USCS' competitive position and
overall performance will benefit from the combined companies' greater business,
technological and financial resources. Please note that achieving these
benefits is subject to important factors that may affect the future results of
DST and USCS. For a discussion of these factors, please see "Risk Factors"
beginning on page 15.
To review the reasons for the Merger in greater detail, as well as related
uncertainties, see pages 39 through 42.
RISK FACTORS
DST and USCS stockholders should consider risks associated with the Merger
and with holding DST Common Stock. The benefits expected to result from the
Merger may not be achieved. DST stockholders should consider that their current
ownership of 100% of the voting power of DST will be substantially diluted as a
result of issuance of DST Common Stock to the USCS stockholders in the Merger.
USCS stockholders should recognize that the Exchange Ratio is fixed and that
the dollar value of the DST Common Stock to be received by USCS stockholders
upon effectiveness of the Merger may be substantially more or less than the
dollar value of DST Common Stock as of the date of execution of the Merger
Agreement, the date hereof, or the date on which stockholders vote on the
Merger. USCS and DST stockholders should consider the risks relative to DST's
and USCS' business. For a discussion of these and other risk factors pertaining
to the Merger and the business of DST and USCS, please refer to "Risk Factors"
beginning on page 15.
APPROVALS IN CONNECTION WITH THE MERGER
By DST Stockholders:
In order for any of the proposals at the DST Special Meeting to be approved,
a quorum of DST stockholders must be present at the meeting, either in person
or by proxy, regardless of whether such stockholders vote their shares. The
presence in person or by proxy of the holders of a majority of the shares of
DST Common Stock outstanding on the record date constitutes a quorum. The
proposal to approve the Merger, including the issuance of DST Common Stock in
connection with the Merger requires the vote of a majority of the shares of DST
Common Stock present at the meeting in person or by proxy. (See pages 31
through 32)
By USCS Stockholders:
In order for any of the proposals to be approved at the USCS Special Meeting,
a quorum of USCS stockholders must be present at the meeting, either in person
or through a proxy, regardless of whether such stockholders vote their shares.
The presence in person or by proxy of the holders of a majority of the shares
of USCS Common Stock outstanding on the record date constitutes a quorum. The
affirmative vote of a majority of shares of USCS Common Stock outstanding on
the record date is required to approve the Merger. (See page 33)
APPROVAL BY DST STOCKHOLDERS OF THE AMENDMENT TO DST PLAN TO INCREASE SHARES
AUTHORIZED FOR ISSUANCE THEREUNDER
In order for any of the proposals to be approved at the DST Special Meeting,
a quorum of DST stockholders must be present at the meeting, either in person
or by proxy, regardless of whether such stockholders vote their
9
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shares. The holders of a majority of the shares of DST Common Stock outstanding
on the record date constitute a quorum. With respect to the proposal to amend
DST's 1995 Stock Option and Performance Award Plan, as amended (the "DST Plan")
to increase the number of shares authorized for issuance thereunder, the DST
stockholders present at the meeting in person or by proxy must vote a majority
of their shares for the proposal. (See pages 31 through 32)
OPINION OF USCS' FINANCIAL ADVISOR
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), an
international investment banking firm familiar with USCS and its business,
delivered a written fairness opinion to the USCS Board on September 2, 1998
stating that, as of such date and based upon the assumptions made, matters
considered and limits of review, as set forth in its opinion, the Exchange
Ratio was fair from a financial point of view, to the holders of USCS Common
Stock (not including an opinion as to DST and its affiliates as stockholders of
USCS). Merrill Lynch's opinion is included as Appendix B to this Joint Proxy
Statement-Prospectus. See also "The Merger--Opinion of USCS' Financial Advisor"
beginning on page 42.
RECOMMENDATIONS TO STOCKHOLDERS
To DST Stockholders:
The DST Board believes that the Merger is in your best interest and the best
interests of DST and unanimously recommends that you vote FOR the proposal to
approve the Merger, including the issuance of shares of DST Common Stock to
USCS stockholders in connection with the Merger. (See page 40)
The DST Board unanimously recommends that you vote FOR the approval of the
amendment to the DST Plan to increase the number of shares of DST Common Stock
authorized for issuance thereunder. (See page 89)
To USCS Stockholders:
The USCS Board believes that the Merger is in your best interest and
unanimously recommends that you vote FOR the proposal to approve and adopt the
Merger Agreement and to authorize the Merger and the other transactions
contemplated by the Merger Agreement. (See page 42). Certain USCS directors
have potential conflicts of interest in recommending approval of the Merger.
(See pages 11 and 59 through 60)
THE MERGER
The Merger Agreement is included as Appendix A to this Joint Proxy Statement-
Prospectus. We encourage you to read the Merger Agreement, as it is the legal
document that governs the Merger. (See page A-1)
WHAT USCS STOCKHOLDERS WILL RECEIVE
As a result of the Merger, USCS stockholders (other than DST, USCS and their
subsidiaries) will have the right to receive .62 of a share of DST Common Stock
for each share of USCS Common Stock that they own. USCS stockholders will
receive a cash payment in place of any fractional share of DST Common Stock
which would have otherwise been received. (See page 50)
USCS stockholders should not send in their stock certificates to be exchanged
for DST stock certificates until requested to do so after the Merger is
completed.
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OWNERSHIP OF DST BY USCS STOCKHOLDERS FOLLOWING THE MERGER
We anticipate that DST will issue up to 14,291,378 shares of DST Common Stock
to USCS stockholders in the Merger based on the 23,377,460 shares of USCS
Common Stock (excluding those owned by DST, USCS and their subsidiaries)
outstanding as of November 19, 1998. Based on that number, the shares of DST
Common Stock issued to USCS stockholders in the Merger will constitute
approximately 22% of the outstanding DST Common Stock after the Merger.
BOARD OF DIRECTORS AND MANAGEMENT OF DST AND THE SURVIVING SUBSIDIARY FOLLOWING
THE MERGER
When the Merger is complete, DST intends that Thomas A. McDonnell will
continue as Chief Executive Officer of DST. Immediately following the
consummation of the Merger, the DST Board will consist of its six current
members, plus George L. Argyros, Sr. and James C. Castle (two of the present
directors of USCS), whom DST has agreed to appoint as directors of DST upon the
consummation of the Merger. The directors of DST Acquisitions, Inc. immediately
prior to effectiveness of the Merger will become the directors of the surviving
corporation (the "Surviving Subsidiary"). The officers of USCS immediately
prior to effectiveness of the Merger will become the officers of the Surviving
Subsidiary. (See pages 83 through 84)
INTERESTS OF USCS MANAGEMENT AND DIRECTORS IN THE MERGER
Certain members of the Board of Directors of USCS have potential conflicts of
interest in recommending approval of the Merger. Mr. Argyros and Dr. Castle
will become members of the Board of Directors of DST following the Merger. Dr.
Castle and Mr. Michael McGrail, currently Board members and executive officers
of USCS, are expected to be employed by DST following the Merger. All of the
members of the USCS Board hold options to purchase USCS Common Stock, which
will be subject to partial accelerated vesting due to the change in control of
USCS because of the Merger. (See pages 59 through 60). Certain members of USCS
management also have interests in the Merger that may be different from, or in
addition to, yours. (See pages 66 through 67).
CONDITIONS TO THE MERGER
The completion of the Merger depends upon satisfaction of a number of
conditions, including: (a) approval by the stockholders of DST and the
stockholders of USCS; (b) expiration of the waiting period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended, ("HSR Act"); (c)
effectiveness of the Registration Statement on Form S-4 of which this Joint
Proxy Statement-Prospectus is a part; (d) obtaining all material consents of
governmental entities, and no governmental entity having established any legal
requirement that makes the transactions contemplated by the Merger Agreement
illegal or prohibits or questions the validity or legality of such transactions
which could reasonably be expected to materially and adversely affect the value
of USCS' business; (e) approval for listing on the NYSE and the Chicago Stock
Exchange of the DST Common Stock to be issued in connection with the Merger;
(f) receipt of opinions of counsel that the Merger will be a "tax-free"
reorganization for federal income tax purposes; (g) a proposed spin-off
transaction by KCSI not having occurred within the prior 30 days; (h) the
fairness opinion of Merrill Lynch not having been withdrawn; and (i) certain
other conditions customary for a transaction of this nature. Similarly, each
party shall have received a letter dated as of the closing date of the Merger
from its independent accountants confirming that the Merger may be accounted
for as a pooling-of-interests in accordance with generally accepted accounting
principles ("GAAP"), Accounting Principles Board Opinion No. 16 and all
published rules, regulations and interpretations of the Securities and Exchange
Commission ("SEC"). Certain of the conditions to the Merger may be waived by
the company entitled to assert the condition. (See pages 53 through 55)
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TERMINATION OF THE MERGER AGREEMENT
DST or USCS may terminate the Merger Agreement without completing the Merger
under various circumstances, including if (a) the Merger is not completed by
January 31, 1999, (or, if the spin-off transaction proposed by KCSI occurs in
January 1999, by that date which is 30 days after such spin-off), (b) the
required stockholder approvals are not received, (c) their independent
accountants advise in writing that the Merger will not qualify for pooling-of-
interests accounting treatment under GAAP, or (d) the DST Board and the USCS
Board mutually agree in writing. The Merger Agreement may also be terminated
(i) by DST (A) if before effectiveness of the Merger or termination of the
Merger Agreement any person or entity acquires 50% or more of the outstanding
USCS Common Stock and does not deliver to DST within two business days of the
acquisition written confirmation that such person or entity will vote in favor
of the Merger and take no action to prevent or delay the Merger, or (B) if the
USCS Board determines (in connection with an Acquisition Proposal (as defined
in the Merger Agreement)) that the Merger would be inconsistent with its
fiduciary duties to its stockholders and notice thereof and to further
negotiate is given to DST, or (ii) by USCS if DST does not advise USCS of its
intention to negotiate within two business days after DST's receipt of the USCS
notice or if no agreement is reached within two business days after DST's
notice to negotiate. (See pages 55 through 56)
TERMINATION FEE
USCS must pay to DST a $25 million termination fee if: (i) under certain
circumstances, Merger approval is not recommended by the USCS Board or the
Merger is not consummated because of a failure to obtain USCS stockholder
approval, and within 12 months USCS enters into a merger, acquisition,
consolidation or similar transaction involving purchase of a significant
portion of the assets or equity securities of USCS or any of its subsidiaries
(other than with DST or a DST subsidiary); (ii) a person or entity (other than
DST or an affiliate of DST) acquires before the Merger is effective or the
termination of the Merger Agreement at least 50% of the outstanding USCS Common
Stock unless such person or entity agrees to vote for the Merger and take no
action to prevent or delay the Merger; or (iii) termination of the Merger
Agreement by USCS under certain conditions relating to a failure to negotiate
or reach agreement if the USCS Board determines that a recommendation to
approve the Merger is inconsistent with its fiduciary duties to USCS
stockholders. (See page 56)
REGULATORY APPROVALS
The HSR Act prohibits us from completing the Merger until after we have
furnished certain information and materials to the Antitrust Division of the
Department of Justice ("Antitrust Division") and the Federal Trade Commission
("FTC") and a required 30 day waiting period has ended. The required
information was furnished and the waiting period commenced on September 24,
1998, and the parties have received notice of early termination. The Antitrust
Division and the FTC have the authority to challenge the Merger on antitrust
grounds before or after the Merger is completed.
ACCOUNTING TREATMENT
We expect the Merger to qualify as a pooling-of-interests, which means that
we will treat our companies as if they had always been combined for accounting
and financial reporting purposes. This means that the historical book value of
the assets, liabilities and stockholders' equity of USCS will be carried over
to the consolidated balance sheet of DST (after adjustments to conform
accounting policies and certain other items), and no new goodwill will be
recorded as a result of this transaction. It is a condition of closing that DST
and USCS each receive a letter dated as of the closing date of the Merger from
PricewaterhouseCoopers LLP confirming that the Merger may be accounted for as a
pooling-of-interests in accordance with GAAP, Accounting Principles Board
Opinion No. 16 and all published rules, regulations and interpretations of the
SEC. (See pages 58 through 59)
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MATERIAL FEDERAL INCOME TAX CONSEQUENCES
We have structured the Merger so that neither DST, USCS nor the stockholders
of either company will recognize any gain or loss for federal income tax
purposes in the Merger (except as to the receipt of cash by USCS stockholders
for any fractional shares). (See page 57)
NO APPRAISAL RIGHTS
Under Delaware law, neither DST nor USCS stockholders have any right to
dissent from the Merger and receive the appraised value of their shares in cash
in connection with the Merger. (See page 60)
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
DST Common Stock trades on the NYSE and the Chicago Stock Exchange and the
USCS Common Stock trades on Nasdaq. On September 2, 1998, the last full trading
day prior to the public announcement that the parties had entered into the
Merger Agreement, DST Common Stock closed at $60.50 per share on the NYSE and
USCS Common Stock closed at $26 per share on Nasdaq. On an equivalent per share
basis calculated by multiplying the closing sale price of DST Common Stock on
that day by .62, the Exchange Ratio set forth in the Merger Agreement, the
value of DST Common Stock to be received by holders of USCS Common Stock was
$37.51 per share of USCS Common Stock. On November 19, 1998, DST Common Stock
closed at $51.75 per share on the NYSE and USCS Common Stock closed at $30.3125
per share on Nasdaq. You may obtain more recent stock price quotes in most
newspapers or in other financial sources. (See page 28)
LISTING OF DST COMMON STOCK
It is a condition to closing of the Merger that the shares of DST Common
Stock to be issued in the Merger will be listed on the NYSE and the Chicago
Stock Exchange, subject to satisfaction of applicable NYSE and Chicago Stock
Exchange requirements upon official notice of issuance. (See pages 50 through
51)
DIVIDENDS AFTER THE MERGER
As public companies, neither DST nor USCS has paid cash dividends. DST
currently intends to retain its earnings for use in its business, and does not
currently expect to pay cash dividends.
EXCHANGE OF USCS STOCK CERTIFICATES AFTER THE MERGER
After effectiveness of the Merger, the exchange agent will mail to USCS
stockholders a transmittal form and instructions to be used to forward USCS
Common Stock certificates for surrender and exchange for a certificate for the
appropriate number of shares of DST Common Stock and cash for fractional shares
of DST Common Stock to which a USCS stockholder would otherwise be entitled.
PLEASE DO NOT SURRENDER YOUR USCS COMMON STOCK CERTIFICATES FOR EXCHANGE UNTIL
YOU HAVE RECEIVED SUCH TRANSMITTAL FORM AND INSTRUCTIONS. (See page 50)
OTHER FILINGS
USCS and DST will prepare and file any other required filings relating to the
Merger and the transactions contemplated by the Merger Agreement. This includes
filing or amending a Form S-8 registration statement after effectiveness of the
Merger to cover the DST Common Stock issuable upon exercise of USCS options
assumed by DST. (See page 56)
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CONDUCT OF USCS BUSINESS PRIOR TO MERGER
Prior to effectiveness of the Merger, each of USCS and its subsidiaries will
conduct its operations according to its ordinary course of business consistent
with past practice, seek to preserve intact its current business organizations
and preserve its relationships with customers, suppliers and others having
business dealings with them. (See pages 51 through 52)
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RISK FACTORS
You should consider carefully the following risk factors and other
information in this Joint Proxy Statement--Prospectus in connection with the
proposed Merger.
CAUTION WITH RESPECT TO FORWARD-LOOKING STATEMENTS
DST and USCS claim the protection of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995. DST, USCS, or others on
their behalf may make from time to time (whether orally or in writing)
forward-looking comments or statements concerning potential future events,
including but not limited to, their results of operations. Such forward-
looking statements are based upon assumptions or beliefs by DST's or USCS'
management at the time the statements are made, including assumptions or
beliefs about risks and uncertainties faced by DST or USCS. If any of
management's assumptions or beliefs prove incorrect or should unanticipated
circumstances arise, the actual results of operations could materially differ
from those anticipated by such forward-looking statements. The differences
could be caused by a number of factors or combinations of factors including,
but not limited to, those factors set forth below. Persons hearing or reading
such forward-looking statements should consider carefully the following
factors, in addition to the other information contained in DST's or USCS'
public documents, when evaluating such forward-looking statements. DST and
USCS do not intend to update any forward-looking statement made or published
to reflect events or developments occurring after the making or publishing of
such statement.
RISKS RELATED TO THE MERGER
Integration of the Two Companies
DST and USCS expect the Merger to result in certain benefits. Achieving
these benefits depends in part upon the efficient integration of certain
operations of DST and USCS. The categories of potential synergies that could
result from such integration include elimination of public company expenses by
USCS, operational synergies from more effective utilization of the combined
operating capacities, and potential purchased materials cost reductions from
the combined purchasing power of the two companies. DST estimates that, if
achieved, such synergy savings could aggregate from $5 million to $15 million
on a pretax basis by the end of 2000. However, DST and USCS do not have
sufficient information to ascertain the precise level of synergy savings and
there can be no assurance that such benefits will be achieved. The transition
to combined operations will require substantial attention from management.
Neither company's management has experience in integrating operations on the
scale represented by the Merger. There could be a disruption in the business
activities of DST, USCS or both. There could also be significant costs
incurred to achieve the benefits of the Merger, including, but not limited to,
a non-recurring restructuring charge. If integration of DST and USCS is not
efficient, if significant disruptions occur, or if the costs outweigh the
benefits, DST and USCS may not realize fully the anticipated benefits of the
Merger. The diversion of management attention and any difficulties encountered
in the transition process could also have a material adverse effect on the
business or financial results of the combined companies.
Dilution of Current DST Stockholders' Voting Power and Book Value
Immediately following the Merger, the former USCS stockholders will own
approximately 22% of the outstanding shares of DST Common Stock, thereby
diluting substantially the DST stockholders' current ownership of 100% of the
voting power in DST. In addition, the book value per share as of September 30,
1998 of the shares of DST Common Stock held by DST stockholders is expected to
be diluted from approximately $19.28 to pro forma $16.50. See "Comparative Per
Share Data," page 27.
Fixed Exchange Ratio
As a result of the Merger, each outstanding share of USCS Common Stock
(other than those held by DST, USCS or their respective subsidiaries) will be
converted into the right to receive .62 of a share of DST Common Stock. The
Merger Agreement does not provide for adjustment of the Exchange Ratio based
on fluctuations in
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the price of DST Common Stock. Because the Exchange Ratio is fixed and will
not increase or decrease due to fluctuations in the market price of either DST
Common Stock or USCS Common Stock, USCS stockholders will not receive
additional DST Common Stock to compensate for any decreases in the market
price of DST Common Stock which occur before the Merger is effective.
The price of DST Common Stock at the time the Merger is effective may vary
significantly from the price as of the date of execution of the Merger
Agreement, the date hereof, or the date on which the stockholders vote on the
Merger. These variances may be due to changes in the business, operations and
prospects of DST and USCS; market assessments of the likelihood that the
Merger will be consummated; the timing of the consummation; conditions or
restrictions imposed on or proposed by regulatory agencies in connection with
or following consummation of the Merger; general market and economic
conditions; and other factors. The dollar value of the DST Common Stock to be
received by USCS stockholders upon effectiveness of the Merger may be
substantially more or less than the dollar value of DST Common Stock as of the
date of execution of the Merger Agreement, the date hereof or the date on
which stockholders vote on the Merger.
Increase in Shares Eligible for Future Sale Could Depress Market for DST
Common Stock
Upon completion of the Merger, up to 14,291,378 shares of DST Common Stock
will be issued to USCS stockholders in exchange for their shares. As of
December 21, 1998 USCS is projected to have outstanding stock options which,
if outstanding upon consummation of the Merger, will convert to options to
purchase approximately 1,524,000 shares of DST Common Stock. Immediately upon
consummation of the Merger, approximately 8,871,000 of the shares of DST
Common Stock to be issued to USCS stockholders (assuming all exercisable
options are exercised) will be freely tradeable. Following publication of
financial results covering at least 30 days of post-Merger combined
operations, approximately 5,966,000 shares to be issued to USCS stockholders
who may be deemed affiliates of USCS (assuming all exercisable options are
exercised) could be publicly sold, subject only to certain limited trading
restrictions applicable to "affiliates" of USCS under federal securities
regulations. KCSI has agreed not to sell any of the 20,263,426 shares of DST
Common Stock it holds at the time of the Merger until publication of financial
results covering 30 days of post-Merger combined operations or 60 days from
the closing of the Merger. Following such period, those shares will be freely
tradeable, subject to the limitations on affiliates referred to above.
If any USCS stockholder who is deemed to be an "affiliate" of USCS cannot
sell his DST Common Stock in a single transaction without registration because
of the resale restrictions of Rule 145 and/or the volume restrictions in Rule
144(e), he will have registration rights allowing him to cause DST to register
under the Securities Act of 1933, as amended (the "Securities Act") his shares
for sale. See "Other Agreements--Registration Rights Agreement." KCSI also has
registration rights with respect to its shares of DST Common Stock.
As of November 19, 1998, there were 49,016,618 shares of DST Common Stock
outstanding. All of these shares are freely transferable without restriction
or further registration under the Securities Act, except for any shares held
by "affiliates" of DST, as defined in Rule 144 under the Securities Act.
The market price of DST Common Stock could drop as a result of sales of a
large number of shares of DST Common Stock in the market after the Merger, or
the perception that such sales could occur. These factors also could make it
more difficult for DST to raise funds through future offerings of common
stock.
RISKS RELATED TO DST
Dependence on U.S. Mutual Fund Industry
DST's future growth and success will depend in part upon the further growth
of the mutual fund industry in the United States. DST derives a substantial
portion of its consolidated revenues from the delivery of services and
products to mutual fund industry clients. Any event affecting the mutual fund
industry which results in a significant decline in the number of shareowner
accounts could have a material adverse effect on DST.
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Impact of Technological Change
The markets served by DST require the use of advanced computer hardware and
software technology, and the development of new products and services to meet
increasingly complex and rapidly changing client and regulatory requirements.
DST's future success depends in part on its ability to continue to adapt its
technology, on a timely and cost effective basis, to meet these requirements.
There can be no assurance that DST will be able to respond adequately to these
technological demands or that its competitors will not develop more advanced
technology that will place DST's products and services at a competitive
disadvantage.
Reliance on a Centralized Processing Facility
DST's processing services are primarily dependent on the Winchester Data
Center, DST's central computer operations and information processing facility
located in Kansas City, Missouri. A natural disaster or other calamity that
causes long-term damage to the facility could have a material adverse effect
on DST.
Importance of Key Personnel
DST's operations and the continuing implementation of its business strategy
depend on the efforts of its technical personnel and senior management.
Recruiting and retaining capable personnel, particularly those with expertise
in the types of computer hardware and software utilized by DST, are vital to
DST's success. There is substantial competition for qualified technical and
management personnel and there can be no assurance that DST will be able to
attract or keep the qualified personnel it requires. The loss of key personnel
or the failure to hire qualified personnel could have a material adverse
effect on DST. If members of the senior management team become unable or
unwilling to continue in their present positions, or if DST is unable to
recruit and retain qualified technical personnel, DST's business and financial
results could be materially adversely affected.
Lack of Control of Joint Ventures
DST's business strategy for growth and expansion has included a reliance on
joint ventures. DST can derive a significant part of its net income from its
pro rata share in the earnings of these unconsolidated companies. Although DST
owns significant equity interests in these companies and has representation on
their Boards of Directors, DST is not in a position to exercise control over
their operations, strategies or financial decisions without the concurrence of
its equity partners. DST's equity interests in Boston Financial Data Services,
Inc. ("BFDS") and Argus Health Systems, Inc. are also subject to contractual
buy/sell arrangements that restrict DST's ability to fully dispose of its
interest in these companies and that under certain circumstances permit such
companies to purchase DST's interests.
The other parties to such existing joint venture arrangements, and to
arrangements in which DST may subsequently participate, may at any time have
economic, business or legal interests or goals that are inconsistent with
those of the joint venture or those of DST. In addition, a joint venture
partner may be unable to meet its economic or other obligations to the
venture, which, depending upon the nature of such obligations, could adversely
affect the combined operations of DST and the price of DST Common Stock.
Influence by Current Stockholder
KCSI owns approximately 41%, and immediately following the Merger will own
approximately 32%, of the outstanding DST Common Stock. In addition, two
outside directors of KCSI are also outside directors of DST and KCSI is
generally exempted from certain restrictions in DST's stockholders' rights
plan until such time as KCSI's ownership of DST drops below certain levels. As
a result, KCSI may be able to significantly influence matters affecting DST,
including matters submitted to a vote of DST's stockholders, such as the
election of directors and the approval of corporate transactions.
KCSI has announced that it plans to spin off to its common stockholders its
financial services operations, which include its ownership of DST Common
Stock. Since the final terms and timing of that transaction have not been
disclosed, the impact, if any, upon DST cannot be ascertained. KCSI has
indicated that the spin-off is not expected to occur this year.
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Significant Competition From Other Providers
DST, its subsidiaries, joint ventures and strategic associations encounter
significant competition for DST's services and products from other third-party
providers of similar services and products and from in-house providers who
have chosen not to outsource their own business. DST's ability to compete
effectively is, in part, dependent on the availability of capital and other
resources, and some of these competitors have greater resources and greater
access to capital than DST. DST also competes for shareowner accounting
services with brokerage firms that perform sub-accounting services for the
brokerage firms' customers who purchase or sell shares of mutual funds of
DST's clients. Such brokerage firms maintain only an "omnibus" account or
accounts with DST representing the aggregate number of shares of DST's mutual
fund client owned by the brokerage firms' customers, thus resulting in fewer
mutual fund shareowner accounts being maintained by DST.
Operations Subject to Significant Regulation
As registered transfer agents, DST, BFDS and BFDS' subsidiary, National
Financial Data Services, Inc. ("NFDS"), are subject to the Exchange Act and to
the rules and regulations of the SEC under the Exchange Act which require DST,
BFDS, and NFDS to register with the SEC and which impose on them recordkeeping
and reporting requirements. Certain of the operations and records of DST,
BFDS, and NFDS are subject to examination by the SEC and, as providers of
services to financial institutions, to examination by bank and thrift
regulatory agencies. Material noncompliance with the Exchange Act or SEC rules
and regulations by DST, BFDS, or NFDS could result in their suspension or in
the revocation of their transfer agent registrations, which could have a
material adverse effect on DST. In addition, CFDS Limited, a subsidiary of
BFDS, and European Financial Data Services Limited, a joint venture of DST and
State Street Corporation, are subject to regulation of similar regulatory
agencies in Canada and the United Kingdom, respectively. Any of these
companies could have its regulatory authorizations suspended or revoked if it
were to materially violate applicable regulations, which could have an adverse
effect on DST.
Year 2000
Many computer programs use only two digits to identify a year in a date
field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000. These Year 2000-
related issues are of particular importance to DST. DST depends upon its
computer and other systems and the computer and other systems of third-parties
to conduct and manage DST's business. Additionally, DST's products and
services are dependent upon using accurate dates in order to function
properly. These Year 2000-related issues may also adversely affect the
operations and financial performance of one or more of DST's customers or
suppliers. As a result, the failure of DST's computer and other systems,
products or services, the computer systems and other systems upon which DST
depends, or of DST's customers or suppliers to be Year 2000 ready could have a
material adverse effect on DST.
DST has completed its review and evaluation of its mission critical
products, services and internal systems and is maintaining its schedule to
achieve material Year 2000 readiness in such products, services and systems
which are material by December 31, 1998. DST anticipates internal readiness
for all of its other material systems by June 30, 1999. DST will continue
testing its systems with clients and other third parties for Year 2000 related
issues as needed throughout 1999, subject to the cooperation of such third
parties.
As part of resolving its Year 2000 issues, DST is developing contingency
plans. DST has had for several years formal contingency plans for its
Winchester Data Center in the event of a natural disaster or a processing
failure such as those that could be caused by Year 2000 issues. DST expects to
formalize contingency plans for its other material business units, which would
incorporate Year 2000 related contingencies, by March 31, 1999. The costs to
address the Year 2000 related issues to date have not been material, and DST
does not anticipate such costs to become material in the future.
Although DST is not aware of any material operational or financial Year
2000-related issues not being addressed, DST cannot assure that its computer
systems, products, services or other systems or the computers and other
systems of others upon which DST depends will be Year 2000 ready on schedule,
that the costs of its
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Year 2000 program will not become material or that DST's alternative plans
will be adequate. DST is currently unable to anticipate accurately the
magnitude, if any, of the Year 2000-related issues arising from DST's
customers or suppliers. If any such risks (either with respect to DST or its
customers or suppliers) materialize, DST could experience material adverse
consequences to its business.
Anti-Takeover Considerations
Some provisions of DST's Certificate of Incorporation could make it more
difficult for a third party to acquire control of DST, even if the change of
control would be beneficial to stockholders. Certain of these provisions could
allow the DST Board and, because of its significant influence, KCSI, to take
or prevent actions affecting unaffiliated stockholders without their approval
or consent. DST has also adopted a stockholders' rights plan which could
delay, deter or prevent a change in control of DST. A few of DST's client
agreements allow the client to terminate its agreement or to obtain rights to
use DST's software used in processing the client's data in the event of an
acquisition or change of control of DST. One of DST's joint venture agreements
allows its joint venture partner to buy DST's interest in the joint venture in
the event of a change of control of DST.
Non-U.S. Operations
Consolidated revenues outside the U.S. account for a significant percentage
of DST's revenues. DST derives revenues from a large number of countries
primarily in Europe and Canada. Economic or political events which affect the
economies of these countries could result in material adverse consequences to
DST.
RISKS RELATED TO USCS
General
A number of uncertainties exist that could affect USCS' future operating
results, including, without limitation, changes in the global communications
market, concentration in the cable television market, USCS' ability to retain
existing customers and attract new customers in the global communications
market, as well as other high-volume service industries, USCS' continuing
ability to develop products that are responsive to the evolving needs of its
customers, increased competition, changes in operating expenses, changes in
government regulation of USCS' customers and general economic factors in the
U.S. as well as the international marketplace.
Changing Communications Market and Development of Software and Services
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. USCS' future success will depend, in part,
upon its ability to enhance its existing applications, develop and introduce
new products that take advantage of technological advances and respond
promptly to new client requirements and evolving industry standards. USCS has
expended considerable funds to develop products to serve the changing
communications market. If the communications market grows or converges more
slowly than anticipated or USCS' products and services fail to achieve market
acceptance, there could be a material adverse effect on the financial
condition and results of operations of USCS.
USCS' development projects are subject to all of the risks associated with
the development of new software and other products based on innovative
technologies. The failure of such development projects could have a material
adverse effect on the financial condition and results of operations of USCS.
Dependence on the Cable Television Market
Although USCS' current strategy is to address the needs of the global
communications market and other high volume service providers, USCS is highly
dependent on the cable television market. For the nine months ended September
30, 1998, more than 55% of USCS' revenue was derived from sales to cable
television service providers. In both 1997 and 1996, more than 60% of USCS'
revenue was derived from sales to cable television
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service providers. Although the cable television industry outside of North
America is generally expanding, the number of providers of cable television
service in the United States has been declining, due to industry
consolidation. This has resulted in a reduction of the number of potential
cable television clients in the United States. As the number of companies
serving the available subscriber base decreases, the loss of a single client
could have a greater adverse impact on USCS than in the past. Even if the
number of clients remains the same, a decrease in the number of subscribers
served by USCS' cable television clients would result in lower revenue for
USCS. A decrease in the number of cable subscribers or any adverse development
in the cable television market could have a material adverse effect on the
financial condition and results of operations of USCS.
Concentration of Client Base
Aggregate revenue from USCS' ten largest clients accounted for approximately
two-thirds of its total revenue. Loss of all or a significant part of the
business of any of these clients or a decrease in their respective customer
bases could have a material adverse effect on the financial condition and
results of operations of USCS. Three of USCS' clients, represented
approximately 41% and 36% of total revenue for the nine months ended September
30, 1997 and 1998, respectively. These clients represented approximately 40%
and 47% of total revenue in 1997 and 1996.
Tele-Communications, Inc. ("TCI") represented approximately 18% and 14% of
USCS' total revenue in the nine-month periods ended September 30, 1997 and
1998, respectively, and 21% and 18% in 1996 and 1997, respectively. See "--
Potential Loss of Revenue."
USCS' largest bill processing client, Ameritech Corporation, accounted for
14% and 12% of total revenues in the nine-month periods ended September 30,
1997 and 1998, respectively, and for 16% and 13% of total revenue in 1996 and
1997, respectively. Ameritech became a client early in 1994 and has contracts
with USCS expiring in 2000 and 2001. Another bill processing client,
Cincinnati Bell Information Systems, Inc. ("CBIS"), a client since 1990,
accounted for 9% and 10% of total revenues for the nine-month periods ended
September 30, 1997 and 1998, and 10% and 9% of total revenue in 1996 and 1997,
respectively. In early 1997, USCS entered into a new contract with CBIS
expiring in 2002.
Potential Loss of Revenue
TCI represented approximately 18% and 14% of USCS' total revenue in the
nine-month periods ended September 30, 1997 and 1998, respectively, and 21%
and 18% in 1996 and 1997, respectively. TCI represented approximately 28% and
22% of customer management software and services revenue for the nine-month
periods ended September 30, 1997 and 1998, respectively, and 31% and 28% of
such revenue in 1996 and 1997, respectively. More than two years ago, TCI
announced and began development of an in-house system to replace USCS'
customer management software. On August 11, 1997, TCI informed USCS that it
had agreed to sell its partially developed in-house system to a competitor of
USCS and was going to enter into an exclusive long-term contract for customer
management software with that competitor. Under the current contract between
TCI and USCS, which expires on December 31, 1999, TCI may remove subscribers
after giving ninety days' notice, without significant economic penalty.
Although TCI has not provided USCS with a definitive schedule for conversion
of the TCI subscribers to the competitor's software, the conversions have
begun and it is believed that TCI and the competitor wish to complete the
transfer by the end of 1998. Additionally, USCS believes that TCI's contract
with the competitor provides financial incentives to TCI for converting
subscribers of certain TCI affiliates, some of whom are currently clients of
USCS, to the competitor's software.
A customer that accounted for approximately 5% and 6% of USCS' total revenue
in the nine-month periods ended September 30, 1997 and 1998, respectively, and
4% and 6% in 1996 and 1997, respectively, and 8% and 10% of customer
management software and services revenue for the nine-month periods ended
September 30, 1997 and 1998, respectively, and 7% and 8% of such revenue in
1996 and 1997, respectively, has orally advised USCS that it may move to an
alternative solution for its customer management software requirements. The
customer informed USCS that it expects a USCS competitor may have this
alternative available for pilot testing in mid-1999 and, if that test is
successful, the customer would begin migrating its subscribers to this
alternative in the first or second quarter of 2000. The migration would extend
over twelve months or longer. Under the contract between the customer and
USCS, which expires in July 2003, the customer may remove subscribers after
giving ninety days' notice, without significant economic penalty.
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Variability of Quarterly Operating Results
USCS' quarterly and annual operating results may fluctuate from quarter to
quarter and year to year depending on various factors, including the impact of
significant start-up costs associated with initiating the delivery of
contracted services to new clients, the hiring of additional staff, new
product development and other expenses, introduction of new products by
competitors, pricing pressures, the evolving and unpredictable nature of the
markets in which USCS' products and services are sold and general economic
conditions.
Year 2000
Because USCS licenses software and provides services relating to such
software and otherwise makes extensive use of date-sensitive computer
programs, USCS may be exposed to Year 2000 issues.
USCS has completed a review of its IT systems, such as internal computer
systems, financial and payroll systems and software development systems, and
its non-IT systems, such as HVAC, security and elevators, to identify systems
that could be affected by the Year 2000 issue. USCS has developed an
enterprise-wide implementation plan to resolve any Year 2000 issues in its
internal systems. With modifications to existing systems, which are expected
to be completed by September 30, 1999, USCS believes the Year 2000 issue will
not pose significant operational problems for USCS's computer systems. USCS is
in the process of quantifying internal staff costs as well as consulting and
other expenses related to enhancements necessary to prepare the systems for
the year 2000. USCS currently believes that such costs will not be material;
however, there can be no assurances of such.
USCS has also completed an assessment of third party Year 2000 dependencies,
has determined risk levels associated with those dependencies and is in the
process of developing contingency plans, which are expected to be completed by
December 31, 1998, relative to those dependencies. USCS believes it will not
experience any Year 2000 problems from most of its key vendors and suppliers;
however, USCS is unable to determine whether certain suppliers, principally
USCS's utility providers, will likely be Year 2000 compliant in time. USCS is
developing contingency plans in the event that a key vendor or supplier causes
or could potentially cause any Year 2000 problems, but there can be no
assurances an acceptable contingency plan can be developed for certain
suppliers, such as utilities, or that any such plan would successfully protect
USCS from any Year 2000 exposure. There can also be no assurances that a
vendor or supplier that appears to be Year 2000 compliant will not experience
problems that could adversely affect USCS. USCS is specifically dependent upon
uninterrupted service from utilities providers. In the event that service is
disrupted as a result of a utility provider not being Year 2000 ready, USCS
results of operations could be materially adversely affected.
USCS believes that its current products do not require further modification
for the Year 2000 issue and does not anticipate any material exposures related
to Year 2000 issues for its products and services. USCS expects that the
current installed base of its customer management software will be fully
replaced with Year 2000 ready software by June 30, 1999, both through the
customer's regular upgrade program or under the customer's maintenance
contracts. In certain cases, USCS will be required under the applicable
maintenance contract to provide Year 2000 compliant software free of charge.
USCS believes that the cost of such upgrades will be immaterial. USCS has
since 1995 been implementing an on-going program of upgrading or replacing its
bill processing computer systems. A part of such program includes providing
Year 2000 capability. The cost of including Year 2000 compliance as part of
the upgrade program is immaterial. The program is expected to be completed by
September 30, 1999.
Factors that could impact USCS' ability to make the necessary modifications
and deploy those modifications across the current computer systems include,
but are not limited to, the availability and cost of trained personnel and the
ability of such personnel to complete the current remediation plan on
schedule. However, if such remediation is not completed on a timely basis or
is more costly to implement than currently anticipated, USCS' business,
financial condition or results of operations could be materially adversely
affected. Further, USCS cannot anticipate the degree to which it may be the
subject of claims or complaints regarding the Year 2000 issue.
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New Products, Rapid Technological Changes and Competition
The market for USCS' products and services is highly competitive, and
competition is increasing as additional market opportunities arise. USCS
believes its most significant competitors for customer management software and
services are independent providers of such software and services and in-house
systems.
In August 1998, USCS acquired, for approximately $15.4 million, Custima
International Holdings, plc ("Custima"), a United Kingdom corporation that
provides billing and customer care to the energy and utilities industries and
has subsidiaries in the United Kingdom, United States, Australia and Mexico.
Through the acquisition of Custima, USCS is entering into a new market which
is currently undergoing significant and rapid changes. There can be no
assurance that USCS will be successful in this new market. In addition, USCS
incurred an in-process research and development expense and reorganization
charge in connection with the acquisition during the third quarter. See Note 4
to the Consolidated Condensed Financial Statements included in Appendix M.
In addition, competitive factors could influence or alter USCS' overall
revenue mix between customer management software, services, including bill
processing services, and equipment sales and leasing. Any of these events
could have a material adverse effect on the financial condition and results of
operations, including gross profit margins, of USCS.
Electronic Bill Presentment
USCS' bill processing business is dependent on its ability to design,
handle, print and distribute via first class mail paper-based statements and
related materials. A number of companies, many with resources greater than
USCS, are developing and introducing electronic bill presentment services that
could reduce, if not eliminate, the need for paper statements.
USCS has introduced products and has formed alliances with other companies
for the introduction, marketing and deployment of electronic bill presentment
and other electronic services. The maintenance of USCS' paper statement
expertise, successful development and marketing of electronic services and
rate of customer acceptance of such services are all subject to the
technological, competitive and market condition risks discussed in various
sections of this Joint Proxy Statement-Prospectus.
Client Failure to Renew or Utilize Contracts
Substantially all of USCS' revenue is derived from the sale of services or
products under long-term contracts with its clients. USCS does not have the
unilateral option to extend the terms of such contracts upon their expiration.
In addition, certain of USCS' contracts do not require clients to make any
minimum purchase. Others require minimum purchases that are substantially
below the current level of business under such contracts, and all such
contracts are cancelable by clients under certain conditions. The failure of
clients to renew contracts, a reduction in usage by clients under any
contracts or the cancellation of contracts could have a material adverse
effect on USCS' financial condition and results of operations.
International Business Activities
USCS' strategy to diversify its customer base includes the selling of its
products in a variety of international markets. To date, USCS' primary
customer management software has been installed in more than 20 countries.
Generally, USCS operates in U.S. dollars, which reduces but does not eliminate
exposure to the adverse impact of currency fluctuations. Currently, less than
10% of USCS' revenue comes from international sources, but USCS is expanding
its international presence, primarily through third party marketing and
distribution alliances. USCS' current and proposed international business
activities are subject to certain inherent risks, including but not limited
to, specific country, regional or global economic conditions, exchange rate
fluctuation and its impact on liquidity, changes in the national priorities of
any given country and cultural differences. There can be no assurance that
such risks will not have a material adverse effect on USCS' future
international sales and, consequently, USCS' business, operating results and
financial condition.
22
<PAGE>
Dependence on Proprietary Technology
USCS relies on a combination of patent, trade secret and copyright laws,
nondisclosure agreements, and other contractual and technical measures to
protect its proprietary technology. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. There can be no
assurance that third parties will not assert infringement claims against USCS
or USCS' clients.
USCS has been advised by a cable customer that a third party has orally
asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from USCS. To the
best of USCS' knowledge, no legal proceedings with regard to this matter have
been instituted against the customer or USCS as of the date of this Joint
Proxy Statement-Prospectus. There can be no assurance, however, that such
claims, if brought, would not have a material adverse effect on USCS.
Management of Growth and Attraction and Retention of Key Personnel
Management of USCS' growth may place a considerable strain on USCS'
management, operations and systems. USCS' ability to execute its business
strategy will depend in part upon its ability to manage the demands of a
growing business. Any failure of USCS' management team to effectively manage
growth could have a material adverse effect on USCS' business, financial
condition or results of operations.
USCS' future success depends in large part on the continued service of its
key management, sales, product development and operational personnel. USCS
believes that its future success also depends on its ability to attract and
retain skilled technical, managerial and marketing personnel, including, in
particular, additional personnel in the areas of research and development and
technical support. Competition for qualified personnel is intense. USCS has
from time to time experienced difficulties in recruiting qualified skilled
technical personnel. Failure by USCS to attract and retain the personnel it
requires could have a material adverse effect on the financial condition and
results of operations of USCS.
Government Regulation
USCS' existing and potential clients are subject to extensive regulation,
and certain of USCS' revenue opportunities may depend on continued
deregulation in the world-wide communications industry. In addition, USCS'
clients are subject to certain regulations governing the privacy and use of
the customer information that is collected and managed by USCS' products and
services. Regulatory changes that adversely affect USCS' existing and
potential clients could have a material adverse effect on the financial
condition and results of operations of USCS.
OTHER RISK FACTORS RELATED TO DST AND USCS
In addition to the factors noted above, changes in management strategies,
changes in lines of business, failure of anticipated opportunities to
materialize, changes in the cost of necessary supplies, changes in the
economic, political or regulatory environments in the United States or in the
other countries where DST or USCS may do business, and litigation, all present
risks to DST and USCS and may cause any forward-looking statement to become
inaccurate.
23
<PAGE>
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
In the following tables we provide you with selected historical financial
data of DST and USCS. We derived the selected historical financial data for
the five years ended December 31, 1997 from the audited consolidated financial
statements of DST and USCS. We derived the historical financial data for the
nine months ended September 30, 1997 and 1998 from unaudited condensed
consolidated financial statements of DST and USCS, which were prepared on the
same basis as the historical audited financial statements. When you read this
selected historical financial data, you should consider reading along with it
the historical financial statements and accompanying notes that DST and USCS
have included in their Annual Reports on Form 10-K for the year ended
December 31, 1997, and their Quarterly Reports on Form 10-Q for the quarter
ended September 30, 1998, copies of which are included as Appendices to this
Joint Proxy Statement-Prospectus.
We derived the selected pro forma combined financial data below from the
unaudited pro forma condensed combined financial statements. When you read
this selected pro forma combined financial data, you should consider reading
along with it the unaudited pro forma condensed combined financial statements
and the notes thereto included in this Joint Proxy Statement-Prospectus. We
present the pro forma information for illustrative purposes only. You should
remember that pro forma information is hypothetical and does not necessarily
indicate operating results or the financial position that would have occurred
if the Merger had been consummated at the beginning of the earliest period
presented, nor is it necessarily indicative of future operating results or
financial position.
DST SYSTEMS, INC.
SELECTED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------ ----------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $341,172 $401,736 $484,131 $ 580,808 $ 650,678 $ 473,941 $ 557,972
Income from operations.. 29,587 34,955 40,821 56,973 92,240 66,242 85,688
Interest expense........ (10,855) (14,016) (21,964) (6,940) (7,670) (6,006) (6,087)
Gains on sales of equity
investments............ 44,895 223,438(1) 1,464
Equity in earnings
(losses) of
unconsolidated
affiliates............. 11,670 22,227 6,452 (4,028) (1,345) 1,357 (1,529)
Income before income
taxes and minority
interests.............. 31,689 46,641 73,831 273,619 88,709 66,044 83,563
Income from continuing
operations............. 22,752 33,431 27,640 167,202 58,997 42,974 54,654
Income per share from
continuing operations
Basic(2)............... 0.74 1.09 0.82 3.35 1.20 0.87 1.12
Diluted(2)............. $ 0.74 $ 1.09 $ 0.82 $ 3.32 $ 1.18 $ 0.86 $ 1.09
Shares used in per share
computation:
Basic(2)............... 30,550 30,550 33,791 49,871 49,308 49,378 48,988
Diluted(2)............. 30,550 30,550 33,848 50,335 49,838 49,862 49,991
Total assets............ $401,702 $510,407 $749,520 $1,121,588 $1,355,404 $1,263,160 $1,480,146
Long-term obligations... $146,046 $175,767 $ 52,477 75,895 92,005 72,514 88,254
Cash dividends per
common share(2)........ $ -- $ -- $ -- $ --
</TABLE>
- --------
(1) In the third quarter of 1996, DST recognized a one-time gain on the
Computer Sciences Corporation ("CSC")/The Continuum Company, Inc.
("Continuum") merger. See Note 4 to the consolidated financial statements
included in Appendix C.
(2) DST's capital structure changed substantially as a result of the initial
public offering of DST Common Stock in the fourth quarter of 1995.
Earnings per share data prior to the public offering is reflective of
being a wholly-owned subsidiary of KCSI. DST paid cash dividends of $6.2
million, $6.2 million and $150.0 million to KCSI in 1993, 1994 and 1995,
respectively, which have been excluded from this table. The declaration
and payment of dividends is at the discretion of the DST Board which,
prior to DST's initial public offering, was controlled by KCSI.
24
<PAGE>
USCS INTERNATIONAL, INC.
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------ --------------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $166,064 $188,805 $229,263 $263,214 $299,346 $ 216,791 $ 246,565
Income from operations.. 13,494 15,787 22,106 27,520 38,024 27,897 25,206(3)
Interest expense........ (4,609) (4,284) (4,966) (3,185) (554) (464) (250)
Income before taxes and
cumulative effect of
accounting change...... 8,885 11,503 17,140 24,335 37,470 27,433 24,956
Income before cumulative
effect of accounting
change................. 4,555 6,169 10,370 14,509 22,460 16,446 13,118
Net income(1)........... 6,963 6,169 10,370 14,509 22,460 16,446 13,118
Income per share before
cumulative effect of
accounting change
Basic(2)............... 0.23 0.31 0.53 0.69 0.97 0.71 0.56
Diluted(2)............. 0.22 0.30 0.51 0.66 0.93 0.68 0.54
Net income per share
Basic(2)............... 0.35 0.31 0.53 0.69 0.97 0.71 0.56
Diluted(2)............. $ 0.33 $ 0.30 $ 0.51 $ 0.66 $ 0.93 $ 0.68 $ 0.54
Shares used in per share
computation:
Basic(2)............... 20,010 19,798 19,452 21,178 23,164 23,180 23,232
Diluted(2)............. 20,816 20,622 20,159 22,075 24,203 24,293 24,084
Total assets............ $140,922 $157,331 $180,450 $205,559 $238,619 $ 213,984 $ 272,779
Long-term obligations... 40,167 37,647 51,155 5,647 5,453 2,079 2,451
Cash dividends per
common share........... $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
- --------
(1) In 1993, USCS adopted Statement of Financial Accounting Standards No. 109
"Accounting for Income Taxes", resulting in an accumulated credit to
income of $2.4 million for an adjustment in the calculation of the income
tax expense.
(2) USCS' capital structure changed substantially as a result of the public
offering of USCS Common Stock in the second quarter of 1996.
(3) In the third quarter of 1998, USCS recognized a $6.0 million in-process
research and development write-off and a $1.1 million reorganization
charge related to the acquisition of Custima. See Note 4 to the
Consolidated Condensed Financial Statements included in Appendix M and
Note 10 to the Unaudited Pro Forma Condensed Combined Financial Statements
included herein.
25
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined statement of income data for each
of the three years in the period ended December 31, 1997 and for the nine
months ended September 30, 1997 and 1998 assumes that the Merger occurred at
the beginning of the earliest period presented. The following unaudited pro
forma combined balance sheet data as of September 30, 1998 assumes that the
Merger occurred as of that date.
DST SYSTEMS, INC. AND USCS INTERNATIONAL, INC.
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................ $713,394 $844,022 $950,024 $690,732 $ 804,537
Income from operations.. 54,122 78,160 126,951 91,269 106,417 (3)
Interest expense........ (26,930) (10,125) (8,224) (6,684) (6,895)
Gains on sales of equity
investments............ 44,895 223,438 (1) 1,464
Equity in earnings
(losses) of
unconsolidated
affiliates............. 6,452 (4,028) (1,345) 1,357 (1,529)
Income before income
taxes and minority
interests.............. 82,166 291,621 122,866 90,607 104,042
Income from continuing
operations............. 32,683 177,937 79,472 57,699 65,063
Income per share from
continuing operations:
Basic(2).............. 0.71 2.82 1.25 0.91 1.04
Diluted(2)............ $ 0.71 $ 2.78 $ 1.23 $ 0.89 $ 1.01
Shares used in per share
computation:
Basic(2).............. 45,851 63,001 63,571 63,750 62,710
Diluted(2)............ 46,347 64,022 64,745 64,924 64,241
Total assets............ $1,686,318
Long-term obligations... $ 90,705
Cash dividends per
common share(2)........ $ -- $ -- $ -- $ --
</TABLE>
- --------
(1) In the third quarter of 1996, DST recognized a one-time gain on the
CSC/Continuum merger. See Note 4 to the consolidated financial statements
included in Appendix C.
(2) DST's capital structure changed substantially as a result of the initial
public offering of DST's common stock in the fourth quarter of 1995.
Earnings per share data prior to the public offering is reflective of
being a wholly-owned subsidiary of KCSI. DST paid a cash dividend of
$150.0 million to KCSI in 1995 which has been excluded from this table.
The declaration and payment of dividends is at the discretion of the DST
Board which, prior to DST's initial public offering was controlled by
KCSI. USCS' capital structure changed substantially as a result of the
public offering of USCS Common Stock in the second quarter of 1996.
(3) In the third quarter of 1998, USCS recognized a $6.0 million in-process
research and development write-off and a $1.1 million reorganization
charge related to the acquisition of Custima. See Note 4 to the
Consolidated Condensed Financial Statements included in Appendix M and
Note 10 to the Unaudited Pro Forma Condensed Combined Financial Statements
included herein.
26
<PAGE>
COMPARATIVE PER SHARE DATA
In the table below, we provide you with certain historical per share data of
DST and USCS and combined per share data on an unaudited pro forma basis after
giving effect to the Merger on a pooling-of-interests basis of accounting. We
calculated the equivalent unaudited pro forma data for USCS by multiplying the
unaudited pro forma combined per common share data by the Exchange Ratio.
The information set forth below should be read in conjunction with the
selected historical financial data, and the unaudited pro forma combined
financial data, included elsewhere in this Joint Proxy Statement-Prospectus or
the attached Appendices. The pro forma combined per share data is hypothetical
and does not necessarily indicate the operating results that would have been
achieved had the Merger been consummated as of the beginning of the periods
presented and should not be construed as representative of future operating
results.
DST's capital structure changed substantially as a result of the initial
public offering of DST Common Stock in the fourth quarter of 1995. Earnings
per share data prior to the public offering is reflective of being a wholly-
owned subsidiary of KCSI. DST paid a cash dividend of $150.0 million to KCSI
in 1995 which has been excluded from this table. The declaration and payment
of dividends is at the discretion of the DST Board which, prior to DST's
initial public offering, was controlled by KCSI. USCS' capital structure
changed substantially as a result of the public offering of USCS Common Stock
in the second quarter of 1996. USCS has not paid cash dividends during the
periods presented.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- --------------------
1995 1996 1997 1997 1998
---------------- -------- --------- ----------
<S> <C> <C> <C> <C> <C>
HISTORICAL DST
Basic earnings per share.. $ 0.82 $ 3.35(1) $ 1.20 $ 0.87 $ 1.12
Diluted earnings per
share.................... $ 0.82 $ 3.32(1) $ 1.18 $ 0.86 $ 1.09
Book value per common
share.................... $ 17.04 $ 19.28
HISTORICAL USCS
Basic earnings per share.. $ 0.53 $ 0.69 $ 0.97 $ 0.71 $ 0.56(2)
Diluted earnings per
share.................... $ 0.51 $ 0.66 $ 0.93 $ 0.68 $ 0.54(2)
Book value per common
share.................... $ 5.72 $ 6.38
PRO FORMA COMBINED
Basic earnings per share.. $ 0.71 $ 2.82 $ 1.25 $ 0.91 $ 1.04
Diluted earnings per
share.................... $ 0.71 $ 2.78 $ 1.23 $ 0.89 $ 1.01
Book value per common
share.................... $ 14.74 $ 16.50
USCS PRO FORMA PER SHARE
EQUIVALENTS
Basic earnings per share.. $ 0.44 $ 1.75 $ 0.78 $ 0.56 $ 0.64
Diluted earnings per
share.................... $ 0.44 $ 1.72 $ 0.76 $ 0.55 $ 0.63
Book value per common
share.................... $ 9.14 $ 10.23
</TABLE>
- --------
(1) In the third quarter of 1996, DST recognized a one-time gain on the
CSC/Continuum merger. See Note 4 to the consolidated financial statements
included in Appendix C.
(2) In the third quarter of 1998, USCS recognized a $6.0 million in-process
research and development write-off and a $1.1 million reorganization
charge related to the acquisition of Custima. See Note 4 to the
Consolidated Condensed Financial Statements included in Appendix M and
Note 10 to the Unaudited Pro Forma Condensed Combined Financial Statements
included herein.
27
<PAGE>
COMPARATIVE MARKET PRICE DATA
DST Common Stock is traded on the NYSE and the Chicago Stock Exchange under
the symbol "DST", and USCS Common Stock is traded on the Nasdaq under the
symbol "USCS". The table below sets forth the reported high and low intra-day
prices for DST Common Stock and USCS Common Stock on those markets for the
periods indicated. (Quarters are for a calendar year.)
<TABLE>
<CAPTION>
DST USCS
------------------ -----------------
HIGH LOW HIGH LOW
-------- --------- --------- -------
<S> <C> <C> <C> <C>
1996
First Quarter.............................. $34 7/8 $27 1/8 $ * $ *
Second Quarter............................. 38 29 1/2 19 3/4 17
Third Quarter.............................. 32 7/8 24 5/8 19 7/8 13 1/8
Fourth Quarter............................. 34 3/8 28 7/8 18 1/2 14 3/4
1997
First Quarter.............................. 35 3/4 28 1/2 21 16 1/8
Second Quarter............................. 33 3/8 24 1/4 33 15 5/8
Third Quarter.............................. 38 31 3/8 35 1/2 16 3/4
Fourth Quarter............................. 45 7/16 34 7/16 22 11/16 14 7/8
1998
First Quarter.............................. 55 5/16 39 15/16 21 7/8 15 1/4
Second Quarter............................. 57 1/8 49 15/16 22 3/4 17 1/8
Third Quarter.............................. 70 9/16 47 13/16 35 1/2 19 1/8
Fourth Quarter (through November 19)....... 54 7/8 34 33 5/16 20
</TABLE>
- --------
* The initial public offering of USCS Common Stock occurred on June 20, 1996.
Quotations for USCS Common Stock reflect inter-dealer prices, without retail
mark-up, markdown or commission and may not necessarily represent actual
transactions.
Following the Merger, it is expected that DST Common Stock will continue to
be traded on the NYSE and the Chicago Stock Exchange. Following the Merger,
USCS Common Stock will cease to be traded on the Nasdaq, and there will be no
further market for such stock.
No cash dividends have been paid by DST since the initial public offering of
DST Common Stock on October 31, 1995. DST does not currently plan to pay cash
dividends and currently plans to retain its earnings for use in its business.
USCS has not paid cash dividends on USCS Common Stock to date and, if the
Merger is not consummated, has no current intention to pay any such cash
dividends. The Merger Agreement does not permit USCS to pay cash dividends on
USCS Common Stock prior to consummation of the Merger or termination of the
Merger Agreement.
On September 2, 1998, the last full trading day prior to announcement of the
execution of the Merger Agreement, the reported NYSE Composite Transactions
closing price per share of DST Common Stock was $60.50. The reported Nasdaq
closing price per share of USCS Common Stock was $26.00. On an equivalent per
share basis calculated by multiplying the closing sale price of DST Common
Stock on that day by .62, the Exchange Ratio set forth in the Merger
Agreement, the value of DST Common Stock to be received by holders of USCS
Common Stock was $37.51 per share of USCS Common Stock. On November 19, 1998,
the most recent practicable date prior to printing this Joint Proxy Statement-
Prospectus, the reported NYSE Composite Transactions closing price per share
of DST Common Stock was $51.75, and the Nasdaq closing price per share of USCS
Common Stock was $30.3125. We urge stockholders to obtain current market
quotations.
28
<PAGE>
THE COMPANIES
DST
DST provides sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance companies, banks
and other financial services organizations.
DST was established in 1969. Through a reorganization in August 1995, DST is
now a corporation organized in the State of Delaware. DST has its principal
executive offices at 333 West 11th Street, Kansas City, Missouri 64105
(telephone number 816-435-1000).
DST ACQUISITIONS, INC.
DST Acquisitions, Inc. is a Delaware corporation formed by DST in September
1998 solely for the purpose of being merged with and into USCS and is wholly-
owned by DST. The mailing address of DST Acquisitions, Inc.'s principal
executive offices is c/o DST Systems, Inc., 333 West 11th Street, Kansas City,
Missouri 64105 (telephone number 816-435-1000).
USCS
USCS provides customer management software to cable television and multi-
service providers worldwide, and bill processing services to the cable
television, telecommunications, financial services, utilities and other
service industries.
USCS was founded in 1969. USCS has its principal executive offices at 2969
Prospect Park Drive, Rancho Cordova, California 95670 (telephone number 916-
636-4500).
29
<PAGE>
PART II. THE PROPOSALS BEFORE THE DST AND USCS STOCKHOLDERS
GENERAL INFORMATION ABOUT THE PROPOSALS AND MEETINGS
SUMMARY OF PROPOSALS AND BOARD RECOMMENDATIONS
This Joint Proxy Statement-Prospectus is furnished in connection with the
solicitation by DST and by USCS of proxies to be voted, respectively, at the
DST Special Meeting and the USCS Special Meeting.
The purpose of the DST Special Meeting is to consider and vote upon the
following proposals:
1. To consider and vote on a proposal to approve the Merger, including
the issuance of shares of DST Common Stock in connection with the Merger
(the "DST Merger Proposal");
2. To approve an amendment to the DST Plan to increase the number of
shares of DST Common Stock authorized for issuance under the DST Plan (the
"DST Plan Proposal"); and
3. To transact such other business as may properly come before the DST
Special Meeting with respect to any matters to be presented which are
presently unknown to DST.
The purpose of the USCS Special Meeting is to consider and vote upon a
proposal to approve and adopt the Merger Agreement and to authorize the Merger
and the other transactions contemplated by the Merger Agreement (the "USCS
Merger Proposal") and to transact such other business as may properly come
before the USCS Special Meeting with respect to any matters to be presented
which are presently unknown to USCS.
THE DST BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND
THE TRANSACTIONS RELATED THERETO AND RECOMMENDS A VOTE FOR APPROVAL OF THE DST
MERGER PROPOSAL. THE DST BOARD HAS UNANIMOUSLY APPROVED AN AMENDMENT TO THE
DST PLAN TO INCREASE THE NUMBER OF SHARES OF DST COMMON STOCK AUTHORIZED FOR
ISSUANCE UNDER THE DST PLAN AND UNANIMOUSLY RECOMMENDS A VOTE FOR THE DST PLAN
PROPOSAL.
THE USCS BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND
THE TRANSACTIONS RELATED THERETO AND RECOMMENDS A VOTE FOR THE USCS MERGER
PROPOSAL.
Certain USCS directors have potential conflicts of interest in recommending
approval of the Merger. (See pages 59 through 60)
30
<PAGE>
THE SPECIAL MEETING OF DST STOCKHOLDERS
PLACE, DATE AND TIME OF DST SPECIAL MEETING
The DST Special Meeting will be held at the offices of DST, 333 West 11th
Street, Kansas City, Missouri 64105, on December 21, 1998, at 11:00 a.m.,
local time.
RECORD DATE; VOTING RIGHTS; PROXIES AND INSTRUCTIONS
The DST Board has fixed the close of business on November 6, 1998 as the
record date for determining DST stockholders entitled to notice of and to vote
at the DST Special Meeting.
Participants of The Employee Stock Ownership Plan of DST Systems, Inc. (the
"DST ESOP") and stockholders holding DST Common Stock through a broker
generally may not vote their shares in person. Absent special direction to DST
from the trustee or the stock broker, such shares may be voted only in person
by or through a proxy given by the trustee or broker, respectively.
The DST ESOP trustee will vote such shares as instructed and will vote any
shares of DST Common Stock not allocated to the accounts of participants, and
any shares for which it received no instructions, in the same proportion as
those shares for which it received instructions. The DST ESOP trustee may vote
shares allocated to the accounts of the DST ESOP participants either in person
or through a proxy.
Each share of DST Common Stock issued and outstanding entitles the holder
thereof to one vote. All shares of DST Common Stock represented by a proxy or
instruction given pursuant to this solicitation will be voted as specified in
such proxy or instruction. If no specification is given on a proxy card naming
as the proxy the DST committee printed on the card, such shares will be voted
FOR the DST Merger Proposal and FOR the DST Plan Proposal. Any proxies given
by stockholders of record holding DST Common Stock in their own names may be
revoked at any time before they are exercised by giving written notice to the
Secretary of DST, by delivering a later-dated proxy, or by voting in person at
the DST Special Meeting. Any instructions given to brokers by stockholders
holding stock through such brokers may be revoked by following the brokers'
revocation procedures, and any instructions given to the DST ESOP trustee by
DST ESOP participants may be revoked by following the trustee's revocation
procedures.
SOLICITATION OF PROXIES
DST will bear the cost of solicitation of proxies. In addition to the use of
the mails, directors and officers of DST may solicit proxies by personal
interview, telephone, telegram or e-mail. These persons will receive no
additional compensation for solicitation of proxies, but may be reimbursed for
out-of-pocket expenses in connection with such solicitations. DST has also
arranged for brokerage firms, banks, custodians, nominees and fiduciaries to
forward proxy solicitation materials to the beneficial owners of DST Common
Stock held of record by such persons. DST will reimburse them for reasonable
out-of-pocket expenses in connection with forwarding such materials. In
addition, DST has engaged the services of D.F. King & Co., Inc. to assist in
soliciting proxies at a cost of approximately $5,000 plus reasonable expenses.
DST will bear the cost of such solicitation.
QUORUM
A majority of the issued and outstanding shares of DST Common Stock entitled
to vote as of the record date constitutes a quorum at the DST Special Meeting.
Such shares may be present in person or by proxy. Election inspectors
appointed for the meeting will determine if a quorum is present. Proxies
marked as abstentions (or abstentions from voting by stockholders appearing in
person) will be counted as shares towards establishing a quorum. When a broker
has not received directions from customers on whether to vote for a proposal,
and the broker cannot or does not vote the shares it holds for such customers,
a "broker non-vote" has occurred. (Customer directed abstentions are
directions to the broker and therefore do not cause broker non-
31
<PAGE>
votes.) Broker non-votes generally would not affect the determination of
whether a quorum is present at the DST Special Meeting because typically some
of the shares held in the broker's name have been voted on at least some
proposals, and therefore, all of such shares held in the broker's name are
considered present at the DST Special Meeting.
REQUIRED VOTE; OUTSTANDING SHARES
Each of the proposals requires the affirmative vote of a majority of the
shares of DST Common Stock present in person or by proxy at the DST Special
Meeting. Abstentions and broker non-votes (if the NYSE declares that the
applicable proposal is non-discretionary) will be counted as votes against the
DST Merger Proposal and against the DST Plan Proposal. As of the record date,
there were 49,012,552 shares of DST Common Stock outstanding and entitled to
vote held by approximately 1,700 stockholders of record. As of the record
date, directors and officers of DST and their affiliates as a group
beneficially owned approximately 1,675,640 shares of DST Common Stock, or
approximately 3.4% of those shares of DST Common Stock outstanding as of such
date.
32
<PAGE>
THE SPECIAL MEETING OF USCS STOCKHOLDERS
PLACE, DATE AND TIME OF USCS SPECIAL MEETING
The USCS Special Meeting will be held at the offices of USCS, 2969 Prospect
Park Drive, Rancho Cordova, California, on December 21, 1998, at 9:00 a.m.,
local time.
RECORD DATE; VOTING RIGHTS; PROXIES
The USCS Board has fixed the close of business on November 6, 1998 as the
record date for determining USCS stockholders entitled to notice of and to
vote at the USCS Special Meeting.
Each share of USCS Common Stock issued and outstanding is entitled to one
vote on each matter to be voted on at the USCS Special Meeting. All shares of
USCS Common Stock represented by a proxy given pursuant to this solicitation
will be voted as specified in such proxy. If no specification is given, such
shares will be voted FOR the USCS Merger Proposal. Any proxy given may be
revoked at any time before it is exercised by giving written notice to the
Secretary of USCS, by delivery of a later-dated proxy, or by voting in person
at the USCS Special Meeting.
Participants in the USCS International, Inc. 401(k) Retirement Plan holding
USCS Common Stock under such Plan shall have the right to direct the vote of
such stock.
SOLICITATION OF PROXIES
USCS will bear the cost of solicitation of proxies. In addition to the use
of the mails, directors and officers of USCS may solicit proxies by personal
interview, telephone, telegram or e-mail. These persons will receive no
additional compensation for solicitation of proxies, but may be reimbursed for
out-of-pocket expenses in connection with such solicitations. USCS has also
arranged for brokerage firms, banks, custodians, nominees and fiduciaries to
forward proxy solicitation materials to the beneficial owners of USCS Common
Stock held of record by such persons. USCS will reimburse them for reasonable
out-of-pocket expenses in connection with forwarding such materials. In
addition, USCS has engaged the services of ChaseMellon Shareholder Services to
assist in soliciting proxies at a cost of approximately $8,000 plus reasonable
expenses. USCS will bear the cost of such solicitation.
QUORUM
A majority of the issued and outstanding shares of USCS Common Stock
entitled to vote as of the record date constitutes a quorum at the USCS
Special Meeting. Such shares may be present in person or by proxy. Election
inspectors appointed for the meeting will determine if a quorum is present.
Proxies marked as abstentions (or abstentions from voting by stockholders
appearing in person) will be counted as shares towards establishing a quorum.
Broker non-votes will be counted towards establishing a quorum at the USCS
Special Meeting.
REQUIRED VOTE; OUTSTANDING SHARES
Approval of the USCS Merger Proposal requires the affirmative vote of a
majority of the outstanding shares of USCS Common Stock. A proposal to adjourn
the USCS Special Meeting to solicit additional proxies requires the
affirmative vote of a majority of the USCS Common Stock present in person or
by proxy at the USCS Special Meeting. As of the record date, there were
23,371,460 shares of USCS Common Stock outstanding and entitled to vote held
by approximately 194 stockholders of record. As of the record date, directors
and officers of USCS and their affiliates as a group beneficially owned
approximately 8,777,083 shares of USCS Common Stock, or approximately 37.6% of
those shares of USCS Common Stock outstanding as of such date. In addition, as
of the record date, DST owned approximately 4.7% of the outstanding USCS
Common Stock.
Abstentions and broker non-votes will be counted as votes against the USCS
Merger Proposal.
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MERGER PROPOSALS FOR DST AND USCS STOCKHOLDERS
THE MERGER
The Merger Agreement provides for the merger of a wholly-owned subsidiary of
DST with and into USCS, with USCS surviving the Merger as a wholly-owned
subsidiary of DST. The Merger will become effective at the time of filing of a
Certificate of Merger with the Delaware Secretary of State (such time being
herein referred to as the "Effective Time"), which is expected to occur as
soon as practicable after the last of the conditions precedent to the Merger
set forth in the Merger Agreement has been satisfied or waived. A copy of the
Merger Agreement is included as Appendix A.
BACKGROUND OF THE MERGER
From time to time, DST has evaluated strategic alliances, including business
combinations with other companies that could complement, expand and strengthen
DST's product and service offerings and revenues. Similarly, from time to time
USCS has considered various opportunities for expanding and strengthening its
base of products and distribution, including acquisitions, business
combinations and joint ventures. DST and USCS believe that the product lines
of the two companies are complementary, and that the Merger will both broaden
and strengthen the resources, product and service offerings and distribution
channels for each company.
In the third quarter of 1997, Thomas A. McDonnell, Chief Executive Officer
of DST, and Charles W. Schellhorn, President of Output Technologies, Inc., a
wholly owned subsidiary of DST, met with James C. Castle, Chief Executive
Officer of USCS, Douglas L. Shurtleff, Chief Financial Officer of USCS,
Claudia D. Coleman, Vice President, Corporate Development of USCS, C. Randles
Lintecum, President of International Billing Services, Inc., a wholly owned
subsidiary of USCS, and Michael F. McGrail, a director of USCS and President
of CableData, Inc., a wholly owned subsidiary of USCS, and engaged in general
discussions concerning a possible business arrangement for the joint use of
print mail production facilities to permit more efficient use of equipment and
facility capacities. A strategic business combination between USCS and DST was
not discussed at that time. Subsequent discussions on joint use of facilities
occurred between Mr. McDonnell and the other persons named above. At a DST
Board meeting in October 1997, the DST Board approved the exploration of joint
venture opportunities and, in connection with such opportunities, authorized
DST to purchase up to 4.9% of USCS' Common Stock. During the fourth quarter of
1997, DST acquired approximately 4.7% of USCS' Common Stock on the open
market.
At a regularly scheduled DST Board meeting on February 26, 1998, one item of
business was a report by Mr. McDonnell of the discussions with USCS.
In the first quarter of 1998, DST and USCS concluded that joint use of
facilities by unrelated companies was not then practical and Mr. McDonnell
suggested to Dr. Castle that DST and USCS consider a possible strategic
business combination between USCS and DST. Mr. McDonnell made the suggestion
for several reasons. DST believed that due to the timing of the peak demands
in the respective industries of each company, DST's business combination with
USCS would permit both companies to use more efficiently their output
production facilities. The peak demands of the industries that DST's output
business serves and the peak demands of USCS' output customers occur at
different times of the month. The ability to use both companies' facilities
would provide for more efficient use of equipment and, collectively, would
require less peak capacity at each company's facilities. DST also believed
that, because USCS' output production clients are generally in different
industries than the output clients of DST, a combination of certain operations
of DST and of USCS would provide an opportunity for cost saving synergies.
In addition, DST believed that USCS' strong capabilities and business in
subscriber management software development and services in the cable TV and
communications industry would enable DST to expand its product and service
offerings into an area not served by DST. Further, DST's subscriber management
software development and service to the satellite TV industry would complement
USCS' subscriber management business.
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Both DST and USCS are engaged in development of electronic billing technology.
DST believed that joint development of this technology would be more efficient
and result in a more rapid introduction of such products and services. DST's
management believed that a combination with USCS could establish the combined
companies as a market leader in three businesses: (a) mutual fund shareowner
processing; (b) output processing, including print and electronic billing and
statement production services; and (c) subscriber management software
development and service in the cable TV and communications industries as well
as satellite TV.
On March 25, 1998, Mr. McDonnell and Dr. Castle met to discuss the
parameters of a possible transaction. On April 20, 1998, DST and USCS executed
a Mutual Non-Disclosure Agreement which provided that each party receiving
confidential information from the other would use such information for the
sole purpose of "evaluating a potential strategic relationship between the
Parties and for use only in business arrangements of or with [the other party]
and for no other purpose."
On May 7, 1998, Mr. McDonnell and Mr. Kenneth V. Hager, Chief Financial
Officer of DST, met with Dr. Castle, Mr. Shurtleff and Ms. Coleman of USCS,
and Mr. Argyros, a director and significant stockholder of USCS. At the
meeting, the parties discussed the potential benefits and drawbacks of a
possible strategic business combination. DST and USCS shared materials to
provide background on their respective companies. DST management presented
background information on DST, information on DST's products, services and
business strategy, and its assessment of the possible synergies in operations
and technology between DST and USCS. The discussion of synergies focused on
the strategic fit between the two companies and did not include a discussion
of any financial effect of such potential synergies.
At a DST Board meeting on May 12, 1998, DST management reported to the DST
Board on the preliminary discussions between the two companies, reviewed the
financial and strategic implications of a business combination and received
authority to continue the discussions.
On May 20, 1998, the USCS Board held a regularly scheduled meeting in which
one of the items of discussion was the inquiry received from DST regarding the
potential business combination. At the meeting, USCS' legal advisor, Graham &
James LLP, made a presentation to the USCS Board regarding its fiduciary
duties and obligations in considering potential acquisition or other
significant business combination proposals. The presentation covered overall
fiduciary obligations under Delaware law, specific fiduciary duties in the
context of an acquisition proposal, confidentiality issues and relevant
securities laws. USCS management made a presentation to the USCS Board that
included an overview of the business of DST and a discussion of strategic
alternatives. The USCS Board discussed the business of DST, its interest in
USCS and its compatibility with USCS' long-term business plan. The USCS Board
members discussed their respective opinions as to the risks and merits of a
potential transaction with DST. At the conclusion of the meeting, the USCS
Board instructed management to continue discussions with DST about a potential
strategic combination and to continue evaluating the relative merits of a
combination with DST versus maintaining an independent course.
On May 28, 1998, DST and USCS exchanged due diligence requests and the
respective legal, financial, accounting and management representatives of each
of DST and USCS commenced their due diligence review. On June 3, 1998, the
USCS Board held a meeting and one item was an update on the discussions with
DST. Management made a presentation to the USCS Board regarding the
anticipated due diligence schedule with DST. On June 4, 1998, Mr. Robert C.
Canfield, Senior Vice President and General Counsel of DST, Mr. Hager and Mr.
Gregg Wm. Givens, Financial Reporting and Tax Officer of DST, and their
outside legal advisors, Sonnenschein Nath & Rosenthal, met with Mr. Shurtleff,
Ms. Coleman and Mr. James E. Laramy, the General Counsel of USCS, and Graham &
James LLP to discuss structure and tax and accounting treatment of a potential
transaction, the due diligence process and timetable and possible synergies
from the proposed transaction. At the conclusion of this meeting, it was
agreed that representatives of USCS and DST would begin intensive due
diligence reviews of legal and financial matters relevant to the proposed
transaction, and that the management and technical teams of the two companies
should begin meeting to analyze the operational issues and possible synergies
related to a potential business combination of DST and USCS.
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Beginning the week of June 15, 1998 and continuing through the months of
July and August, 1998, representatives of the two companies and their
respective legal and accounting advisors met to conduct additional due
diligence and to further explore potential synergies in the proposed strategic
business combination. USCS provided DST with the following due diligence
materials; general business information, historical financial information,
budgets, strategic plans and financial projections, audit and tax workpapers,
corporate tax returns, product plans, intellectual property information, major
customer contracts, vendor contracts, employee and benefits information,
insurance information, information regarding bank and credit arrangements,
facilities information, and litigation information. DST provided USCS with
general background due diligence information, including general business
information, securities law filings, trademark registrations, employee benefit
information, monthly summary financial reports, income statements by
significant business unit, consolidated balance sheets, consolidated cash
flows, detail of selected investments, financial projections for the period
1998-2000, information involving claims by or against DST, insurance
information, correspondence with auditors, information regarding bank and
credit arrangements, marketing information, officer employment agreements,
sample customer contracts, partnership and joint venture agreements and
leases. Among the numerous meetings and conversations during this time period
were (i) meetings and telephone conferences between DST and USCS management
concerning integration of products, product development plans, administrative
organizations, personnel and employee benefit plans; (ii) interviews with
members of the companies' respective management teams and technical personnel,
(iii) meetings and interviews in which independent teams from
PricewaterhouseCoopers LLP, independent accountants to both DST and USCS,
performed certain due diligence procedures at the request of the parties, and
(iv) meetings and telephone conferences between the technical teams of DST and
USCS to conduct product due diligence, evaluate intellectual property issues,
discuss Year 2000 compliance matters and explore potential synergies and cost
savings from integrating the products and services of DST and USCS. The
categories of potential synergies included elimination of public company
expenses by USCS, operational synergies from more effective utilization of the
combined operating capacities, and potential purchased materials cost
reductions from the combined purchasing power of the two companies. DST
estimated that, if achieved, such synergy savings could aggregate from $5
million to $15 million on a pretax basis by the end of 2000. However, DST does
not have sufficient information to ascertain the precise level of synergy
savings, and there can be no assurance that such savings will be achieved.
The USCS Board, at its scheduled meeting on June 25, 1998, received due
diligence updates and reports from management, heard an updated presentation
from Graham & James LLP on the USCS Board's fiduciary duties and discussed the
status of the proposed strategic business combination. At this meeting
management was authorized to continue discussions.
On July 7 and 8, 1998, Dr. Castle, Mr. Shurtleff and Ms. Coleman of USCS met
with Mr. McDonnell and members of DST's senior management team. At this
meeting the USCS team presented information about USCS, USCS' view of the
potential business and financial implications of a strategic combination of
DST and USCS, the status of pending USCS acquisitions and joint ventures, and
tax and accounting issues. USCS also gave DST summary financial projections,
which projections were consistent with Wall Street analyst projections. Dr.
Castle, Mr. Shurtleff and Ms. Coleman also met with Mr. Landon H. Rowland,
Chief Executive Officer of KCSI.
At its July 9, 1998 meeting the DST Board reviewed the results of DST
management's due diligence analysis, discussed financial and legal aspects of
the proposed transaction, discussed the potential value of DST and USCS as
combined companies and authorized Mr. McDonnell to propose to USCS financial
terms for the acquisition of USCS, including an exchange ratio equal to $32.00
divided by the mean per share market price of the DST Common Stock for the
twenty trading days prior to the consummation of the Merger, with a "collar"
of 0.5 DST Common Stock shares minimum and 0.6 DST Common Stock shares
maximum. Following the meeting Mr. McDonnell advised Dr. Castle by telephone
of the financial terms of DST's initial offer for a business combination with
USCS.
On July 21, 1998, the USCS Board held a telephonic meeting in which one of
the items of business was an update on the discussions with DST and the
financial terms of the initial offer from DST. Management updated
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the USCS Board as to the status of the negotiations and progress of due
diligence efforts of DST and USCS. The USCS Board also approved the formal
engagement of Merrill Lynch, with whom USCS had been having informal
discussions, as its financial advisor with respect to the proposed
transaction. Merrill Lynch was engaged by USCS pursuant to a letter agreement
dated July 21, 1998. Dr. Castle, as instructed by the USCS Board, continued
negotiations with Mr. McDonnell by telephone over the proposed
pricing/exchange ratio and other terms of the Merger.
On July 27, 1998 DST provided USCS with additional due diligence information
regarding DST which USCS provided to Merrill Lynch (with exception of income
tax workpapers). This information included: 1998-1999 income statements by
quarter; detail of cost and tax basis of material investments; selected
information on investments, debt and capital additions; consolidating income
statements and balance sheets; income tax workpapers; revenue and cost
information for significant clients and vendors; and detail of outstanding
stock options.
On August 7, 1998, Dr. Castle, Mr. Shurtleff and Ms. Coleman from USCS, Mr.
Argyros, and Charles D. Martin, a USCS director, met with representatives of
Merrill Lynch to review the status of discussions, discuss open due diligence
matters and evaluate certain proposed terms and conditions of the potential
strategic business combination with DST.
On August 8, 1998, while discussions continued on the pricing/exchange
ratio, an initial draft of the Merger Agreement was sent by Sonnenschein Nath
& Rosenthal to Graham & James LLP. This draft was subsequently distributed to
the working group and the parties continued negotiations. A few days later,
the parties' respective legal counsel, financial advisors, independent
auditors, executive officers and significant stockholders and their
representatives, had meetings and conversations regarding the terms of the
Merger Agreement and related documents, including the Stockholder Agreements,
the Affiliate Agreements, the Registration Rights Agreement, the circumstances
under which the Merger Agreement could be terminated, the conditions upon
which any break-up fees would be payable and the amount of such fees, the
representations, warranties, covenants and conditions to closing to be set
forth in the Merger Agreement, treatment of stock option, stock purchase and
other USCS employee benefit plans, the availability of pooling-of-interest
accounting treatment for the proposed Merger, the qualification of the Merger
as a tax-free reorganization pursuant to Section 368(a) of the Internal
Revenue Code and the ability of the Merger to be consummated in compliance
with applicable anti-trust laws.
On August 9 and 10, 1998, Dr. Castle, Mr. Argyros, Mr. Martin and Mr.
McDonnell met to discuss the proposed pricing/exchange ratio for the
transaction. Mr. McDonnell began by proposing a .6 fixed exchange ratio with
no collar. Dr. Castle made a counter-proposal of a .7 exchange ratio with no
collar. The parties engaged in extensive discussions regarding the strategic
advantages of the proposed Merger and the value of the combination going
forward. While no agreement was reached on the appropriate exchange ratio at
this meeting, the parties concluded that additional discussions were warranted
between USCS and DST.
On August 17, 1998, one item of discussion at the regularly scheduled DST
Board meeting was the status of the discussions with USCS and the results of
the diligence to date. The DST Board reviewed with DST management the pricing
discussions and authorized Mr. McDonnell to continue those discussions at an
exchange ratio approved by the DST Board. After the DST Board meeting, Mr.
McDonnell called to confirm that the proposal was a fixed exchange ratio of .6
to 1.
Early in the process of USCS' contacts and negotiations with DST, USCS
received an unsolicited inquiry from the CEO of a large information technology
company ("Company A") which indicated an interest in pursuing discussions
regarding a possible business combination between USCS and Company A. The USCS
Board, after consultation with counsel, believed that its fiduciary duties
required it to further explore this opportunity. The USCS Board therefore
directed management to follow up with Company A to determine and evaluate (i)
Company A's level of interest, (ii) the potential synergies of a combination
with Company A, (iii) the probable timing and structure of a transaction,
including related tax effects, with Company A, and (iv) Company A's view of
the value of USCS. A mutual non-disclosure agreement was executed and USCS and
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Company A commenced a financial and legal due diligence review of each other.
Representatives of Company A and its legal and financial advisors had several
meetings with representatives of USCS and its legal and financial advisors.
Prior to an August 19, 1998 USCS Board meeting and at the request of USCS
management, Company A orally proposed a transaction pursuant to which Company
A, subject to certain conditions, would acquire the outstanding shares of USCS
for cash at a premium to market value.
On August 19, 1998, USCS held a special meeting of the USCS Board in which
Dr. Castle, Mr. Shurtleff, Ms. Coleman and Mr. Laramy of USCS and USCS'
financial and legal advisors reviewed with the USCS Board the terms and
conditions of the proposed Merger with DST as well as the conditional offer
from Company A. Representatives of Graham & James LLP again reviewed the USCS
Board's fiduciary duties in evaluating the alternatives of a strategic
business combination, an outright purchase or remaining independent. Graham &
James LLP also reviewed the principal terms and conditions of the draft Merger
Agreement and related agreements, copies of which had been previously
distributed to the USCS Board. Representatives of Merrill Lynch reviewed with
the USCS Board an overview of the various aspects of the proposed transactions
and a preliminary analysis of certain valuation metrics applicable to the
proposed transactions. Among other things, Merrill Lynch reported on the
results of the "market check" analysis that it conducted to assess the
potential of alternative strategic partners for USCS. The "market check"
included (i) a review of prior unsolicited inquiries made by third parties
such as Company A, and an assessment of the potential interest in and fit with
USCS of certain domestic and international companies in the customer care,
billing transaction processing and systems integration businesses and (ii)
communications with several potential strategic partners to determine their
level of interest and potential to complete a transaction with USCS. Merrill
Lynch's "market check" revealed no alternatives that were competitive with DST
and Company A in terms of business fit, valuation and ability to consummate a
transaction. Messrs. Castle, Shurtleff, Laramy and Ms. Coleman next
participated in a detailed presentation to the USCS Board which included an
evaluation of the three strategic alternatives facing the USCS Board: (i) the
Merger with DST; (ii) a potential purchase by Company A; or (iii) a strategy
of remaining independent.
The USCS Board, management and the financial and legal advisors then engaged
in a discussion of the various potential benefits and drawbacks of the
alternatives. The participants first discussed the proposal from Company A.
The USCS Board determined not to pursue further discussions with Company A
for, among other things, the following reasons: (i) Company A's proposed
valuation represented a substantial discount to DST's proposed exchange ratio
and (ii) the proposed strategic combination with DST was thought to offer USCS
stockholders a better opportunity to realize long-term value.
The USCS Board then discussed with USCS management USCS' prospects if it
followed an independent course. Members of management and the USCS Board
indicated their belief that USCS was capable of achieving its long-term goals
as a stand-alone entity. However, it was noted that the industry appeared to
be moving towards substantial consolidation and, if appropriate terms could be
reached, USCS stockholders would benefit from being part of a larger, more
diversified company able to more effectively take advantage of market
opportunities. The USCS Board then discussed a number of matters relating to
the proposed Merger, including without limitation (i) the terms of the
proposed Merger, including the proposed exchange ratio, conditions to closing,
and interim covenants and termination events, (ii) potential market reaction
to the proposed combination and (iii) issues related to the integration of
management, employees, operations and products following a merger. The USCS
Board authorized and instructed USCS management to continue discussions with
representatives of DST regarding the proposed Merger and gave negotiating
frameworks as to the exchange ratio and the terms of the Merger Agreement.
On August 20, 1998 Mr. McDonnell and M. Jeannine Strandjord, a DST director,
met with Mr. Argyros to discuss the results of the USCS Board meeting and the
proposed exchange ratio. On August 21, 1998, the DST Board held a meeting at
which they discussed the status of the transaction, financial and legal due
diligence and related matters. At that meeting, the DST Board authorized Mr.
McDonnell to propose to USCS an exchange ratio of .62 of a share of DST Common
Stock for each share of USCS Common Stock. On August 21, 1998, Mr. McDonnell
communicated the proposal by DST of a .62 fixed exchange ratio to Dr. Castle,
and such offer was subsequently accepted by USCS.
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On August 28, 1998, the DST Board met to discuss the proposed transaction
and approve the form of Merger Agreement submitted to the directors prior to
the meeting. Counsel reviewed with the DST Board the provisions of the Merger
Agreement. The DST Board approved the form of Merger Agreement and authorized
its execution on behalf of DST with such changes as designated officers of DST
deemed appropriate.
On September 2, 1998, the USCS Board, along with members of management and
USCS' financial and legal advisors, reviewed the proposed final terms and
conditions of the Merger Agreement (copies of which had been circulated to
each USCS Board member) and the exchange ratio fairness opinion analysis
provided by Merrill Lynch (copies of which had been circulated to each USCS
Board member). Representatives of Graham & James LLP made a presentation on
the significant terms and conditions of the Merger Agreement, the Stockholder
Agreements and other related agreements. Representatives of Merrill Lynch made
a presentation to the USCS Board regarding the terms, structure and valuation
aspects of the proposed Merger. This presentation included a discussion of the
several analyses of the terms of the Merger described under "--Opinion of
USCS' Financial Advisor," pages 42 through 48. After these presentations,
Merrill Lynch rendered its oral opinion, subsequently confirmed in writing on
September 2, 1998, that as of the date of such opinion and based upon the
assumptions made, matters considered and limits of its review, the Exchange
Ratio was fair, from a financial point of view, to the holders of USCS Common
Stock (not including an opinion as to DST and its affiliates as stockholders
of USCS). After further discussion, the USCS Board unanimously voted to
approve the Merger, the .62 Exchange Ratio, and the form of Merger Agreement
and all exhibits thereto, subject to such immaterial changes as management may
deem proper prior to execution.
Following the DST Board meeting on August 28, 1998 and the USCS Board
meeting on September 2, 1998, the parties resolved the open contractual
matters, principally relating to the nature and extent of representations and
warranties. The parties executed the Merger Agreement and publicly announced
the execution of the Merger Agreement after the close of the market on
September 2, 1998. In addition, the major stockholders of each of DST and USCS
executed their respective Stockholder Agreements agreeing to vote for the
Merger. See "Other Agreements--Stockholder Agreements," pages 61 through 62.
DST'S REASONS FOR THE MERGER; RECOMMENDATION OF THE DST BOARD
At the meeting of the DST Board held on August 28, 1998, after careful
consideration, the DST Board (a) determined that the Merger is fair to, and in
the best interests of, the DST stockholders, (b) approved the Merger Agreement
and the transactions contemplated thereby, including the stockholder
agreements, and (c) resolved to recommend that the stockholders of DST vote in
favor of the DST Merger Proposal. ACCORDINGLY, THE DST BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT, THE MERGER AND THE OTHER TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT, INCLUDING THE ISSUANCE OF DST COMMON
STOCK CONTEMPLATED THEREIN. The following briefly describes the material
reasons, factors and information taken into account by the DST Board in
reaching its conclusion.
DST's Reasons for the Merger
The following are the principal reasons that the DST Board believes the
Merger will be beneficial to DST and its stockholders:
(i) USCS and DST together will have a significant presence in terms of
market share in three growing industries: mutual fund shareowner
processing, subscriber management services and output processing.
(ii) The combined operations may generate synergy savings through
combined economies of scale, coordinated product efficiencies and the
elimination of duplicate costs associated with having two public companies
(as discussed under "Risk Factors," beginning on page 15 and "--Background
of the Merger," beginning on page 34).
(iii) USCS' products, services and management team will complement DST's
and enable the combined enterprise to service the needs of a broader
spectrum of clients.
(iv) There is significant potential enhancement of the strategic position
and position in new markets of the combined companies beyond that which may
have been achievable by DST alone.
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Information and Factors Considered by the DST Board
The DST Board made its determination after careful consideration of, and
based on, a number of factors including the material factors described below:
(i) All of the reasons described above under "--DST's Reasons for the
Merger," page 39;
(ii) Information concerning the business, assets, capital structure,
financial performance and condition and prospects of DST and USCS;
(iii) Current and historical market prices and trading information with
respect to each company's common stock;
(iv) The strategic fit between the businesses of DST and USCS, the
opportunity for significant cost savings and synergies and the anticipated
financial results of operations of the combined companies;
(vi) The challenges of combining the businesses of two major corporations
of this size and the attendant risk of not achieving the expected cost
savings or synergies (as discussed under "Risk Factors," beginning on page
15 and "--Background of the Merger," beginning on page 34) and of diverting
management focus and resources from other strategic opportunities and from
operational matters for an extended period of time;
(vii) The terms and structure of the transaction and the terms and
conditions of the Merger Agreement, including the Exchange Ratio and the
intended tax and accounting treatment for the Merger;
(viii) The agreement of the major stockholders of both companies to vote
their shares of DST and USCS, respectively, in favor of the Merger;
(ix) The likelihood of obtaining required regulatory approvals;
(x) The impact of the Merger on the customers and employees of each
company;
(xi) DST management's assessment of USCS' current technology platforms
and plans for Year 2000 readiness; and
(xii) The decline in revenue from the loss of TCI and the expected loss
of another USCS customer, the reason for the loss of such business and
USCS' plans to replace such revenue.
In view of the wide variety of factors considered in connection with its
evaluation of the Merger and the complexity of these matters, the DST Board
did not find it practicable to and did not attempt to quantify, rank or
otherwise assign relative weights to these factors. In addition, the DST Board
did not undertake to determine whether any particular factor (or any aspect of
any particular factor) was favorable or unfavorable to the DST Board's
ultimate determination, but rather, generally analyzed the factors described
above and discussed and questioned DST's management and legal, financial and
accounting advisors. In considering the factors described above, individual
members of the DST Board may have given different weight to different factors.
The DST Board considered all these factors as a whole, and overall considered
the factors to favor and support its determination. The DST Board concluded it
was not necessary to seek independent financial advice on the financial terms
of the Merger.
Recommendation of the DST Board
The DST Board recommends that the stockholders of DST vote "FOR" the DST
Merger Proposal.
USCS' REASONS FOR THE MERGER; RECOMMENDATION OF THE USCS BOARD
At the meeting of the USCS Board held on September 2, 1998, after careful
consideration, the USCS Board (i) determined that the Merger is fair to, and
in the best interests of, the USCS stockholders, (ii) approved the Merger
Agreement and the transactions contemplated thereby, including the stockholder
agreements, and (iii) resolved to recommend that the stockholders of USCS vote
in favor of the USCS Merger Proposal. ACCORDINGLY, THE USCS BOARD HAS
UNANIMOUSLY APPROVED THE MERGER AGREEMENT, THE MERGER AND THE OTHER
TRANSACTIONS CONTEMPLATED BY THE MERGER
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AGREEMENT. The following briefly describes certain of the reasons, factors and
information taken into account by the USCS Board in reaching its conclusion.
USCS' Reasons for the Merger
The following are the principal reasons that the USCS Board believes the
Merger will be beneficial to USCS and its stockholders:
(i) USCS and DST together will have a significant presence in terms of
market share in three growing industries: mutual fund shareowner
processing, subscriber management services, and output processing.
(ii) The combined operations may generate synergy savings through
combined economies of scale, coordinated product efficiencies and the
elimination of duplicate costs associated with having two public companies
(as discussed under "Risk Factors," beginning on page 15 and "--Background
of the Merger," beginning on page 34).
(iii) USCS' products and services will complement DST's and enable the
combined enterprise to service the needs of a broader spectrum of clients.
(iv) There is significant potential enhancement of the strategic position
and position in new markets of the combined companies beyond that which may
have been achievable by USCS alone.
Information and Factors Considered by the USCS Board
The USCS Board made its determination after careful consideration of, and
based on, a number of factors including the material factors described below:
(i) All of the reasons described above under "USCS' Reasons for the
Merger";
(ii) The potential for appreciation in the value of DST Common Stock as a
result of the Merger;
(iii) The fact that the value at the Effective Time of the shares of DST
Common Stock to be received in the Merger for each share of USCS Common
Stock will vary as a result of any change in the value of DST Common Stock;
(iv) The analysis prepared by Merrill Lynch and its oral opinion
presented at the meeting of the USCS Board and subsequently confirmed in
writing to the effect that, as of the date of such opinion and based upon
its review and analysis and subject to the limitations set forth therein,
the Exchange Ratio was fair, from a financial point of view, to the USCS
stockholders (a copy of the written opinion dated September 2, 1998, of
Merrill Lynch, setting forth the assumptions made, factors considered and
scope of the review undertaken by it, is included as Appendix B and is
incorporated herein by reference);
(v) The fact that DST has a leading market position in providing
sophisticated information processing and computer software services and
products to mutual funds, insurance companies, banks and other financial
services organizations while USCS has a leading market position in
providing customer management software and services to the communications
and other service industries, but with minimal overlap in the types of
clients they serve;
(vi) The provisions of the Merger Agreement pursuant to which DST has
committed to work closely with USCS to gain clearance for the Merger from
regulatory authorities and to use its best efforts to take all actions
necessary to secure such approvals, subject to a limitation on any such
action which would have a material adverse effect on DST or USCS;
(vii) The ability to consummate the Merger as a tax-free reorganization
under the Internal Revenue Code of 1986, as amended (the "Code");
(viii) Advice from USCS' legal advisors as to the likelihood that the
legal conditions to the Merger could be satisfied;
(ix) The agreement of the major stockholders of both companies to vote
their shares of DST and USCS, respectively, in favor of the Merger;
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(x) The fact that two current directors of USCS will become directors of
DST upon consummation of the Merger;
(xi) The business, assets, financial condition, results of operations and
cash flow of USCS, DST and the combined company, on both an historical and
a prospective basis;
(xii) The current and historical trading prices and values of DST Common
Stock and USCS Common Stock and the current and historical trading
multiples of other comparable companies;
(xiii) The challenges of combining the businesses of two major
corporations of this size and the attendant risk of not achieving the
expected cost savings or synergies or improvement in earnings (as discussed
under "Risk Factors," beginning on page 15 and "--Background of the
Merger," beginning on page 34) and of diverting management focus and
resources from other strategic opportunities and from operational matters
for an extended period of time; and
(xiv) The interests of the officers and directors of USCS in the Merger,
including the matters described under "--Interests of Certain Persons in
the Merger," pages 59 through 60.
In view of the wide variety of factors considered by the USCS Board in
connection with its evaluation of the Merger and the complexity of such
matters, the USCS Board did not consider it practicable to, nor did it attempt
to, quantify, rank or otherwise assign relative weights to the specific
factors it considered in reaching its decision. The USCS Board relied in part
on the experience and expertise of its financial advisors for quantitative
analysis of the financial terms of the Merger. In addition, the USCS Board did
not undertake to determine whether any particular factor (or any aspect of any
particular factor) was favorable or unfavorable to its ultimate determination,
but rather discussed generally the factors described above, asked questions of
USCS' management and legal, financial and accounting advisors, and reached a
general consensus that the Merger was in the best interests of USCS and its
stockholders. In considering the factors described above, individual members
of the USCS Board may have given different weight to different factors.
Recommendation of the USCS Board
The USCS Board recommends that the USCS stockholders vote "FOR" the USCS
Merger Proposal. Certain USCS directors have potential conflicts of interest
in recommending approval of the Merger Proposal. (See pages 59 through 60)
OPINION OF USCS' FINANCIAL ADVISOR
USCS retained Merrill Lynch to act as its financial advisor with respect to
the Merger. In connection with such engagement, USCS requested that Merrill
Lynch evaluate the fairness, from a financial point of view, of the Exchange
Ratio to the holders of USCS Common Stock (not including an opinion as to DST
and its affiliates as stockholders of USCS). At a meeting of the USCS Board on
September 2, 1998, Merrill Lynch rendered its oral opinion to the USCS Board,
which opinion was subsequently confirmed in writing on September 2, 1998 (the
"Merrill Lynch Opinion"), that, as of such date and based upon the assumptions
made, matters considered and limits of review, as set forth in such opinion,
the Exchange Ratio was fair, from a financial point of view, to the holders of
USCS Common Stock (not including an opinion as to DST and its affiliates as
stockholders of USCS).
THE FULL TEXT OF THE MERRILL LYNCH OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, MATTERS CONSIDERED AND QUALIFICATIONS AND LIMITATIONS ON THE SCOPE OF
REVIEW UNDERTAKEN BY MERRILL LYNCH IS INCLUDED AS APPENDIX B TO THIS JOINT
PROXY STATEMENT-PROSPECTUS. THE DESCRIPTION OF THE MERRILL LYNCH OPINION SET
FORTH HEREIN IS QUALIFIED BY REFERENCE TO THE FULL TEXT OF THE MERRILL LYNCH
OPINION. HOLDERS OF USCS COMMON STOCK ARE URGED TO READ THE MERRILL LYNCH
OPINION IN ITS ENTIRETY AND CONSIDER IT CAREFULLY. THE MERRILL LYNCH OPINION
WAS PROVIDED TO THE USCS BOARD OF DIRECTORS FOR ITS
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INFORMATION AND ADDRESSES ONLY THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW,
OF THE EXCHANGE RATIO TO THE HOLDERS OF USCS COMMON STOCK (NOT INCLUDING AN
OPINION AS TO DST AND ITS AFFILIATES AS STOCKHOLDERS OF USCS). THE EXCHANGE
RATIO WAS DETERMINED THROUGH NEGOTIATIONS BETWEEN USCS AND DST AND NOT
DETERMINED OR RECOMMENDED BY MERRILL LYNCH. THE MERRILL LYNCH OPINION DOES NOT
ADDRESS THE MERITS OF THE UNDERLYING DECISION OF USCS TO ENGAGE IN THE MERGER
AND DOES NOT CONSTITUTE, NOR SHOULD IT BE CONSTRUED AS, A RECOMMENDATION TO
ANY HOLDER OF USCS COMMON STOCK AS TO HOW SUCH HOLDER SHOULD VOTE ON THE
MERGER OR AS TO ANY OTHER MATTER IN CONNECTION WITH THE MERGER.
In arriving at the Merrill Lynch Opinion, Merrill Lynch, among other things:
(i) reviewed certain publicly available business and financial information
relating to USCS and DST that Merrill Lynch deemed to be relevant; (ii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flow, assets, liabilities and prospects of USCS and
DST; (iii) conducted discussions with members of senior management and
representatives of USCS and DST concerning the matters described in clauses
(i) and (ii) above as well as their respective businesses and prospects,
before and after giving effect to the Merger; (iv) reviewed the market prices
and valuation multiples for shares of USCS Common Stock and shares of DST
Common Stock and compared them with those of certain publicly traded companies
that Merrill Lynch deemed to be relevant; (v) reviewed the results of
operations of USCS and DST and compared them with those of certain publicly
traded companies that Merrill Lynch deemed to be relevant; (vi) compared the
proposed financial terms of the Merger with the financial terms of certain
other transactions that Merrill Lynch deemed to be relevant; (vii)
participated in certain discussions and negotiations among representatives of
USCS and DST and their legal advisors; (viii) reviewed the potential pro forma
impact of the Merger; (ix) reviewed a draft of the Merger Agreement; (x)
reviewed drafts of the Stockholder Agreements to be entered into by certain
stockholders of USCS and DST; and (xi) reviewed such other financial studies
and took into account such other matters as Merrill Lynch deemed necessary,
including Merrill Lynch's assessment of general economic, market and monetary
conditions.
In preparing the Merrill Lynch Opinion, Merrill Lynch assumed and relied on
the accuracy and completeness of all information supplied or otherwise made
available to it, discussed with or reviewed by or for it, or publicly
available, and Merrill Lynch did not assume any responsibility for
independently verifying such information. Merrill Lynch did not undertake an
independent evaluation or appraisal of any of the assets or liabilities of
USCS or DST, nor was Merrill Lynch furnished with any such evaluation or
appraisal. In addition, Merrill Lynch did not assume any obligation to
conduct, nor did Merrill Lynch conduct, any physical inspection of the
properties or facilities of USCS or DST. With respect to certain publicly
traded securities held by DST, Merrill Lynch assumed that the current reported
sales prices for such securities reflected the fair market value of such
securities. With respect to the financial forecasts furnished to or discussed
with Merrill Lynch by USCS and DST, Merrill Lynch assumed that such forecasts
had been reasonably prepared and reflected the best then available estimates
and judgments of USCS' or DST's management as to the expected future financial
performance of USCS or DST, as the case may be. In addition, Merrill Lynch
assumed that the Merger will qualify as a tax-free reorganization for United
States federal income tax purposes and will be accounted for as a pooling-of-
interests under GAAP. Merrill Lynch also assumed that the final terms of the
Merger Agreement and the Stockholder Agreements would be substantially similar
to the last drafts thereof reviewed by Merrill Lynch.
The Merrill Lynch Opinion was necessarily based upon market, economic and
other conditions as they existed and could be evaluated, and on the
information made available to Merrill Lynch, as of the date of such opinion.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Merrill Lynch expressed no opinion as to
the price at which USCS Common Stock or DST Common Stock would trade following
the announcement or consummation of the Merger.
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In performing its analyses, Merrill Lynch made numerous assumptions with
respect to industry performance, general business and economic conditions, and
other matters, many of which are beyond the control of USCS and DST. Any
estimates incorporated in the analyses performed by Merrill Lynch are not
necessarily indicative of actual past or future results or values, which may
be significantly more or less favorable than such estimates. Future results or
actual values may vary materially different from these forecasts or
assumptions. Estimated values do not purport to be appraisals and do not
necessarily reflect the prices at which businesses or companies may be sold in
the future. The Merrill Lynch Opinion does not present a discussion of the
relative merits of the Merger as compared with any other business plan or
opportunity that might be presented to USCS, or the effect of any other
arrangement in which USCS might engage.
Summary of Material Analyses
Set forth below is a summary setting forth the material analyses presented
by Merrill Lynch to the USCS Board on September 2, 1998 in connection with the
Merrill Lynch Opinion.
Valuation of USCS
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call, an industry service provider of earnings estimates based on an
average of earnings estimates published by various investment banking firms
("First Call"), and taken from research reports, Merrill Lynch compared
certain financial and operating information and ratios for USCS with the
corresponding financial and operating information for a group of publicly
traded companies in the customer care and billing, and transaction processing
services industries. For purposes of its analysis, the following ten
companies, that Merrill Lynch deemed to be reasonably comparable to USCS based
upon a variety of operating and financial criteria, including, among others,
industry (including a focus on billing and customer care), growth, size and
profitability, were used as comparable companies to USCS: American Management
Systems Inc., Billing Concepts Corp., Convergys Corporation, CSG Systems Inc.,
First Data Corporation, Moore Corporation Ltd., Systems & Technology Corp.,
International Telecommunication Data Systems, Inc., LHS Group Inc., and
Saville Systems PLC (collectively, the "USCS Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the USCS Comparable Companies and for USCS as of September 1, 1998: a range of
multiples of market value to estimated fiscal year-end ("FYE") 1998 net income
of 12.2x to 34.7x, with a mean of 21.9x (as compared to USCS at 22.7x); a
range of multiples of market value to estimated FYE 1999 net income of 9.8x to
23.9x, with a mean of 16.1x (as compared to USCS at 21.1x); a range of five-
year growth rates, as reported by I/B/E/S International Inc., an industry
service provider of global earnings information based on an average of
earnings estimates published by various investment banking firms ("IBES"), of
10.0% to 52.0%, with a mean of 30.0% (as compared to USCS at 19.4%); and a
range of multiples derived from a fraction, the numerator of which is each
company's market value to estimated FYE 1999 net income and the denominator of
which is such company's IBES five-year growth rate, of 0.21x to 1.50x, with a
mean of 0.70x (as compared to USCS at 1.09x). Based on Merrill Lynch's
judgment, a range of multiples for the USCS Comparable Companies of market
value to estimated FYE 1999 net income of 19.0x to 22.0x was applied to
corresponding First Call estimates of USCS' earnings resulting in a range of
per share values for USCS Common Stock of $22.04 to $25.52 per share of USCS
Common Stock. Based upon a stock price of $56.75 per share of DST Common
Stock, such range of equity values for USCS Common Stock produces an implied
range for the exchange ratio of 0.39x to 0.45x.
None of the USCS Comparable Companies is, of course, identical to USCS.
Accordingly, a complete analysis of the results of the foregoing calculations
cannot be limited to a quantitative review of such results and involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the USCS Comparable Companies and other factors
that could affect the public trading value of the USCS Comparable Companies,
as well as that of USCS.
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Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., an analysis of the present value of the projected unlevered
free cash flows for the periods and using the discount rates indicated) of
USCS based upon 1998-2002 forecasts prepared by USCS' management. Utilizing
these forecasts, Merrill Lynch calculated a range of per share values for USCS
based upon the sum of the discounted net present value of USCS' four and one-
half year stream of projected unlevered free cash flows as of June 30, 1998,
plus the discounted net present value of the terminal value based on a range
of multiples of its projected calendar year 2002 unlevered net income. Based
on Merrill Lynch's analyses and judgment, discount rates reflecting a weighted
average cost of capital ranging from 13% to 15% and terminal value multiples
of calendar year 2002 unlevered net income ranging from 22.0x to 26.0x were
used to calculate a range of per share values for USCS Common Stock of $30.84
to $38.72. Based upon similar discounted cash flow analysis performed for DST
(described below), such range of equity values for USCS Common Stock produces
an implied range for the exchange ratio of 0.39x to 0.64x.
Comparable Transactions Analysis. Using publicly available information,
Merrill Lynch reviewed 27 merger transactions that it deemed comparable and
relevant to the Merger based upon a variety of operating and financial
criteria, including, among others, industry, growth, size and profitability of
the acquired entity. These transactions included 10 cash or stock-for-stock
merger transactions since December 11, 1995 among comparable companies (the
"Comparable Transactions") in the customer care and billing, and transaction
processing services industries and 17 stock-for-stock merger transactions with
transaction values in excess of $500 million since January 1, 1996 among
technology companies (the "Technology Transactions").
Merrill Lynch compared certain financial ratios for the Comparable
Transactions to those of the Merger. Merrill Lynch compared the prices paid in
the Comparable Transactions in terms of, among other things, the Transaction
Value ("Transaction Value" is defined as Offer Value ("Offer Value" is defined
as offer price per share multiplied by the number of shares and in-the-money
options outstanding) plus preferred equity at liquidation value and net debt)
as multiples of the last twelve months ("LTM") revenues, LTM earnings before
interest, taxes, depreciation and amortization ("EBITDA") and LTM earnings
before interest and taxes ("EBIT"), and Offer Value as a multiple of LTM net
income). An analysis of the multiples for the Comparable Transactions produced
the following results: (i) Transaction Value as a multiple of LTM revenues
yielded a range of 2.06x to 3.20x, with a mean of 2.68x; (ii) Transaction
Value as a multiple of LTM EBITDA yielded a range of 21.8x to 29.8x, with a
mean of 24.9x; (iii) Transaction Value as a multiple of LTM EBIT yielded a
range of 15.6x to 38.8x, with a mean of 27.3x; and (iv) Offer Value as a
multiple of LTM net income yielded a range of 25.3x to 59.9x, with a mean of
43.4x. Based on its analysis of such multiples, Merrill Lynch calculated a
summary reference range of implied per share values of USCS Common Stock of
$31.00 to $39.00. Based upon a stock price of $56.75 per share of DST Common
Stock, such range of equity values for USCS Common Stock produces an implied
range for the exchange ratio of 0.55x to 0.69x.
Merrill Lynch then compared the premiums paid in the Technology Transactions
in terms of, among other things, the Offer Value per share over the public
equity closing sale price one day, one week and one month prior to the
announcement of the transactions. An analysis of the premiums paid for the
Technology Transactions produced the following results: (i) a range of
premiums paid in the Technology Transactions over the public equity closing
sale price one day prior to the announcement of the transactions of (2.8%) to
42.4%, with a mean of 19.0%; (ii) a range of premiums paid in the Technology
Transactions over the public equity closing sale price one week prior to the
announcement of the transactions of (5.8%) to 46.7%, with a mean of 22.6%; and
(iii) a range of premiums paid in the Technology Transactions over the public
equity closing sale price one month prior to the announcement of the
transactions of (3.6%) to 64.9%, with a mean of 26.6%. Based on its analysis
of such premiums, Merrill Lynch calculated a reference range of premiums paid
over the one week prior to the announcement price of 0.0% to 46.7% resulting
in a summary reference range of implied per share values of USCS Common Stock
of $24.50 to $35.94. Based upon a stock price of $56.75 per share of DST
Common Stock, such range of equity values for USCS Common Stock produces an
implied range for the exchange ratio of 0.43x to 0.63x.
None of the Comparable Transactions nor the Technology Transactions analysis
was identical to the Merger. Accordingly, an analysis of the results of the
foregoing transactions is not purely mathematical. Rather, it
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involves complex considerations and judgments concerning differences in
financial and operating characteristics of the companies included in the
comparable transaction analysis and other factors that could affect the Offer
Value and the Transaction Value.
Valuation of DST
Analysis of Selected Comparable Publicly Traded Companies. Using publicly
available information and estimates of future financial results published by
First Call and taken from research reports, Merrill Lynch compared certain
financial and operating information and ratios for DST with the corresponding
financial and operating information for a group of publicly traded companies
in the customer care and billing, and transaction processing services
industries. For purposes of its analysis, the following seven companies, that
Merrill Lynch deemed to be reasonably comparable to DST based upon a variety
of operating and financial criteria, including, among others, industry
(including a focus on transaction processing services), growth, size and
profitability, were used as comparable companies to DST: Automatic Data
Processing, Inc., BISYS Group Inc., Ceridian Corporation, First Data
Corporation, Fiserv, Inc., Paychex, Inc., and Sungard Data Systems Inc.
(collectively, the "DST Comparable Companies").
Merrill Lynch's calculations resulted in the following relevant ranges for
the DST Comparable Companies and DST as of September 1, 1998: a range of
multiples of market value to estimated FYE 1998 net income of 14.3x to 31.4x,
with a mean of 24.8x (as compared to DST (adjusted to eliminate the value of
certain public equity securities held by DST, on both a pre-tax and after tax
basis) ("DST Adjusted Market Values") at 27.0x pre-tax and 30.8x post- tax); a
range of multiples of market value to estimated FYE 1999 net income of 12.4x
to 27.4x, with a mean of 21.0x (as compared to DST Adjusted Market Values at
22.2x pre-tax and 25.4x post-tax); a range of IBES five-year growth rates of
14.8% to 28.4%, with a mean of 19.5% (as compared to DST at 18.5%); and a
range of multiples derived from a fraction, the numerator of which is each
company's market value (DST Adjusted Market Values in the case of DST) to
estimated FYE 1999 net income and the denominator of which is such company's
IBES five-year growth rate, of 0.79x to 1.90x, with a mean of 1.29x (as
compared to DST at 1.20x pre-tax and 1.37x post-tax). Based on Merrill Lynch's
judgment, a range of multiples for the DST Comparable Companies of market
value to estimated FYE 1999 net income of 22.0x to 26.0x was applied to
corresponding First Call estimates of DST's earnings resulting in a range of
equity values for DST of $50.73 to $63.41.
None of the DST Comparable Companies is, of course, identical to DST.
Accordingly, a complete analysis of the results of the foregoing calculations
cannot be limited to a quantitative review of such results and involves
complex considerations and judgments concerning differences in financial and
operating characteristics of the DST Comparable Companies and other factors
that could affect the public trading value of the DST Comparable Companies, as
well as that of DST.
Discounted Cash Flow Analysis. Merrill Lynch performed discounted cash flow
analyses (i.e., an analysis of the present value of the projected unlevered
free cash flows for the periods and using the discount rates indicated) of
DST, based on 1998 -2000 forecasts prepared by DST's management with Merrill
Lynch's extrapolation thereafter through 2002. Utilizing these forecasts,
Merrill Lynch calculated a range of equity per share values based upon the sum
of the discounted net present value of DST's four and one-half year stream of
projected unlevered free cash flows as of June 30, 1998, plus the discounted
net present value of the terminal value based on a range of multiples of its
projected calendar year 2002 unlevered net income. Based on Merrill Lynch's
analyses and judgment, discount rates reflecting a weighted average cost of
capital ranging from 10.5% to 12.5% and terminal value multiples of calendar
year 2002 unlevered net income ranging from 26.0x to 30.0x were used to
calculate a range of per share values of $48.98 to $60.36. Merrill Lynch then
added the value of DST's public investments, estimated at between $11.79 and
$17.39 per share of DST Common Stock, resulting in a final range of per share
values for DST Common Stock of $60.77 to $77.75.
Comparable Transactions Analysis. Using the same Comparable Transactions as
described under "Valuation of USCS--Comparable Transaction Analysis" above,
Merrill Lynch reviewed the multiples derived from such transactions to
calculate a summary reference range of implied per share values of DST Common
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Stock. Based on its analysis of such multiples, Merrill Lynch calculated a
summary reference range of implied per share values of DST Common Stock of
$55.00 to $75.00.
Merrill Lynch then applied the same premium analysis, derived from the
Technology Transactions, that it used to value the USCS Common Stock to
produce a summary reference range of implied per share values of DST Common
Stock. Based upon the Technology Transactions and Merrill Lynch's judgment to
use a reference range of premiums paid over the one week prior to the
announcement price of 0.0% to 46.7%, Merrill Lynch calculated a summary
reference range of implied per share values of DST Common Stock of $56.75 to
$83.25.
Pro Forma Consequences of the Merger
Pro Forma Contribution Analysis; Pro Forma EPS Analysis. Merrill Lynch
analyzed and compared the respective pro forma contribution of USCS and DST to
EBIT and net income to the combined companies following consummation of the
proposed Merger for each of the periods LTM, estimated FYE 1999 and estimated
FYE 2000 based upon estimates of management for USCS and DST, both without
taking into account any potential synergies and, based on conversations with
USCS management, the assumption of $20 million in pre-tax synergies (with $10
million of such synergies attributed to each of USCS and DST) resulting from
the Merger. This analysis showed that (i) USCS would contribute approximately
23.5% and 23.1% of the combined companies' LTM EBIT and LTM net income,
respectively, without any synergies and approximately 25.8% and 25.6%,
respectively, with $20 million of assumed pre-tax synergies, (ii) USCS would
contribute approximately 20.7% and 20.8% of the combined companies' estimated
FYE 1999 EBIT and estimated FYE 1999 net income, respectively, without any
synergies and approximately 22.8% and 22.9%, respectively, with $20 million of
assumed pre-tax synergies, and (iii) USCS would contribute approximately 20.8%
and 20.8% of the combined companies' estimated FYE 2000 EBIT and estimated FYE
2000 net income, respectively, without any synergies and approximately 22.5%
and 22.5%, respectively, with $20 million of assumed pre-tax synergies. Based
on its analysis of the estimated pro forma contribution of USCS to the
combined companies following the Merger, Merrill Lynch calculated a reference
range for an implied Exchange Ratio of 0.54x to 0.61x.
Merrill Lynch also analyzed the estimated pro forma effect of the Merger,
with and without potential synergies, on the earnings per share of the
combined companies. Based upon the Exchange Ratio and estimates of management
for the financial performance of USCS and DST, Merrill Lynch estimated that
the Merger would be accretive in 1998, 1999 and 2000, respectively, both with
and without potential synergies.
Valuation of Potential Pro Forma Synergies. Merrill Lynch analyzed the
estimated value of the potential synergies resulting from the Merger by
reviewing the after tax contribution that various dollar estimates of
potential synergies would have on the earnings of the combined companies.
Based upon conversations with USCS management with respect to benefits
attainable after the potential synergies have been realized over time, Merrill
Lynch analyzed the after-tax contribution of pretax synergies ranging from $10
million to $30 million assuming a range of multiples of market value to
estimated FYE 1999 net income of 21.0x to 29.0x. This analysis indicated that
the implied value of the potential synergies when applied to the outstanding
shares of USCS Common Stock to be within the range $0.00 per share (assuming
that none of the value of the potential synergies were attributed to USCS
stockholders) and $23.71 per share (assuming that 100% of the value of the
potential synergies were attributed to USCS stockholders). Based on Merrill
Lynch's judgment, pre-tax synergies of $20 million and a multiple of market
value to estimated FYE 1999 net income of 21.0x were used to calculate a range
of estimated after tax value of the potential synergies of $0.00 to $11.45 per
share of USCS Common Stock. Based upon a stock price of $56.75 per share of
DST Common Stock and a stock price of $24.50 per share of USCS Common Stock,
such range of potential synergy values for each share of USCS Common Stock
produces an implied range for the exchange ratio of 0.43x to 0.63x.
The summary set forth above does not purport to be a complete description of
the analyses performed by Merrill Lynch in arriving at the Merrill Lynch
Opinion. The preparation of a fairness opinion is a complex and analytical
process involving various determinations as to the most appropriate and
relevant methods of financial analysis and the application of those methods to
the particular circumstances and, therefore, such an opinion is
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not readily susceptible to partial analysis or summary description. In
arriving at its opinion, Merrill Lynch did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all of
its analyses, would create a misleading view of the analyses underlying the
Merrill Lynch Opinion.
Pursuant to a letter agreement, USCS has agreed to pay Merrill Lynch (i) a
fee of $100,000 payable on the date of the letter agreement, and (ii) if the
Merger is consummated, a transaction fee of $3,900,000. If the consideration
to be received by the holders of USCS Common Stock in the Merger exceeds
$34.00 per share, additional fees will be paid to Merrill Lynch equal to 2.0%
of the amount by which such consideration exceeds $34.00 per share; provided,
however, that the total fee paid to Merrill Lynch will not exceed 0.70% of the
Offer Value nor be less that 0.52% of the Offer Value, in either case,
excluding the value of all shares of USCS Common Stock held by DST and its
affiliates. The total fee cannot be determined at this point in time, because
it is partially dependent on DST's Common Stock price at the closing of the
Merger which is unknown at this point, but if it were to be paid based upon
the Offer Value as of September 2, 1998, the last full trading day prior to
the public announcement that the parties had entered into the Merger
Agreement, the fee would be $5.9 million, and if it were based on the Offer
Value as of November 16, 1998, the fee would be $4 million. In addition, USCS
has agreed to reimburse Merrill Lynch for its reasonable out-of-pocket
expenses (including reasonable fees and expenses of its legal counsel),
subject to certain limitations, incurred in connection with its engagement,
and to indemnify Merrill Lynch and certain related persons against certain
liabilities arising out of or in conjunction with its rendering of services
under its engagement, including certain liabilities under the federal
securities laws.
USCS retained Merrill Lynch based upon Merrill Lynch's experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm. Merrill Lynch, as part of its investment banking business,
is continuously engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive biddings, secondary distributions of listed and unlisted
securities, private placements and valuations for corporate and other
purposes. Merrill Lynch has in the past provided financial advisory and
financing services to USCS and financing services to DST and may continue to
do so and has received, and may receive, customary fees for such services. In
the ordinary course of its business, Merrill Lynch and its affiliates may
actively trade the debt and equity securities of USCS and DST for their own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
CERTAIN INFORMATION PROVIDED AMONG THE PARTIES AND TO MERRILL LYNCH
In connection with the negotiation of the Merger and the preparation of the
Merrill Lynch Opinion, USCS and DST provided each other and Merrill Lynch with
certain financial projections that were not publicly available, including
estimated diluted earnings per share ("EPS") for the fiscal years ending
December 31, 1998, December 31, 1999 and December 31, 2000. Such projections
did not take into account any of the potential effects of the Merger. The
projections prepared by USCS' management reflected diluted EPS that ranged
from $1.06 to $1.10 and $1.18 to $1.22 for the fiscal years ending December
31, 1998 and December 31, 1999, respectively, and a diluted EPS of $1.50 for
the fiscal year ending December 31, 2000. These 1998 and 1999 fiscal year
projections compare to First Call estimates of USCS' diluted EPS for the
fiscal years ending December 31, 1998 and December 31, 1999 of $1.08 and
$1.16, respectively. The projections prepared by DST's management reflected
diluted EPS that ranged from $1.43 to $1.46 and $1.81 to $1.86 for the fiscal
years ending December 31, 1998 and December 31, 1999, respectively, and a
diluted EPS of $2.25 for the fiscal year ending December 31, 2000. These 1998
and 1999 fiscal year projections compare to First Call estimates of DST's
diluted EPS for the fiscal years ending December 31, 1998 and December 31,
1999 of $1.46 and $1.77, respectively.
As a matter of course, neither USCS nor DST disclose projections of future
revenue, earnings or other financial information. The projections provided
above were not prepared with a view to public disclosure and
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were therefore not prepared in compliance with the published guidelines of the
SEC regarding projections, nor were they prepared in accordance with the
guidelines established by the American Institute of Certified Public
Accountants for preparation and presentation of financial projections. Such
projections were based upon the companies' current accounting policies, and a
variety of estimates and assumptions which involve judgments with respect to,
among other things, future economic and competitive conditions, financial
market conditions and future business decisions, which, though considered
reasonable by USCS and DST, respectively, may not be realized, and are
inherently subject to significant economic, competitive and business
uncertainties, all of which are difficult to predict and many of which are
beyond the control of USCS and DST. The companies' independent accountants
have not examined or compiled the foregoing financial projections and
accordingly do not provide any form of assurance with respect to such
projections. While each of USCS and DST believes that the estimates and
assumptions relating to such projections were reasonable, there can be no
assurance that such projections will be realized, and actual results may vary
materially from those indicated. In light of the uncertainties inherent in any
projected data, USCS and DST stockholders are cautioned not to place undue
reliance on such projections. Such projections are included in this Joint
Proxy Statement-Prospectus only because such information was provided by USCS
and DST to each other and to Merrill Lynch. Such projections are not being
included herein to induce any stockholder to vote in favor of the Merger.
TERMS OF THE MERGER
THE DESCRIPTION OF THE MERGER AGREEMENT SET FORTH BELOW DOES NOT PURPORT TO
BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MERGER
AGREEMENT, A COPY OF WHICH IS INCLUDED AS APPENDIX A TO THIS JOINT PROXY
STATEMENT-PROSPECTUS.
The Merger. Subject to the terms and conditions of the Merger Agreement,
Acquisition Sub will merge with and into USCS when the Certificate of Merger
is accepted for filing by the Delaware Secretary of State. See "--Effective
Time of the Merger," page 50. The separate corporate existence of Acquisition
Sub will then cease, and USCS as the Surviving Subsidiary will continue as a
Delaware corporation and a wholly-owned subsidiary of DST.
Certificate of Incorporation and By-laws. The Merger Agreement provides that
at the Effective Time, the Certificate of Incorporation and By-laws of
Acquisition Sub will become the Certificate of Incorporation and By-laws of
the Surviving Subsidiary.
Directors and Officers. The directors of Acquisition Sub at the Effective
Time will become the directors of the Surviving Subsidiary until their
successors have been duly elected or appointed and qualified or until their
earlier resignation or removal. The officers of USCS at the Effective Time
will become the officers of the Surviving Subsidiary until their successors
have been duly elected or appointed and qualified or until their earlier
resignation or removal. See "--Management and Operations of USCS after the
Merger," page 60.
Conversion of USCS Common Stock in the Merger. At the Effective Time, each
issued and outstanding share of USCS Common Stock (other than shares owned by
DST or USCS or any of their respective subsidiaries) will be converted into
.62 of a share of DST Common Stock. If, prior to the Effective Time, DST
should split or combine the shares of DST Common Stock, or pay a stock
dividend or other stock distribution in DST Common Stock (except upon exercise
of options, warrants or other rights to purchase DST Common Stock), or
otherwise change the DST Common Stock into any other securities, or make any
other dividend or distribution on the DST Common Stock, then the Exchange
Ratio will be appropriately adjusted to reflect such split, combination,
dividend or other distribution or change.
Each outstanding option to purchase shares of USCS Common Stock (each, an
"Option") issued pursuant to USCS' stock option plans (collectively, the
"Option Plans"), whether or not exercisable, will be assumed by DST. Each such
Option will constitute an option to acquire, on the same terms and conditions
as were applicable under such assumed Option, that number of shares of DST
Common Stock equal to the product of the Exchange
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Ratio and the number of shares of USCS Common Stock subject to such Option
rounded down to the nearest whole share. The exercise price per share of DST
Common Stock will be equal to the exercise price per share of such Option
immediately prior to the Effective Time divided by the Exchange Ratio, rounded
up to the nearest whole cent. DST will not be obligated to issue any fraction
of a share of DST Common Stock upon exercise of any Options. Pursuant to
certain change of control provisions in the Option Plans, approximately 50% of
the unvested portions of the Options will accelerate and become exercisable at
the Effective Time. As of November 19, 1998, there were 2,443,360 options
outstanding, 626,895 of which are currently exercisable.
Fractional Shares. No fractional shares of DST Common Stock will be issued
in the Merger. In lieu of any such fractional shares, each holder of USCS
Common Stock who otherwise would be entitled to receive a fractional share of
DST Common Stock pursuant to the Merger will be paid an amount in cash,
without interest, rounded up to the nearest cent, equal to such holder's
fractional share interest in DST Common Stock multiplied by the closing price
on the NYSE of a share of DST Common Stock at the Effective Time. As soon as
practicable following the Effective Time, DST will deposit the required cash
with an exchange agent selected by DST and reasonably acceptable to USCS (the
"Exchange Agent"). The Exchange Agent will mail such amounts to such holders,
provided they have surrendered their USCS Common Stock certificates.
EFFECTIVE TIME OF THE MERGER
On the first business day after satisfaction or waiver of the conditions to
the Merger (other than those conditions to be satisfied or waived at the
closing of the Merger), or at such other time as DST and USCS agree in
writing, the Merger will be consummated. The Merger will become effective at
the time at which the Certificate of Merger to be filed pursuant to the
Delaware General Corporation Law ("DGCL") is accepted for filing by the
Delaware Secretary of State. See "--Conditions; Waivers," beginning on page
53.
EXCHANGE OF CERTIFICATES IN THE MERGER
Promptly after the Effective Time, the Exchange Agent will mail a
transmittal form and instructions to each USCS stockholder of record. The
transmittal form and instructions are to be used in forwarding USCS Common
Stock certificates (the "Certificates") for surrender and exchange for (i)
certificates representing that number of whole shares of DST Common Stock that
such holder has the right to receive pursuant to the Merger and (ii) cash for
any fractional shares of DST Common Stock to which such holder otherwise would
be entitled. PLEASE DO NOT SURRENDER YOUR CERTIFICATES FOR EXCHANGE UNTIL YOU
RECEIVE SUCH TRANSMITTAL FORM AND INSTRUCTIONS. At and after the Effective
Time and until surrendered as provided above, Certificates will be deemed to
represent the right to receive certificates for the applicable number of
shares of DST Common Stock and a cash payment in lieu of any fractional
shares. The holders of Certificates will not be entitled to receive dividends
or any other distributions from DST until such Certificates are surrendered.
Following the Merger, former USCS stockholders will be DST stockholders with
all rights thereof, except for the right to receive dividends and
distributions pending surrender of their Certificates. Upon surrender of a
Certificate, DST will pay to the person in whose name such shares of DST
Common Stock are issued, any dividends or other distributions with respect to
such DST Common Stock which have a record date after the Effective Time and
which became payable prior to surrender. In addition, after such surrender, at
the appropriate payment date, DST will pay to the person in whose name the
shares of DST Common Stock are issued any dividends or other distributions on
such DST Common Stock which have a record date after the Effective Time and
prior to such surrender and a payment date after such surrender. In no event
shall the persons entitled to receive such dividends or other distributions be
entitled to receive interest on such dividends or other distributions. DST
will pay all charges and expenses in connection with such exchanges of shares
of USCS Common Stock.
LISTING OF THE DST COMMON STOCK ON THE NYSE AND THE CHICAGO STOCK EXCHANGE
In the Merger Agreement, DST has agreed to use all reasonable efforts to
cause the shares of DST Common Stock which are to be issued pursuant to the
Merger Agreement, and pursuant to any exercises of Options granted
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to employees of USCS and its subsidiaries, to be listed for trading on the
NYSE and the Chicago Stock Exchange. Such authorization for listing is a
condition to the obligations of DST, Acquisition Sub and USCS to consummate
the Merger.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
parties thereto. The Merger Agreement includes representations and warranties
by USCS as to, among other things, (i) the corporate organization, standing
and power of USCS and its subsidiaries, (ii) the authorization of the Merger
Agreement, approvals by the USCS Board and the inapplicability of Section 203
of the DGCL to the transactions contemplated by the Merger Agreement, (iii)
USCS' possession of all governmental permits necessary for USCS or any of its
subsidiaries to conduct its current business and USCS' compliance with
applicable laws, (iv) its capitalization, (v) pending or threatened
litigation, (vi) the Merger Agreement's noncontravention of any agreement, law
or charter or by-law provision, (vii) the terms, existence, operations,
liabilities and compliance with applicable laws of USCS employee plans, and
certain other matters relating to the Employee Retirement Income Security Act
of 1974, as amended, (viii) certain tax matters, (ix) ownership of and rights
to use certain intellectual property, (x) the accuracy of USCS' financial
statements and filings with the SEC, (xi) the conduct of USCS' business in the
ordinary and usual course and the absence of any undisclosed liabilities or
recent changes that would have a Material Adverse Effect (as defined in the
Merger Agreement) on USCS, (xii) certain contracts and leases of USCS and its
subsidiaries, and certain transactions with affiliates, (xiii) brokers and
finders employed by USCS, and (xiv) compliance with all environmental laws and
the absence of orders, directions or notices concerning environmental laws.
The Merger Agreement also includes representations and warranties by DST and
Acquisition Sub as to (i) the corporate organization, standing and power of
DST and Acquisition Sub, (ii) the authorization of the Merger Agreement, (iii)
DST's capitalization, (iv) the authorization of the shares of DST Common Stock
to be issued pursuant to the Merger Agreement, (v) pending or threatened
litigation, (vi) the Merger Agreement's noncontravention of any agreement, law
or charter or by-law provision, (vii) the accuracy of DST's financial
statements and filings with the SEC, (viii) the absence of any undisclosed
liabilities or recent changes that would have a Material Adverse Effect (as
defined in the Merger Agreement) on DST, (ix) brokers and finders employed by
DST, and (x) the ownership of Acquisition Sub.
BUSINESS OF USCS PENDING THE MERGER
USCS has agreed that, among other things, prior to the Effective Time,
except as contemplated by the Merger Agreement, USCS and each of its
subsidiaries will conduct its operations according to its ordinary course of
business consistent with past practice, seek to preserve intact its current
business organizations and preserve its relationships with customers,
suppliers and others having business dealings with them. USCS has agreed that,
except as otherwise contemplated by the Merger Agreement, prior to the
Effective Time neither USCS nor any of its subsidiaries will:
(i) (A) amend or propose to amend the Certificate of Incorporation or By-
laws of USCS or any of its subsidiaries; (B) split, combine or reclassify
the outstanding capital stock of, or issue or authorize or propose the
issuance of any other securities for shares of capital stock of, or other
ownership interests in, USCS or any of its subsidiaries; (C) declare, set
aside or pay any dividend, or similar payment, to any stockholder, director
or officer of USCS or any of its subsidiaries; (D) redeem, purchase or
otherwise acquire any shares of capital stock of, or other ownership
interests in, USCS or any of its subsidiaries; or (E) agree to do any of
the foregoing;
(ii) (A) encumber, issue, deliver or sell any shares of capital stock of,
or other equity interests in USCS or any of its subsidiaries, except for
shares issued upon exercise of Options outstanding at the date of the
Merger Agreement which are exercised in accordance with the terms of such
Options; (B) acquire, lease or dispose of any assets other than in the
ordinary course of business consistent with past practice; (C) create,
assume or incur any indebtedness except in the ordinary course of business
consistent with past
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practice; (D) encumber any of its assets other than in connection with
equipment leases incurred in the ordinary course of business consistent
with past practice; (E) enter into any other material transaction; (F) make
any payment with respect to any indebtedness of USCS or its subsidiaries
except such payments that are scheduled to come due prior to the Effective
Time; (G) acquire any business or any other person or entity except
pursuant to certain agreements identified by USCS; or (H) agree to do any
of the foregoing;
(iii) except as required to comply with applicable Legal Requirements (as
defined in the Merger Agreement) or existing USCS benefit plans: (A) adopt,
terminate or amend any USCS benefit plan; (B) increase the compensation or
benefits of any director, officer or employee (except normal increases in
the ordinary course of business consistent with past practice); (C) grant
any award or option under any compensation or benefit plan (with certain
limited, identified exceptions); (D) take any action to fund or secure the
payment of compensation or benefits (including any option or similar right)
under any employee or benefit plan (except in the ordinary course of
business consistent with past practice); or (E) agree to do any of the
foregoing;
(iv) take any action that would: (A) make any representation or warranty
of USCS set forth in the Merger Agreement untrue or incorrect so as to
cause the conditions set forth in Article VII of the Merger Agreement not
to be fulfilled as of the Effective Time; or (B) result in any breach of
the Merger Agreement or cause any of the other conditions of the Merger
Agreement not to be satisfied as of the Effective Time; or
(v) enter into any transaction with any officer, stockholder, director,
consultant or employee of USCS or any subsidiary thereof or any person or
entity that is an "affiliate" or "associate" of any of the foregoing, as
those terms are defined in Rule 12b-2 under the Exchange Act, whether or
not such transaction would be in the ordinary course of business.
CERTAIN ADDITIONAL COVENANTS OF USCS
USCS also agrees that:
(i) USCS will not take any action that reasonably could be expected to
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment under GAAP;
(ii) the USCS Board will recommend to the USCS stockholders the approval
of the Merger, unless the USCS Board reasonably determines in good faith in
connection with an Acquisition Proposal (as defined in the Merger
Agreement), after consultation with outside counsel, that such action would
be inconsistent with its fiduciary duties to stockholders as required by
law and, if such determination is made, will give written notice to DST of
such determination within two business days of the making of such
determination. Upon the issuance of such written notice to DST, and upon
the written election of DST, USCS will negotiate in good faith with DST for
a period of two business days regarding such adjustments in the terms of
the Merger as would enable the USCS Board, consistent with its fiduciary
duties to the stockholders, to proceed to recommend the Merger to the USCS
stockholders as contemplated in the Merger Agreement;
(iii) upon the request of DST, USCS will prepare and deliver to DST,
within thirty days after such request, such financial statements (including
audited financial statements) as may be required by DST to meet its
financial reporting obligations (including requirements under applicable
securities laws);
(iv) USCS will not take any action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code; and
(v) prior to the Effective Time, USCS shall take all necessary action to
terminate the Stockholder Rights Plan between USCS and ChaseMellon
Shareholder Services, LLC without issuing any securities or making any cash
payment.
NO SOLICITATION
Under the Merger Agreement, USCS has agreed that, prior to the Effective
Time, USCS and its subsidiaries will not take any action to initiate, solicit
or encourage any inquiries or the making or implementation of any
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proposal (including, without limitation, any proposal to its stockholders)
with respect to a merger, acquisition or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, USCS or any of its subsidiaries (any such proposal or offer
being referred to as an "Acquisition Proposal"), or engage in any negotiations
concerning, or provide any confidential information to, or have any
discussions with, any person or other entity or group relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make or
implement an Acquisition Proposal. See "--Termination Fee" on page 56 for a
discussion of certain circumstances under which USCS must pay DST a
termination fee. USCS also agreed that USCS and its subsidiaries would (i)
immediately cease and terminate any existing activities, discussions or
negotiations with any parties previously conducted with respect to any of the
foregoing, (ii) inform the individuals or entities referred to above of these
obligations, and (iii) notify DST immediately if any such inquiries or
proposals are received by, any such information is requested from or any such
negotiations or discussions are sought to be initiated or continued with, USCS
or any of its subsidiaries. However, the Merger Agreement does not prohibit
the USCS Board from (i) furnishing information to, or entering into
discussions or negotiations with, any person or other entity or group that
makes an Acquisition Proposal or recommending to its stockholders that they
accept such Acquisition Proposal, if (a) the USCS Board reasonably determines
in good faith, after consultation with outside legal counsel, that such action
is compelled by its fiduciary duties to stockholders imposed by law, (b) prior
to furnishing such information to, or entering into discussions or
negotiations with, such person or entity, USCS provides written notice to DST
to the effect that it is furnishing information to, or entering into
discussions or negotiations with, such person or entity, and (c) subject to
any confidentiality agreement with such other party (which USCS determines in
good faith, after consultation with outside counsel, is required to be
executed in order for the USCS Board to act in accordance with its fiduciary
duties to stockholders imposed by law), USCS keeps DST informed of the status
(not the terms) of any such discussions or negotiations; and (ii) to the
extent applicable, complying with Rule 14e-2 promulgated under the Exchange
Act with regard to an Acquisition Proposal.
CERTAIN COVENANTS OF DST
DST has agreed that, except as otherwise contemplated, permitted or required
by the Merger Agreement, prior to the Effective Time:
(i) DST and each of its subsidiaries will conduct its business in the
ordinary course in accordance with past practice, and will seek to preserve
intact its present business organization and to preserve relationships with
customers, suppliers and others having business dealings with them;
(ii) DST will not take or agree to take, and will cause its subsidiaries
not to take or agree to take, any action that would (A) make any
representation or warranty of DST set forth in the Merger Agreement untrue
or incorrect so as to cause the conditions set forth in Article VII of the
Merger Agreement not to be fulfilled as of the Effective Time or (B) result
in any breach of the Merger Agreement or cause any of the other conditions
of the Merger Agreement not to be satisfied as of the Effective Time;
(iii) the DST Board will recommend to the DST stockholders the approval
of the Merger;
(iv) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment under GAAP; and
(v) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code.
DST has also agreed to guarantee obligations of the Surviving Subsidiary
with respect to the USCS Deferred Salary Plan and the USCS Deferred Bonus Plan
for those participants under such plans who agree to waive application of the
change in control provisions under such plans to the transactions contemplated
by the Merger Agreement.
CONDITIONS; WAIVERS
Conditions to Each Party's Obligations to Effect the Merger. The respective
obligations of USCS, DST and Acquisition Sub to effect the Merger are subject
to the satisfaction or waiver of the following conditions: (i)
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the Merger shall have been approved by the required vote of stockholders of
USCS and DST; (ii) any waiting period applicable to the Merger under the HSR
Act shall have expired or early termination thereof shall have been granted;
(iii) the Registration Statement on Form S-4 that includes the Joint Proxy
Statement-Prospectus shall have become effective in accordance with the
provisions of the Securities Act and any necessary state securities law
approvals shall have been obtained and no stop orders with respect thereto
shall have been issued by the SEC and remain in effect; (iv) no governmental
entity shall have enacted, issued, promulgated, enforced or entered any legal
requirement that remains in effect and has the effect of making the
transactions contemplated by the Merger Agreement illegal or otherwise
prohibiting the transactions contemplated by the Merger Agreement, or that
questions the validity or the legality of the transactions contemplated by the
Merger Agreement and that could reasonably be expected to materially and
adversely affect the value of the business of USCS, it being agreed that each
party will use its reasonable best efforts to have any such injunction lifted,
and all material consents of governmental entities required to be obtained
with respect to the Merger and the other transactions contemplated by the
Merger Agreement shall have been obtained; (v) as of the Effective Time, the
shares of DST Common Stock issued in connection with the Merger will be
approved for listing on the NYSE and Chicago Stock Exchange, subject to
satisfaction of applicable NYSE and Chicago Stock Exchange requirements upon
official notice of issuance; (vi) DST and USCS shall have each received the
written opinion of its respective counsel, or other evidence, reasonably
satisfactory to it, to the effect that the Merger will constitute a
reorganization within the meaning of Section 368 of the Code; (vii) DST and
USCS shall each have received a letter from PricewaterhouseCoopers LLP dated
as of the closing date of the Merger confirming that the Merger may be
accounted for as a pooling-of-interests in accordance with GAAP, Accounting
Principles Board Opinion No. 16 and all published rules, regulations and
interpretations of the SEC; and (viii) the spin-off by KCSI of its wholly-
owned subsidiary, FAM Holdings, Inc. ("FAM"), shall not have occurred within
thirty days prior to the Effective Time. It is expected that FAM will hold
KCSI's interest in DST and in KCSI's other financial asset management
businesses.
Conditions to the Obligations of USCS. The obligation of USCS to effect the
Merger will be subject to the fulfillment at or prior to the Effective Time of
the following additional conditions: (i) the representations and warranties of
DST contained in the Merger Agreement shall be true and correct in all
material respects as of the Effective Time, with the same force and effect as
if made as of the Effective Time, except (A) for changes contemplated by the
Merger Agreement, (B) for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as
of such date), and (C) in all such cases, for such breaches or inaccuracies of
such representations and warranties as do not have a material adverse effect
on DST, and USCS shall have received a certificate of DST to such effect
signed by the Chief Executive Officer of DST (for purposes of determining
whether there has been a failure to satisfy this condition, any change in the
stock price of capital stock of DST after the date of the Merger Agreement
shall not be considered); (ii) DST shall have performed or complied in all
material respects with all material agreements and covenants required by the
Merger Agreement to be performed or complied with by it prior to the Effective
Time, and USCS shall have received a certificate of DST to such effect signed
by the Chief Executive Officer of DST; (iii) George L. Argyros, Sr. and James
C. Castle shall have been appointed to the DST Board effective as of the
Effective Time; (iv) the fairness opinion of Merrill Lynch shall not have been
withdrawn; and (v) USCS shall have received (A) Affiliate Agreements in the
form attached to the Merger Agreement executed by each person or entity that
may be reasonably deemed an "affiliate" of DST, (B) a Registration Rights
Agreement executed by DST, (C) the legal opinion of Sonnenschein Nath &
Rosenthal dated as of the closing date of the Merger, and (D) a Stockholder
Agreement executed by a major DST stockholder.
Conditions to the Obligations of DST and Acquisition Sub. The obligations of
DST and Acquisition Sub to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the additional following
conditions: (i) the representations and warranties of USCS contained in the
Merger Agreement shall be true and correct in all material respects as of the
Effective Time, except (A) for changes contemplated by the Merger Agreement,
(B) for those representations and warranties which address matters only as of
a particular date (which shall remain true and correct as of such date), and
(C) in all such cases, for such breaches or inaccuracies of such
representations and warranties as do not have a Material Adverse Effect (as
defined in the Merger
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Agreement) on USCS, and DST shall have received certificates of USCS officers
to such effect; (ii) USCS shall have performed or complied in all material
respects with all material agreements and covenants required by the Merger
Agreement to be performed or complied with by it on or prior to the Effective
Time, and DST shall have received USCS officers' certificates to such effect;
and (iii) DST shall have received (A) Affiliate Agreements in the form
attached to the Merger Agreement executed by each person or entity that may be
reasonably deemed an "affiliate" of USCS, (B) Stockholder Agreements executed
by the major stockholders of USCS, (C) the legal opinion of Graham & James LLP
dated as of the closing date of the Merger, and (D) a comfort letter from
PricewaterhouseCoopers LLP, in scope and substance equivalent to letters
customarily delivered by independent accountants in such circumstances and
reasonably acceptable in form and substance to DST.
Waiver of Conditions to the Obligations. At any time prior to the Effective
Time, DST and USCS may, by or pursuant to action taken by the DST Board and
the USCS Board, waive compliance with any of these conditions, but after the
approval of the Merger Agreement by the DST and USCS stockholders, no waiver
may be made that changes the Exchange Ratio or in any other way materially
adversely affects the rights of the DST or USCS stockholders, without the
further approval of such stockholders.
AMENDMENT; TERMINATION
DST and USCS may amend the Merger Agreement pursuant to action taken by
their respective Boards of Directors at any time before or after approval of
the Merger Agreement by the stockholders of USCS and DST and prior to the
Effective Time. However, after either such approval, no amendment will be made
that changes the Exchange Ratio or in any other way materially adversely
affects the rights of such stockholders, without further approval of such
stockholders. The Merger Agreement may only be amended by an instrument in
writing signed on behalf of DST and USCS.
In the event of any waiver or amendment changing the terms of the Merger
from those described in this Joint Proxy Statement-Prospectus which is deemed
material, by DST or USCS, to a stockholder's decision in voting on the Merger,
a revised Joint Proxy Statement-Prospectus will be circulated and proxies will
be resolicited.
The Merger Agreement may be terminated and the Merger may be abandoned at
any time prior to the Effective Time, before or after the approval by USCS
stockholders, by the mutual written consent of the DST Board and the USCS
Board.
Either DST or USCS may terminate the Merger Agreement if (i) the Merger is
not approved and adopted by the required stockholder vote, (ii) the Merger has
not been consummated by January 31, 1999 or, if the spin-off of FAM by KCSI
occurs in January 1999, within thirty days after such spin-off, or (iii) its
independent accountants advise it in writing that the Merger will not qualify
for pooling-of-interests accounting treatment under GAAP. DST may terminate
the Merger Agreement if (i) any person or entity (other than DST or any of its
affiliates) shall have acquired before the Effective Time or the termination
of the Merger Agreement 50% or more of the outstanding USCS Common Stock,
unless such person or entity shall have delivered to DST within two business
days of such acquisition written confirmation that such person or entity will
vote in favor of the Merger at the USCS Special Meeting and take no action to
prevent or delay the Merger, or (ii) if it receives notice from USCS of the
determination of the USCS Board in connection with an Acquisition Proposal
that a recommendation of approval of the Merger would be inconsistent with
USCS' fiduciary duties to USCS stockholders as required by law. In addition,
USCS may terminate the Merger Agreement if within two business days after DST
receives such notice from USCS, USCS does not receive notice that DST elects
to negotiate terms meeting the USCS directors' fiduciary duties or if after
such notice no agreement is reached within two business days after DST's
notice to negotiate.
In the event of termination of the Merger Agreement or a breach of any
provision of the Merger Agreement by either DST or USCS, DST and USCS shall be
entitled to all remedies available at law, except that no party shall have any
liability under the Merger Agreement in the event the Merger Agreement is
terminated as a
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consequence of the nonfulfillment of the conditions relating to: the HSR Act
waiting period; the effectiveness of the Registration Statement (of which this
Joint Proxy Statement-Prospectus is a part); certain legal requirements of
governmental entities; failure of the listing of DST Common Stock; or the
letters to be received by DST and USCS from PricewaterhouseCoopers LLP
regarding accounting for the Merger as a pooling-of-interests, unless the
nonfulfillment is caused by DST's or USCS' breach of any of its covenants or
obligations under the Merger Agreement.
TERMINATION FEE
If any of the following occur, USCS will pay to DST a termination fee of $25
million (the "Termination Fee"), which represents approximately 3% of the
total consideration that USCS stockholders would have received based on
closing stock prices on September 2, 1998, the last full trading day prior to
the public announcement of the execution and delivery of the Merger Agreement:
(i) (a) DST receives notice from USCS that the USCS Board has determined
in connection with an Acquisition Proposal that a recommendation to approve
the Merger would be inconsistent with its fiduciary duties to the USCS
stockholders, (b) the USCS Board fails to recommend to USCS stockholders
that they approve the Merger or withdraws such recommendation, or (c) the
Merger is not consummated because of the failure to obtain USCS stockholder
approval (if such failure or withdrawal is not due to DST's failure to
satisfy the conditions relating to the truth and correctness of DST's
representations and warranties or performance or compliance with material
covenants of the Merger Agreement) and within 12 months after such failure
USCS enters into a merger, acquisition, consolidation or similar
transaction involving, or any purchase of all or any significant portion of
the assets or any equity securities of, USCS or any of its subsidiaries
with any person other than DST or a DST subsidiary; or
(ii) any person or entity (other than DST and any of its affiliates)
shall have acquired before the Effective Time or the termination of the
Merger Agreement 50% or more of the outstanding USCS Common Stock and such
person or entity does not deliver within two business days of such
acquisition written confirmation that such person or entity will vote in
favor of the Merger at the USCS Special Meeting and take no action to
prevent or delay the Merger; or
(iii) USCS terminates the Merger Agreement because DST does not notify
USCS of its intention to negotiate within two business days after receipt
of notice from USCS that the USCS Board has determined, in connection with
an Acquisition Proposal, that a recommendation to approve the Merger would
be inconsistent with the USCS Board's fiduciary duties to the USCS
stockholders or because DST and USCS fail to reach an agreement within two
business days after DST's notice to negotiate terms which would enable the
USCS Board to make a recommendation to the USCS stockholders to approve the
Merger.
However, USCS will not be obligated to pay DST the Termination Fee if the
Merger Agreement is terminated or terminable because of the nonfulfillment of
the conditions of the Merger Agreement relating to the HSR Act waiting period,
the effectiveness of the Registration Statement (of which this Joint Proxy
Statement-Prospectus is a part), certain legal requirements of governmental
entities, failure of the listing of DST Common Stock; or the letters to be
received by DST and USCS from PricewaterhouseCoopers LLP regarding accounting
for the Merger as a pooling-of-interests, unless the nonfulfillment is caused
by USCS' material breach of any of its covenants or obligations under the
Merger Agreement.
OTHER FILINGS
USCS and DST will prepare and file any other filings relating to the Merger
and the transactions contemplated by the Merger Agreement that are required to
be filed by each under the Exchange Act (including the filing or amending of a
Form S-8 registration statement promptly after the Effective Time to cover the
DST Common Stock issuable upon exercise of the Options assumed by DST) and
other applicable legal requirements. USCS and DST will use their reasonable
best efforts to respond to any comments by the SEC or other appropriate
government official with respect to such filings.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion accurately summarizes the opinions of Sonnenschein
Nath & Rosenthal, special tax counsel to DST, and Graham & James LLP, special
tax counsel to USCS, filed as exhibits to the Registration Statement of which
this Joint Proxy Statement-Prospectus is a part, subject to the qualifications
set forth below and contained therein as to the material United States federal
income tax consequences of the Merger. The following discussion addresses only
such stockholders who hold their USCS Common Stock as a capital asset, and
does not address all of the United States federal income tax consequences that
may be relevant to particular stockholders in light of their individual
circumstances or to stockholders that are subject to special rules (including,
without limitation, financial institutions, tax-exempt organizations,
insurance companies, dealers in securities or foreign currencies, foreign
holders, persons who hold such shares as a hedge against currency risk, or a
constructive sale or conversion transaction, or holders who acquired their
shares pursuant to the exercise of employee stock options or otherwise as
compensation). Such opinions are not binding on the Internal Revenue Service
("IRS"). The following discussion is based upon the Code, laws, regulations,
rulings and decisions in effect as of the date hereof, all of which are
subject to change possibly with retroactive effect. Tax consequences under
state, local, and other foreign laws are not addressed herein.
No ruling has been (or will be) sought from the IRS as to the United States
federal income tax consequences of the Merger. It is a condition to the
consummation of the Merger that DST receive an opinion from its special tax
counsel, Sonnenschein Nath & Rosenthal, and that USCS receive an opinion from
its special tax counsel, Graham & James LLP, to the effect that, based upon
certain facts, representations and assumptions, the Merger will qualify as a
reorganization within the meaning of Section 368(a) of the Code. The issuance
of such opinions is conditioned on, among other things, such tax counsels'
receipt of representation letters from each of USCS, Acquisition Sub and DST,
in each case, in form and substance reasonably satisfactory to each such
counsel.
Based on the above assumptions and qualifications, holders of USCS Common
Stock who exchange their USCS Common Stock for DST Common Stock pursuant to
the Merger Agreement will not recognize gain or loss for United States federal
income tax purposes, except with respect to cash, if any, they receive in lieu
of fractional shares of USCS Common Stock. Holders of USCS Common Stock who
receive cash in lieu of fractional shares of DST Common Stock in the Merger
generally will be treated as if the fractional shares of DST Common Stock had
been distributed to them as part of the Merger and then redeemed by DST in
exchange for the cash actually distributed in lieu of the fractional shares,
with such redemption qualifying as an exchange under Section 302 of the Code.
Consequently, such holders generally will recognize capital gain or loss with
respect to cash payments they receive in lieu of fractional shares. The tax
rate applicable to capital gains of non-corporate holders varies depending on
the taxpayer's holding period for the shares. In the case of non-corporate
holders, any such capital gain will generally be subject to a maximum federal
income tax rate of 20%, if the holder has held the USCS Common Stock for more
than one year at the Effective Time. The deductibility of capital losses is
subject to certain limitations.
Each holder's aggregate tax basis in the DST Common Stock received in the
Merger will be the same as the holder's aggregate tax basis in the USCS Common
Stock exchanged therefor, decreased by the amount of any tax basis allocable
to any fractional share interest for which cash is received. The holding
period of the DST Common Stock received by a USCS stockholder pursuant to the
Merger Agreement will include the holding period of the USCS Common Stock
surrendered in exchange therefor.
THE DISCUSSION OF UNITED STATES FEDERAL INCOME TAX CONSEQUENCES SET FORTH
ABOVE DOES NOT PURPORT TO BE A COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL
TAX EFFECTS THAT MAY APPLY IF YOU WILL RECEIVE DST COMMON STOCK IN THE MERGER.
USCS STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR TAX ADVISORS TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE
APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. DST and USCS filed
the required notification and report forms under the HSR Act with the FTC and
the Antitrust Division, and the applicable waiting period commenced on
September 24, 1998. The parties have received notice of early termination. The
FTC and the Antitrust Division have the authority to challenge the Merger on
antitrust grounds before or after the Merger is completed. Each state in which
DST or USCS operates may also review the Merger under state antitrust law.
It is possible that some of these governmental authorities may impose
conditions for granting approval of the Merger. DST and USCS have agreed to
use their reasonable best efforts to overcome any objections that may be
raised by any of these governmental authorities. However, neither DST nor USCS
will be required to make any materially adverse changes in their operations or
activities or those of their respective affiliates. DST and USCS cannot
predict whether they will obtain the required regulatory approvals within the
time frame contemplated by the Merger Agreement or on terms that they find
satisfactory.
FEDERAL SECURITIES LAWS CONSEQUENCES; STOCK TRANSFER RESTRICTION AGREEMENTS
This Joint Proxy Statement-Prospectus does not cover any resales of the DST
Common Stock to be received by the stockholders of USCS upon consummation of
the Merger, and no person is authorized to make any use of the Joint Proxy
Statement-Prospectus in connection with any such resale.
All shares of DST Common Stock received by USCS stockholders in the Merger
will be freely transferable, except that shares of DST Common Stock received
by persons who are deemed to be "affiliates" of USCS under the Securities Act
at the time of the USCS Special Meeting may be resold by them only in
transactions permitted by Rule 145 or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of USCS
("Affiliates") for such purposes generally include individuals or entities
that control, are controlled by, or are under common control with, USCS, and
may include certain officers, directors and principal stockholders of USCS.
The Merger Agreement requires USCS to cause each of such persons to execute a
written agreement to the effect that such persons will not sell, assign or
transfer any of the shares of DST Common Stock issued to such persons in the
Merger except pursuant to an effective registration statement, in conformity
with certain requirements of Rule 145 or Rule 144, or in a transaction which,
in the opinion of counsel or according to the SEC, is not required to be
registered. However, pursuant to the Merger Agreement, DST will enter into a
Registration Rights Agreement with USCS stockholders who may be deemed
Affiliates of USCS, giving such stockholders certain registration rights with
respect to the DST Common Stock they receive in the Merger. See "Other
Agreements--Registration Rights Agreement," pages 62 through 63.
In addition, USCS will cause each of the stockholders who may be deemed
Affiliates of USCS to deliver to DST a written agreement prohibiting such
persons, during the period commencing on the date DST gives written notice
that consummation of the Merger is reasonably expected to occur within 30 days
of the date of such notice and ending at such time as financial results
covering at least 30 days of post-Merger operations of DST and USCS have been
publicly released by DST, from selling, transferring or otherwise disposing
of, or reducing their risk relative to, any shares of USCS Common Stock or any
shares of DST Common Stock beneficially owned by them.
ACCOUNTING TREATMENT
The Merger is expected to be accounted for as a pooling-of-interests.
Under the pooling-of-interests method of accounting, the historical cost
bases of the assets, liabilities and stockholders' equity of DST and USCS will
be combined and carried forward at their previously recorded
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amounts (adjusted for intercorporate investments and to conform accounting
policies) on DST's consolidated balance sheet. Income and other financial
statements of DST issued after consummation of the Merger will be restated
retroactively to reflect the consolidated operations of DST and USCS as if the
Merger had taken place prior to the periods covered by such financial
statements.
Consummation of the Merger is conditioned upon, among other things, (i)
qualification of the Merger under the pooling-of-interests method of
accounting and (ii) receipt by each of DST and USCS of a letter dated as of
the closing date of the Merger from PricewaterhouseCoopers LLP confirming that
the Merger may be accounted for as a pooling-of-interests in accordance with
GAAP, Accounting Principles Board Opinion No. 16 and all published rules,
regulations and interpretations of the SEC.
The unaudited pro forma condensed combined financial statements contained in
the Joint Proxy Statement-Prospectus have been prepared assuming that the
Merger is accounted for as a pooling-of-interests.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. USCS will be the Surviving Subsidiary in the Merger, and following
the Merger, will be a wholly-owned subsidiary of DST. Certain officers of USCS
have interests in the Merger that are different from, or in addition to, the
interests of stockholders of USCS generally. These officers, including Douglas
L. Shurtleff, Claudia D. Coleman, C. Randles Lintecum, and two other members
of management, have severance agreements currently in effect which contain
change of control provisions. The agreements provide that in the event of a
change of control and a constructive termination resulting from a revocation
of the employee's title, a reduction in compensation or responsibility, or a
change in the location of job performance by more than fifty miles, the
employee will, upon giving notice, be entitled to special benefits, including
a severance payment equal to the employee's annual base salary. These
agreements will continue in effect with the Surviving Subsidiary after the
Merger.
Stock Options. At the Effective Time, each Option issued pursuant to the
Option Plans and then outstanding, whether or not exercisable, will be assumed
by DST and will constitute an option to acquire, on the same terms and
conditions as were applicable under such assumed Option, that number of shares
of DST Common Stock equal to the product of the Exchange Ratio and the number
of shares of USCS Common Stock subject to such Option. The exercise price per
share of DST Common Stock will be equal to the exercise price per share of
such Option immediately prior to the Effective Time divided by the Exchange
Ratio, rounded up to the nearest whole cent. However, if the foregoing
calculation results in an assumed Option being exercisable for a fraction of a
share of DST Common Stock, then the number of DST Common Stock shares subject
to such Option shall be rounded down to the nearest whole number of shares
with no cash being payable for such fractional share.
The Options will continue to be exercisable following the consummation of
the Merger. As of November 19, 1998, Options to purchase 2,443,360 shares of
USCS Common Stock were outstanding under the Option Plans at exercise prices
ranging from $.205 to $30.25 per share. Pursuant to certain change of control
provisions of the Option Plans and assuming consummation of the Merger on
December 21, 1998, approximately 917,000 of the approximately 1,723,000 then
projected unvested Options will accelerate and become exercisable at the
Effective Time. For additional information regarding the Options held by
officers and directors, see "Beneficial Ownership Of Principal Stockholders,
Directors and Management--USCS," pages 66 through 67.
Employee Stock Purchase Plan. The USCS Employee Stock Purchase Plan ("ESPP")
will be suspended on the Effective Date. Immediately prior to the Effective
Date, USCS will issue shares of USCS Common Stock in full satisfaction of the
outstanding purchase rights under the ESPP, taking into account all
participant contributions through such date. Following the Effective Date, no
further participant contributions to the ESPP will be accepted.
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401(k) Retirement Plan. This Plan will be continued following the Effective
Date. On the Effective Date, each share of USCS Common Stock held by the Plan
will be converted into the right to receive .62 of a share of
DST Common Stock. Participants may elect to invest up to 100% of their account
balances in employer stock. As of September 25, 1998, approximately 17% of the
assets of the Plan, or approximately $14.6 million, is invested in USCS'
Common Stock.
Indemnification of Directors and Officers Pursuant to the Merger
Agreement. From and after the Effective Time, DST and the Surviving Subsidiary
shall indemnify each person who has been an officer or director of USCS,
against certain losses arising out of actions or omissions as an officer or
director of USCS. Such indemnification will be to the fullest extent permitted
under the DGCL, the Certificate of Incorporation and By-laws of USCS and
existing indemnification agreements. DST has agreed that for a one year period
following the Effective Time the indemnification and exculpation of liability
provisions in USCS' Certificate of Incorporation and By-laws will be included
in the Certificate of Incorporation and By-laws of the Surviving Subsidiary
and will not be eliminated or changed in any manner that would adversely
affect the rights of such indemnified persons.
Registration Rights. DST will execute a Registration Rights Agreement giving
USCS stockholders who may be deemed Affiliates of USCS certain registration
rights for their DST Common Stock. See "Other Agreements--Registration Rights
Agreement," pages 62 through 63.
Appointment of Two USCS Directors to DST Board. Immediately following the
consummation of the Merger, George L. Argyros, Sr. and James C. Castle will
become members of the DST Board, in the classes with terms expiring,
respectively, in 2001 and 2000.
For a summary of the contractual interests of the principal stockholders in
the Merger, see "Other Agreements," pages 61 through 63.
MANAGEMENT AND OPERATIONS OF USCS AFTER THE MERGER
After the Merger, USCS will be a wholly-owned subsidiary of DST. USCS will
operate as one of DST's business units and will participate in appropriate
activities with other DST business units and operate under the direction and
guidance of DST senior management and the DST Board. See "--Terms of the
Merger," pages 49 through 50.
Certain of the officers of USCS have employment agreements currently in
effect with USCS. These agreements will continue in effect with the Surviving
Subsidiary after the Merger.
EXPENSES AND FEES
Whether or not the Merger is consummated, DST and USCS will each pay their
own expenses in connection with the Merger, except that DST will pay the
registration, qualification and filing fees, the costs and expenses of
printing this Joint Proxy Statement-Prospectus, fees and disbursements of
counsel (other than USCS' counsel), and fees and expenses of any other
applicable governmental body.
NO APPRAISAL RIGHTS
Under Delaware law, stockholders in a public company are not entitled to
appraisal rights in a merger if the consideration they receive in the merger
consists only of shares listed on a national securities exchange and cash in
lieu of fractional shares. Accordingly, holders of USCS Common Stock are not
entitled to appraisal rights in connection with the Merger because the shares
of USCS Common Stock are designated as Nasdaq securities and shares of DST
Common Stock are listed on the NYSE.
Holders of DST Common Stock are not entitled to dissenter's appraisal rights
under Delaware law in connection with the Merger because DST is not a
constituent corporation in the Merger (i.e. DST is not being merged with or
into another corporation nor is another corporation being merged with or into
DST).
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OTHER AGREEMENTS
THE DESCRIPTIONS OF THE STOCKHOLDER AGREEMENTS AND THE REGISTRATION RIGHTS
AGREEMENT SET FORTH BELOW DO NOT PURPORT TO BE COMPLETE AND ARE QUALIFIED IN
THEIR ENTIRETY BY REFERENCE TO THE STOCKHOLDER AGREEMENTS AND THE REGISTRATION
RIGHTS AGREEMENT. COPIES OF FORMS OF THESE AGREEMENTS ARE FILED AS EXHIBITS TO
THE REGISTRATION STATEMENT OF WHICH THIS JOINT PROXY STATEMENT-PROSPECTUS
FORMS A PART.
STOCKHOLDER AGREEMENTS
USCS Stockholder Agreements. Concurrently with the execution of the Merger
Agreement, George L. Argyros, Sr., James C. Castle and Charles D. Martin
entered into USCS Stockholder Agreements. Pursuant to such agreements, Messrs.
Argyros, Castle and Martin agreed to vote their shares of USCS Common Stock in
favor of the Merger and for approval and adoption of the Merger Agreement. As
of September 2, 1998, Mr. Argyros owned approximately 33% of the shares of
USCS Common Stock. In addition, Messrs. Argyros, Castle and Martin each agreed
that if they sell or transfer more than 2.3 million shares of USCS Common
Stock to a single purchaser or transferee at any time which is more than 30
days prior to the closing date of the Merger, they will require such purchaser
or transferee to execute an "Affiliate Agreement" in the form agreed to and
executed by Messrs. Argyros, Castle and Martin. Receipt by DST of executed
Affiliate Agreements is a condition to DST's and Acquisition Sub's obligations
to effect the Merger. See "The Merger--Conditions; Waivers--Conditions to the
Obligations of DST and Acquisition Sub," page 54.
DST Stockholder Agreement. As of September 2, 1998, KCSI owned approximately
41% of the outstanding shares of DST Common Stock. Concurrently with the
execution of the Merger Agreement, DST and KCSI entered into a DST Stockholder
Agreement. Pursuant to such agreement, KCSI agreed to vote its shares of DST
Common Stock in favor of the Merger (which includes the issuance of the shares
of DST Common Stock in the Merger), the adoption of the Merger Agreement and
the approval of the terms thereof. In addition, KCSI agreed that if it sells
or transfers more than 4.5 million shares of its DST Common Stock to a single
purchaser or transferee at any time which is more than 30 days prior to the
closing date of the Merger, KCSI will require such purchaser or transferee to
execute an Affiliate Agreement in the same form agreed to be signed by other
affiliates of DST. KCSI also agreed that, during the period beginning when
KCSI receives written notice from DST that the closing of the Merger is
reasonably expected to occur 30 days from the date of such notice, KCSI will
not sell, transfer or otherwise dispose of, or reduce any risk relative to
(collectively, the "Restricted Actions"), its DST Common Stock until the
earlier of (i) the time when results covering at least 30 days of operations
of DST (including the combined operations of USCS) after the closing of the
Merger have been published in a public filing or announcement, or (ii) 60 days
from the closing of the Merger (the "Restricted Period"). The Restricted
Actions include the setting of a record date for, or consummating, a spin-off
that has been proposed by KCSI. In a subsequent letter agreement dated October
30, 1998, KCSI agreed that if the closing of the Merger occurs after December
1, 1998 and on or before December 31, 1998, the period during which KCSI will
not engage in the Restricted Actions will be extended to at least February 15,
1999. Notwithstanding the Restricted Actions, KCSI may, prior to the spin-off,
sell or transfer its DST Common Stock to any wholly-owned subsidiary of KCSI,
subject to the transferee agreeing to assume and be bound by the DST
Stockholder Agreement. The DST Stockholder Agreement provides that KCSI may
consummate such spin-off prior to the closing of the Merger and if it does,
DST agreed that the closing of the Merger will not occur for at least 30 days
following the consummation of the spin-off. However, if the closing of the
Merger has not occurred, and KCSI has not consummated the spin-off, by
November 20, 1998, and if DST has notified KCSI within two days prior to
November 20, 1998 that DST reasonably expects the closing to occur by December
31, 1998, KCSI will not consummate the spin-off during the period from
November 20, 1998 through January 1, 1999, and DST will use its reasonable
best efforts to cause the closing of the Merger to occur as soon as reasonably
possible after November 20, 1998. Notwithstanding the preceding sentence, if
KCSI has set a record date prior to November 20, 1998, it may consummate the
spin-off during the period from November 20 to November 30, 1998 provided
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the closing of the Merger has not occurred during such period and prior to the
spin-off. If neither the closing of the Merger nor the spin-off occur during
the period from November 20 through December 31, 1998, KCSI will not take any
Restricted Actions after December 31, 1998 for the term of the DST Stockholder
Agreement. The DST Stockholder Agreement terminates the earlier of (i) the
termination of the Merger Agreement (ii) 60 days after the closing of the
Merger provided that if the closing of the Merger occurs after December 1,
1998 and on or before December 31, 1998, KCSI will not engage in any
Restricted Actions until at least February 15,1999, or (iii) March 15, 1999.
KCSI further agreed that if it desires to declare the dividend to effectuate
the spin-off during the Restricted Period, it will notify DST at least 10 days
prior to such declaration and, if DST provides KCSI with an opinion of counsel
that there is a reasonable likelihood that such declaration within the
Restricted Period would prevent accounting for the Merger as a pooling-of-
interests, KCSI will not make such declaration within the Restricted Period.
Mr. Argyros has agreed to enter into an Affiliate Agreement that provides
substantially the same time period restrictions on disposing of USCS or DST
securities as apply to KCSI.
REGISTRATION RIGHTS AGREEMENT
The Registration Rights Agreement between DST and each of the stockholders
of USCS that may be deemed to be an "affiliate" of USCS (each an "Affiliate
Stockholder") gives each Affiliate Stockholder the right to request (a
"Request") that DST register for sale under the Securities Act (a "Request
Registration") all or part of their DST Common Shares which the Affiliate
Stockholder cannot sell or transfer in a single transaction without
registration as a result of certain restrictions in Rule 145 and/or Rule 144
under the Securities Act ("Registrable Securities"). The Affiliate
Stockholders are collectively entitled to make two Requests during the five-
year term of the agreement, but not more than once in any twelve-month period.
Upon receipt of any such Request, DST is required to notify the other
Affiliate Stockholders of the Request, and DST is required to include in the
Request Registration, subject to specified limits, any Registrable Securities
for which registration is requested by any Affiliate Stockholder. Any
Affiliate Stockholder who does not participate in the Request Registration
cannot make a Request for twelve months following effectiveness of the Request
Registration.
DST is not required to file any Request Registration within six months after
the effectiveness of any other Request Registration, or in connection with an
acquisition by DST of another company, or if the aggregate fair market value
of Registrable Securities to be included in the Request Registration is less
than $15 million. The Registration Rights Agreement also provides that DST is
entitled to postpone any Request Registration or to cause the Affiliate
Stockholders to discontinue use of the registration statement if the DST Board
determines in good faith that it would be significantly disadvantageous to DST
or its stockholders for the registration statement to be maintained effective
or be filed and become effective at that time. No single postponement of any
Request Registration or such discontinued use of a registration statement for
such reason may exceed 90 days and DST may not postpone or cause such
discontinued use for such reason more than once in any twelve-month period.
The Registration Rights Agreement provides that DST may include in any
Request Registration other securities for sale for its own account or for the
account of any other person or entity, subject to certain rights of the
Affiliate Stockholders in the event marketing or other factors limit the
number of shares to be included in the Request Registration.
The Registration Rights Agreement also gives the Affiliate Stockholders
certain "piggyback" registration rights during the term of the agreement.
Pursuant to these rights, Affiliate Stockholders may request that their
Registrable Securities be included in certain registrations of common equity
securities by DST (including registrations effected by DST for stockholders
other than the Affiliate Stockholders). DST will not be obligated to register
the Registrable Securities if it decides not to register its common equity
securities and notifies the Affiliate Stockholders. Similarly, if DST
determines to delay registration of its common equity securities and gives the
Affiliate Stockholders notice, DST will be permitted to delay registration of
the Registrable Securities requested to be included in such registration for
the same period as the delay in registering such common equity securities.
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Pursuant to the Registration Rights Agreement, the Affiliate Stockholder
will pay all registration expenses of a Request Registration on a pro rata
basis, based on the total number of shares of Registrable Securities requested
to be included by the participating Affiliate Stockholders (except that DST
will pay any incremental expenses of including securities for its own account
or for another stockholder (other than an Affiliate Stockholder) in such
Request Registration). In connection with a piggyback registration, Affiliate
Stockholders will be required to pay the incremental expenses of including
their shares of Registrable Securities in such registration on a pro rata
basis, based on the total number of shares of Registrable Securities requested
to be included by the participating Affiliate Stockholders.
If Registrable Securities are to be distributed through an underwritten
offering, the Affiliate Stockholders requesting to include their shares in
such registration will enter into an underwriting agreement in customary form
with the underwriters. In the event marketing factors limit the number of
shares to be included in a Request Registration, the number of shares of
Registrable Securities that may be included in such registration and
underwriting will be allocated among all participating Affiliate Stockholders
pro rata based on the total number of shares requested to be included in such
registration by all participating Affiliate Stockholders. In the event
Affiliate Stockholders "piggyback" into an underwritten offering where such
marketing factor limitations apply, the priority of allocation of Affiliate
Stockholders' Registrable Securities to be included in such registration
depends upon whether the offering is made for the account of DST, for the
account of KCSI or for the account of any other stockholder of DST (other than
the Affiliate Stockholders).
The receipt by USCS of the Registration Rights Agreement executed by DST is
a condition to the obligation of USCS to effect the Merger.
63
<PAGE>
BENEFICIAL OWNERSHIP OF
PRINCIPAL STOCKHOLDERS, DIRECTORS AND MANAGEMENT
DST
The following table sets forth information regarding the beneficial
ownership of DST Common Stock as of September 15, 1998 by: (i) beneficial
owners of more than 5% of the outstanding DST Common Stock which have publicly
filed a report acknowledging such ownership; (ii) the directors and certain
executive officers of DST; and (iii) all of DST's executive officers and
directors as a group. The number of shares owned beneficially by each director
or executive officer is determined under SEC rules. Under such rules,
beneficial ownership includes any shares as to which the individual has the
sole or shared voting power or investment power and also any shares which the
individual has the right to acquire within 60 days of September 15, 1998
through the exercise of any stock option or other right. Except as otherwise
noted, the holders have sole voting and dispositive power. No officer or
director of DST owns any equity securities of any subsidiary of DST.
<TABLE>
<CAPTION>
SHARES OF DST
COMMON STOCK AS OF PERCENT OF
NAMES SEPTEMBER 15, 1998(1) CLASS(2)
- ----- --------------------- ----------
<S> <C> <C>
Kansas City Southern Industries, Inc.(3)...... 20,263,426(4) 41.3%
FMR Corp., Edward C. Johnson III,
Abigail P. Johnson, Fidelity
Management & Research Company ("Fidelity"),
Fidelity Management Trust Company ("Fidelity
Trust")(5)................................... 4,225,290(6) 8.6%
UMB Financial Corporation ("UMBFC"),
UMB Bank, N.A. ("UMB"), and the DST ESOP(7).. 2,988,858(8) 6.1%
Massachusetts Financial Services Company(9)... 2,492,396(10) 5.1%
A. Edward Allinson............................ 18,000(11) *
Director
Robert C. Canfield............................ 94,683(12) *
Senior Vice President, General Counsel and
Secretary
Michael G. Fitt............................... 16,000(11) *
Director
James P. Horan................................ 102,887(13) *
Chief Information Officer
Thomas A. McCullough.......................... 246,022(14) *
Executive Vice President, Director
Thomas A. McDonnell........................... 508,433(15) 1.0%
President and Chief Executive Officer,
Director
William C. Nelson............................. 13,100(11) *
Director
Charles W. Schellhorn......................... 164,340(17) *
President, Output Technologies, Inc.(16)
M. Jeannine Strandjord........................ 14,000(11) *
Director
All Executive Officers and Directors as a 1,675,740(18) 3.4%
Group (16 Persons)...........................
</TABLE>
- --------
* Less than 1% of the outstanding DST Common Stock.
(1) Under Rule 13d-3 under the Exchange Act, share amounts shown for DST's
officers and directors include shares they may acquire upon the exercise
of options which are exercisable at the record date or will become
exercisable within 60 days of such date and shares allocated to the
accounts of such persons under
64
<PAGE>
the DST ESOP. The holders may disclaim beneficial ownership of any such
shares which are owned by or with family members, trusts or other
entities.
(2) The percentage is based on the number of shares outstanding as of the
record date.
(3) The address of KCSI is 114 West 11th Street, Kansas City, Missouri 64105.
(4) The number of shares is based upon information reported in a Form 4 dated
January 6, 1998.
(5) The address of FMR Corp., Fidelity and Fidelity Trust is 82 Devonshire
Street, Boston, Massachusetts 02109. Edward C. Johnson III is Chairman
and Abigail P. Johnson is a director of FMR Corp. Fidelity and Fidelity
Trust are wholly-owned subsidiaries of FMR Corp.
(6) The number of shares is based upon information in Amendment No. 1 to
Schedule 13G dated February 14, 1998 (the "FMR Schedule"). The FMR
Schedule states that Fidelity beneficially owns 3,724,200 shares and
Fidelity Trust beneficially owns 501,090 shares of DST Common Stock.
(7) The address for UMB, UMBFC, and the DST ESOP is 1010 Grand, Kansas City,
Missouri 64106.
(8) The number of shares is based on 3,188,858 shares of DST Common Stock
held as of December 31, 1997 reported in Amendment No. 2 to Schedule 13G,
dated February 13, 1998 (the "UMB Schedule"), jointly filed by UMB,
UMBFC, and the DST ESOP. Of the 3,188,858 shares of DST Common Stock
beneficially owned by UMB, UMB reported that it holds 3,187,568 shares as
a trustee of the DST ESOP and 1,290 shares in other capacities. The
number of shares of DST Common Stock shown in the UMB Schedule has been
reduced in the above table by the number of shares of DST Common Stock
the DST ESOP has sold since December 31, 1997. Shares held by UMB as
trustee of the DST ESOP include shares allocated to the accounts of DST
ESOP participants. UMB and the DST ESOP disclaimed in the UMB Schedule
beneficial ownership of the shares allocated to participants' accounts.
Voting and dispositive power over such allocated shares are vested in the
DST ESOP participants, who have the right to direct the voting of all
such allocated shares and the tendering of such shares in response to
offers to purchase. The DST ESOP requires the trustee to vote any
unallocated shares in the same proportion as the allocated shares. UMBFC
reported that it does not own of record any DST Common Stock, that it
participated in the filing of the UMB Schedule solely as a result of its
ownership of 100% of stock of UMB, and that it is prohibited by law from
directing the voting or disposition of the shares and therefore disclaims
beneficial ownership of the shares shown in the UMB Schedule. The
3,188,858 shares reported in the UMB Schedule do not include 86,759
shares held by UMB in custody accounts for which UMB does not have voting
or dispositive power.
(9) The address of Massachusetts Financial Services Company is 500 Boylston
Street, Boston, Massachusetts 02116.
(10) The number of shares is based upon information in Amendment No. 1 to
Schedule 13G dated February 12, 1998 ("MFS Schedule"). The MFS Schedule
states that the shares are also beneficially owned by certain non-
reporting entities as well as MFS.
(11) Includes 13,000 shares that may be acquired through option exercises.
(12) Includes 82,000 shares that may be acquired through option exercises and
5,934 shares allocated to his account in the DST ESOP.
(13) Includes 82,000 shares that may be acquired through option exercises and
13,374 shares allocated to his account in the DST ESOP.
(14) Includes 220,000 shares that may be acquired through option exercises and
18,113 shares allocated to his account in the DST ESOP.
(15) Includes 475,000 shares that may be acquired through option exercises and
18,933 shares allocated to his account in the DST ESOP.
(16) Output Technologies, Inc. is a wholly-owned subsidiary of DST.
(17) Includes 140,000 shares that may be acquired through option exercises and
12,530 shares allocated to his account in the DST ESOP.
(18) Includes 1,452,375 shares that may be acquired through option exercises
by the executive officers and directors and by the spouse of an executive
officer and 145,288 shares allocated to the DST ESOP accounts of
executive officers and the spouses of two executive officers.
65
<PAGE>
USCS
The following table sets forth information regarding the beneficial
ownership of USCS Common Stock as of September 15, 1998 by: (i) beneficial
owners of more than 5% of the outstanding USCS Common Stock which have
publicly filed a report acknowledging such ownership; (ii) the directors and
certain executive officers of USCS; and (iii) all of USCS' executive officers
and directors as a group. The number of shares beneficially owned by each
director or executive officer is determined under SEC rules. Under such rules,
beneficial ownership includes any shares as to which the individual has the
sole or shared voting power or investment power and also any shares which the
individual has the right to acquire within 60 days of September 15, 1998
through the exercise of any stock option or other right. Unless otherwise
indicated, each person has sole investment and voting power with respect to
the shares set forth in the following table. Except as otherwise noted, the
holders have sole voting and dispositive power. No officer or director of USCS
owns any equity securities of any subsidiary of USCS.
<TABLE>
<CAPTION>
SHARES OF USCS
COMMON STOCK AS OF
SEPTEMBER 15, 1998 PERCENT OF
CLASS(1) CLASS(1)
------------------ ----------
<S> <C> <C>
George L. Argyros, Sr.(2)........................ 7,711,296(3) 33.10%
Director
Charles D. Martin(4)............................. 503,033(5) 2.16%
Director
Daniel R. Hesse(6)............................... 0 0
Director
Larry W. Wangberg(7)............................. 9,666(8) *
Director
James L. Hesburgh(9)............................. 186(10) *
Director
John W. Clark(11)................................ 44,938(12) *
Director
Thomas A. Page(13)............................... 0 0
Director
James C. Castle, Ph.D(14)........................ 525,924(15) 2.26%
Chairman of the Board and Chief Executive
Officer; Director
C. Randles Lintecum(14).......................... 129,019(16) *
President of International Billing Services,
Inc.
Michael F. McGrail(14)........................... 137,508(17) *
President of CableData, Inc.; Director
Douglas L. Shurtleff(14)......................... 74,575(18) *
Senior Vice President, Finance and Chief
Financial Officer
Claudia D. Coleman(14)........................... 41,909(19) *
Vice President, Corporate Development
Executive Officers and Directors as a group (12 9,178,054(20) 39.16%
persons)........................................
Massachusetts Financial Services Company(21)..... 1,260,400 5.41%
</TABLE>
- --------
* Less than 1.0%
(1) Applicable percentage of ownership is based on 23,300,199 shares of USCS
Common Stock outstanding as of September 15, 1998. The number of shares of
USCS Common Stock beneficially owned and calculation of percent ownership,
in each case, takes into account those shares underlying stock options
that are exercisable within 60 days after September 15, 1998, but that may
or may not be subject to repurchase rights.
66
<PAGE>
(2) Mr. Argyros' business address is: Arnel & Affiliates, 949 South Coast
Drive, Suite 600, Costa Mesa, California 92626.
(3) Consists of 7,591,736 shares held by Mr. Argyros, 60,000 shares held by
Argyros Children's Trust, 25,000 shares held by HBI Financial, 1,360
shares held by GLA Financial, 26,534 shares held by the Argyros
Foundation, and 6,666 shares issuable pursuant to stock options
exercisable within 60 days of September 15, 1998. On June 16, 1997, Mr.
Argyros received a distribution from Westar Capital, a California limited
partnership, of 7,551,270 shares. Westar Capital, LP distributed its
remaining 1,167,006 shares to Westar Capital Associates, LP. On August 19,
1997, Mr. Argyros received 12,363 shares as a distribution from Westar
Capital Associates. On August 22, 1997, GLA Financial received 1,360
shares as a distribution from Westar Capital Associates. Mr. Argyros
disclaims beneficial ownership of the shares held by the Argyros
Children's Trust and the Argyros Foundation.
(4) Mr. Martin's business address is: Enterprise Partners, 5000 Birch St.,
Suite 6200, Newport Beach, California 92660.
(5) Consists of 496,367 shares held by Mr. Martin and 6,666 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998. On June 16, 1997, Westar Capital, a California limited partnership,
distributed all of its 8,718,276 shares, 1,167,006 were distributed to
Westar Capital Associates, one of its general partners. Mr. Martin is a
general partner of Westar Capital Associates. In August, 1997, on various
dates, Westar Capital Associates distributed all of its 1,167,006 shares
to various entities, including 449,633 shares to Mr. Martin.
(6) Mr. Hesse's business address is: AT&T Wireless Services, 5000 Carillon
Point, Kirkland, Washington 98033.
(7) Mr. Wangberg's business address is: ZDTV: Your Computer Channel, 650
Townsend Street, San Francisco, California 94103.
(8) Consists of 3,000 shares held by Mr. Wangberg and 6,666 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998.
(9) Mr. Hesburgh's business address is : PO Box 929, Edwards, Colorado 81632.
(10) Consists of 93 shares held by Mr. Hesburgh and 93 shares held by his
spouse. Mr. Hesburgh has no shares issuable pursuant to stock options
exercisable within 60 days of September 15, 1998.
(11) Mr. Clark's business address is Westar Capital, 949 S. Coast Drive, Suite
650, Costa Mesa, California 92626-7737.
(12) Consists of 43,938 shares Mr. Clark received as a distribution from
Westar Capital Associates, a general partner of Westar Capital, on August
12, 1997 and 1,000 shares held by Mr. Clark's daughter who is dependent
and resides in his household. Mr. Clark has no shares issuable pursuant
to stock options exercisable within 60 days of September 15, 1998.
(13) Mr. Page's business address is c/o USCS International, Inc., 2969
Prospect Park Drive, Rancho Cordova, California 95670.
(14) The business address for Messrs. Castle, McGrail, Lintecum, Shurtleff and
Ms. Coleman is: USCS International, Inc., 2969 Prospect Park Drive,
Rancho Cordova, California 95670.
(15) Consists of 328,409 shares held by Dr. Castle and 197,515 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998.
(16) Consists of 92,858 shares held by Mr. Lintecum and 36,161 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998.
(17) Consists of 137,508 shares issuable pursuant to stock options exercisable
within 60 days of September 15, 1998.
(18) Consists of 73,329 shares held by Mr. Shurtleff and 1,246 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998.
(19) Consists of 20,338 shares held by Ms. Coleman and 21,571 shares issuable
pursuant to stock options exercisable within 60 days of September 15,
1998.
(20) Includes 413,999 shares issuable pursuant to stock options exercisable
within 60 days of September 15, 1998.
(21) The business address for Massachusetts Financial Services Company is 500
Boylston Street, Boston, Massachusetts 02116.
67
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
are based on the historical consolidated balance sheets and statements of
income of DST and USCS, adjusted to give effect to the Merger, using the
pooling-of-interests method of accounting for business combinations.
The unaudited pro forma condensed combined statements of income for the
years ended December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1997 and 1998 combine the historical results of operations of
DST and USCS and assume that the Merger occurred at the beginning of the
earliest period presented, adjusted for conformity of accounting policies
relating primarily to depreciation and amortization policies and accounting
for the costs of software developed for internal use. The unaudited pro forma
condensed combined statements of income do not reflect the effect of cost
savings and synergies that may result from the Merger.
The unaudited pro forma condensed combined balance sheet as of September 30,
1998 assumes that the Merger occurred as of that date and reflects the
combination of the historical financial position of DST and USCS adjusted for
conformity of accounting policies, intercorporate investments and certain
Merger-related costs.
The following unaudited pro forma condensed combined financial statements
have been prepared from, and should be read in conjunction with, the
historical consolidated financial statements and notes thereto of DST and USCS
appearing in the respective company's Annual Report on Form 10-K for the year
ended December 31, 1997 or Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998 included in this Joint Proxy Statement-Prospectus as
Appendices C, L, H and M. These unaudited pro forma condensed combined
financial statements are presented for illustrative purposes only and are not
necessarily indicative of the operating results or financial position that
would have occurred had the Merger been consummated on the dates indicated in
the preceding paragraphs, and are not necessarily indicative of the future
operating results or financial position of the combined companies.
68
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
------------------ ----------------------
DST USCS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues...................... $484,131 $229,263 $ $713,394
Costs and expenses............ 373,561 191,157 6,872 (3) 571,590
Depreciation and amortization. 69,749 16,000 1,933 (4) 87,682
-------- -------- ------- --------
Income from operations........ 40,821 22,106 (8,805) 54,122
Interest expense.............. (21,964) (4,966) (26,930)
Other income, net............. 3,627 3,627
Gain on sale of equity
investments.................. 44,895 44,895 (7)
Equity in earnings of
unconsolidated affiliates,
net of income taxes.......... 6,452 6,452 (7)
-------- -------- ------- --------
Income before income taxes and
minority interest............ 73,831 17,140 (8,805) 82,166
Income taxes.................. 46,174 6,770 (3,478)(5) 49,466
-------- -------- ------- --------
Income before minority
interest..................... 27,657 10,370 (5,327) 32,700
Minority interests in income.. 17 17
-------- -------- ------- --------
Net income.................... $ 27,640 $ 10,370 $(5,327) $ 32,683
======== ======== ======= ========
Average common shares
outstanding.................. 33,791 19,452 45,851
Basic earnings per share...... $ 0.82 $ 0.53 $ 0.71(6)(7)
Diluted shares outstanding.... 33,848 20,159 46,347
Diluted earnings per share.... $ 0.82 $ 0.51 $ 0.71(6)(7)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
69
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
------------------ ----------------------
DST USCS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues..................... $580,808 $263,214 $ $844,022
Costs and expenses........... 431,563 215,383 5,838 (3) 652,784
Depreciation and
amortization................ 78,572 20,311 495 (4) 99,378
Other expenses............... 13,700 13,700 (8)
-------- -------- ------- --------
Income from operations....... 56,973 27,520 (6,333) 78,160
Interest expense............. (6,940) (3,185) (10,125)
Other income, net............ 4,176 4,176
Gain on sale of equity
investments................. 223,438 223,438 (8)
Equity in losses of
unconsolidated affiliates,
net of income taxes......... (4,028) (4,028)(8)
-------- -------- ------- --------
Income before income taxes
and minority interest....... 273,619 24,335 (6,333) 291,621
Income taxes................. 105,920 9,826 (2,559)(5) 113,187
-------- -------- ------- --------
Income before minority
interest.................... 167,699 14,509 (3,774) 178,434
Minority interests in income. 497 497
-------- -------- ------- --------
Net income................... $167,202 $ 14,509 $(3,774) $177,937
======== ======== ======= ========
Average common shares
outstanding................. 49,871 21,178 63,001
Basic earnings per share..... $ 3.35 $ 0.69 $ 2.82 (6)(8)
Diluted shares outstanding... 50,335 22,075 64,022
Diluted earnings per share... $ 3.32 $ 0.66 $ 2.78 (6)(8)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
70
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
------------------ ----------------------
DST USCS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................ $650,678 $299,346 $ $950,024
Costs and expenses.............. 479,103 236,262 4,488 (3) 719,853
Depreciation and amortization... 79,335 25,060 (1,175)(4) 103,220
-------- -------- ------- --------
Income from operations.......... 92,240 38,024 (3,313) 126,951
Interest expense................ (7,670) (554) (8,224)
Other income, net............... 4,020 4,020
Gain on sale of equity
investments.................... 1,464 1,464
Equity in losses of
unconsolidated affiliates, net
of income taxes................ (1,345) (1,345)
-------- -------- ------- --------
Income before income taxes and
minority interest.............. 88,709 37,470 (3,313) 122,866
Income taxes.................... 29,178 15,010 (1,328)(5) 42,860
-------- -------- ------- --------
Income before minority interest. 59,531 22,460 (1,985) 80,006
Minority interests in income.... 534 534
-------- -------- ------- --------
Net income...................... $ 58,997 $ 22,460 $(1,985) $ 79,472
======== ======== ======= ========
Average common shares
outstanding.................... 49,308 23,164 (98)(9) 63,571
Basic earnings per share........ $ 1.20 $ 0.97 $ 1.25 (6)
Diluted shares outstanding...... 49,838 24,203 (98)(9) 64,745
Diluted earnings per share...... $ 1.18 $ 0.93 $ 1.23 (6)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
71
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
------------------ ----------------------
DST USCS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................ $473,941 $216,791 $ $690,732
Costs and expenses.............. 349,148 170,012 3,198 (3) 522,358
Depreciation and amortization... 58,551 18,882 (328)(4) 77,105
-------- -------- ------- --------
Income from operations.......... 66,242 27,897 (2,870) 91,269
Interest expense................ (6,006) (678) (6,684)
Other income, net............... 4,451 214 4,665
Equity in earnings of
unconsolidated affiliates, net
of income taxes................ 1,357 1,357
-------- -------- ------- --------
Income before income taxes and
minority interests............. 66,044 27,433 (2,870) 90,607
Income taxes.................... 22,463 10,987 (1,149)(5) 32,301
-------- -------- ------- --------
Income before minority interest. 43,581 16,446 (1,721) 58,306
Minority interests in income.... 607 607
-------- -------- ------- --------
Net income...................... $ 42,974 $ 16,446 $(1,721) $ 57,699
======== ======== ======= ========
Average common shares
outstanding.................... 49,378 23,180 63,750
Basic earnings per share........ $ 0.87 $ 0.71 $ 0.91 (6)
Diluted shares outstanding...... 49,862 24,293 64,924
Diluted earnings per share...... $ 0.86 $ 0.68 $ 0.89 (6)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
72
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
------------------ ----------------------
DST USCS ADJUSTMENTS COMBINED
-------- -------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Revenues....................... $557,972 $246,565 $ $804,537
Costs and expenses............. 411,573 193,244 8,200 (3) 613,017
Depreciation and amortization.. 60,711 21,015 (3,723)(4) 78,003
Other Expenses................. 7,100 7,100 (10)
-------- -------- ------- --------
Income from operations......... 85,688 25,206 (4,477) 106,417
Interest expense............... (6,087) (808) (6,895)
Other income, net.............. 5,491 558 6,049
Equity in losses of
unconsolidated affiliates, net
of income taxes............... (1,529) (1,529)
-------- -------- ------- --------
Income before income taxes and
minority interests............ 83,563 24,956 (4,477) 104,042
Income taxes................... 29,153 11,838 (1,768)(5) 39,223
-------- -------- ------- --------
Income before minority
interest...................... 54,410 13,118 (2,709) 64,819
Minority interests in income... (244) (244)
-------- -------- ------- --------
Net income..................... $ 54,654 $ 13,118 $(2,709) $ 65,063
======== ======== ======= ========
Average common shares
outstanding................... 48,988 23,232 (682)(9) 62,710
Basic earnings per share....... $ 1.12 $ 0.56 $ 1.04 (6)
Diluted shares outstanding..... 49,991 24,084 (682)(9) 64,241
Diluted earnings per share..... $ 1.09 $ 0.54 $ 1.01 (6)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
73
<PAGE>
DST AND USCS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
HISTORICAL(2) PRO FORMA
-------------------- --------------------------
DST USCS ADJUSTMENTS COMBINED
---------- -------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents... $ 35,388 $ 16,630 $ $ 52,018
Accounts receivable......... 177,884 96,097 273,981
Other assets................ 42,503 18,760 61,263
---------- -------- -------- ----------
255,775 131,487 387,262
Investments................... 936,259 5,416 (35,338)(11) 906,337
Properties.................... 235,402 105,321 (29,030)(12) 311,693
Intangibles and other assets.. 52,710 30,555 (2,239)(12) 81,026
---------- -------- -------- ----------
Total assets.............. $1,480,146 $272,779 $(66,607) $1,686,318
========== ======== ======== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year.... $ 10,584 $ 4,594 $ $ 15,178
Accounts payable............ 28,405 27,062 8,500 (13) 63,967
Accrued compensation and
benefits................... 32,195 20,737 52,932
Deferred revenues and gains. 29,908 7,473 37,381
Other liabilities........... 37,251 22,051 59,302
---------- -------- -------- ----------
138,343 81,917 8,500 228,760
Long-term debt................ 88,254 2,451 90,705
Deferred income taxes......... 280,424 3,469 (17,797)(5) 266,096
Other liabilities............. 27,555 35,980 63,535
---------- -------- -------- ----------
534,576 123,817 (9,297) 649,096
---------- -------- -------- ----------
Minority interest............. 845 845
---------- -------- -------- ----------
Stockholders' equity
Common stock................ 500 1,171 (1,033)(14) 638
Additional paid-in capital.. 409,351 52,893 (1,674)(14) 460,570
Retained earnings........... 316,243 96,015 (47,750)(14) 364,508
Treasury stock.............. (35,986) (1,463) 1,463 (14) (35,986)
Accumulated other
comprehensive income....... 254,617 346 (8,316)(14) 246,647
---------- -------- -------- ----------
Total stockholders'
equity................... 944,725 148,962 (57,310) 1,036,377
========== ======== ======== ==========
Total liabilities and
stockholders' equity..... $1,480,146 $272,779 $(66,607) $1,686,318
========== ======== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
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DST AND USCS
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) On September 2, 1998, DST, Acquisition Sub (a wholly-owned subsidiary of
DST) and USCS entered into a Merger Agreement that provides for the
merger of Acquisition Sub with and into USCS. Under the terms of the
Merger Agreement, each outstanding share of USCS Common Stock (not
already owned by DST, USCS or subsidiaries thereof) will be converted
into the right to receive .62 of a share of DST Common Stock. The
business combination is to be accounted for using the pooling-of-
interests method of accounting for business combinations. Each
outstanding Option to purchase shares of USCS Common Stock issued
pursuant to the Option Plans, whether or not exercisable, will be assumed
by DST. Each such Option will constitute an option to acquire, on the
same terms and conditions as were applicable under such assumed Option,
that number of shares of DST Common Stock equal to the product of the
Exchange Ratio and the number of shares of USCS Common Stock subject to
such Option rounded down to the nearest whole share. The exercise price
per share of DST Common Stock will be equal to the exercise price per
share of such Option immediately prior to the Effective Time divided by
the Exchange Ratio, rounded up to the nearest whole cent.
(2) Certain amounts in the historical financial statements of USCS have been
reclassified to be consistent with the presentation used by DST.
(3) Reflects the increase in costs and expenses as a result of conforming
USCS' accounting policies to DST's policies related primarily to
expensing costs of software developed for internal use. USCS previously
capitalized and amortized such costs.
(4) Reflects the net change in depreciation and amortization as a result of
conforming USCS' accounting policies to DST's policies. Conforming
adjustments relate primarily to increased depreciation expense on fixed
assets from conforming to the use of accelerated depreciation methods
offset by the reversal of amortization of capitalized software developed
for internal use. Such costs are being expensed as incurred as explained
in (3) above.
(5) Reflects the income tax effects of pro forma adjustments recorded at
USCS' approximate marginal income tax rate.
(6) The pro forma combined earnings per share data is based upon the sum of
the historical weighted average number of common and potential common
shares outstanding in each fiscal year reported by DST and the common and
potential common shares outstanding for USCS in each fiscal year using an
Exchange Ratio of .62 of a share of DST Common Stock for each share of
USCS Common Stock and adjusting (in the year ended December 31, 1997 and
the nine months ended September 30, 1998) for shares of USCS Common Stock
held by DST.
(7) In January 1995, DST closed the sale of its 50% interest in Investors
Fiduciary Trust Company ("IFTC") to State Street Corporation ("State
Street"). At closing, DST received shares of State Street common stock,
with a then-market value of $98.2 million, in a tax-free exchange. DST
recognized a pre-tax gain on the transaction of $43.6 million and
deferred taxes of $35.0 million resulting in a net book gain of $8.6
million.
In December 1995, Continuum acquired SOCS Groupe SA, a French insurance
software firm. DST recorded in December 1995 its estimated $7.7 million
after-tax share of a non-recurring charge in connection with this
acquisition.
Excluding the effects of the IFTC gain and the Continuum non-recurring
charge, DST's historical basic and diluted earnings per share for 1995
would have been $0.79. On an unaudited pro forma combined basis, basic and
diluted earnings per share for 1995 would have been $0.69.
(8) In March 1996, Continuum announced the completion of its merger with
Hogan Systems, Inc. DST recorded in March 1996 its estimated $9.4 million
after-tax share of a non-recurring charge recorded by Continuum in
connection with such merger.
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<PAGE>
In August, 1996, Continuum merged with CSC in a tax-free share exchange
accounted for as a pooling-of-interests. DST, which prior to such merger
owned approximately 23% of Continuum, received in the exchange shares of
CSC common stock with a value of $295 million. DST recognized a one-time
gain after taxes and other expenses of $127.6 million. In connection with
such merger, DST elected to make a one-time $13.7 million DST ESOP
contribution to provide funding for certain Continuum employee withdrawals
from the DST ESOP. As a result of the merger, Continuum ceased to be an
unconsolidated equity affiliate of DST and, under GAAP, no part of
Continuum or CSC earnings since that time have been recognized by DST.
Excluding the effects of DST's equity in earnings of Continuum, the gain
on the sale of Continuum and DST's contribution to the DST ESOP in
connection with the sale of Continuum, DST's historical basic and diluted
earnings per share for 1996 would have been $0.88. On an unaudited pro
forma combined basis, basic and diluted earnings per share for 1996 would
have been $0.87 and $0.86, respectively.
(9) Reflects the weighted average shares of USCS Common Stock held by DST
during the period presented (multiplied by the Exchange Ratio of .62) as
if they were retired.
(10) In August 1998, USCS acquired Custima International Holdings, plc for
approximately $15.4 million in cash. In connection with this transaction,
USCS recorded an in-process research and development charge of $6.0
million and a reorganization charge for redundant facilities and
workforce of $1.1 million. Excluding the effects of these nonrecurring
items, USCS' historical basic and diluted earnings per share would have
been $0.85 and $0.82, respectively. On an unaudited pro forma combined
basis, basic and diluted earnings per share would have been $1.14 and
$1.12, respectively.
(11) Reflects elimination of DST's investment in 1.1 million shares of USCS
Common Stock (cost and fair market value of $21.7 million and $35.3
million, respectively).
(12) Reflects cumulative adjustments of conforming USCS' accounting policies
to DST's policies relating primarily to depreciation and amortization of
capitalized assets of $14.8 million and expensing capitalized costs of
software developed for internal use of $16.4 million.
(13) DST and USCS expect to incur approximately $6.5 to $10.5 million for
investment banking and other transaction-related expenses as a result of
the Merger. DST and USCS will defer recognition of these costs until the
Merger is completed. The midpoint of the range of estimated costs are
reflected in the Unaudited Pro Forma Condensed Combined Balance Sheet,
without any associated tax benefit. These costs have not been included in
the accompanying Unaudited Pro Forma Condensed Combined Statements of
Income as they are nonrecurring and not expected to occur in future
periods.
(14) Reflects the issuance of DST Common Stock to effect the Merger, the
adjustment of historical stockholders' equity for USCS Common Stock held
in Treasury, the stockholders' equity effects of the above pro forma
adjustments, and the necessary reclassification to reflect the difference
in DST and USCS par values.
(15) Management believes there are significant efficiencies, economies of
scale, and productivity enhancements that could result from the
integration of DST and USCS. Such integration activities could result in
nonrecurring expenses being incurred to achieve the benefits. Such costs
cannot be estimated at this time. Potential cost reductions and related
nonrecurring expenses are not reflected in the Unaudited Pro Forma
Condensed Combined Financial Statements.
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COMPARATIVE RIGHTS OF USCS
STOCKHOLDERS AND DST STOCKHOLDERS
If the Merger is consummated, holders of USCS Common Stock, whose rights are
governed by Delaware law and USCS' Second Amended and Restated Certificate of
Incorporation ("USCS Certificate of Incorporation") and the USCS By-laws, will
become holders of DST Common Stock. The rights of the holders of DST Common
Stock are governed by the laws of the State of Delaware and by the DST
Certificate of Incorporation and the DST Amended and Restated By-laws ("DST
By-laws"). The rights of DST stockholders under the DST Certificate of
Incorporation and the DST By-laws differ in certain respects from the rights
of USCS stockholders under the USCS Certificate of Incorporation and the USCS
By-laws. The following discussion is intended only to highlight certain
material differences between the rights of stockholders with respect to
stockholders of USCS and DST pursuant to their respective charters and by-
laws. THIS SUMMARY IS NOT INTENDED TO BE RELIED UPON AS AN EXHAUSTIVE LIST OR
A DETAILED DESCRIPTION OF THE PROVISIONS DISCUSSED AND IS QUALIFIED IN ITS
ENTIRETY BY THE USCS CERTIFICATE OF INCORPORATION AND USCS BY-LAWS AND THE DST
CERTIFICATE OF INCORPORATION AND DST BY-LAWS. For information as to how you
can obtain such documents, see "Where You Can Find More Information," page 95.
BUSINESS COMBINATIONS
Generally, under the DGCL, the approval by the affirmative vote of the
holders of a majority of the outstanding stock (or, if the certificate of
incorporation provides for more or less than one vote per share, a majority of
the votes of the outstanding stock) of a corporation entitled to vote on the
matter is required for a merger or consolidation or sale, lease or exchange of
all or substantially all the corporation's assets to be consummated. The USCS
Certificate of Incorporation does not contain any provisions relating to
stockholder approval of business combinations. The DST Certificate of
Incorporation requires a vote as required by Delaware law, except that after
the first date on which KCSI ceases to directly or indirectly own 30% or more
of the Voting Stock (as defined below) ("Trigger Date"), any merger,
consolidation or other business combination of DST with an Interested
Stockholder (as defined in the DST Certificate of Incorporation) requires the
affirmative vote of at least 70% of the then outstanding shares of the capital
stock of DST entitled to vote generally in the election of directors (the
"Voting Stock"), voting together as a class. Since the Merger is between USCS
and a subsidiary of DST, and not DST itself, these voting requirements do not
apply to DST stockholders' approval of the Merger. However, approval of the
issuance of the DST Common Stock in the Merger by the holders of a majority of
shares present or represented by proxy is required under the rules of the
NYSE.
AMENDMENTS TO CHARTERS
Under the DGCL, unless otherwise provided in the charter, a proposed charter
amendment requires an affirmative vote of a majority of all votes entitled to
be cast on the matter. If any such amendment would adversely affect the rights
of any holders of shares of a class or series of stock, the vote of the
holders of a majority of all outstanding shares of the class or series, voting
as a class, is also necessary to authorize such amendment. The USCS
Certificate of Incorporation alters the basic DGCL requirements for the
amendment of its charter with regard to the number, classes and filling of
vacancies of directors, for which the affirmative vote of 66 2/3% of the
outstanding shares of USCS is required. The DST Certificate of Incorporation
alters the basic DGCL requirements by requiring that, after the Trigger Date,
the affirmative vote of the holders of at least 70% of the Voting Stock,
voting together as a single class, is required to (i) amend the provisions of
the DST Certificate of Incorporation relating to: the number, election and
term of the DST Board; removal of a director from office; amending the DST By-
laws; Business Combinations (as defined in the DST Certificate of
Incorporation); consideration of any offer to purchase DST's assets, tender or
exchange offer, or to merge or consolidate DST; the indemnification of DST's
directors and officers and those of its subsidiaries; the liability of
directors of DST to DST or its stockholders; stockholder action without a
meeting; and amending the DST Certificate of Incorporation; (ii) remove a
director from office; (iii) amend the DST By-laws; and (iv) approve
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certain Business Combinations not approved by a majority of Disinterested
Directors (as defined by the DST Certificate of Incorporation).
AMENDMENTS TO BY-LAWS
Under the DGCL, the power to adopt, alter and repeal the by-laws is vested
in the stockholders, except to the extent that the charter vests concurrent
power in the board of directors. The DST and USCS Certificates of
Incorporation both vest such power in their respective Boards of Directors.
PREEMPTIVE RIGHTS
Under the DGCL, a stockholder does not possess preemptive rights unless such
rights are specifically granted in the certificate of incorporation. Neither
the USCS Certificate of Incorporation nor the DST Certificate of Incorporation
provides for preemptive rights.
REDEMPTION OF CAPITAL STOCK
Under the DGCL, subject to certain limitations, a corporation's stock may be
made subject to redemption by the corporation at its option, at the option of
the holders of such stock or upon the happening of a specified event. Neither
the USCS Certificate of Incorporation nor the DST Certificate of Incorporation
addresses the redemption of common stock.
STOCKHOLDER ACTION BY CONSENT
Under the DGCL, unless otherwise provided in the certificate of
incorporation, any action required or permitted to be taken at a meeting of
stockholders may be taken without a meeting, without prior notice and without
a vote, if a written consent or consents setting forth the action taken is
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote upon such action were present and
voted. The USCS By-laws permit stockholder action to be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, is signed by the holders of record of
shares of USCS Common Stock having not less than the minimum number of votes
necessary to authorize or take such action at a meeting at which the holders
of record of all shares of USCS Common Stock entitled to vote thereon were
present and voted. The DST Certificate of Incorporation indicates that consent
in writing is to be governed by the DGCL, provided, however, that on or after
the Trigger Date any action required or permitted to be taken by the
stockholders of DST may be effected only at a duly called annual or special
meeting of such holders and may not be effected by consent in writing.
SPECIAL STOCKHOLDERS MEETINGS
The DGCL provides that a special meeting of stockholders may be called by
the board of directors or by such person or persons as may be authorized by
the certificate of incorporation or the by-laws. The USCS By-laws provide that
special meetings may be called by the USCS Board, the chairman of the USCS
Board or the President or by one or more stockholders holding shares in the
aggregate entitled to cast 25% or more of the votes at the meeting. The DST
Certificate of Incorporation provides that special meetings of stockholders
may be called only by the DST Board pursuant to a resolution approved by a
majority of the whole DST Board, and requires between 10 and 60 days' written
notice.
CUMULATIVE VOTING
Under the DGCL, the certificate of incorporation may provide that at all
elections of directors, or at elections held under specified circumstances,
each stockholder is entitled to cumulate such stockholder's votes. The USCS
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Certificate of Incorporation does not provide for cumulative voting for the
election of directors. The DST Certificate of Incorporation does provide for
cumulative voting.
NUMBER AND ELECTION OF DIRECTORS
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to contain provisions governing the number and terms of directors.
However, if the certificate of incorporation contains provisions fixing the
number of directors, such number may not be changed without amending the
certificate of incorporation. The USCS Certificate of Incorporation provides
that the number of directors shall be as provided for in the USCS By-laws. The
USCS By-laws provide that the number of directors is initially to be 6 and
shall thereafter be fixed by a majority of the total number of authorized
directors. The DST Certificate of Incorporation provides that the DST Board
shall consist of between 3 and 11 persons, the exact number to be set by a
resolution adopted by a majority of the entire DST Board.
The DGCL permits the certificate of incorporation or the by-laws of a
corporation to provide that directors be divided into one, two or three
classes. The term of office of one class of directors shall expire each year
with the terms of office of no two classes expiring the same year. The USCS
Certificate of Incorporation provides for a classified board of directors,
consisting of 3 classes. The DST Certificate of Incorporation provides for a
classified board, also consisting of 3 classes.
REMOVAL OF DIRECTORS
The DGCL provides that a director or directors may be removed with or
without cause by the holders of a majority of the shares then entitled to vote
at an election of directors, except that (i) members of a classified board may
be removed only for cause, unless the certificate of incorporation provides
otherwise and (ii) in the case of a corporation having cumulative voting, if
less than the entire board is to be removed, no director may be removed
without cause if the votes cast against such director's removal would be
sufficient to elect such director if then cumulatively voted at an election of
the entire board of directors or of the class of directors of which such
director is a part.
The USCS By-laws provide that, unless otherwise required by the DGCL, a
director or directors may be removed with or without cause at any time by vote
of the holders of record of a majority of the shares then entitled to vote at
an election of directors, provided however, that so long as stockholders of
the corporation are entitled to cumulative voting, if less than the entire
USCS Board is to be removed, no director may be removed without cause if the
votes cast against his removal would be sufficient to elect him if then
cumulatively voted at an election of the entire USCS Board.
The DST Certificate of Incorporation provides that, subject to the rights of
the holders of any series of preferred stock then outstanding, directors may
be removed from office for cause only by the affirmative vote of the majority
of the then outstanding shares of Voting Stock, provided, however, that on or
after the Trigger Date a director may be removed from office for cause only by
the affirmative vote of the holders of at least 70% of the Voting Stock. The
DST Certificate of Incorporation also provides that if less than the whole DST
Board is to be removed no director may be removed without cause if the votes
cast against such director's removal would be sufficient to elect the director
if voted cumulatively in an election of the class of directors of which such
director is a part.
VACANCIES
Under the DGCL, unless otherwise provided in the certificate of
incorporation or the by-laws, vacancies on the board of directors and newly
created directorships resulting from an increase in the authorized number of
directors may be filled by a majority of the directors then in office,
although less than a quorum, or by the sole remaining director, provided that,
in the case of a classified board, such vacancies and newly created
directorships may be filled by a majority of the directors elected by such
class, or by the sole remaining director
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so elected. In the case of a classified board, directors elected to fill
vacancies or newly created directorships shall hold office until the next
election of the class for which such directors have been chosen, or until
their successors have been duly elected and qualified. In addition, if, at the
time of the filling of any such vacancy or newly created directorship, the
directors in office constitute less than a majority of the whole board (as
constituted immediately prior to any such increase), the Delaware Court of
Chancery may, upon application of any stockholder or stockholders holding at
least 10% of the total number of outstanding shares entitled to vote for such
directors, summarily order an election to fill any such vacancy or newly
created directorship, or replace the directors chosen by the directors then in
office.
The USCS Certificate of Incorporation provides that vacancies occurring on
the USCS Board for any reason and newly created directorships may be filled
only by a vote of a majority of the remaining members of the USCS Board,
although less than a quorum, at any meeting of the USCS Board, and all
directors elected to fill vacancies or newly created directorships shall
remain in office until the next annual election of the class for which such
director shall have been chosen and until their successors are duly elected
and qualified unless sooner displaced.
The DST Certificate of Incorporation and the DST By-laws provide that
vacancies or newly created directorships may be filled by a majority vote of
the directors then in office, though less than a quorum, and the directors so
elected shall remain in office until the term of office of the class to which
they have been elected expires and until their successors shall have been duly
elected and qualified. In the alternative, such directors may, by resolution,
eliminate any vacant directorship by reducing the size of the DST Board,
provided that such reduction does not reduce the size of the DST Board to
fewer than three directors.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may not indemnify any director, officer,
employee or agent made or threatened to be made party to any threatened,
pending or completed proceeding unless such person acted in good faith and in
a manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding,
had no reasonable cause to believe that his or her conduct was unlawful. The
USCS Certificate of Incorporation and USCS By-laws contain provisions which
require the indemnification of such persons to the full extent permitted by
the DGCL. The DST Certificate of Incorporation and DST By-laws contain
provisions requiring the indemnification of directors and officers of DST, and
any other person serving at the request of DST as a director or officer of
another corporation, to the full extent permitted by the DGCL. The DST
Certificate of Incorporation also contains provisions for the permissive
indemnification of employees or agents of DST, to the extent authorized by a
majority vote of the Disinterested Directors (as defined in the DST
Certificate of Incorporation).
The DGCL also establishes several mandatory rules for indemnification. In
the case of a proceeding by or in the right of the corporation to procure a
judgment in its favor (e.g., a stockholder derivative suit), a corporation may
indemnify an officer, director, employee or agent if such person acted in good
faith and in a manner such person reasonably believed to be in or not opposed
to the best interests of the corporation; provided, however, that no person
adjudged to be liable to the corporation may be indemnified unless, and only
to the extent that, the Delaware Court of Chancery or the court in which such
action or suit was brought determines upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which such court deems proper. A director or officer who is successful, on the
merits or otherwise, in defense of any proceeding subject to the DGCL's
indemnification provision must be indemnified by the corporation for
reasonable expenses incurred therein, including attorneys' fees.
The DGCL and the USCS By-laws state that a determination must be made that a
director or officer has met the required standard of conduct before the
director or officer may be indemnified. The DGCL and the USCS By-laws state
that a determination may be made by (i) a majority vote of a quorum of
disinterested directors, (ii) independent legal counsel in a written opinion
if a majority of disinterested directors so directs, or (iii) the
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stockholders. The USCS By-laws also provide that the determination may be made
by a majority vote of a quorum of the Executive Committee. Neither the DST By-
laws nor the DST Certificate of Incorporation specifically addresses these
provisions.
The DGCL and the DST Certificate of Incorporation require DST to advance
reasonable expenses to a director or officer if such person provides an
undertaking to repay such advancement if it is determined that the required
standard of conduct has not been met. The DST Certificate of Incorporation
also requires DST to advance reasonable expenses to those parties serving as a
director or officer of another corporation at DST's request, however, no
undertaking is required by such parties. The USCS By-laws also require USCS to
advance expenses upon receipt of such an undertaking, but the obligation
extends to employees and agents of USCS as well as the officers and directors
of USCS.
LIMITATION OF PERSONAL LIABILITY OF DIRECTORS
The DGCL provides that a corporation's certificate of incorporation may
include a provision limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. However, no such provision can eliminate or limit the
liability of a director for (i) any breach of the director's duty of loyalty
to the corporation or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of the
law, (iii) violation of certain provisions of the DGCL, (iv) any transaction
from which the director derived an improper personal benefit or (v) any act or
omission prior to the adoption of such a provision in the certificate of
incorporation. The DST Certificate of Incorporation and the USCS Certificate
of Incorporation contain provisions eliminating the personal liability for
monetary damages of their directors to the full extent permitted under
Delaware law.
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INFORMATION REGARDING MANAGEMENT OF DST
For information regarding DST's executive officers and directors,
compensation of certain executive officers of DST and certain relationships
and related transactions, see "Item 4--Submission of Matters to a Vote of
Security Holders; Executive Officers of the Company" of DST's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997, included as Appendix C,
and DST's definitive proxy statement in connection with its annual meeting of
stockholders held on May 12, 1998, included as Appendix K.
At DST's annual meeting of stockholders on May 12, 1998, Mr. A. Edward
Allinson and Mr. Michael G. Fitt were re-elected as directors of DST for a
three year term expiring in 2001 or when their successors are elected and
qualified.
In addition, upon effectiveness of the Merger, George L. Argyros, Sr. and
James C. Castle will become directors of DST. Mr. Argyros, 61 years old, has
been a director of USCS since November 1990. From 1968 to the present, Mr.
Argyros has been Chairman and Chief Executive Officer of Arnel & Affiliates, a
West Coast diversified investment company. From 1987 to the present, he has
been a General Partner and the principal financial partner in Westar Capital,
a private investment company. Mr. Argyros serves as a member on the boards of
directors of First American Financial Corporation, The Newhall Land and
Farming Company, Rockwell International Corporation, Tecstar Inc., All Post,
Inc., and Doskocil Manufacturing Company, Inc. Since 1976 he has served as
Chairman of the Board of Trustees of Chapman University and is a member of the
Board of Trustees of the California Institute of Technology. Mr. Argyros is
Chairman of the Board of Directors of The Beckman Foundation and Founding
Chairman for the Nixon Center for Peace and Freedom in Washington, D.C. In
1993, he received the Horatio Alger Award of Distinguished Americans and
currently serves as Chairman of the Washington, D.C. based Horatio Alger
Association.
Information regarding Dr. Castle is included below under "Information
Regarding Management of the Surviving Subsidiary," pages 83 through 84.
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INFORMATION REGARDING MANAGEMENT OF THE SURVIVING SUBSIDIARY
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the executive
officers and directors of the Surviving Subsidiary.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH SURVIVING SUBSIDIARY
- ---- --- --------------------------------------
<S> <C> <C>
James C. Castle, Ph.D................. 62 Chief Executive Officer and Director
Michael F. McGrail.................... 51 President of CableData, Inc. and
Director
C. Randles Lintecum................... 53 President of International Billing
Services, Inc. and Director
Douglas L. Shurtleff.................. 52 Senior Vice President, Finance and
Chief Financial Officer
Claudia D. Coleman.................... 47 Vice President, Corporate Development
Thomas A. McDonnell................... 53 Director
</TABLE>
James C. Castle, Ph.D. joined USCS as Chairman of the Board and Chief
Executive Officer in August 1992. Prior to joining USCS, Dr. Castle served as
Chief Executive Officer and Director of Teradata Corporation, a manufacturer
of high capacity, high performance parallel processing database systems, from
August 1991 until April 1992. Dr. Castle served as President and Chief
Executive Officer of Infotron Systems Corporation, a manufacturer of data and
voice transmission equipment, from October 1987 until August 1991 and was
named Chairman of the Board in May 1989. Prior to October 1987, Dr. Castle
held various senior management positions with TBG Information Systems, Inc.,
Memorex Corporation, Honeywell, Inc. and General Electric. Dr. Castle is also
a Director of PAR Technology Corp., Leasing Solutions, Inc., The PMI Group,
Inc. and ADC Telecommunications, Inc. Dr. Castle received his B.S. from the
U.S. Military Academy at West Point and a M.S.E.E. and Ph.D. in Computer
Information Sciences from the University of Pennsylvania.
Michael F. McGrail has been President of CableData, Inc., USCS' wholly-owned
subsidiary, and a Director of USCS since April 1995. Since December 1993, Mr.
McGrail has been President and Managing Director of CableData International,
Ltd., a wholly-owned subsidiary of CableData, Inc. Prior to his joining
CableData, Mr. McGrail served as President of Gandalf International, Ltd.
("Gandalf"), a wide and local area network communications products company. He
was also Managing Director of Infotron Systems International Ltd., which was
acquired by Gandalf in 1991. Mr. McGrail received a B.Sc. with honors from the
University of Sussex and an M.Sc. in Management from Trinity College, Dublin.
C. Randles Lintecum has been the President of International Billing
Services, Inc. ("IBS"), a wholly-owned subsidiary of USCS, since July 1995.
From February 1995 to July 1995, Mr. Lintecum was Senior Vice President,
Marketing and Business Development of USCS, and from May 1993 to February 1995
Mr. Lintecum was Vice President, Corporate Development of USCS. From 1989 to
May 1993, Mr. Lintecum was Executive Vice President of Corporate Marketing for
Infonet Services Corporation ("Infonet"), an international data network
services company. From 1988 to 1989, Mr. Lintecum was division Vice President
of Marketing for Computer Sciences Corporation, a computer services company.
From 1985 to 1987, Mr. Lintecum was division Vice President of New Business
Development for Computer Sciences Corporation. Mr. Lintecum received a B.S. in
Business Administration from the University of Kansas and an M.B.A. from the
University of Missouri.
Douglas L. Shurtleff has been Senior Vice President, Finance, and Chief
Financial Officer of USCS since May 1995. From September 1988 to May 1995, Mr.
Shurtleff was Vice President, Finance and Administration, and Treasurer of
Infonet. From October 1984 to September 1988, Mr. Shurtleff was Group Vice
President, Finance and administration, of Computer Sciences Corporation.
Previously, Mr. Shurtleff held various senior management positions at
Pacesetter Systems, Inc., and Deloitte & Touche. Mr. Shurtleff received a B.S.
in Accounting and his M.B.A. from the University of Southern California and is
a certified public accountant.
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Claudia D. Coleman has been Vice President, Corporate Development, of USCS
since December 1995. From March 1988 to December 1995, Ms. Coleman held
various positions, including Principal, in the investment banking division of
Alex. Brown & Sons ("Alex. Brown"). Prior to joining Alex. Brown, Ms. Coleman
was a Vice President in the investment banking division of Drexel Burnham
Lambert from 1984 to 1988. From 1979 to 1984, Ms. Coleman held various
positions, including Vice President, Corporate Planning, at Bank of America.
Ms. Coleman received a B.A. and a M.B.A. from the University of California.
Thomas A. McDonnell has served as a director of DST since 1971, as Chief
Executive Officer of DST since October 1984, and as President of DST since
January 1973 (except for a 30-month period from October 1984 to April 1987).
He served as Treasurer of DST from February 1973 to September 1995, and as
Vice Chairman of the DST Board from June 1984 to September 1995. He served as
Executive Vice President of KCSI from February 1987 until October 1995 and as
a director of KCSI from 1983 until October 1995. He is a director of BHA
Group, Inc., Cerner Corporation, Computer Sciences Corporation, Euronet
Services, Inc., and Informix Software, Inc. Mr. McDonnell was appointed a
director of Acquisition Sub on its formation in September 1998.
There are no family relationships between any directors or executive
officers of the Surviving Subsidiary.
None of the directors or executive officers, during the last five years, has
filed a petition, or had a petition filed against him, under the Federal
bankruptcy laws or any state insolvency law, nor had a receiver, fiscal agent
or similar officer appointed by a court for his business or property, or any
partnership in which he was a general partner at or within two years before
the time of such filing, or any corporation or business association of which
he was an executive officer at or within two years before the time of such
filing.
None of the directors or executive officers has, during the last five years,
been convicted in a criminal proceeding (excluding traffic violations or
similar misdemeanors).
Finally, none of the directors or executive officers has, during the last
five years, been the subject of any judgment, decree or final order enjoining
future violations of, prohibiting or mandating activities subject to, or
finding any violation, either civil or criminal, with respect to: the federal
or state securities law; any federal commodities law; engaging in any type of
business practice; or engaging in any activity in connection with the purchase
or sale of any security or commodity or in connection with any violation of
federal or state securities laws or federal commodities laws.
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EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth the total
compensation for the three fiscal years ending December 31, 1995, 1996 and
1997 of USCS' Chief Executive Officer and the four other highest paid
executive officers of USCS ("Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
NUMBER OF
OTHER ANNUAL SECURITIES ALL OTHER
COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) OPTIONS (#) ($)
--------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
James C. Castle, Ph.D... 1997 348,000 207,493 33,173(1) -- 59,319(2)
Chairman of the Board 1996 326,191 231,215 9,490(3) 420,000 39,434(4)
and Chief Executive 1995 300,000 102,337 57,146(5) 94,500 23,623(6)
Officer; Director
Michael F. McGrail...... 1997 219,713 155,058 50,998(7) -- 609(8)
President of CableData, 1996 205,000 148,178 50,382(9) 154,770 30,500(10)
Inc; Director 1995 168,311 97,033 100,484(11) -- 11,732(10)
C. Randles Lintecum..... 1997 220,374 104,891 9,750(3) -- 14,446(12)
President of 1996 205,000 145,660 9,490(3) 117,810 12,738(13)
International Billing 1995 171,223 51,048 9,230(3) 18,900 11,012(14)
Services, Inc.
Douglas L. Shurtleff.... 1997 211,097 111,881 9,750(3) -- 38,418(15)
Senior Vice President, 1996 201,045 120,627 96,176(16) 43,050 25,825(17)
Finance and Chief 1995 111,000(18) 43,652 84,399(19) 94,500 2,243(20)
Financial Officer
Claudia D. Coleman...... 1997 168,000 66,864 29,505(21) 8,355 14,248(22)
Vice President, 1996 160,000 73,440 22,862(23) 21,000 12,286(24)
Corporate Development 1995 -- (25) -- -- 63,000 --
</TABLE>
- --------
(1) This amount represents $23,423 in lieu of paid time off and a $9,750 car
allowance.
(2) The amount represents a contribution by USCS of $13,708 to USCS' 401(k)
Plan, $44,490 in imputed interest payable on deferred compensation, and
payment by USCS of a $1,121 life insurance premium.
(3) The amount represents a car allowance.
(4) The amount represents a contribution by USCS of $12,000 to USCS' 401(k)
Plan, $26,313 in imputed interest payable on deferred compensation, and
payment by USCS of a $1,121 life insurance premium.
(5) The amount represents a $24,839 relocation payment, $23,077 in lieu of
paid time off and a $9,230 car allowance.
(6) The amount represents a contribution by USCS of $12,000 to USCS' 401(k)
Plan, $10,699 in imputed interest payable on deferred compensation, and
payment by USCS of a $924 life insurance premium.
(7) The amount represents $34,126 of relocation expenses and $16,872 in
imputed income with respect to a leased vehicle.
(8) The amount represents a payment by USCS of a life insurance premium.
(9) The amount represents $35,132 of relocation expenses and $15,250 in
imputed income with respect to a leased vehicle.
(10) The amount represents contributions by USCS to Mr. McGrail's self-funded
pension plan.
(11) The amount represents $77,289 of relocation expenses, $15,780 in imputed
income with respect to a leased vehicle and $7,415 in lieu of paid time
off.
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<PAGE>
(12) The amount represents a contribution by USCS of $13,708 to USCS' 401(k)
Plan and payment by USCS of a $738 life insurance premium.
(13) The amount represents a contribution by USCS of $12,000 to USCS' 401(k)
Plan and payment by USCS of a $738 life insurance premium.
(14) The amount represents a contribution by USCS of $10,536 to USCS' 401(k)
Plan and payment by USCS of a $476 life insurance premium.
(15) The amount represents a contribution by USCS of $13,708 to USCS' 401(k)
Plan, $23,986 in imputed interest payable on deferred compensation, and
payment by USCS of a $724 life insurance premium.
(16) The amount represents a $86,686 relocation payment and a $9,490 car
allowance.
(17) The amount represents a contribution by USCS of $11,693 to USCS' 401(k)
Plan, $13,408 in imputed interest payable on deferred compensation, and
payment by USCS of a $724 life insurance premium.
(18) Mr. Shurtleff joined USCS in May 1995. Salary represents amounts actually
paid to Mr. Shurtleff during 1995.
(19) The amount represents $79,145 of relocation payments and a $5,254 car
allowance.
(20) The amount represents payment by USCS of a $333 life insurance premium
and $1,910 in imputed interest payable on deferred compensation.
(21) The amount represents a $19,755 relocation payment and a $9,750 car
allowance.
(22) The amount represents a contribution by USCS of $13,708 to USCS' 401(k)
Plan and payment by USCS of a $540 life insurance premium.
(23) The amount represents a $13,914 relocation payment and a $8,948 car
allowance.
(24) The amount represents a contribution by USCS of $11,746 to USCS' 401(k)
Plan and payment by USCS of a $540 life insurance premium.
(25) Ms. Coleman joined USCS in late December 1995.
Option Grants. The following table sets forth for each of the Named
Executive Officers certain information concerning stock options granted during
1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE PRICE FOR OPTION TERM(5)
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ----------------------
NAME GRANTED (#)(1) 1997(2) ($/SH.)(3) DATE(4) 5% 10%
- ---- -------------- ------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Claudia D. Coleman...... 8,355 1.3% $19.31 3/5/07 $ 101,476 $ 257,160
</TABLE>
- --------
(1) All options listed are incentive stock options granted pursuant to the
1996 Stock Option Plan and have ten year terms. The options vest over five
years.
(2) In 1997, USCS granted options to purchase an aggregate of 666,930 shares.
(3) The exercise price may be paid in cash, check or shares of USCS Common
Stock.
(4) Options may terminate before their expiration dates if the optionee's
status as an employee is terminated or upon the optionee's death or
disability.
(5) Potential Realizable Value is based on certain assumed rates of
appreciation pursuant to rules prescribed by the SEC. Actual gains, if
any, on stock option exercises are dependent on the future performance of
the stock. There can be no assurance that the amounts reflected in this
table will be achieved.
Stock Option Exercises and Year-End Option Values. The following table
provides information on option exercises in fiscal 1997 by the Named Executive
Officers and the value of such officers' unexercised options as of December
31, 1997.
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<PAGE>
<TABLE>
<CAPTION>
VALUE REALIZED NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
NUMBER OF (MARKET PRICE OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES AT EXERCISE DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON LESS EXERCISE ------------------------- -------------------------
NAME EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James C. Castle, Ph.D... 102,082 $1,645,587 87,430 416,640 $ 462,712 $2,687,689
Claudia D. Coleman...... 0 $ 0 19,950 72,405 $ 217,125 $ 672,376
C. Randles Lintecum..... 0 $ 0 118,302 101,808 $1,485,400 $ 565,380
Michael F. McGrail...... 0 $ 0 96,033 134,337 $1,038,013 $ 757,456
Douglas L. Shurtleff.... 7,000 $ 96,542 35,210 91,140 $ 374,284 $ 878,251
</TABLE>
- --------
(1) Calculated by determining the difference between the fair market value of
the securities underlying the options at December 31, 1997 and the
exercise price of the Named Executive Officer's option. The fair market
value on December 31, 1997 was 17 1/2, the average of the high and low
prices on December 31, 1997.
EMPLOYMENT AND SEVERANCE AGREEMENTS
USCS has an employment agreement with James C. Castle, Ph.D., USCS' Chairman
of the Board and Chief Executive Officer, terminable at will by either USCS or
Dr. Castle. The agreement may be terminated at any time by either USCS or Dr.
Castle upon 30 days' notice. If Dr. Castle is terminated without cause he will
receive one year's salary, which will cease to be paid upon Dr. Castle
starting new employment. USCS will provide a gross-up of any excise taxes
payable by Dr. Castle in the event termination without cause or a change of
control trigger accelerated vesting of his stock options.
USCS has entered into an agreement with Michael F. McGrail, President of
CableData, Inc. (a wholly-owned subsidiary of USCS) and a Director of USCS.
USCS may terminate Mr. McGrail's employment upon 12 months' notice, with or
without cause. USCS shall have the right to pay salary in lieu of any notice.
Mr. McGrail may terminate his employment with USCS at any time, with or
without cause. USCS will provide a gross-up of any excise taxes payable by Mr.
McGrail in the event termination without cause or a change of control trigger
accelerated vesting of his stock options.
USCS has entered into severance agreements with C. Randles Lintecum, Douglas
L. Shurtleff and Claudia D. Coleman, the President of IBS, USCS' Chief
Financial Officer and USCS' Vice President, Corporate Development,
respectively, pursuant to which Mr. Lintecum, Mr. Shurtleff and Ms. Coleman
are entitled to receive certain benefits in the event of termination without
cause following a change of control. Benefits consist primarily of a lump-sum
payment of one year's compensation. Change of control is defined as sale of
substantially all assets, merger or upon 50% of the outstanding USCS Common
Stock becoming held by a person or entity other than Westar, Enterprise
Partners, the employee stock ownership plan or any employee stock purchase
plan. USCS will provide a gross-up of any excise taxes payable by Messrs.
Shurtleff and Lintecum in the event termination without cause or a change of
control trigger accelerated vesting of their stock options.
In addition, all the Named Executive Officers are eligible for bonuses under
USCS' Management Bonus Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
USCS is party to a letter agreement with Westar pursuant to which Westar
provides financial management and strategic advisory services to USCS for a
monthly fee of $35,875 plus out-of-pocket expenses. The agreement may be
terminated at any time, with or without cause, by either USCS or Westar. USCS
paid Westar approximately $400,000 for advisory services during 1997. George
L. Argyros, a Director of USCS, is sole
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<PAGE>
stockholder of GLA Financial, which is a general partner of Westar Capital
Associates, which is the general partner of Westar. John W. Clark, a Director
of USCS, is the managing partner of Westar Capital Associates, and Charles D.
Martin, a Director of USCS, is a general partner of Westar Capital Associates.
DST and Westar have agreed to terminate the agreement. At the Effective Time,
DST currently intends to terminate this agreement.
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<PAGE>
PROPOSAL 2 FOR DST STOCKHOLDERS--AMENDMENT OF THE DST PLAN
In addition to approval of the Merger Agreement discussed above, DST
stockholders are being asked, at the DST Special Meeting, to vote upon a
proposal to amend the DST Plan to increase the number of shares of DST Common
Stock authorized for issuance under the DST Plan, and such other business as
may be properly brought before the DST Special Meeting and any adjournments
thereof.
For information on the DST Special Meeting, the vote required to approve the
DST Plan Proposal and proxy information, see "The Special Meeting of DST
Stockholders" on page 31.
BACKGROUND OF AMENDMENT TO DST PLAN
The DST Board is proposing for stockholder approval an amendment to the DST
Plan that would set the number of shares to be authorized under the DST Plan
at 9,000,000 shares of DST Common Stock (currently 6,000,000 shares are
authorized under the DST Plan). To date, awards have been issued for 4,097,389
shares (not including forfeited awards). At the Effective Time, USCS Options
will convert to options to acquire DST Common Stock. The DST Board is
proposing such amendment because, following the Merger, DST will have a larger
base of employees eligible for periodic stock option grants. A summary of the
DST Plan follows the discussion of the proposed amendment.
DST PLAN PROPOSAL; RECOMMENDATION OF THE DST BOARD
DST Plan Proposal
The DST Board has approved an amendment, subject to stockholder approval, to
increase the number of authorized shares by 3,000,000. Based on the closing
price of the DST Common Stock on November 19, 1998 of $51.75, the aggregate
market value of the additional 3,000,000 shares to be authorized for issuance
is $155,250,000. If approved, the DST Plan, as amended, would provide for the
availability of a total of 9,000,000 shares of DST Common Stock for the
granting of awards to certain eligible employees and Outside Directors (as
defined in the DST Plan). Therefore, the maximum number of authorized shares
that could be issued in the future in connection with the awards under the DST
Plan, if the amendment is approved by the DST stockholders, would be 8,824,095
shares, representing approximately 18% of DST Common Stock outstanding on the
record date.
Recommendation of DST Board
The DST Board unanimously recommends that DST stockholders vote FOR the DST
Plan Proposal.
SUMMARY OF THE DST PLAN
The following summary of the DST Plan (describing the DST Plan prior to the
proposed amendment) is qualified in its entirety by reference to the DST Plan,
a copy of which is filed as an exhibit to the Registration Statement of which
this Joint Proxy Statement-Prospectus is a part. Capitalized terms in this
summary not defined in this Joint Proxy Statement-Prospectus have the meanings
set forth in the DST Plan.
The DST Plan provides for the availability of 6,000,000 shares of DST Common
Stock (representing approximately 12% of the outstanding DST Common Stock as
of the record date) for the granting of options (incentive and non-qualified),
reload options, stock appreciation rights, limited rights, Performance Shares,
Performance Units (including performance-based cash awards), dividend
equivalents, Restricted Stock, DST Common Stock, or any other right, interest
or option relating to shares of DST Common Stock granted pursuant to the
provisions of the DST Plan to officers and other employees and to Outside
Directors. As of the date of this Joint Proxy Statement-Prospectus, options to
purchase 3,854,339 shares of DST Common Stock have been awarded to
participants. No other Awards have been made under the DST Plan. The USCS
Options being assumed in connection with the Merger will not be counted
against the aggregate limit of shares available under the DST Plan.
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<PAGE>
The purposes of the DST Plan are to generate an increased incentive for
employees of DST to contribute to its future success, to secure for DST and
its stockholders the benefits inherent in equity ownership by employees of
DST, and to enhance the ability of DST and its Affiliates to attract and
retain exceptionally qualified employees upon whom, in large measure, the
sustained progress, growth and profitability of DST depend. All Outside
Directors and Employees are eligible to participate in the DST Plan. As of the
date of this Joint Proxy Statement-Prospectus, approximately 920 persons are
eligible to participate in the DST Plan.
When an Outside Director first takes a position on the DST Board, the
Outside Director receives an option to purchase 8,000 shares of DST Common
Stock. On the date of each annual meeting of DST's stockholders, each Outside
Director will be granted an option to purchase 4,000 shares of DST Common
Stock if such Outside Director will continue to serve in such capacity
immediately following such annual stockholders' meeting. Except as otherwise
set forth in the DST Plan, all options granted to an Outside Director to
purchase shares of DST Common Stock become exercisable as follows: 50% on the
day preceding the date of the first annual stockholders' meeting after the
date of grant of the option; an additional 25% on the day preceding the date
of the second annual stockholders' meeting after the date of grant of the
option; and the remaining 25% on the day preceding the third annual
stockholders' meeting after the date of grant of the option. All such options
will immediately become exercisable in the event the Outside Director's
service on the Board is terminated by reason of such Outside Director's death,
disability or retirement after reaching age 60 and having at least five years
of service on the Board. All such options will also immediately become
exercisable in the event of a change in control of DST subject to certain
restrictions under the federal securities laws. Options granted to an Outside
Director may be exercised, to the extent otherwise exercisable, for up to one
year (but no later than ten years after the date of grant) after the Outside
Director ceases to be a member of the Board by reason of death for the
remaining term of the option if the Outside Director retires (as described
below) from the Board or becomes disabled, or for a period of ninety days (but
no later than ten years after the date of grant) after the Outside Director
otherwise ceases to be a member of the Board.
Except for the options granted to the Outside Directors, the DST
Compensation Committee (or another committee designated by the Board
consisting of disinterested persons within the meaning of Rule 16b-3 under the
Exchange Act and outside directors within the meaning of Code Section 162(m)
or its delegate (the "DST Plan Committee") will administer the DST Plan and
determine the recipients of Awards, the type or types of Awards to be granted
to each such recipient, the term of such Awards, the consideration to be
received by DST for such Awards, if any, the method of payment and the number
of shares subject to such Awards. All determinations of the DST Plan Committee
shall be made by a majority of its members. The DST Plan Committee may not
grant Awards under the DST Plan after August 31, 2005. The term of Awards
granted under the DST Plan may be set at any length the DST Plan Committee
determines and may extend beyond August 31, 2005. However, the term of any
options granted to Outside Directors may not extend beyond ten years from the
date of grant, and the term of any incentive stock option may not extend
beyond ten years from the date of grant (five years, in the case of an
incentive stock option granted to a 10% or more stockholder of DST).
With respect to options, the option exercise price must be at least equal to
(and in the case of options granted to Outside Directors must be equal to) the
fair market value of the underlying shares on the date of the grant, or, in
the case of an option granted in tandem with or in substitution of another
grant under the DST Plan or another plan of DST, the fair market value on the
effective date of grant of such other award. A stock appreciation right may be
granted to Participants either alone or in addition to other Awards granted
under the DST Plan and need not relate to a specific option granted. Subject
to the terms of the DST Plan, a participant receiving a stock appreciation
right will have the right to receive upon exercise thereof an amount equal to
the excess of the fair market value of one share of DST Common Stock on the
date of exercise, or (except with respect to an incentive stock option) at any
time during a specified period before or after the date of exercise as
determined by the DST Plan Committee, over the grant price of the right,
multiplied by the number of shares of DST Common Stock as to which the
participant is exercising the right. The grant price will be as specified by
the DST Plan Committee, but will not be less than the fair market value of one
share of DST Common Stock on the date of grant of the right, or, in the case
of any stock appreciation right retroactively granted in tandem with or in
substitution for
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another Award or any outstanding award under any other plan of DST, on the
date of grant of such other award. Limited rights, however, may be granted to
participants only with respect to an option granted under the DST Plan or
another plan of DST. Subject to the terms of the DST Plan, a participant
receiving a limited right granted under the DST Plan will have the right to
receive upon exercise thereof an amount equal to the excess of the fair market
value of one share of DST Common Stock on the date of exercise or, if greater,
and only with respect to any limited right related to an option other than an
incentive stock option, the highest price per share of DST Common Stock paid
in connection with any change in control of DST, over the option price of the
related option, multiplied by the number of shares of DST Common Stock as to
which the recipient is exercising the right. Limited rights are exercisable
only to the extent the related option is exercisable and only during the
three-month period immediately following a change in control of DST. A "change
in control" of DST is deemed to have occurred for purposes of the DST Plan if
(i) there is a 25% change in the constitution of the Board, (ii) any person(s)
make a public announcement or filing that they have become, without the
consent of the Board, an owner of 40% of the voting securities of DST, or
(iii) the stockholders of DST (or in certain cases 75% of the Board) approve a
merger, consolidation or dissolution of DST or a sale, lease, exchange or
disposition of all or substantially all the assets of DST.
The DST Plan provides that the grant, vesting or exercise of Restricted
Stock or Performance Awards may be based on one or more of the following
performance-based criteria or such other criteria as the DST Plan Committee
may determine: (i) attainment of a specified price per share of DST Common
Stock; (ii) attainment of a specific rate of growth or increase in the amount
of growth in the price per share of DST Common Stock; (iii) attainment of a
specified level of earnings or earnings per share of DST Common Stock; (iv)
attainment of a specified rate of growth or increase in the amount of growth
of earnings or earnings per share of DST Common Stock; (v) attainment of a
specified level of cash flow or cash flow per share of DST Common Stock; (vi)
attainment of a specific rate of growth or increase in the amount of growth of
cash flow or cash flow per share of DST Common Stock; (vii) attainment of a
specified level of return on equity; (viii) attainment of a specific rate of
growth or increase in the amount of growth of return on equity; (ix)
attainment of a specified level of return on assets; or (x) attainment of a
specified rate of growth or increase in the amount of growth of return on
assets.
Performance Awards may be paid in cash, DST Common Stock, Restricted Stock
or other property or combination thereof as determined by the DST Plan
Committee at the time of payment. Such payment may be made in a single sum, in
installments or may be deferred, as determined by the DST Plan Committee.
Subject to the terms of the DST Plan, the DST Plan Committee may provide
that the recipient (other than an Outside Director) of any Award, including a
deferred Award, may receive, currently or on a deferred basis, interest or
dividends, or interest or dividend equivalents (which the DST Plan Committee
may deem to have been reinvested in additional shares of DST Common Stock or
otherwise invested), with respect to the number of shares of DST Common Stock
covered by an Award. The DST Plan Committee may permit payment of a
Performance Dividend Equivalent to be deferred by a participant until such
time as the DST Plan Committee may establish, subject to applicable
requirements of the Code.
No participant in the DST Plan may be granted in any one year options,
limited rights, stock appreciation rights, Performance Shares or DST Common
Stock, whether or not restricted, that together with all other such Awards
granted under the DST Plan in the same calendar year to such participant
relates to DST Common Stock in excess of 400,000 shares. Reload options are
not counted toward the 6,000,000 share overall DST Plan limit. Performance
Units, including performance-based cash bonuses, for any year may not exceed
300% of a participant's annual base salary as of the first day of the year;
provided, however, that no more than $1,000,000 of annual base salary may be
taken into account for purposes of determining the maximum amount of
Performance Units which may be granted in any calendar year to any
participant.
In the event of a change in control of DST, vesting of Awards (including
options) will be automatically accelerated and all conditions on Awards will
be deemed satisfactorily completed without any action required by the DST Plan
Committee. Such Award may then be exercised or realized in full on or before a
date fixed by the
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DST Plan Committee subject to certain restrictions under the federal
securities laws. The DST Plan Committee may, in its discretion, include such
further provisions and limitations in any agreement documenting such Awards as
it may deem equitable and in the best interests of DST.
The DST Board may amend, alter, suspend, discontinue or terminate the DST
Plan. However, any such action that would impair the rights of a holder of an
Award cannot be made without such holder's consent. Stockholder approval is
required for any amendment of the DST Plan that would: (i) materially increase
the total number of shares available for awards under the DST Plan (except
certain adjustments described in the last sentence of this paragraph); (ii)
materially increase benefits accruing to participants; (iii) materially modify
the requirements as to eligibility for participation in the DST Plan; (iv)
change in any way options that may be granted to Outside Directors; or (v) be
required in order for the DST Plan to continue to comply with Section 162(m)
of the Code. Amendments to the DST Plan provisions concerning the timing of
grants and the number and exercise price of options for Outside Directors may
not be made more frequently than every six months except to comport to changes
in the Code, the Employee Retirement Income Security Act of 1974, as amended,
or regulations thereunder. The DST Plan Committee is authorized, without a
participant's consent, to make adjustments in Performance Award criteria or in
the terms and conditions of other Awards (other than Outside Director Options)
in recognition of events it deems to be unusual or non-recurring that affect
DST or any Affiliates or the financial statements of DST or any Affiliate, or
in recognition of changes in applicable law, regulations or accounting
principles, whenever the DST Plan Committee deems appropriate to prevent
dilution or enlargement of benefits or potential benefits under the DST Plan.
In addition, the DST Plan Committee, however, has authority (but is not
required), in the case of changes affecting the securities of DST or other
unusual events (as the DST Plan Committee determines), to make certain
adjustments in the DST Plan or in Awards in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available under the DST Plan.
The federal income tax consequences of the issuance and exercise of options
under the DST Plan are summarized below. The summary is based on federal
income tax laws in effect as of the date hereof. The summary does not
constitute tax advice and, among other things, does not address possible
state, local or foreign tax consequences.
The grant of an option will have no tax consequences for the grantee or DST.
In general, the grantee will have no taxable income upon the exercise of an
incentive stock option if the applicable incentive stock option holding period
is satisfied (except that the alternative minimum tax may apply) and DST will
have no deduction upon exercise of the incentive stock option. Upon exercising
a non-qualified option, the grantee will recognize ordinary income in an
amount equal to the difference between the fair market value on the date of
exercise of the stock acquired on exercise and the option exercise price; DST
will be entitled to a deduction in the same amount, subject to the possible
applicability of the $1,000,000 limitation on deductibility under Section
162(m) of the Code. Generally, there will be no tax consequence to DST in
connection with a disposition of shares acquired on exercise of an option,
except that DST may be entitled to a deduction upon disposition of shares
acquired on exercise of an incentive stock option before the applicable
holding periods have been satisfied.
Under current rulings of the IRS, a grantee who pays the exercise price for
an option with DST Common Stock does not recognize gain or loss with respect
to the disposition of the stock transferred in payment of the option price.
However, the optionee normally will recognize ordinary income upon the
exercise of a non-qualified option in the manner discussed above. The
grantee's basis in a number of acquired shares equal to the number surrendered
will be the same as the optionee's basis in the surrendered shares; the
grantee's basis in any additional shares received will be equal to the amount
of income the grantee recognizes upon exercise of the option.
92
<PAGE>
PART III. GENERAL INFORMATION ABOUT DST AND USCS
BUSINESS OF DST
For a description of DST's business, see "Item 1--Business" and "Item 7--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of DST's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, included as Appendix C (the "DST Form 10-K"), and "Item 2--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of each of DST's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, included as Appendix D (the "DST First Quarter 10-Q"),
DST's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
included as Appendix E (the "DST Second Quarter 10-Q") and DST's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, included as
Appendix L (the "DST Third Quarter 10-Q"). For a description of DST's
properties, see "Item 2--Properties" of the DST Form 10-K. For a description
of DST's legal proceedings, see "Item 3--Legal Proceedings" of the DST Form
10-K and Part II, "Item 1--Legal Proceedings" of each of the DST First Quarter
10-Q, the DST Second Quarter 10-Q and the DST Third Quarter 10-Q.
BUSINESS OF USCS
For a description of USCS' business, see "Item 1--Business" and "Item 7--
Management's Discussion and Analysis of Financial Condition and Results of
Operations" of USCS' Annual Report on Form 10-K for the fiscal year ended
December 31, 1997, included as Appendix H (the "USCS Form 10-K"), and "Item
2--Management's Discussion and Analysis of Financial Condition and Results of
Operations" of each of USCS' Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998, included as Appendix I (the "USCS First Quarter 10-Q"),
USCS' Quarterly Report on Form 10-Q for the quarter ended June 30, 1998,
included as Appendix J (the "USCS Second Quarter 10-Q") and USCS' Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998, included as
Appendix M (the "USCS Third Quarter 10-Q"). For a description of USCS'
properties, see "Item 2--Properties" of the USCS Form 10-K. For a description
of USCS' legal proceedings, see "Item 3--Legal Proceedings" of the USCS Form
10-K and Part II, "Item 1--Legal Proceedings" of each of the USCS First
Quarter 10-Q, the USCS Second Quarter 10-Q and the USCS Third Quarter 10-Q.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF DST
For DST's management's discussion and analysis of its financial condition
and results of operations, see "Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations" of the DST Form 10-K, and
"Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations" of each of the DST First Quarter 10-Q, the DST Second
Quarter 10-Q and the DST Third Quarter 10-Q.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF USCS
For USCS' management's discussion and analysis of its financial condition
and results of operations, see "Item 7--Management's Discussion and Analysis
of Financial Condition and Results of Operations" of the USCS Form 10-K, and
"Item 2--Management's Discussion and Analysis of Financial Condition and
Results of Operations" of each of the USCS First Quarter 10-Q, the USCS Second
Quarter 10-Q and the USCS Third Quarter 10-Q.
93
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ADDITIONAL INFORMATION REGARDING DST
FINANCIAL STATEMENTS
For DST's financial statements, financial schedules and supplementary
financial information, see "Item 8--Financial Statements and Supplementary
Data" of the DST Form 10-K, and "Item 1--Financial Statements" of each of the
DST First Quarter 10-Q, the DST Second Quarter 10-Q and the DST Third Quarter
10-Q.
ADDITIONAL INFORMATION REGARDING USCS
FINANCIAL STATEMENTS
For USCS' financial statements, financial schedules and supplementary
financial information, see "Item 8--Financial Statements and Supplementary
Data" of the USCS Form 10-K, and "Item 1--Financial Statements" of each of the
USCS First Quarter 10-Q, the USCS Second Quarter 10-Q and the USCS Third
Quarter 10-Q.
94
<PAGE>
PART IV. MISCELLANEOUS
EXPERTS
The consolidated financial statements of DST Systems, Inc. and of USCS
International, Inc. as of December 31, 1996 and 1997 and for each of the three
years in the period ended December 31, 1997 appearing in the respective
company's Annual Report on Form 10-K for the year ended December 31, 1997
which are included as Appendices C and H, respectively, to this Joint Proxy
Statement-Prospectus, have been so included in reliance on the reports of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL OPINIONS
The legality of the DST Common Shares to be issued in connection with the
Merger is being passed upon for DST by Sonnenschein Nath & Rosenthal.
Certain of the tax consequences of the Merger will be passed upon at the
Effective Time, as a condition to the Merger, by Graham & James LLP, on behalf
of USCS, and by Sonnenschein Nath & Rosenthal, on behalf of DST. See "The
Merger--Material United States Federal Income Tax Consequences of the Merger",
page 57.
WHERE YOU CAN FIND MORE INFORMATION
DST and USCS file annual, quarterly and special reports, proxy statements
and other information with the SEC. You may read and copy any reports,
statements or other information that the companies file with the SEC at the
SEC's public reference rooms at Room 1024, Judiciary Plaza, 450 Fifth Street,
NW, Washington, D.C. 20549, at the New York Regional Office, 7 World Trade
Center, Suite 1300, New York, New York 10048 and at the Midwest Regional
Office, Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Copies of such material can be obtained from
the Public Reference Section of the SEC, 450 Fifth Street, NW, Washington,
D.C. 20549 at prescribed rates. These SEC filings are also available to the
public from commercial document retrieval services and at the Internet web
site maintained by the SEC at "http://www.sec.gov." Reports, proxy statements
and other information should also be available for inspection at the offices
of the NASD (for USCS) and the NYSE (for DST).
DST filed a Registration Statement on Form S-4 to register with the SEC the
shares of DST Common Stock to be issued to USCS stockholders in the Merger.
This Joint Proxy Statement-Prospectus is a part of that Registration Statement
and constitutes a prospectus of DST. As allowed by SEC rules, this Joint Proxy
Statement-Prospectus does not contain all the information you can find in
DST's Registration Statement or the exhibits to that Registration Statement.
DST has supplied all information contained in this Joint Proxy Statement-
Prospectus relating to DST, and USCS has supplied all such information
relating to USCS and to any of the principal stockholders of USCS.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT-PROSPECTUS (INCLUDING THE APPENDICES). WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN
THIS JOINT PROXY STATEMENT-PROSPECTUS. THIS JOINT PROXY STATEMENT-PROSPECTUS
IS DATED NOVEMBER 25, 1998. YOU SHOULD NOT ASSUME THAT THE INFORMATION
CONTAINED IN THIS JOINT PROXY STATEMENT-PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THAT DATE. NEITHER THE MAILING OF THIS JOINT PROXY STATEMENT-
PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF DST COMMON STOCK IN THE MERGER
CREATES ANY IMPLICATION TO THE CONTRARY.
95
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
Acquisition Proposal....................................................... 53
Acquisition Sub............................................................ 1
Affiliate Stockholder...................................................... 62
Affiliates................................................................. 58
Antitrust Division......................................................... 12
BFDS....................................................................... 17
CBIS....................................................................... 20
Certificates............................................................... 50
Code....................................................................... 41
Comparable Transactions.................................................... 45
Continuum.................................................................. 24
CSC........................................................................ 24
Custima.................................................................... 22
DGCL....................................................................... 50
DST........................................................................ 1
DST Adjusted Market Values................................................. 46
DST Board.................................................................. 1
DST By-laws................................................................ 77
DST Common Stock........................................................... 1
DST ESOP................................................................... 31
DST Comparable Companies................................................... 46
DST First Quarter 10-Q..................................................... 93
DST Form 10-K.............................................................. 93
DST Merger Proposal........................................................ 30
DST Plan................................................................... 10
DST Plan Proposal.......................................................... 30
DST Second Quarter 10-Q.................................................... 93
DST Special Meeting........................................................ 1
DST Third Quarter 10-Q..................................................... 93
EBIT....................................................................... 45
EBITDA..................................................................... 45
Effective Time............................................................. 34
EPS........................................................................ 48
ESPP....................................................................... 59
Exchange Act............................................................... 1
Exchange Agent............................................................. 50
Exchange Ratio............................................................. 1
FAM........................................................................ 54
First Call................................................................. 44
FTC........................................................................ 12
FYE........................................................................ 44
GAAP....................................................................... 11
HSR Act.................................................................... 11
IBES....................................................................... 44
IBS........................................................................ 83
IFTC....................................................................... 75
Infonet.................................................................... 83
IRS........................................................................ 57
KCSI....................................................................... 8
</TABLE>
96
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
- ---- ----
<S> <C>
LTM........................................................................ 45
Merger..................................................................... 1
Merger Agreement........................................................... 1
Merrill Lynch.............................................................. 10
Merrill Lynch Opinion...................................................... 42
Named Executive Officers................................................... 85
Nasdaq..................................................................... 1
NFDS....................................................................... 18
NYSE....................................................................... 1
Offer Value................................................................ 45
Option..................................................................... 49
Option Plans............................................................... 49
Registrable Securities..................................................... 62
Request.................................................................... 62
Request Registration....................................................... 62
Restricted Actions......................................................... 61
Restricted Period.......................................................... 61
SEC........................................................................ 11
Securities Act............................................................. 16
State Street............................................................... 75
Surviving Subsidiary....................................................... 11
TCI........................................................................ 20
Technology Transactions.................................................... 45
Termination Fee............................................................ 56
Transaction Value.......................................................... 45
Trigger Date............................................................... 77
USCS....................................................................... 1
USCS Board................................................................. 1
USCS Certificate of Incorporation.......................................... 77
USCS Common Stock.......................................................... 1
USCS Comparable Companies.................................................. 44
USCS First Quarter 10-Q.................................................... 93
USCS Form 10-K............................................................. 93
USCS Merger Proposal....................................................... 30
USCS Second Quarter 10-Q................................................... 93
USCS Special Meeting....................................................... 1
USCS Third Quarter 10-Q.................................................... 93
Voting Stock............................................................... 77
</TABLE>
97
<PAGE>
APPENDIX A
AGREEMENT AND PLAN OF MERGER
DATED
SEPTEMBER 2, 1998
AMONG
DST SYSTEMS, INC.,
DST ACQUISITIONS, INC.
AND
USCS INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I--THE MERGER AND RELATED MATTERS
Section 1.1 The Merger............................................... 1
Section 1.2 Effective Time of the Merger............................. 2
ARTICLE II--CONVERSION OF CAPITAL STOCK
Section 2.1 Conversion of Stock...................................... 2
Section 2.2 Exchange of Certificates................................. 3
Section 2.3 Dividends and Other Distributions........................ 4
Section 2.4 No Fractional Shares..................................... 4
Section 2.5 No Liability............................................. 4
Section 2.6 Lost Certificates........................................ 4
Section 2.7 Treatment of Stock Options, Etc.......................... 5
Section 2.8 Closing of USCS' Transfer Books.......................... 5
Section 2.9 Closing.................................................. 5
Section 2.10 No Repurchase Rights..................................... 5
ARTICLE III--REPRESENTATIONS AND WARRANTIES OF USCS
Section 3.1 Organization and Qualification........................... 5
Section 3.2 Capitalization........................................... 5
Section 3.3 Subsidiaries............................................. 6
Section 3.4 Authority Relative to this Agreement..................... 6
Section 3.5 No Breach; Required Consents............................. 7
Section 3.6 Consents and Approvals................................... 7
Section 3.7 Reports and Financial Statements......................... 7
Section 3.8 Compliance with Law; Litigation.......................... 8
Section 3.9 Title to Assets.......................................... 8
Section 3.10 Employee Matters......................................... 8
Section 3.11 ERISA.................................................... 9
Section 3.12 Approval................................................. 10
Section 3.13 Financial Advisor/Investment Banker...................... 10
Section 3.14 Taxes.................................................... 10
Section 3.15 Environmental Laws....................................... 10
Section 3.16 Transactions with Affiliates............................. 10
Section 3.17 Material Contracts....................................... 11
Section 3.18 Intellectual Property.................................... 11
Section 3.19 Year 2000 Compliance..................................... 11
ARTICLE IV--REPRESENTATIONS AND WARRANTIES OF DST AND ACQUISITION SUB
Section 4.1 Organization and Qualification........................... 12
Section 4.2 Capitalization........................................... 12
Section 4.3 Authority Relative to this Agreement..................... 13
Section 4.4 No Breach; Required Consents............................. 13
Section 4.5 Consents and Approvals................................... 13
Section 4.6 Reports and Financial Statements......................... 13
Section 4.7 Litigation............................................... 14
Section 4.8 No Broker................................................ 14
Section 4.9 Approval................................................. 14
ARTICLE V--CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1 Conduct of Business of USCS.............................. 14
Section 5.2 Conduct of Business of DST............................... 16
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE VI--ADDITIONAL AGREEMENTS
Section 6.1 Access and Information.................................. 17
Section 6.2 SEC Filings............................................. 17
Section 6.3 Meetings of Stockholders................................ 19
Section 6.4 Compliance with the Securities Act...................... 20
Section 6.5 Other Actions........................................... 20
Section 6.6 Confidentiality and Public Announcements................ 20
Section 6.7 Notification............................................ 20
Section 6.8 HSR Act Filings......................................... 20
Section 6.9 USCS Director and Officer Indemnification............... 21
Section 6.10 Termination of USCS Rights Agreement.................... 21
Section 6.11 Actions Under Stockholder Agreement..................... 21
Section 6.12 Consents/Waivers........................................ 21
Section 6.13 USCS Deferred Compensation Plans........................ 21
ARTICLE VII--CONDITIONS PRECEDENT
Section 7.1 Conditions to Each Party's Obligation to Effect the
Merger................................................. 21
Section 7.2 Conditions to Obligation of USCS to Effect the Merger... 22
Section 7.3 Conditions to Obligations of DST and Acquisition Sub to
Effect the Merger...................................... 23
ARTICLE VIII--TERMINATION, AMENDMENT AND WAIVER
Section 8.1 Termination............................................. 23
Section 8.2 Remedies................................................ 24
Section 8.3 Amendment............................................... 24
Section 8.4 Waiver.................................................. 24
ARTICLE IX--DEFINITIONS; GENERAL PROVISIONS
Section 9.1 Definitions............................................. 24
Section 9.2 Other Definitions....................................... 27
Section 9.3 Use of Terms............................................ 27
Section 9.4 Non-Survival of Representations, Warranties and
Agreements............................................. 28
Section 9.5 Notices................................................. 28
Section 9.6 Fees and Expenses....................................... 28
Section 9.7 Specific Performance.................................... 28
Section 9.8 Entire Agreement; Miscellaneous......................... 28
Section 9.9 Governing Law and Venue; Waiver of Jury Trial........... 29
</TABLE>
EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
A USCS Disclosure Schedule
6.4 Form of USCS Affiliate Agreement
7.2(e)(i) Form of DST Affiliate Agreement
E-1 Form of USCS Stockholder Agreement
E-2 Form of DST Stockholder Agreement
7.2(e)(ii) Legal Opinion of Sonnenschein Nath & Rosenthal
7.2(e)(iv) Registration Rights Agreement
7.3(c)(iii) Legal Opinion of Graham & James LLP
</TABLE>
A-ii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated September 2,
1998 and is entered into by and among DST Systems, Inc., a Delaware
corporation ("DST"), DST Acquisitions, Inc., a Delaware corporation and a
wholly-owned subsidiary of DST ("Acquisition Sub") and USCS International,
Inc., a Delaware corporation ("USCS").
RECITALS
A. DST and USCS desire to enter into a transaction in which Acquisition Sub
will merge with and into USCS (the "Merger"). At the effective time of the
Merger, the outstanding shares of the capital stock of USCS shall be converted
into the right to receive shares of common stock of DST (except as provided
herein). As a result, DST will become the holder of all the outstanding shares
of capital stock of USCS and the holders of shares of capital stock of USCS
outstanding immediately prior to the Merger will become holders of shares of
common stock of DST.
B. The Boards of Directors of DST, USCS and Acquisition Sub each have
determined that the transactions described herein are in the best interests of
their respective corporations and stockholders.
C. It is intended that, for federal income tax purposes, the Merger shall
qualify as a reorganization under the provisions of Section 368(a) of the
Code.
D. It is intended that for financial accounting purposes, the Merger shall
be accounted for as a "pooling-of-interests" under generally accepted
accounting principles.
E. Parties owning more than 35% of the outstanding shares of (i) USCS Common
Stock (the "USCS Major Stockholders") and of (ii) DST Common Stock (the "DST
Major Stockholder") are contemporaneously with the execution and delivery of
this Agreement executing and delivering the respective Stockholder Agreements
attached hereto as Exhibits E-1 and E-2.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement, the
parties to this Agreement agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
SECTION 1.1 THE MERGER. Subject to the terms and conditions of this
Agreement and applicable provisions of the Delaware General Corporation Law
("DGCL"), at the Effective Time: (i) Acquisition Sub will be merged with and
into USCS; (ii) the separate existence of Acquisition Sub will cease and USCS
will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and (iii) the name of the Surviving Corporation will be USCS
from and after the Effective Time, and without any further action on the part
of any Person, the Merger will have all the effects provided by applicable
Legal Requirements, including Sections 251 and 259 of the DGCL, the effects
described in Section 2.1 with respect to the capital stock of Acquisition Sub
and USCS and, subject to applicable Legal Requirements, the following
additional effects as of the Effective Time:
(A) CERTIFICATE OF INCORPORATION. The certificate of incorporation of
Acquisition Sub (the "Certificate of Incorporation"), will become the
certificate of incorporation of the Surviving Corporation, and such
Certificate of Incorporation may thereafter be amended and/or restated as
provided therein and by the DGCL.
(B) BYLAWS. The bylaws of Acquisition Sub, as in effect immediately prior
to the Effective Time, will become the bylaws of the Surviving Corporation,
and such bylaws may thereafter be amended or repealed in accordance with
their terms and the Certificate of Incorporation and as provided by the
DGCL.
A-1
<PAGE>
(C) DIRECTORS. The directors of Acquisition Sub immediately prior to the
Effective Time will become the directors of the Surviving Corporation, each
to hold office in accordance with the Certificate of Incorporation and
bylaws of the Surviving Corporation and the DGCL and until the earlier of
such director's resignation or removal or such director's successor is duly
elected and qualified, as the case may be.
(D) OFFICERS. The officers of USCS immediately prior to the Effective
Time will become the officers of the Surviving Corporation, each to hold
office in accordance with the Certificate of Incorporation and bylaws of
the Surviving Corporation and the DGCL and until the earlier of such
officer's resignation or removal or such officer's successor is duly
appointed and qualified, as the case may be.
(E) PROPERTIES AND LIABILITIES. All the properties, rights, privileges,
powers and franchises of USCS and Acquisition Sub will vest in the
Surviving Corporation, and all debts, liabilities, agreements and duties of
USCS and Acquisition Sub will become the debts, liabilities, agreements and
duties of the Surviving Corporation.
(F) NEW DST DIRECTORS. George Argyros and James Castle, Directors of
USCS, will become members of the Board of Directors of DST, in the classes
with terms expiring, respectively, in 2001 and 2000, to hold office in
accordance with the certificate of incorporation and bylaws of DST and the
DGCL and until the earlier of their resignation or removal or their
successors are duly elected and qualified.
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. Subject to the terms and
conditions of this Agreement, on the Closing Date the parties will prepare,
sign and acknowledge, in accordance with the DGCL, a certificate of merger
(the "Certificate of Merger") and deliver the Certificate of Merger to the
Secretary of State of the State of Delaware (the "Secretary") for filing
pursuant to the DGCL. The Merger will become effective upon the filing of the
Certificate of Merger with the Secretary. As used in this Agreement, the
"Effective Time" means the time at which the Certificate of Merger is filed
with the Secretary.
ARTICLE II
CONVERSION OF CAPITAL STOCK
SECTION 2.1 CONVERSION OF STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of DST, Acquisition Sub, USCS or the
holders of any of the following securities:
(a) Each share of USCS Common Stock outstanding immediately prior to the
Effective Time (except shares subject to Section 2.1(b)), shall be
converted into the right to receive, and there shall be paid and issued as
provided in this Agreement in exchange for such share, .62 shares of DST
Common Stock (the "Exchange Ratio"), plus cash in lieu of any fractional
share as provided in Section 2.4.
(b) Each share of capital stock of USCS (the "USCS Stock") issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by USCS or any Subsidiary of USCS, or by DST or any Subsidiary
of DST, if any, will be canceled and retired, and no DST Common Stock or
other consideration will be delivered in exchange therefor.
(c) The shares of common stock, par value $.01 per share, of Acquisition
Sub issued and outstanding immediately prior to the Effective Time will be
converted into and will thereafter evidence and become one thousand (1,000)
shares of validly issued, fully paid, and nonassessable common stock, par
value $.01 per share, of the Surviving Corporation.
(d) In the event DST changes the number of shares of DST Common Stock
issued and outstanding after the date of this Agreement and prior to the
Effective Time as a result of a stock split, stock dividend, or similar
recapitalization with respect to DST Common Stock and the record date
therefor (in the case of a stock dividend) or the effective date thereof
(in the case of a stock split or similar recapitalization for which a
record date is not established) is after the date of this Agreement and
prior to the Effective Time, the Exchange Ratio will be appropriately
adjusted to reflect such stock split, stock dividend or similar
recapitalization. The issuance of shares of DST Common Stock upon exercise
of options, warrants or other rights to purchase such stock shall not be
deemed an event requiring any adjustment pursuant to this Section 2.1(d).
A-2
<PAGE>
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(A) EXCHANGE AGENT. As of the Effective Time, DST shall enter into an
agreement with a bank or trust company selected by DST and reasonably
acceptable to USCS to act as exchange agent (the "Exchange Agent") in
connection with the surrender of certificates that, prior to the Effective
Time, evidenced outstanding shares of USCS Common Stock ("USCS Stock
Certificates"). On or prior to the Closing Date, DST will deposit with the
Exchange Agent for exchange in accordance with this Section 2.2 certificates
evidencing the shares of DST Common Stock to be issued in the Merger ("DST
Certificates"), which shares of DST Common Stock will be deemed to be issued
at the Effective Time. At and following the Effective Time, DST will deliver
to the Exchange Agent such cash as may be required from time to time to make
payments of cash in lieu of fractional shares of DST Common Stock in
accordance with Section 2.4.
(B) EXCHANGE. As soon as practicable after the Effective Time, DST will
cause the Exchange Agent to mail to each Person who was a holder of record of
USCS Common Stock at the Effective Time: (i) a letter of transmittal (which
will specify that delivery will be effective, and risk of loss and title to
any USCS Stock Certificates will pass, only upon delivery of USCS Stock
Certificates to the Exchange Agent and will be in such form and will have such
other provisions that are specified by DST and reasonably acceptable to USCS);
and (ii) instructions for use in effecting the surrender of USCS Stock
Certificates in exchange for DST Certificates (together with any dividend or
distribution with respect thereto made after the Effective Time and any cash
to be paid in lieu of fractional shares of DST Common Stock pursuant to
Section 2.4). Upon surrender of a USCS Stock Certificate for cancellation to
the Exchange Agent or to such other agent or agents as may be appointed by
DST, together with such letter of transmittal, duly executed, and such other
documents as may be required by the Exchange Agent or such other agent, the
holder of such USCS Stock Certificate will be entitled to receive in exchange
therefor DST Certificates representing the number of whole shares of DST
Common Stock that such holder has the right to receive pursuant to this
Agreement (together with any dividend or distribution with respect thereto
made after the Effective Time and any cash to be paid in lieu of fractional
shares of DST Common Stock pursuant to Section 2.4) and each USCS Stock
Certificate so surrendered will be canceled. In the event of a transfer of
ownership of USCS Common Stock that is not registered in the transfer records
of USCS, DST Certificates representing the proper number of shares of DST
Common Stock may be issued to a Person other than the Person in whose name the
surrendered USCS Stock Certificate is registered if the USCS Stock Certificate
representing such USCS Common Stock is presented to the Exchange Agent
accompanied by all documents required to evidence and effect such transfer and
by evidence reasonably satisfactory to DST that any applicable stock transfer
tax has been paid. DST will not directly or indirectly pay or reimburse any
Person for any transfer taxes. If any DST Certificates are to be delivered to
a Person other than the Person in whose name USCS Stock Certificates
surrendered in exchange therefor are registered, it will be a condition to the
delivery of such DST Certificates that USCS Stock Certificates so surrendered
are properly endorsed or accompanied by appropriate stock powers and otherwise
in proper form for transfer, that such transfer otherwise is proper and that
the Person requesting such transfer pay to the Exchange Agent any transfer or
other taxes payable by reason of the foregoing or establishes to the
satisfaction of the Exchange Agent that such taxes have been paid or are not
required to be paid.
(C) CERTIFICATES NOT EXCHANGED. After the Effective Time, each outstanding
USCS Stock Certificate will, until surrendered for exchange in accordance with
this Section 2.2, be deemed for all purposes to evidence ownership of the
number of whole shares of DST Common Stock into which the shares of USCS
Common Stock (which, prior to the Effective Time, were represented thereby)
are converted in accordance with Section 2.1, together with the right to
receive any dividend or distribution with respect thereto made after the
Effective Time, subject to Section 2.3, and any cash to be paid in lieu of
fractional shares of DST Common Stock pursuant to Section 2.4.
(D) EXPENSES. Except as otherwise expressly provided in this Agreement, DST
will pay all charges and expenses, including those of the Exchange Agent, in
connection with the exchange of shares of DST Common Stock for shares of USCS
Common Stock, except any charges or expenses that are otherwise solely the
liability of one or more holders of USCS Common Stock. Any DST Certificates
deposited with the Exchange Agent that
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remain unclaimed by the former stockholders of USCS after six months following
the Effective Time will be delivered to DST upon its demand, and any former
stockholders of USCS who have not then complied with the instructions for
exchanging their USCS Stock Certificates will thereafter look only to DST for
exchange of USCS Stock Certificates and for any dividend or distribution with
respect thereto made after the Effective Time and any cash to be paid in lieu
of fractional shares of DST Common Stock pursuant to Section 2.4.
SECTION 2.3 DIVIDENDS AND OTHER DISTRIBUTIONS. No dividends or other
distributions declared or made after the Effective Time with respect to shares
of DST Common Stock with a record date after the Effective Time will be paid
to the holder of any unsurrendered USCS Stock Certificate with respect to the
shares of DST Common Stock issuable upon surrender thereof until the holder of
such USCS Stock Certificate surrenders such USCS Stock Certificate in
accordance with Section 2.2. Subject to the effect of applicable Legal
Requirements, following surrender of any such USCS Stock Certificate, DST will
pay or cause to be paid, without interest, to the record holder of DST
Certificates issued in exchange therefor, (a) at the time of such surrender,
the amount of cash in lieu of fractional shares of DST Common Stock to which
such holder is entitled pursuant to Section 2.4 and the amount, if any, of
dividends or other distributions by DST with a record date after the Effective
Time theretofore paid with respect to such whole shares of DST Common Stock
and (b) at the appropriate payment date, the amount of dividends or other
distributions (if any) by DST with a record date after the Effective Time but
prior to surrender of such USCS Stock Certificate and a payment date
subsequent to such surrender payable with respect to such whole shares of DST
Common Stock.
SECTION 2.4 NO FRACTIONAL SHARES.
(A) CASH PAYMENT IN LIEU OF FRACTIONAL SHARES. No certificates or scrip
representing fractional shares of DST Common Stock will be issued upon the
surrender of USCS Stock Certificates pursuant to Section 2.2. No such
fractional interest will entitle the owner thereof to any rights as a security
holder of DST. In lieu of any such fractional shares of DST Common Stock, each
holder of USCS Common Stock entitled to receive shares of DST Common Stock in
the Merger, upon surrender of such Person's USCS Stock Certificates for
exchange pursuant to Section 2.2, will be entitled to receive an amount in
cash (without interest), rounded up to the nearest cent, determined by
multiplying the fractional share interest in DST Common Stock to which such
holder would otherwise be entitled (after taking into account all shares of
USCS Common Stock held of record by such holder immediately prior to the
Effective Time) by the Market Price of one share of DST Common Stock at the
Effective Time.
(B) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares
of USCS Common Stock in lieu of any fractional shares of DST Common Stock, DST
will promptly deposit with the Exchange Agent cash in the required amounts and
the Exchange Agent will mail such amounts without interest to such holders;
provided however, that no such amount will be paid to any holder with respect
to any USCS Stock Certificate prior to the surrender by such holder of such
USCS Stock Certificate.
SECTION 2.5 NO LIABILITY. None of DST, Acquisition Sub, USCS, the Surviving
Corporation or the Exchange Agent will be liable to any holder of shares of
USCS Common Stock for any shares of DST Common Stock, dividends or
distributions with respect thereto or cash payable in lieu of fractional
shares of DST Common Stock delivered to a state abandoned property
administrator or other public official pursuant to any applicable abandoned
property, escheat or similar law.
SECTION 2.6 LOST CERTIFICATES. If any USCS Stock Certificate is lost, stolen
or destroyed, the Exchange Agent will issue in exchange for such lost, stolen
or destroyed USCS Stock Certificate the shares of DST Common Stock (and any
dividend or distribution with respect thereto made after the Effective Time
and any cash payable in lieu of fractional shares of DST Common Stock pursuant
to Section 2.4) deliverable in respect thereof as determined in accordance
with the terms of this Agreement, subject to the condition that the Person to
whom the DST Common Stock (and any dividend or distribution with respect
thereto made after the Effective Time and any cash payable in lieu of
fractional shares pursuant to Section 2.4) is to be issued shall have (a)
delivered to DST an affidavit claiming such USCS Stock Certificate to be lost,
stolen, or destroyed and (b) if
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required by DST, give DST an indemnity agreement and bond satisfactory to DST
against any claim that may be made against DST with respect to USCS Stock
Certificate alleged to have been lost, stolen or destroyed.
SECTION 2.7 TREATMENT OF STOCK OPTIONS, ETC. At the Effective Time, each
outstanding stock option, warrant or other right to acquire shares of USCS
Common Stock, identified in Section 3.2(b) of the USCS Disclosure Schedule
("USCS Options"), whether or not exercisable, as of the Effective Time will be
converted into and become rights with respect to DST Common Stock, and DST
shall assume each USCS Option, in accordance with the terms and conditions of
the stock option, warrant or other agreement by which it is evidenced
(including, without limitation, continuing the qualification as incentive
stock options of any options that qualify as such under Section 422 of the
Code), except that from and after the Effective Time, (i) each USCS Option
assumed by DST may be exercised solely for shares of DST Common Stock, (ii)
the number of shares of DST Common Stock subject to such USCS Option will be
equal to the number of shares of USCS Common Stock subject to such USCS Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded down to the nearest whole share, and (iii) the per share exercise
price under each such USCS Option will be adjusted by dividing the per share
exercise price under each such USCS Option by the Exchange Ratio and rounding
up to the nearest cent. Notwithstanding the provisions of clause (ii) of the
preceding sentence, DST will not be obligated to issue any fraction of a share
of DST Common Stock upon exercise of USCS Options.
SECTION 2.8 CLOSING OF USCS' TRANSFER BOOKS. At the Effective Time, the
stock transfer books of USCS will be closed and no transfer of shares of USCS
Common Stock will be made thereafter. In the event that, after the Effective
Time, USCS Stock Certificates are presented to the Surviving Corporation, they
will be canceled and exchanged for DST Certificates (and, if required, cash)
as provided in Section 2.2(b) and Section 2.4.
SECTION 2.9 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place (i) at the offices of Sonnenschein
Nath & Rosenthal, 4520 Main Street, Suite 1100, Kansas City, Missouri, at
10:00 a.m. local time on the date that is the first Business Day after the day
on which the last of the conditions set forth in Article VII (excluding
delivery of opinions and certificates) is fulfilled or waived or (ii) at such
other place and time as DST and USCS agree in writing. The date on which the
Closing occurs is referred to in this Agreement as the "Closing Date."
SECTION 2.10 NO REPURCHASE RIGHTS. The holders of DST Common Stock received
pursuant to the Merger or issuable pursuant to USCS Options shall have no
right to require DST or its Affiliates to repurchase any such shares of DST
Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF USCS
USCS represents and warrants to DST as follows:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. USCS is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware and has all requisite corporate power and authority to carry on
its business as it is now being conducted. USCS is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction
where the character of its properties owned or held under lease or the nature
of its activities makes such qualification necessary, except where the failure
to be so qualified will not, individually or in the aggregate, have a Material
Adverse Effect upon it. Set forth in Section 3.1 of the USCS Disclosure
Schedule (Exhibit A hereto) is a list of all jurisdictions in which USCS and
its Subsidiaries, Cabledata, Inc. and International Billing Services, Inc. are
each qualified as a foreign corporation.
SECTION 3.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of USCS
consisted of: (i) 40,000,000 shares of USCS Common Stock, of which 23,296,188
shares were issued and outstanding as of August 31, 1998;
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(ii) 10,000,000 shares of preferred stock, $.05 par value per share, none of
which are issued and outstanding; and (iii) 2,532,280 shares of USCS Common
Stock issuable as of September 2, 1998 with respect to all outstanding options
to acquire shares of USCS Common Stock.
(b) Set forth in Section 3.2(b) of the USCS Disclosure Schedule is a
schedule of all options, warrants, calls, subscriptions or other rights,
agreements or commitments of any kind (including preemptive rights), to which
USCS or any of its Subsidiaries is a party, relating to the issued or unissued
capital stock or other securities of USCS. Such schedule sets forth for all
such options, warrants, calls, subscriptions or other rights, agreements or
commitments that are outstanding (i) the names of the holders, (ii)
identification of the plan under which each such USCS Option was issued, (iii)
the number of shares of USCS Common Stock issuable pursuant thereto, (iv) the
exercise or conversion price, (v) the date of grant and date of expiration,
and (vi) as to options, which options are "incentive stock options" as defined
in Section 422(b) of the Code. All such options, warrants, calls,
subscriptions, rights, agreements and commitments have been validly issued in
accordance with the provisions of applicable plans or agreements and Legal
Requirements.
(c) All issued and outstanding shares of USCS Stock have been duly
authorized and validly issued and are fully paid and nonassessable, are not
subject to, and have not been issued in violation of, any preemptive rights,
and have not been issued in violation of any federal or state securities laws
or any other Legal Requirement and all corporate and other action on behalf of
USCS and the USCS Option Holders to permit assumption of the USCS Options
contemplated in Section 2.7 has been taken.
(d) Except as set forth in Section 3.2(d) of the USCS Disclosure Schedule,
since June 20, 1996 USCS has not reacquired any of its Common Stock or other
equity securities and all securities identified in such schedule were
reacquired in compliance with applicable Legal Requirements solely for use in
connection with Employee Benefit Plans and not in a manner that would prevent
the Merger from being accounted for as a "pooling-of-interest."
SECTION 3.3 SUBSIDIARIES. Set forth in Section 3.3 of the USCS Disclosure
Schedule is a schedule listing all the Equity Affiliates of USCS including the
percentage and nature of USCS' ownership of each Subsidiary and Equity
Affiliate of USCS. Each of USCS' Subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or formation and has the corporate power to carry on its
business as it is now being conducted or currently proposed to be conducted.
Each of USCS' Subsidiaries is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities makes
such qualification necessary except where the failure to be so qualified will
not have a Material Adverse Effect on USCS. All the outstanding shares of
capital stock of each of USCS' Subsidiaries are validly issued, fully paid and
nonassessable. Except as set forth in Section 3.3 of the USCS Disclosure
Schedule, the shares of capital stock or other ownership interests in each of
USCS' Subsidiaries or Equity Affiliates that are owned by USCS or by a
Subsidiary of USCS are owned free and clear of any Liens, are not subject to
and have not been issued in violation of any preemptive rights and have not
been issued in violation of any federal or state securities laws or any other
Legal Requirement. Except as set forth in Section 3.3 of the USCS Disclosure
Schedule, there are not, as of the date hereof, and at the Effective Time
there will not be, any outstanding options, warrants, calls or other rights,
agreements or commitments of any character, to which USCS or any of its
Subsidiaries is a party, relating to the issued or unissued capital stock,
other securities or other ownership interests in any of the Subsidiaries or
Equity Affiliates of USCS.
SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT. USCS has all requisite
corporate power and authority to execute and deliver this Agreement and,
subject to approval of this Agreement by the holders of USCS Stock, to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement have been duly authorized by USCS' Board of
Directors. Except for the approval of the holders of USCS Stock, no other
corporate proceedings on the part of USCS are necessary to authorize this
Agreement and the transactions contemplated by this Agreement. The Board of
Directors of USCS has received the opinion of Merrill Lynch &
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Co. as financial advisor to USCS dated as of the date of this Agreement
satisfactory to USCS and its Board of Directors to the effect that, as of the
date of this Agreement, the Exchange Ratio is fair to USCS' stockholders from
a financial point of view. This Agreement constitutes a valid and binding
obligation of USCS enforceable in accordance with its terms except (i) as
enforcement may be limited by bankruptcy, insolvency or other similar Legal
Requirements affecting the enforcement of creditors' rights generally, (ii) as
the availability of indemnification and other remedies may be limited by
federal and state securities laws and (iii) for limitations imposed by general
principles of equity.
SECTION 3.5 NO BREACH; REQUIRED CONSENTS. The execution and delivery of this
Agreement by USCS does not, and the consummation of the transactions
contemplated by this Agreement by USCS will not: (a) subject to the approval
of holders of USCS Stock, violate or conflict with the certificate of
incorporation or bylaws of USCS; (b) except as set forth in Section 3.5 of the
USCS Disclosure Schedule, constitute a breach or default (or an event that
with notice or lapse of time or both would become a breach or default) or give
rise to any Lien, third-party right of termination, cancellation, modification
or acceleration under any agreement or undertaking to which USCS is a party or
by which it is bound, except where such breach, default, Lien, third-party
right of termination, cancellation, modification, or acceleration would not
have a Material Adverse Effect on USCS; or (c) subject to obtaining the
consents, approvals or authorizations and making the filings or registrations
described in Section 3.6, constitute a violation of any Legal Requirement.
SECTION 3.6 CONSENTS AND APPROVALS. Except as set forth in Section 3.6 of
the USCS Disclosure Schedule, neither the execution and delivery of this
Agreement by USCS nor the consummation of the transactions contemplated by
this Agreement by USCS will require USCS to make any filing or registration
with, or obtain any authorization, consent or approval of, any Governmental
Entity or any other Person, except those required in connection, or in
compliance, with the provisions of (i) the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), (ii) the Securities Act,
(iii) the Exchange Act and (iv) the corporation, securities or blue sky laws
or regulations, or similar Legal Requirements, of the various states of the
United States.
SECTION 3.7 REPORTS AND FINANCIAL STATEMENTS.
(A) SEC REPORTS. USCS has filed all required forms, reports and documents
required to be filed with the SEC since June 20, 1996 (collectively, the "USCS
SEC Reports"). As of their respective dates or effective dates and except as
the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of
USCS SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading insofar as such statements relate to or affect USCS or its
Subsidiaries. USCS has delivered or made available to DST, in the form filed
with the SEC, all USCS SEC Reports.
(B) FINANCIAL STATEMENTS. The audited consolidated financial statements of
USCS contained in USCS SEC Reports comply in all material respects with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto) and present fairly USCS' consolidated
financial condition and the results of its operations as of the relevant dates
thereof and for the periods covered thereby. The unaudited consolidated
interim financial statements of USCS contained in USCS SEC Reports comply in
all material respects with applicable accounting requirements and with the
published rules and regulations of the SEC with respect thereto, were prepared
on a basis consistent with prior interim periods (except as required by
applicable changes in GAAP or in SEC accounting policies) and include all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of USCS' consolidated financial condition and results of
operations for such periods.
(C) ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.7(c) of the
USCS Disclosure Schedule, since the date of the most recent consolidated
balance sheet of USCS included in USCS' Quarterly
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Report on Form 10-Q filed with the SEC for the quarter ended June 30, 1998
(the "Most Recent USCS Balance Sheet"), there has not been any: (i)
transaction, commitment, dispute or other event or condition (financial or
otherwise) of any character (whether or not in the ordinary course of
business) that, individually or in the aggregate, has had, or would have, a
Material Adverse Effect on USCS; (ii) any declaration, setting aside or
payment of any dividend or other distribution (whether in cash, stock or
property) with respect to the capital stock of USCS; or (iii) entry into any
commitment or transaction material to USCS and its Subsidiaries taken as a
whole (including any borrowing or sale of assets) except in the ordinary
course of business consistent with past practice.
(D) ABSENCE OF UNDISCLOSED LIABILITIES. USCS does not have any indebtedness,
liability or obligation required by GAAP to be reflected on a balance sheet
that is not reflected or reserved against in the Most Recent USCS Balance
Sheet except (i) liabilities, obligations and contingencies that were incurred
after the date of the Most Recent USCS Balance Sheet in the ordinary course of
business and which would not in the aggregate have a Material Adverse Effect
on USCS or its Subsidiaries and (ii) other liabilities, obligations and
contingencies that would not, in the aggregate, have a Material Adverse Effect
on USCS.
SECTION 3.8 COMPLIANCE WITH LAW; LITIGATION.
(a) Except as set forth in Section 3.8 of the USCS Disclosure Schedule, USCS
and its Subsidiaries hold all permits, licenses, franchises, variances,
exemptions, concessions, leases, instruments, orders and approvals (the "USCS
Permits") of all Governmental Entities required to be held under applicable
Legal Requirements and will not lose any USCS Permit as a result of the
Merger, except such USCS Permits the failure of which to hold, individually or
in the aggregate, does not have and, to the Knowledge of USCS, in the future
is not likely to have, a Material Adverse Effect on USCS. USCS and its
Subsidiaries are in compliance with the terms of USCS Permits, except for such
failures to comply that, individually or in the aggregate, would not have a
Material Adverse Effect on USCS. The businesses of USCS and its Subsidiaries
are not being conducted in violation of any Legal Requirement, except for such
violations which, individually or in the aggregate, would not have a Material
Adverse Effect on USCS. No investigation or review by any Governmental Entity
with respect to USCS or any of its Subsidiaries is pending, or, to the
Knowledge of USCS, threatened, nor has any Governmental Entity indicated to
USCS in writing an intention to conduct the same.
(b) Set forth in Section 3.8(b) of the USCS Disclosure Schedule is a
schedule listing every suit, action or proceeding pending or, to the Knowledge
of USCS, threatened against or affecting USCS or any of its Subsidiaries and
every judgment, decree, injunction, rule or order of any Governmental Entity
or arbitrator outstanding against USCS or any of its Subsidiaries and none of
the suits, actions, proceedings, judgments, decrees, injunctions, rules or
orders listed in that Schedule has had or is likely to have a Material Adverse
Effect on USCS.
(c) Neither USCS nor any of its Subsidiaries is subject to Section 2115 of
the California Corporation Code.
SECTION 3.9 TITLE TO ASSETS. USCS and its Subsidiaries have valid title to
all material assets reflected on the Most Recent USCS Balance Sheet, free and
clear of any Lien except: (a) landlord's Liens and Liens for property taxes
not delinquent; (b) Liens that were created in the ordinary course of business
and do not materially detract from the value of such assets or materially
impair the use thereof in the operation of USCS' business; (c) leased
interests in property owned by others; and leased interests in property leased
to others; and (d) zoning, building or similar restrictions, easements,
rights-of-way, reservations of rights, conditions, or other restrictions or
encumbrances relating to or affecting real property that do not, individually
or in the aggregate, materially interfere with the use of such real property
in the operation of USCS' business.
SECTION 3.10 EMPLOYEE MATTERS. Except as set forth in Section 3.10 of the
USCS Disclosure Schedule, USCS and its Subsidiaries are in compliance with all
applicable Legal Requirements relating to the employment of employees,
including any obligations relating to employment standards legislation, pay
equity, occupational health and safety, labor relations and human rights
legislation except for such failures to comply as do not have, and to USCS'
Knowledge are not likely to have, a Material Adverse Effect on USCS. None of
the employees of
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USCS or its Subsidiaries are represented by any labor union and there is to
the knowledge of USCS no organizing effort underway currently to form any such
union.
SECTION 3.11 ERISA.
(a) Set forth in Section 3.11(a) of the USCS Disclosure Schedule is a
schedule listing all "employee benefit plans," as defined in ERISA, and all
other material employee benefit arrangements, programs or payroll practices,
including severance pay, sick leave, vacation pay, salary continuation for
disability, deferred compensation, retirement income, bonus, stock purchase or
option, hospitalization, medical insurance, life insurance, tuition
reimbursement, employee assistance and employee discounts, that USCS or any of
its ERISA Affiliates maintains or has or may have an obligation to make
contributions to (the "USCS Benefit Plans").
(b) Neither USCS nor any of its ERISA Affiliates is or has been a
participating employer in any multiemployer plan within the meaning of Section
3(37) of ERISA. Neither USCS nor any of its ERISA Affiliates has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on USCS. To the
Knowledge of USCS, neither USCS nor any of its ERISA Affiliates reasonably
expects to incur any liability due to a withdrawal from or termination or
reorganization of a multiemployer plan, except any such liability that would
not have a Material Adverse Effect on USCS.
(c) Except as set forth in Section 3.11(c) of the USCS Disclosure Schedule,
each USCS Benefit Plan that is intended to qualify under Section 401 of the
Code, and a form of trust that is similar in all material respects to the
trust maintained pursuant thereto, have been determined to be exempt from
federal income taxation under Section 501 of the Code by the Internal Revenue
Service, and to the Knowledge of USCS, nothing has occurred with respect to
any such plan since such determination that is likely to result in the loss of
such exemption or the imposition of any material liability, penalty or tax
under ERISA or the Code.
(d) Each USCS Benefit Plan has at all times been maintained and operated in
all material respects, by its terms and in operation, in accordance with all
applicable Legal Requirements.
(e) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under USCS Benefit
Plans or pursuant to applicable Legal Requirements (without regard to any
waivers granted under Section 412 of the Code) to any funds or trusts
established thereunder or in connection therewith have been made by the due
date thereof (including any valid extension or grace period) and no
accumulated funding deficiency exists with respect to any of USCS Benefit
Plans subject to Section 412 of the Code.
(f) Except as set forth in Section 3.11(f) of the USCS Disclosure Schedule,
to the Knowledge of USCS, there have been no violations of ERISA or the Code
with respect to the filing of applicable reports, documents and notices
regarding USCS Benefit Plans with the Secretary of Labor, the Pension Benefit
Guaranty Corporation, and the Secretary of the Treasury or the furnishing of
such reports, documents and notices to the participants or beneficiaries of
USCS Benefit Plans, except such violations that, individually or in the
aggregate, would not have a Material Adverse Effect on USCS.
(g) There are no pending actions, claims or lawsuits that have been asserted
or instituted against USCS Benefit Plans, the assets of any of the trusts
under such plans or the plan sponsor or the plan administrator, or against any
fiduciary of USCS Benefit Plans, with respect to the operation of such plans
(other than routine benefit claims), nor does USCS have Knowledge of facts
that reasonably could be expected to form the basis for any such action, claim
or lawsuit.
(h) Neither USCS nor any of its ERISA Affiliates maintain, or has in the
past maintained, a defined benefit pension plan which is or was subject to
Title IV of ERISA.
(i) The current value of vested accrued benefits under each USCS Benefit
Plan which is subject to Title IV of ERISA does not exceed the current value
of all of the assets of such Plan allocable to such vested accrued
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benefits. For purposes of the representations in the preceding sentence, the
terms "current value" and "accrued benefit" have the meanings specified in
Section 3 of ERISA.
(j) There are no accrued liabilities under any USCS Benefit Plan which are
not provided for on the books or financial statements of USCS or its ERISA
Affiliates, or which have not been fully provided for by contributions to such
Plans.
SECTION 3.12 APPROVAL.
(a) The Board of Directors of USCS at a meeting duly called and held: (i)
determined that the Merger is advisable and fair and in the best interests of
USCS and its stockholders; (ii) approved the Merger and this Agreement and the
transactions contemplated by this Agreement in accordance with the provisions
of Section 251 of the DGCL; (iii) recommended the approval of this Agreement
and the Merger by the holders of USCS Stock and directed that the Merger be
submitted for consideration by USCS' stockholders at the Meeting; and (iv)
adopted a resolution having the effect of causing the Merger not to be subject
to Section 203 of the DGCL or to the USCS Rights Plan.
(b) The vote of a majority of the outstanding shares of USCS Stock is the
vote required for the adoption and approval of this Agreement, the Merger and
the other transactions contemplated by this Agreement.
SECTION 3.13 FINANCIAL ADVISOR/INVESTMENT BANKER. Except for amounts payable
to Merrill Lynch & Co., pursuant to the letter agreement dated July 21, 1998,
no broker, finder or investment banker is entitled to any brokerage, finder's
or other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
USCS or its Subsidiaries. There has been delivered to DST a true and complete
copy of the agreement pursuant to which Merrill Lynch & Co. has been retained
to act as financial advisor to USCS in connection with the Merger.
SECTION 3.14 TAXES. USCS and each of its Subsidiaries have timely filed all
Tax returns required to be filed by any of them and have timely paid or have
established an adequate reserve for the payment of all Taxes owed in respect
of the periods covered by such returns. The information contained in such Tax
returns is complete and accurate in all material respects. Neither USCS nor
any Subsidiary of USCS is delinquent in the payment of any Tax or other amount
owed to any Governmental Entity. Except as set forth in Section 3.14 of the
USCS Disclosure Schedule, there are no claims or investigations pending or, to
USCS' Knowledge, threatened against USCS or any of its Subsidiaries for past
Taxes, except claims and investigations that would not have a Material Adverse
Effect on USCS and adequate provision for which has been made on the Most
Recent Balance Sheet. None of USCS or its Subsidiaries has waived or extended
any applicable statute of limitations relating to the assessment of any Taxes
that would be payable by USCS or such Subsidiary.
SECTION 3.15 ENVIRONMENTAL LAWS.
(a) Each of USCS and its Subsidiaries is in compliance in all respects with
all Environmental Laws, except where the failure to so comply would not have a
Material Adverse Effect on USCS; and
(b) No orders, directions or notices have been received by USCS or its
Subsidiaries during the past five years pursuant to any Environmental Law and
no Governmental Entity has submitted to any of USCS and its Subsidiaries any
request for information pursuant to any Environmental Law, except as set forth
in Section 3.15(b) of the USCS Disclosure Schedule.
SECTION 3.16 TRANSACTIONS WITH AFFILIATES. Except as disclosed in USCS SEC
Reports, or as set forth in Section 3.16 of the USCS Disclosure Schedule,
there is no lease, sublease, indebtedness, contract, agreement, commitment,
understanding or other arrangement of any kind entered into by USCS with any
officer, director or stockholder of USCS or any "affiliate" or "associate" of
any of them (as those terms are defined in the Exchange Act) or of USCS,
except, in each case, for compensation paid to directors and officers
consistent with previously established policies, reimbursements of ordinary
and necessary expenses incurred in connection with their employment and
amounts paid or benefits granted pursuant to USCS Benefit Plans.
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SECTION 3.17 MATERIAL CONTRACTS. Set forth in Section 3.17 of the USCS
Disclosure Schedule is a schedule of each contract or agreement to which USCS
or any of its Subsidiaries is a party which involves more than $2.5 Million in
expenses per year or more than $3.0 Million in revenues per year. Each of USCS
and its Subsidiaries are in compliance with each contract or agreement listed
in Section 3.17 of the USCS Disclosure Schedule, and each such contract or
agreement is in full force and effect, without default by USCS or any such
Subsidiary and, to the Knowledge of USCS, without any breach or default by any
other party thereto, except where such breach or default would not result in a
Material Adverse Effect. Except as set forth in Section 3.17 of the USCS
Disclosure Schedule, no written notice has been received by USCS or any such
Subsidiary or, to USCS' Knowledge, threatened regarding termination,
suspension or material alteration or amendment of any such contract or
agreement. Each such contract or agreement is a valid and binding obligation
of USCS or its Subsidiary, as the case may be, in accordance with its terms,
except (i) as enforcement may be limited by bankruptcy, insolvency or other
similar Legal Requirements affecting the enforcement of creditors' rights
generally, (ii) as the availability of indemnification and other remedies may
be limited by federal and state securities laws and (iii) for limitations
imposed by general principles of equity. Also set forth in Section 3.17 of the
USCS Disclosure Schedule is a list of the companies who have indicated an
intention to convert cable subscribers to USCS' software and systems within
the next 18 months and the approximate number of such intended subscribers.
SECTION 3.18 INTELLECTUAL PROPERTY. Set forth in Section 3.18 of the USCS
Disclosure Schedule is a schedule listing all material Intellectual Property
which is owned by, registered in the name of, licensed to, or used in the
business of, USCS or its Subsidiaries, except for "shrink-wrapped end-user
licenses." USCS has a policy of obtaining a license for all computer software
and to USCS' Knowledge this policy is enforced except for non-material
violations. The Intellectual Property identified in Section 3.18 of the USCS
Disclosure Schedule is sufficient to conduct USCS' business as currently
operated by USCS. Except as described in Section 3.18 of the USCS Disclosure
Schedule, (a) to USCS' Knowledge, there is no restriction affecting the use of
any of the Intellectual Property, except for restrictions on the use of
Intellectual Property licensed to USCS as set forth in the applicable license
agreement and except for such restrictions that do not have a Material Adverse
Effect, (b) no license with a term of more than ten years, or which authorizes
a sub-license of any license, has been granted by USCS or its Subsidiaries to
any third party with respect thereto, and (c) to USCS' Knowledge, no third
party has any right, title or interest in, or claims to, the Intellectual
Property, except for rights granted to USCS pursuant to licenses. Each item of
Intellectual Property owned by, or licensed to, USCS or its Subsidiaries, is
valid and enforceable, and to USCS' Knowledge and except as set forth in
Section 3.17 of the USCS Disclosure Schedule, (a) is not being, and has not
been, challenged or infringed, (b) is not, and has not been, involved in any
pending or threatened administrative or judicial proceeding, and (c) has not
conflicted, and does not conflict, with any rights or alleged rights of any
Person. To USCS' Knowledge and except as set forth in Section 3.17 of the USCS
Disclosure Schedule, none of USCS' products or operations, or any products or
operation of any of its Subsidiaries, involves any infringement of any
proprietary or contractual right of any Person. None of the items of
Intellectual Property owned by, or licensed to, USCS or its Subsidiaries, are
subject to any liens or limitations on use by USCS or its Subsidiaries, or to
USCS' Knowledge, by any party granting rights to the Intellectual Property to
USCS or its Subsidiaries. To USCS' Knowledge and except as set forth in
Section 3.17 of the USCS Disclosure Schedule, no event has occurred that has
resulted in a default or violation, or which constitutes or may constitute a
default or violation, by USCS or its Subsidiaries with respect to any of the
Intellectual Property or with respect to any agreement relating directly to,
or affecting USCS' ownership rights in, the Intellectual Property.
SECTION 3.19 YEAR 2000 COMPLIANCE. USCS believes, and it has no information
to the contrary, that it has taken and is taking all reasonable steps to
assure that all of its proprietary hardware and proprietary computer software
that is licensed to others or used by USCS to provide services to its clients
or used otherwise in its business ("USCS Products") will be year 2000
compliant in accordance with Schedule 3.19. As used in this Agreement "year
2000 compliant" shall mean that the USCS Products will perform in accordance
with its specifications and the agreements under which they are provided to
USCS' clients or licensed or used to provide services to USCS' clients
regardless of the year of the date data encountered by such products,
provided, that
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such date data falls within the period ending in the year 2060; provided,
further, that (i) all date data received for use by the USCS Products are
accurate and in formats defined by the USCS Products from time to time, and
(ii) all date data generated by the USCS Products are accepted in formats
defined by the USCS Products from time to time. Notwithstanding the foregoing,
USCS makes no representation or warranty respecting user defined fields that
contain dates, or as to the functionality of the USCS Products in
circumstances where data received from any third party system are invalid,
incorrect or otherwise corrupt. Notwithstanding the foregoing, USCS further
represents and warrants that it is not currently in violation of any year 2000
warranty in any contract to which it is a party and that it is taking all
reasonable steps under its year 2000 compliance program to avoid any future
violation of any such warranty. Section 3.19 of the USCS Disclosure Schedule
lists all contracts in which USCS has made a specific year 2000 warranty. USCS
further represents and warrants that (i) it has made adequate provision for
the costs of its year 2000 compliance program in its current year budget and
in all financial projections for 1998, 1999 and 2000 which have been provided
to DST and (ii) it has taken the appropriate steps in connection with
achieving year 2000 compliance of the USCS Products including but not limited
to:
(a) It has identified all hardware, systems and applications that must be
modified except where the absence of Year 2000 compliance for any such
hardware, systems or applications would not have a Material Adverse
Effect;
(b) It has evaluated alternatives (modification, replacement or
discontinuance); and
(c) It has established plans and programs which include timely milestones
and appropriate testing to ensure that such hardware, systems and
applications identified in subparagraph (a) above shall be year 2000
compliant by June 30, 1999.
USCS further represents and warrants that its year 2000 compliance program
includes (i) projects to ensure that third parties are year 2000 compliant
respecting software, equipment and services provided to USCS; (ii) selection
of alternative vendors on a timely basis; and (iii) interoperability testing
with clients and other third parties.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DST AND ACQUISITION SUB
DST and Acquisition Sub represent and warrant to USCS as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Each of DST and Acquisition Sub
is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and has all requisite corporate power and
authority to carry on its business as it is now being conducted. Each of DST
and Acquisition Sub is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities make such
qualification necessary, except where the failure to be so qualified will not,
individually or in the aggregate, have a Material Adverse Effect on it.
SECTION 4.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of DST
consisted of: (i) 125,000,000 shares of DST Common Stock, of which 48,997,772
were issued and outstanding as of August 31, 1998; (ii) 10,000,000 shares of
preferred stock, par value $.01 per share, of which no shares are issued and
outstanding; and (iii) 3,658,090 shares of DST Common Stock issuable as of
August 31, 1998 with respect to all outstanding options to acquire shares of
DST Common Stock.
(b) All shares of DST Common Stock to be issued in connection with the
Merger, when issued in accordance with this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable, and, assuming the
information provided to DST by USCS is accurate and complete, will be issued
in material compliance with all federal and state securities laws and any
other Legal Requirements.
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(c) As of the date of this Agreement, the authorized capital stock of
Acquisition Sub consisted of 1,000 shares of Common Stock. Acquisition Sub is
a direct, wholly owned subsidiary of DST. DST will own all of the issued and
outstanding stock of (i) Acquisition Sub immediately prior to the Effective
Time and (ii) Surviving Corporation immediately after the Effective Time.
SECTION 4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. DST has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions
contemplated by this Agreement by DST have been duly authorized by the Board
of Directors of DST, and no other corporate proceedings on the part of DST
(other than the approval of DST stockholders as contemplated by this
Agreement) are necessary to authorize this Agreement and the transactions
contemplated by this Agreement. This Agreement constitutes a valid and binding
obligation of DST enforceable against it in accordance with its terms, except
(i) as enforcement may be limited by bankruptcy, insolvency or other similar
Legal Requirements affecting the enforcement of creditors' rights generally,
(ii) as the availability of indemnification and other remedies may be limited
by federal and state securities laws and (iii) for limitations imposed by
general principles of equity.
SECTION 4.4 NO BREACH; REQUIRED CONSENTS. The execution and delivery of this
Agreement by DST does not, and the consummation of the transactions
contemplated by this Agreement by DST and Acquisition Sub will not: (a)
subject to approval of holders of DST Common Stock, violate or conflict with
the certificate of incorporation or bylaws of DST or Acquisition Sub; (b)
constitute a breach or default (or an event that with notice or lapse of time
or both would become a breach or default) or give rise to any Lien, third-
party right of termination, cancellation, modification or acceleration under
any agreement or undertaking to which DST or Acquisition Sub is a party or by
which any of them is bound, except where such breach, default, Lien, third-
party right of termination, cancellation, modification or acceleration would
not have a Material Adverse Effect on DST or Acquisition Sub; or (c) subject
to obtaining the approvals and making the filings described in Section 4.5,
constitute a violation of any applicable Legal Requirement.
SECTION 4.5 CONSENTS AND APPROVALS. Neither the execution and delivery of
this Agreement by DST nor the consummation of the transactions contemplated by
this Agreement by DST and Acquisition Sub will require DST or Acquisition Sub
to make any filing or registration with, or obtain any authorization, consent
or approval of, any Governmental Entity, except those required in connection,
or in compliance, with the provisions of (i) the HSR Act, (ii) the Securities
Act of 1933, as amended (the "Securities Act"), (iii) the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and (iv) the corporation,
securities or blue sky laws or regulations, or similar Legal Requirements, of
various states of the United States.
SECTION 4.6 REPORTS AND FINANCIAL STATEMENTS.
(A) SEC REPORTS. DST has filed all required forms, reports and documents
required to be filed with the SEC since December 31, 1995 (collectively, the
"DST SEC Reports"). As of their respective dates or effective dates and except
as the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of
the DST SEC Reports, including any financial statements or schedules included
or incorporated by reference therein, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading insofar as such statements relate to or affect DST or its
Subsidiaries.
(B) FINANCIAL STATEMENTS. The audited consolidated financial statements of
DST contained in the DST SEC Reports comply in all material respects with
applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, were prepared in accordance with
GAAP applied on a consistent basis during the periods involved (except as may
be indicated in the notes thereto) and present fairly DST's consolidated
financial condition and the results of its operations as of the relevant dates
thereof and for the periods covered thereby. The unaudited consolidated
interim financial statements of DST contained in the DST SEC Reports comply in
all material respects with applicable accounting requirements and with the
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published rules and regulations of the SEC with respect thereto, were prepared
on a basis consistent with prior interim periods (except as required by
applicable changes in GAAP or in SEC accounting policies) and include all
adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of DST's consolidated financial condition and results of
operations for such periods.
(C) ABSENCE OF CERTAIN CHANGES. Since the date of the most recent
consolidated balance sheet of DST included in DST's Quarterly Report on Form
10-Q filed with the SEC for the quarter ended June 30, 1998 (the "Most Recent
DST Balance Sheet"), there has not been any: (i) transaction, commitment,
dispute or other event or condition (financial or otherwise) of any character
(whether or not in the ordinary course of business) that, individually or in
the aggregate, has had, or would have, a Material Adverse Effect on DST; (ii)
any declaration, setting aside or payment of any dividend or other
distribution (whether in cash, stock or property) with respect to the capital
stock of DST; or (iii) entry into any commitment or transaction material to
DST and its Subsidiaries taken as a whole (including any borrowing or sale of
assets) except in the ordinary course of business consistent with past
practice.
(D) ABSENCE OF UNDISCLOSED LIABILITIES. DST does not have any indebtedness,
liability or obligation required by GAAP to be reflected on a balance sheet
that is not reflected or reserved against in the Most Recent DST Balance Sheet
except (i) liabilities, obligations and contingencies that were incurred after
the date of the Most Recent DST Balance Sheet in the ordinary course of
business and which would not, in the aggregate, have a Material Adverse Effect
and (ii) other liabilities, obligations and contingencies that would not, in
the aggregate, have a Material Adverse Effect on DST.
SECTION 4.7 LITIGATION. Except as set forth in Section 4.7 of the DST
Disclosure Schedule, there is no suit, action or proceeding pending, or to the
knowledge of DST, threatened against or affecting DST or any of its
Subsidiaries or any judgment, decree, injunction, rule or order of any
Governmental Entity or arbitrator outstanding against DST or any of its
Subsidiaries that has had or is likely to have a Material Adverse Effect on
DST.
SECTION 4.8 NO BROKER. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of DST or Acquisition Sub.
SECTION 4.9 APPROVAL.
(a) The Board of Directors of DST and Acquisition Sub at meetings duly
called and held, respectively: (i) determined that the Merger is advisable and
fair and in the best interests of DST and its stockholders and Acquisition Sub
and its stockholder; (ii) approved the Merger and this Agreement and the
transactions contemplated by this Agreement; and (iii) recommended the
approval of this Agreement and the Merger by the holders of DST Common Stock
and by DST as the sole stockholder of Acquisition Sub and directed that the
Merger be submitted for consideration by DST's stockholders at the Meeting.
(b) The majority vote of the total votes cast at the Meeting with respect to
this Agreement and the Merger is the minimum vote required for the adoption
and approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1 CONDUCT OF BUSINESS OF USCS. Prior to the Effective Time, except
as contemplated, permitted or required by this Agreement:
(a) Except as set forth in Section 5.1 of the USCS Disclosure Schedule,
USCS will conduct, and will cause each of its Subsidiaries to conduct, its
business in the ordinary course in accordance with past practice, and will
use, and will cause each of its Subsidiaries to use, its reasonable best
efforts to preserve intact its
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present business organization and to preserve relationships with customers,
suppliers and others having business dealings with them.
(b) USCS will not, and will not permit any of its Subsidiaries to: (i)
amend or propose to amend the certificate of incorporation or bylaws of
USCS or any of its Subsidiaries; (ii) split, combine or reclassify the
outstanding capital stock of, or issue or authorize or propose the issuance
of any other securities in respect of, in lieu of or in substitution for
shares of capital stock of, or other ownership interests in, USCS or any of
its Subsidiaries; (iii) or declare, set aside or pay any dividend,
distribution, or similar payment to any stockholder, director or officer of
USCS or any of its Subsidiaries; (iv) directly or indirectly redeem,
purchase or otherwise acquire or agree to redeem, purchase or otherwise
acquire any shares of capital stock of, or other ownership interests in,
USCS or any of its Subsidiaries; or (v) agree to do any of the foregoing.
(c) USCS will not, and will not permit any of its Subsidiaries to: (i)
encumber, issue, deliver or sell or agree to issue, deliver or sell any
shares of capital stock of, or other equity interests (including any
option, warrant or other similar right to acquire any equity interest) in
USCS or any of its Subsidiaries, except for shares issued upon exercise of
options outstanding at the date of this Agreement which are exercised in
accordance with the terms of such options); (ii) acquire, lease or dispose
of any assets other than in the ordinary course of business consistent with
past practice; (iii) create, assume or incur any indebtedness except in the
ordinary course of business consistent with past practice; (iv) encumber
any of its assets other than in connection with equipment leases incurred
in the ordinary course of business consistent with past practice; (v) enter
into any other material transaction; (vi) make any payment with respect to
any indebtedness of USCS or its Subsidiaries except such payments that are
scheduled to come due prior to the Effective Time; (vii) acquire by merging
or consolidating with, or by acquiring assets of, or by purchasing an
ownership interest in, or by any other method, any business or any other
Person, except pursuant to agreements identified in Section 5.1(c) of the
USCS Disclosure Schedule; or (viii) agree to do any of the foregoing.
(d) Except as required to comply with applicable Legal Requirements or
existing USCS Benefit Plans, USCS will not, and will not permit any of its
Subsidiaries to: (i) adopt, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other USCS Benefit Plan, agreement,
trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee; (ii) increase in any
manner the compensation or benefits of any director, officer or employee
(except normal increases in the ordinary course of business consistent with
past practice); (iii) grant any award or option under any bonus, incentive,
performance or other compensation plan or arrangement or USCS Benefit Plan
(except as set forth in Section 5.1(d) to the USCS Disclosure Schedule);
(iv) take any action to fund or in any other way secure the payment of
compensation or benefits (including any option, warrant or other similar
right to acquire any equity interest) under any employee plan, agreement,
contract or arrangement or USCS Benefit Plan (except in the ordinary course
of business consistent with past practice); or (v) agree to do any of the
foregoing.
(e) USCS will not take or agree to take, and will cause its Subsidiaries
not to take or agree to take, any action that would: (i) make any
representation or warranty of USCS set forth in this Agreement untrue or
incorrect so as to cause the conditions set forth in Article VII of this
Agreement not to be fulfilled as of the Effective Time; or (ii) result in
any breach of this Agreement or cause any of the other conditions of this
Agreement not to be satisfied as of the Effective Time.
(f) USCS will not, and will not permit any of its Subsidiaries to enter
into any transaction with any officer, stockholder, director, consultant or
employee of USCS or any Subsidiary thereof or any person or entity that is
an "affiliate" or "associate" of any of the foregoing, as those terms are
defined in Rule 12b-2 under the Exchange Act, whether or not such
transaction would be in the ordinary course of business.
(g) USCS will take no action that reasonably could be expected to
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment under GAAP.
(h) USCS and its Subsidiaries will (i) not take any action to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making
or implementation of any proposal or offer (including, without
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limitation, any proposal or offer to its stockholders) with respect to a
merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, USCS or any of its Subsidiaries (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal"), or engage in
any negotiations concerning, or provide any confidential information or
data to, or have any discussions with, any person or other entity or group,
as defined in Section 13(d)(3) of the Exchange Act, relating to an
Acquisition Proposal, or otherwise facilitate any effort or attempt to make
or implement an Acquisition Proposal; (ii) immediately cease and cause to
be terminated any existing activities, discussions or negotiations with any
parties previously conducted with respect to any of the foregoing and take
the necessary steps to inform the individuals or entities referred to above
of the obligations undertaken in this Section 5.1(h); and (iii) notify DST
immediately if any such inquiries or proposals are received by, any such
information is requested from or any such negotiations or discussions are
sought to be initiated or continued with, USCS or any of its Subsidiaries.
Nothing contained in this Section 5.1(h) will prohibit the Board of
Directors of USCS from (1) furnishing information to, or entering into
discussions or negotiations with, any person or other entity or group that
makes an Acquisition Proposal or recommending to its stockholders that they
accept such Acquisition Proposal, if (A) the Board of Directors of USCS
reasonably determines in good faith, after consultation with outside legal
counsel, that such action is compelled by its fiduciary duties to
stockholders imposed by law, (B) prior to furnishing such information to,
or entering into discussions or negotiations with, such person or entity,
USCS provides written notice to DST to the effect that it is furnishing
information to, or entering into discussions or negotiations with, such
person or entity, and (C) subject to any confidentiality agreement with
such other party (which USCS determines in good faith, after consultation
with outside counsel, is required to be executed in order for the Board of
Directors to act in accordance with its fiduciary duties to stockholders
imposed by law), USCS keeps DST informed of the status (not the terms) of
any such discussions or negotiations; and (2) to the extent applicable,
complying with Rule 14e-2 promulgated under the Exchange Act with regard to
an Acquisition Proposal. Nothing in this Section 5.1(h) shall (x) permit
any party to terminate this Agreement (except as specifically provided in
Section 8.1(d)), (y) permit any party to enter into any agreement with
respect to an Acquisition Proposal during the term of this Agreement (it
being agreed that during the term of this Agreement, no party shall enter
into any agreement with any person that provides for, or in any way
facilitates, an Acquisition Proposal (other than a confidentiality
agreement in customary form)), or (z) breach any obligation of any party
under this Agreement.
(i) The Board of Directors of USCS will recommend to the stockholders of
USCS the approval of the Merger, unless the Board of Directors reasonably
determines in good faith in connection with an Acquisition Proposal, after
consultation with outside counsel, that such action would be inconsistent
with its fiduciary duties to stockholders as required by law and, if such
determination is made, will give written notice to DST of such
determination within two Business Days of the making of such determination.
Upon the issuance of such written notice to DST, and upon the written
election of DST, USCS will negotiate in good faith with DST for a period of
two Business Days regarding such adjustments in the terms of the Merger as
would enable the Board of Directors of USCS, consistent with its fiduciary
duties to the stockholders, to proceed to recommend the Merger to the
stockholders of USCS as contemplated in this Agreement, provided, that
there shall be no obligation, express or implied, on the part of DST to
agree to any terms or conditions which may be different from those set
forth in this Agreement.
(j) Upon the request of DST, USCS will prepare and deliver to DST, within
thirty days after such request, such financial statements (including
audited financial statements) as may be required by DST to meet its
financial reporting obligations (including requirements under applicable
securities laws).
(k) USCS shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code.
SECTION 5.2 CONDUCT OF BUSINESS OF DST. Prior to the Effective Time, except
as contemplated, permitted or required by this Agreement:
(a) DST will conduct, and will cause each of its Subsidiaries to conduct,
its business in the ordinary course in accordance with past practice, and
will use, and will cause each of its Subsidiaries to use, its
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reasonable best efforts to preserve intact its present business
organization and to preserve relationships with customers, suppliers and
others having business dealings with them.
(b) DST will not take or agree to take, and will cause its Subsidiaries
not to take or agree to take, any action that would (i) make any
representation or warranty of DST set forth in this Agreement untrue or
incorrect so as to cause the condition set forth in Article VII of this
Agreement not to be fulfilled as of the Effective Time or (ii) result in
any breach of this Agreement or cause any of the other conditions of this
Agreement not to be satisfied as of the Effective Time.
(c) The Board of Directors of DST will recommend to the stockholders of
DST the approval of the Merger.
(d) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment under GAAP.
(e) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS AND INFORMATION. USCS and its Subsidiaries will afford to
DST and to DST's accountants, counsel and other representatives full and
reasonable access during normal business hours (and at such other times as the
parties may mutually agree) throughout the period prior to the Effective Time
to all of USCS' and its Subsidiaries properties, books, contracts,
commitments, records and personnel, subject to the confidentiality
requirements set forth in Section 6.6.
SECTION 6.2 SEC FILINGS.
(a) USCS and DST will prepare jointly, and as soon as reasonably practicable
after the date of this Agreement, file with the SEC a joint proxy
statement/registration statement (the "Preliminary Joint Proxy
Statement/Prospectus") comprising preliminary proxy materials of USCS and DST
under the Exchange Act with respect to the Merger and a Registration Statement
on Form S-4 and preliminary prospectus of DST under the Securities Act with
respect to the DST Common Stock to be issued in the Merger, and will
thereafter use their respective reasonable best efforts to respond to any
comments of the SEC with respect thereto and to cause a definitive joint proxy
statement/registration statement (including all supplements and amendments
thereto, the "Joint Proxy Statement/Prospectus") and proxy to be mailed to
USCS' and DST's stockholders as promptly as practicable.
(b) As soon as reasonably practicable after the date hereof, USCS and DST
will prepare and file any other filings relating to the Merger and the other
transactions contemplated hereby that are required to be filed by each under
the Exchange Act, including, without limitation, the filing or amending of a
Form S-8 Registration Statement promptly after the Effective Time to cover the
DST Common Stock issuable upon exercise of the USCS Options assumed by DST,
and other applicable Legal Requirements (collectively "Other Filings"), and
will use their reasonable best efforts to respond to any comments of the SEC
or any other appropriate government official with respect thereto.
(c) USCS, on the one hand, and DST, on the other, will cooperate with each
other and provide all information necessary to prepare the Preliminary Joint
Proxy Statement/Prospectus, the Joint Proxy Statement/Prospectus and the Other
Filings (collectively "SEC Filings") and will provide promptly to the other
party any information that such party may obtain that could necessitate
amending any such document.
(d) Each of USCS and DST will notify the other promptly of the receipt of
any comments from the SEC or its staff or any other government official and of
any requests by the SEC or its staff or any other government official for
amendments or supplements to any of the SEC Filings or for additional
information and will supply the other with copies of all correspondence
between USCS or any of its representatives or DST or any of its
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representatives, as the case may be, on the one hand, and the SEC or its staff
or any other government official, on the other hand, with respect thereto. If
at any time prior to the Effective Time, any event occurs that should be set
forth in an amendment of, or a supplement to, any of the SEC Filings, USCS and
DST promptly will prepare and file such amendment or supplement and will
distribute such amendment or supplement as required by applicable Legal
Requirements, including, in the case of an amendment or supplement to the
Joint Proxy Statement/Prospectus, mailing such supplement or amendment to
USCS' stockholders.
(e) DST covenants that the SEC Filings (other than any information provided
by USCS for inclusion in the SEC Filings) (i) will comply in all material
respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements contained therein, in light of the circumstances under which they
are made, not misleading.
(f) USCS covenants that the SEC Filings (other than any information provided
by DST for inclusion in the SEC Filings) (i) will comply in all material
respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(g) DST will be responsible for all reasonable expenses incurred in
complying with this Section 6.2, including all registration, qualification and
filing fees, printing expenses, fees and disbursements of counsel (other than
counsel to USCS) and applicable blue-sky fees and expenses.
(h) (i) Each of DST and Acquisition Sub will indemnify, defend, and hold
harmless USCS, its officers, directors, employees and agents and each other
Person, if any, who controls any of the foregoing within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, against
any losses, claims, damages or liabilities (collectively, "Losses"), joint or
several, to which any of the foregoing may become subject under the Securities
Act or the Exchange Act or otherwise, insofar as such Losses (or actions in
respect thereof) arise out of or are based upon (A) an untrue statement or
alleged untrue statement of a material fact contained in any SEC Filing, or
(B) the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, provided that
such misstatement or omission was based on or omitted from information
provided by DST in writing for inclusion in the SEC Filings or was made in
reliance upon and in conformity with such information. DST promptly will
reimburse USCS and each such officer, director, employee, agent and
controlling Person for any legal or any other expenses reasonably incurred by
any of them in connection with investigating or defending any such Losses (or
action in respect thereof).
(ii) If this Agreement is terminated prior to the consummation of the
Merger, USCS will indemnify, defend and hold harmless each of DST and
Acquisition Sub and their officers, employees and agents and directors and
each other Person, if any, who controls any of the foregoing within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act,
against any Losses, joint or several, to which any of the foregoing may become
subject under the Securities Act or the Exchange Act or otherwise, insofar as
such Losses (or actions in respect thereof) arise out of or are based upon (A)
an untrue statement or alleged untrue statement of a material fact contained
in any USCS SEC Filing or (B) the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, provided that the misstatement or omission was based on or
omitted from information provided by USCS in writing for use in the SEC
Filings or was made in reliance upon and in conformity with such information.
USCS promptly will reimburse DST and Acquisition Sub and each such officer,
director, employee, agent and controlling Person for any legal or any other
expenses reasonably incurred by any of them in connection with investigating
or defending any such Losses (or action in respect thereof).
(iii) For purposes of this Section 6.2, (A) "Indemnifying Party" means the
Person having an obligation hereunder to indemnify any other Person pursuant
to this Section 6.2, (B) "Indemnified Party" means the Person
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having the right to be indemnified pursuant to this Section 6.2 and (C) any
information concerning USCS that is included in any SEC Filing that is
provided to USCS or its counsel for review within a reasonable period before
filing or use thereof and to which USCS has not provided written notice of
objection to DST will be deemed to have been provided by USCS for inclusion in
such SEC Filing. Whenever any claim for indemnification arises under this
Section 6.2, the Indemnified Party will promptly notify the Indemnifying Party
in writing of such claim and, when known, the facts constituting the basis for
such claim (in reasonable detail). Failure by the Indemnified Party so to
notify the Indemnifying Party will not relieve the Indemnifying Party of any
liability hereunder except to the extent that such failure materially
prejudices the Indemnifying Party.
(iv) After such notice, if the Indemnifying Party undertakes to defend any
such claim, then the Indemnifying Party will be entitled, if it so elects, to
take control of the defense and investigation with respect to such claim and
to employ and engage attorneys of its own choice to handle and defend such
claim, at the Indemnifying Party's cost, risk and expense, upon notice to the
Indemnified Party of such election, which notice acknowledges the Indemnifying
Party's obligation to provide indemnification hereunder. The Indemnifying
Party will not settle any third-party claim that is the subject of
indemnification without the written consent of the Indemnified Party, which
consent will not be unreasonably withheld; provided however, that the
Indemnifying Party may settle a claim without the Indemnified Party's consent
if the settlement (A) makes no admission or acknowledgment of liability or
culpability with respect to the Indemnified Party, (B) includes a complete
release of the Indemnified Party and (C) does not require the Indemnified
Party to make any payment or forego or take any action. The Indemnified Party
will cooperate in all reasonable respects with the Indemnifying Party and its
attorneys in the investigation, trial and defense of any lawsuit or action
with respect to such claim and any appeal arising therefrom (including the
filing in the Indemnified Party's name of appropriate cross claims and
counterclaims) and the Indemnifying Party will reimburse the Indemnified Party
for all reasonable direct out-of-pocket expenses incurred by the Indemnified
Party in connection with such cooperation. The Indemnified Party may, at its
own expense, participate in any investigation, trial and defense of such
lawsuit or action controlled by the Indemnifying Party and any appeal arising
therefrom. If, after receipt of a claim notice pursuant to Section
6.2(h)(iii), the Indemnifying Party does not undertake to defend any such
claim, the Indemnified Party may, but will have no obligation to, contest any
lawsuit or action with respect to such claim and the Indemnifying Party will
be bound by the result obtained with respect thereto by the Indemnified Party
(including the settlement thereof without the consent of the Indemnifying
Party). If there are one or more defenses available to the Indemnified Party
that conflict with, or are additional to, those available to the Indemnifying
Party, the Indemnified Party will have the right, at the expense of the
Indemnifying Party, to participate in the defense of the lawsuit or action;
provided however, that the Indemnified Party may not settle such lawsuit or
action without the consent of the Indemnifying Party, which consent will not
be unreasonably withheld.
(v) If the indemnification provided for in this Section 6.2(h) is for any
reason unavailable to the Indemnified Party in respect of any Losses (or
action in respect thereof) then the Indemnifying Party will, in lieu of
indemnifying the Indemnified Party, contribute to the amount paid or payable
by the Indemnified Party as a result of such Losses (or action in respect
thereof), in such proportion as is appropriate to reflect the relative fault
of the Indemnifying Party on the one hand and the Indemnified Party on the
other with respect to the statement or omission that resulted in such Losses
(or action in respect thereof) as well as any other relevant equitable
considerations. Relative fault with respect to an untrue or alleged untrue
statement or omission of a material fact will be determined by reference to
whether the untrue or alleged untrue statement or omission of a material fact
related to information supplied by the Indemnifying Party on the one hand or
the Indemnified Party on the other, the intent of the parties and their
relative Knowledge, access to information and opportunity to correct or
prevent such statement or omission. The amount paid or payable by the
Indemnified Party as a result of the Losses (or action in respect thereof)
referred to above will be deemed to include any legal or other expenses
reasonably incurred by the Indemnified Party in connection with investigating,
trying or defending any such action or claim. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
SECTION 6.3 MEETINGS OF STOCKHOLDERS. Each of USCS and DST will take all
action necessary, in accordance with the DGCL, the rules and regulations of
the NYSE, the Chicago Stock Exchange, the NASDAQ
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Stock Market and the NASD and the certificate of incorporation and bylaws of
USCS or DST, as applicable, to duly call, give notice of, convene and hold a
meeting of its stockholders as promptly as practicable, to consider and vote
upon the adoption and approval of this Agreement (as a plan of merger under
Section 251 of the DGCL), the Merger and the other transactions contemplated
by this Agreement (each, individually, the "Meeting"), to the extent such
approval is required by the DGCL, the NYSE, the Chicago Stock Exchange, the
NASDAQ Stock Market, the NASD or the certificate of incorporation of USCS or
DST, as applicable. Each of USCS and DST will use its best efforts to hold
such meetings at the same date and time.
SECTION 6.4 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Closing Date,
USCS will cause to be delivered to DST a letter from USCS, identifying all
Persons who are, in its opinion, as of the date of this Agreement,
"affiliates" of USCS as that term is used in paragraphs (c) and (d) of Rule
145 under the Securities Act and a written agreement from each such Person
substantially in the form of Exhibit 6.4. DST may cause the DST Certificates
evidencing shares of DST Common Stock issued to such Persons to bear a legend
referring to the applicability of paragraphs (c) and (d) of Rule 145 under the
Securities Act.
SECTION 6.5 OTHER ACTIONS. Without limiting the termination and other rights
of the parties under this Agreement (and subject to the parties' rights to
take certain actions pursuant to Section 5.1(h) and Section 5.1(i) consistent
with the fiduciary duties of their respective Boards of Directors) each of the
parties to this Agreement will use its commercially reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
Requirements to consummate and make effective the transactions contemplated by
this Agreement in the most expeditious manner practicable, including the
satisfaction of all conditions to the Merger.
SECTION 6.6 CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS. Each party to this
Agreement agrees that it will treat this Agreement and all negotiations and
communications between them relating to this Agreement, the Merger or
otherwise, and all information disclosed to a party by the other party, as
confidential. No party to this Agreement will make any public announcements or
otherwise communicate with any news media with respect to this Agreement or
any of the transactions contemplated by this Agreement without prior approval
of the other party, which approval will not unreasonably be withheld or
delayed, as to the timing and contents of any such announcement as may be
reasonable under the circumstances; provided however, that nothing contained
herein will prevent any party from promptly making all filings with
Governmental Entities that may, in its reasonable judgment, be required or
advisable in connection with the execution and delivery of this Agreement or
the consummation of the transactions contemplated by this Agreement, or from
making any disclosures required by Legal Requirements, so long as such party
gives timely notice to the other parties of the anticipated disclosure and
cooperates with the other party in designing reasonable procedural and other
safeguards to preserve, to the maximum extent possible, the confidentiality of
all information furnished by the other party pursuant to this Agreement.
Except as expressly set forth above, all of the terms and conditions of the
Mutual Non-Disclosure Agreement by and between DST and USCS, dated April 20,
1998, shall remain in full force and effect until the Effective Time, but not
any of the amendments thereto, each of which is hereby superseded and replaced
by this Section 6.6.
SECTION 6.7 NOTIFICATION. In the event of, or after obtaining Knowledge of
the occurrence or threatened occurrence of, any fact or circumstance that
would cause or constitute a breach or violation of any of its representations,
warranties, covenants or other agreements set forth herein, each party to this
Agreement promptly will give notice thereof to the other party and will use
its best efforts to prevent or remedy such breach.
SECTION 6.8 HSR ACT FILINGS. DST and USCS each will make or cause to be
made, and will use their reasonable best efforts to cause each of their
respective stockholders to make (if required under the HSR Act), an
appropriate filing of a Notification and Report Form pursuant to the HSR Act
no later than 15 Business Days after the date of this Agreement. Each such
filing will request early termination of the waiting period imposed by the HSR
Act. USCS and DST each will use its reasonable best efforts to respond or
cause a response to be made as promptly as reasonably practicable to any
inquiries received from the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") for
additional
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information or documentation and to respond as promptly as reasonably
practicable to all inquiries and requests received from any other Governmental
Entity in connection with antitrust matters; provided however, that nothing
contained herein will be deemed to preclude either USCS or DST from
negotiating reasonably with any Governmental Entity regarding the scope and
content of any such requested information or documentation. USCS and DST each
will use their respective reasonable best efforts to overcome any objections
that may be raised by the FTC, the Antitrust Division or any other
Governmental Entity having jurisdiction over antitrust matters.
Notwithstanding the foregoing, neither DST nor USCS will be required to make
any significant change in the operations or activities of the business (or any
material assets employed therein) of DST or any of its Affiliates, or of USCS
or any of its Affiliates, as the case may be, if DST or USCS, as the case may
be, determines in good faith that such change would be materially adverse to
the operations or activities of the business (or any material assets employed
therein) of DST or any of its Affiliates or USCS or any of its Affiliates, as
the case may be.
SECTION 6.9 USCS DIRECTOR AND OFFICER INDEMNIFICATION.
(a) From and after the Effective Time, DST will, and will cause the
Surviving Corporation to, fulfill and honor in all respects the obligations of
USCS pursuant to (i) each indemnification agreement identified in Section 6.9
of the USCS Disclosure Schedule in effect on the date hereof between USCS and
any person who was a director or officer of USCS and (ii) the indemnification
provisions set forth in USCS' Certificate of Incorporation or Bylaws as each
is in effect on the date hereof. (The persons to be indemnified pursuant to
the provisions of this Section 6.9(a) are referred to as the "USCS Indemnified
Parties.") For a period of one year following the Effective Time, the
indemnification and exculpation of liability provisions set forth in USCS'
Certificate of Incorporation and Bylaws as in effect on the date hereof shall
not be eliminated or changed in any manner that would adversely affect the
rights thereunder of the USCS Indemnified Parties.
(b) This Section 6.9 shall survive consummation of the Merger at the
Effective Time and is intended to be for the benefit of, and enforceable by,
USCS, DST, the Surviving Corporation, each of the USCS Indemnified Parties and
their heirs and representatives, and shall be binding upon all successors and
assigns of DST and the Surviving Corporation.
SECTION 6.10 TERMINATION OF USCS RIGHTS AGREEMENT. Prior to the Effective
Time, USCS shall take all necessary action to terminate the USCS Rights Plan
without issuing any securities or making any cash payment.
SECTION 6.11 ACTIONS UNDER STOCKHOLDER AGREEMENT. DST shall promptly provide
the notices and take all such other actions required of it under the
Stockholder Agreement attached as Exhibit E-2 hereto.
SECTION 6.12 CONSENTS/WAIVERS. With respect to each agreement identified in
Section 3.5 of the USCS Disclosure Schedule with any customer of USCS or its
Subsidiaries which would permit the customer to declare a breach or default or
to terminate such agreement because of the execution or delivery of this
Agreement or the consummation of the transactions contemplated by this
Agreement, (a "Change of Control Agreement") DST and USCS agree to take the
actions set forth in Schedule 6.12.
SECTION 6.13 USCS DEFERRED COMPENSATION PLANS. DST shall guarantee the
obligations of the Surviving Corporation with respect to the USCS Deferred
Salary Plan and the USCS Deferred Bonus Plan (as described in Section 3.11 of
the USCS Disclosure Schedule) for those participants under such plans who
agree to waive application of the change in control provisions under such
plans to the transactions contemplated by this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
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(a) This Agreement, the Merger and the transactions contemplated by this
Agreement shall have been duly approved, to the extent required by
applicable law or rule by (i) the holders of the outstanding USCS Stock
entitled to vote and (ii) the holders of the outstanding DST Common Stock
entitled to vote.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been earlier terminated.
(c) The Registration Statement on Form S-4 that includes the Joint Proxy
Statement/Prospectus shall have become effective in accordance with the
provisions of the Securities Act and any necessary state securities law
approvals shall have been obtained and no stop orders with respect thereto
shall have been issued by the SEC and remain in effect.
(d) No Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any Legal Requirement that remains in effect and has
the effect of making the transactions contemplated by this Agreement
illegal or otherwise prohibiting the transactions contemplated by this
Agreement, or that questions the validity or the legality of the
transactions contemplated by this Agreement and that could reasonably be
expected to materially and adversely affect the value of the business of
USCS, it being agreed that each party will use its reasonable best efforts
to have any such injunction lifted. All material consents of Governmental
Entities required to be obtained with respect to the Merger and the other
transactions contemplated by this Agreement shall have been obtained.
(e) As of the Effective Time, the shares of DST Common Stock issued in
connection with the Merger will be approved for listing on the NYSE and the
Chicago Stock Exchange, subject to satisfaction of applicable NYSE and
Chicago Stock Exchange requirements upon official notice of issuance.
(f) DST and USCS shall have each received the written opinion of its
respective counsel, Sonnenschein Nath & Rosenthal and Graham & James LLP,
or other evidence, in form and substance reasonably satisfactory to it, to
the effect that the Merger will constitute a reorganization within the
meaning of Section 368 of the Code. In rendering such opinions, such
counsel may rely upon representations of the parties contained herein and
in certificates of officers of DST, USCS and others.
(g) DST and USCS shall have each received letters from
PricewaterhouseCoopers LLP ("PWC") dated as of the Closing Date confirming
that the Merger may be accounted for as a pooling of interests in
accordance with GAAP, Accounting Principles Board Opinion No. 16 and all
published rules, regulations and interpretations of the SEC.
(h) The Spin-off referred to in Exhibit E-2 hereto shall not have
occurred within thirty (30) days prior to the Effective Time.
SECTION 7.2 CONDITIONS TO OBLIGATION OF USCS TO EFFECT THE MERGER. The
obligation of USCS to effect the Merger will be subject to the fulfillment at
or prior to the Effective Time of the additional following conditions:
(a) The representations and warranties of DST contained in this Agreement
shall be true and correct in all material respects as of the Effective
Time, with the same force and effect as if made as of the Effective Time,
except (i) for changes contemplated by this Agreement, (ii) for those
representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such date), and
(iii) in all such cases, for such breaches or inaccuracies of such
representations and warranties as do not have a Material Adverse Effect on
DST, and USCS shall have received a certificate of DST to such effect
signed by the Chief Executive Officer of DST. For purposes of determining
whether there has been a failure to satisfy the condition set forth in this
Section 7.2(a), there shall not be considered any change in the stock price
of capital stock of DST after the date of this Agreement.
(b) DST shall have performed or complied in all material respects with
all material agreements and covenants required by this Agreement to be
performed or complied with by it prior to the Effective Time, and USCS
shall have received a certificate of DST to such effect signed by the Chief
Executive Officer and by the Chief Financial Officer of DST.
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(c) George Argyros and James Castle shall have been appointed to the
Board of Directors of DST effective as of the Effective Time.
(d) The opinion of Merrill Lynch & Co. referenced in Section 3.4 shall
not have been withdrawn (unless withdrawn at the request or direction of
USCS).
(e) USCS shall have received the following documents: (i) Affiliate
Agreements in the form of Exhibit 7.2(e)(i) hereto executed by each Person
who may be reasonably deemed an "affiliate" of DST (except for the DST
Major Stockholder, whose agreement is set forth in Exhibit E-2); (ii) an
Agreement in the form of Exhibit E-2 hereto executed by the DST Major
Stockholder; (iii) the legal opinion of Sonnenschein Nath & Rosenthal dated
as of the Closing Date in the form of Exhibit 7.2(e)(ii) hereto; and (iv)
the Registration Rights Agreement in the form of Exhibit 7.2(e)(iv) hereto
executed by DST.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF DST AND ACQUISITION SUB TO EFFECT
THE MERGER. The obligations of DST and Acquisition Sub to effect the Merger
will be subject to the fulfillment at or prior to the Effective Time of the
additional following conditions:
(a) The representations and warranties of USCS contained in this
Agreement shall be true and correct in all material respects as of the
Effective Time, with the same force and effect as if made as of the
Effective Time, except (i) for changes contemplated by this Agreement, (ii)
for those representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such date), and
(iii) in all such cases, for such breaches or inaccuracies of such
representations and warranties as do not have a Material Adverse Effect on
USCS, and DST shall have received a certificate of USCS to such effect
signed by the Chief Executive Officer and by the Chief Financial Officer of
USCS.
(b) USCS shall have performed or complied in all material respects with
all material agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time, and DST
shall have received a certificate of USCS to such effect signed by the
Chief Executive Officer and by the Chief Financial Officer of USCS.
(c) DST shall have received the following documents: (i) Affiliate
Agreements in the form of Exhibit 6.4 hereto executed by each Person who
may be reasonably deemed an "affiliate" of USCS; (ii) Agreements in the
form of Exhibit E-1 executed by the USCS Major Stockholders; (iii) the
legal opinion of Graham & James LLP dated as of the Closing date, in the
form of Exhibit 7.3(c)(iii); and (iv) comfort letters from PWC with respect
to USCS dated no more than two business days before the date on which the
Joint Proxy Statement/Prospectus becomes effective, in scope and substance
equivalent to letters customarily delivered by independent public
accountants in such circumstances and reasonably acceptable in form and
substance to DST.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval by the stockholders of
USCS or DST:
(a) by mutual written consent of the Board of Directors of DST and the
Board of Directors of USCS;
(b) by either DST or USCS (i) if at the Meeting of its stockholders
(including any postponement or adjournment thereof), the Merger is not
approved and adopted by the affirmative vote required by law, or (ii) after
the later of January 31, 1999 or, if the Spin-off occurs in January, 1999,
that day which is thirty days after the Spin-off, or (iii) if the letter of
its independent accounts referred to in Section 7.1(g) is withdrawn;
(c) by DST, if it receives notice from USCS of the determination of the
Board of Directors of USCS as provided in Section 5.1(i) or by USCS, if a
period of two Business Days has elapsed since receipt by DST of such notice
and no election to negotiate has been received from DST or if the two
Business Day negotiation period set forth in Section 5.1(i) has expired
without an agreement being reached;
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(d) by DST, if any Person (other than DST or any of its Affiliates) shall
have acquired before the Effective Time or the termination of this
Agreement fifty percent (50%) or more of the outstanding USCS Stock, unless
such Person shall have delivered to DST within two Business Days of such
acquisition definitive written confirmation to the effect that such Person
will vote in favor of the Merger at the Meeting and take no action to
prevent or delay the Merger.
SECTION 8.2 REMEDIES.
(a) In the event of the termination of this Agreement or breach of any
provision of this Agreement by either DST or USCS, DST and USCS shall be
entitled to all remedies available at law. Notwithstanding anything to the
contrary in this Agreement, in the event of a breach of any provision of this
Agreement prior to the termination of this Agreement, the non-breaching party
shall be entitled to all available equitable remedies.
(b) Subject to Section 8.2(c), if (i) (w) DST receives notice from USCS of
the determination of the Board of Directors of USCS as provided in Section
5.1(i), (x) the Board of Directors of USCS fails to recommend to the
stockholders of USCS the approval of the Merger or withdraws such
recommendation, or (y) the Merger is not consummated as a result of the
failure of USCS to obtain stockholder approval as provided in Section
7.1(a)(i), if such failure or withdrawal is not the result of the failure of
DST to satisfy the conditions set forth in Section 7.2(a) or Section 7.2(b)
and within twelve months after such failure USCS enters into a merger,
acquisition, consolidation or similar transaction involving, or any purchase
of all or any significant portion of the assets or any equity securities of,
USCS or any of its Subsidiaries with any person other than DST or a Subsidiary
of DST, or (ii) any Person (other than DST and any of its Affiliates) shall
have acquired before the Effective Time or the termination of this Agreement
50 percent or more of the outstanding USCS Stock and such Person fails to
timely deliver the written confirmation to DST as provided in Section 8.1(d),
or (iii) USCS shall have terminated this Agreement pursuant to Section 8.1(c),
USCS will promptly pay to DST by wire transfer, in immediately available
funds, the Termination Fee.
(c) Notwithstanding anything to the contrary herein, no party shall have any
liability under the Agreement, including Section 8.2(a) or Section 8.2(b), in
the event the Agreement is terminated or terminable as a consequence of the
nonfulfillment of any of the conditions set forth in Section 7.1(b), Section
7.1(c), Section 7.1(d), Section 7.1(e) or Section 7.1(g), unless such
nonfulfillment is caused by that party's material breach of any of its
covenants or obligations under this Agreement.
SECTION 8.3 AMENDMENT. This Agreement may be amended by DST and USCS by or
pursuant to action taken by their respective Boards of Directors at any time
before or after approval of this Agreement by the stockholders of USCS and DST
and prior to the Effective Time, but, after either such approval, no amendment
will be made that changes the Exchange Ratio or in any other way materially
adversely affects the rights of such stockholders, without the further
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of DST and USCS.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, subject to
Section 8.3, DST and USCS, by or pursuant to action taken by their respective
Boards of Directors, may (i) extend the time for performance of any of the
obligations or other acts of the other party to this Agreement, (ii) waive any
inaccuracies in the representations and warranties set forth in this Agreement
or in any documents delivered pursuant to this Agreement and (iii) waive
compliance with any of the agreements or conditions set forth in this
Agreement. Any agreement on the part of a party to this Agreement to any such
extension or waiver will be valid if set forth in an instrument in writing
signed on behalf of such party.
ARTICLE IX
DEFINITIONS; GENERAL PROVISIONS
SECTION 9.1 DEFINITIONS. As used in this Agreement, the following terms with
initial capital letters will have the meanings set forth below:
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"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (as well as "controlling,"
"controlled by" and "under common control with") means possession, directly or
indirectly, of the power to direct or cause the direction of the management
and policies of a Person (whether through the ownership of voting securities,
by contract or otherwise).
"Business Day" means any day on which commercial banks are open for business
in Kansas City, Missouri.
"Code" means the Internal Revenue Code of 1986, as amended.
"DST Common Stock" means the shares of common stock, par value $.01 per
share, of DST.
"Environmental Law" means any applicable Legal Requirement relating to the
protection of human health, protection, preservation or restoration of the
environment (including, air, water vapor, surface water, ground water,
drinking water supply, surface land, subsurface land, plant and animal life or
any other natural resource).
"Equity Affiliate" means, as to any Person, any other Person in which such
Person or any of its Subsidiaries holds a five percent or greater equity
interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, as to any Person, any trade or business (whether or
not incorporated) that is treated as a single employer with such Person under
Section 414(b), (c), (m) or (o) of the Code.
"Executive Officer" means, as to DST, any Person identified in its most
recent Annual Report to Shareholders as an executive officer and, as to USCS,
any Person identified in its most recent Annual Report to Shareholders as
management.
"GAAP" means generally accepted accounting principles as in effect from time
to time in the United States of America.
"USCS Common Stock" means the shares of common stock, par value $.05 per
share, of USCS.
"USCS Disclosure Schedule" means the Schedule designated as such and
attached to this Agreement as Exhibit A and incorporated herein.
"USCS Rights Plan" means the Stockholder Rights Plan, as amended, between
USCS and ChaseMellon Shareholder Services, LLC.
"USCS Stock Plans" means the following USCS Stock Option Plans: 1988 Stock
Option Plan; 1996 Stock Option Plan; 1996 Directors' Stock Option Plan; 1993
Stock Option Plan; and 1990 Stock Option Plan.
"Intellectual Property" means copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, technology rights
and licenses, computer software (including any source or object codes therefor
or documentation relating thereto), trade secrets, franchises, know-how,
inventions, and other intellectual property rights, either registered, issued,
applied for or common law.
"Knowledge" means the present actual knowledge of a Person that is a human
being and, in the case of a Person that is not a human being, the present
actual knowledge of any Executive Officer (or any human being having duties
comparable to those of an Executive Officer) of such Person.
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Entity, including judicial decisions
A-25
<PAGE>
applying common law or interpreting any other Legal Requirement or any
agreement entered into with a Governmental Entity in resolution of a dispute
or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim, option,
right to acquire, restriction on transfer, voting restriction or encumbrance
of any nature.
"Market Price" means (i) with respect to DST Common Stock, the closing
quotation from the New York Stock Exchange Composite Transactions as reported
in The Wall Street Journal, and (ii) with respect to USCS Common Stock, the
closing quotation from the NASDAQ National Market Issues as reported in The
Wall Street Journal.
"Material Adverse Effect" means a material adverse effect on the business,
properties, assets, known or reasonably foreseeable prospects, financial
condition, liabilities or operations of a Person and its Subsidiaries, taken
as a whole, or on the ability of such Person to perform its obligations under
this Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means the over-the-counter market of the NASD.
"NYSE" means the New York Stock Exchange.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Entity or other
entity.
"SEC" means the United States Securities and Exchange Commission.
"Spin-off" means the spin-off of FAM by the DST Major Stockholder referred
to in Exhibit E-2 and the date of such Spin-off shall mean the date the shares
of FAM are distributed to the stockholders of the DST Major Stockholder.
"Subsidiary" means, with respect to any Person, any other Person more than
50% of whose outstanding voting securities or partnership or other equity
interests, as the case may be, are directly or indirectly owned by such
Person.
"Tax" means all federal, state, local and foreign income, profits,
estimated, franchise, gross receipts, payroll, sales, employment, use,
property, withholding, excise and other taxes, duties and assessments of any
nature whatsoever together with all interest, penalties and additions imposed
with respect to such amounts.
"Termination Fee" means cash in the amount of $25,000,000.
A-26
<PAGE>
SECTION 9.2 OTHER DEFINITIONS. The following terms are defined in the
Sections indicated:
<TABLE>
<CAPTION>
TERM SECTION
---- -----------
<S> <C>
Acquisition Proposal.......................................... 5.1 (h)
Acquisition Sub............................................... Preamble
Agreement..................................................... Preamble
Antitrust Division............................................ 6.8
Certificate of Incorporation.................................. 1.1(a)
Certificate of Merger......................................... 1.2
Closing....................................................... 2.9
Closing Date.................................................. 2.9
USCS.......................................................... Preamble
USCS Benefit Plans............................................ 3.11(a)
USCS Options.................................................. 2.7
USCS Permits.................................................. 3.8(a)
USCS SEC Reports.............................................. 3.7(a)
USCS Stock.................................................... 2.1(b)
USCS Stock Certificates....................................... 2.2(a)
DGCL.......................................................... 1.1
Effective Time................................................ 1.2
Exchange Act.................................................. 3.6
Exchange Agent................................................ 2.2(a)
Exchange Ratio................................................ 2.1(a)
FTC........................................................... 6.8
Governmental Entity........................................... 3.8(a)
HSR Act....................................................... 3.6
DST........................................................... Preamble
DST Certificates.............................................. 2.2(a)
DST SEC Reports............................................... 4.6(a)
Indemnified Party............................................. 6.2(h)(iii)
Indemnifying Party............................................ 6.2(h)(iii)
Joint Proxy Statement/Prospectus.............................. 6.2(a)
Losses........................................................ 6.2(h)(i)
Meeting....................................................... 6.3
Merger........................................................ Recital A
Most Recent USCS Balance Sheet................................ 3.7(c)
Most Recent DST Balance Sheet................................. 4.6(c)
Other Filings................................................. 6.2(b)
Preliminary Joint Proxy Statement/Prospectus.................. 6.2(a)
Secretary..................................................... 1.2
SEC Filings................................................... 6.2(c)
Securities Act................................................ 3.6
Surviving Corporation......................................... 1.1
Tax........................................................... 9.1
</TABLE>
SECTION 9.3 USE OF TERMS. Terms used with initial capital letters will have
the meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. All pronouns (and any variations) will be deemed
to refer to the masculine, feminine or neuter, as the identity of the Person
may require. The singular or plural includes the other, as the context
requires or permits. The word "include" (and any variation) is used in an
illustrative sense rather than a limiting sense. The word "day" means a
calendar day. All accounting terms not otherwise defined in this Agreement
will have the meanings ascribed to them under GAAP.
A-27
<PAGE>
SECTION 9.4 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. No
representations and warranties contained in this Agreement will survive beyond
the Closing Date. This Section 9.4 will not limit any covenant or agreement of
the parties to this Agreement that by its terms requires performance after the
Closing Date.
SECTION 9.5 NOTICES. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have
been duly given upon receipt) by delivery in person, by cable, telegram, telex
or other standard form of telecommunications, or by registered or certified
mail, postage prepaid, return receipt requested, addressed as follows:
USCS International, Inc.
If to USCS: 2969 Prospect Park Drive
Rancho Cordova, CA 95670
Attn: Chief Executive Officer
With a copy to: Gilles S. Attia, Esq.
Graham & James LLP
400 Capitol Mall, 24th Floor
Sacramento, CA 95814
If to DST: DST Systems, Inc.
333 West 11th Street, 5th Floor
Kansas City, MO 64105
Attn: President
With a copy to: John F. Marvin, Esq.
Sonnenschein Nath & Rosenthal
4520 Main Street, Suite 1100
Kansas City, MO 64111
or to such other addresses as any party may have furnished to the other
parties in writing in accordance with this Section 9.5.
SECTION 9.6 FEES AND EXPENSES. Except as otherwise expressly provided in
this Agreement, whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated by this Agreement will be paid by the party incurring such
expenses.
SECTION 9.7 SPECIFIC PERFORMANCE. The parties to this Agreement agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that, in accordance with Section
8.2(a), the parties will be entitled to enforce specifically the terms and
provisions of this Agreement in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity, and no party will raise any defense to the
institution of such equitable relief other than with respect to the factual
allegations concerning the claims for which relief is sought.
SECTION 9.8 ENTIRE AGREEMENT; MISCELLANEOUS. This Agreement will be of no
force or effect until executed and delivered by all of the parties to this
Agreement. This Agreement (including the documents and instruments referred to
in this Agreement) when executed and delivered, constitutes the entire
agreement and supersedes all other prior agreements and understandings, both
written and oral, among the parties, or any of them, with respect to the
subject matter of this Agreement except for the Mutual Non-Disclosure
Agreement dated as of April 20, 1998 but not the amendments thereto. All
parties have participated in the preparation of this Agreement and the
interpretive principle of construing a document against the drafter shall have
no application to this Agreement. This Agreement may be executed in two or
more counterparts which together will constitute a single agreement. This
Agreement may be delivered by facsimile. Any certificate delivered pursuant to
this Agreement will be made without personal liability on the part of the
officer or employee of the Person giving such certificate.
A-28
<PAGE>
SECTION 9.9 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) This Agreement shall be deemed to be made under, and in all respects
shall be interpreted, construed and governed by and in accordance with, the
law of the State of Delaware. The parties hereby irrevocably submit to the
exclusive jurisdiction of the courts of the State of Delaware and the Federal
courts of the United States of America located in the State of Delaware solely
in respect of the interpretation and enforcement of the provisions of this
Agreement and of the documents referred to in this Agreement, and in respect
of the transactions contemplated hereby, and hereby waive, and agree not to
assert, as a defense in any action, suit or proceeding for the interpretation
or enforcement hereof or of any such document, that it is not subject thereto
or that such action, suit or proceeding may not be brought or is not
maintainable in said courts or that the venue thereof may not be appropriate
or that this Agreement or any such document may not be enforced in or by such
courts, and the parties hereto irrevocably agree that all claims with respect
to such action or proceeding shall be heard and determined in such a Delaware
State or Federal court. The parties hereby consent to and grant any such court
jurisdiction over the person of such parties and over the subject matter of
such dispute and agree that mailing of process or other papers in connection
with any such action or proceeding in the manner provided in Section 9.5 or in
such other manner as may be permitted by law shall be valid and sufficient
service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES,
AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES
ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.9.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunder duly authorized all as of the date first
written above.
DST SYSTEMS, INC.
/s/ Thomas A. McDonnell
By: _________________________________
Name: Thomas A. McDonnell
Title: President and Chief
Executive Officer
DST ACQUISITIONS, INC.
/s/ Thomas A. McDonnell
By: _________________________________
Name: Thomas A. McDonnell
Title: President
USCS INTERNATIONAL, INC.
/s/ James C. Castle
By: _________________________________
Name: James C. Castle
Title:Chief Executive Officer
A-29
<PAGE>
APPENDIX B
[MERRILL LYNCH LETTERHEAD]
September 2, 1998
Board of Directors
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, CA 95670
Members of the Board of Directors:
DST Systems, Inc., (the "Acquiror"), DST Acquisitions, Inc., a newly formed,
wholly owned subsidiary of the Acquiror (the "Acquisition Sub"), and USCS
International, Inc., (the "Company"), propose to enter into an Agreement and
Plan of Merger, dated September 2, 1998 (the "Agreement"), pursuant to which
the Acquisition Sub will be merged with the Company in a transaction (the
"Merger") in which each outstanding share of the Company's common stock, par
value $0.05 per share (the "Company Shares"), will be converted into the right
to receive 0.62 shares (the "Exchange Ratio") of the common stock of the
Acquiror, par value $.01 per share (the "Acquiror Shares").
You have asked us whether, in our opinion, the Exchange Ratio is fair from a
financial point of view to the holders of the Company Shares, other than the
Acquiror and its affiliates.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be
relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and
prospects of the Company and the Acquiror;
(3) Conducted discussions with members of senior management and
representatives of the Company and the Acquiror concerning the matters
described in clauses 1 and 2 above, as well as their respective
businesses and prospects before and after giving effect to the Merger;
(4) Reviewed the market prices and valuation multiples for the Company
Shares and the Acquiror Shares and compared them with those of certain
publicly traded companies that we deemed to be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Participated in certain discussions and negotiations among
representatives of the Company and the Acquiror and their legal
advisors;
(8) Reviewed the potential pro forma impact of the Merger;
(9) Reviewed drafts dated August 28, 1998 of the Agreement and a Form of
Stockholder Agreement to be entered into among certain stockholders of
USCS International and DST Systems; and
(10) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have
not assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company or the Acquiror or been
B-1
<PAGE>
furnished with any such evaluation or appraisal. In addition, we have not
assumed any obligation to conduct any physical inspection of the properties or
facilities of the Company or the Acquiror. With respect to certain publicly
traded securities held by the Acquiror, we have assumed that the current
reported sales prices for such securities reflect their fair market value.
With respect to the financial forecast information furnished to or discussed
with us by the Company or the Acquiror, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected
future financial performance of the Company or the Acquiror. We have further
assumed that the Merger will be accounted for as a pooling of interests under
generally accepted accounting principles and that it will qualify as a tax-
free reorganization for U.S. federal income tax purposes. We have also assumed
that the final form of the Agreement will be substantially similar to the last
draft reviewed by us.
Our opinion is necessarily based upon market, economic and other conditions
as they exist and can be evaluated on, and on the information made available
to us as of, the date hereof. We have assumed that in the course of obtaining
the necessary regulatory or other consents or approvals (contractual or
otherwise) for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger.
We are acting as financial advisor to the Company in connection with the
Merger and will receive a fee from the Company for our services, a significant
portion of which is contingent upon the consummation of the Merger. In
addition, the Company has agreed to indemnify us for certain liabilities
arising out of our engagement. We have, in the past, provided financial
advisory and financing services to the Company and financing services to the
Acquiror and may continue to do so and have received, and may receive, fees
for the rendering of such services. In addition, in the ordinary course of our
business, we may actively trade the Company Shares and other securities of the
Company, as well as the Acquiror Shares and other securities of the Acquiror,
for our own account and for the accounts of customers and, accordingly, may at
any time hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Company. Our opinion does not address the merits of the underlying decision by
the Company to engage in the Merger and does not constitute a recommendation
to any shareholder as to how such shareholder should vote on the proposed
Merger or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Company Shares or the Acquiror Shares will trade following the announcement or
consummation of the Merger.
On the basis of and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Exchange Ratio is fair from a financial point of view
to the holders of the Company Shares, other than the Acquiror and its
affiliates.
Very truly yours,
/s/ Merrill Lynch, Pierce, Fenner &
Smith
Merrill Lynch, Pierce, Fenner &
Smith Incorporated
B-2
<PAGE>
APPENDIX C
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-14036
DST SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1581814
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 WEST 11TH STREET, KANSAS CITY, 64105
MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE (816) 435-1000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
<S> <C>
Common Stock, $0.01 Per Share Par Value New York Stock Exchange
Chicago Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X]NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in a definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Aggregate market value of the voting and non-voting stock held by non-
affiliates of the Company as of February 27, 1998:
Common Stock, $.01 par value--$1,519,931,108
Number of shares outstanding of the Company's common stock as of February
27, 1998:
Common Stock, $.01 par value--49,009,168
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference
into Part of the Form 10-K as indicated:
<TABLE>
<CAPTION>
PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
- --------------------------------------------------------------------------------
<S> <C>
Company's Definitive Proxy Statement for the 1998
Annual Meeting of Stockholders, which will be filed no
later than 120 days after December 31, 1997........... Part III
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DST SYSTEMS, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Cautionary Statement With Respect To Forward-Looking Comments.. 2
PART I
Item 1. Business....................................................... 2
Item 2. Properties..................................................... 12
Item 3. Legal Proceedings.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders............ 13
Executive Officers of the Company.............................. 13
PART II
Market for the Company's Common Stock and Related Stockholder
Item 5. Matters........................................................ 14
Item 6. Selected Consolidated Financial Data........................... 14
Management's Discussion and Analysis of Financial Condition and
Item 7. Results of Operations.......................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... 25
Item 8. Financial Statements and Supplementary Data.................... 26
Changes in and Disagreements with Accountants on Accounting and
Item 9. Financial Disclosure........................................... 50
PART III
Item 10. Directors and Executive Officers of the Company................ 50
Item 11. Executive Compensation......................................... 50
Item 12. Security Ownership of Certain Beneficial Owners and Management. 50
Item 13. Certain Relationships and Related Transactions................. 50
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form 8-
Item 14. K.............................................................. 51
Signatures..................................................... 56
</TABLE>
DST(TM), OTI(TM), Securities Transfer System(TM), STS(TM), TA2000(R),
Portfolio Accounting System(TM), PAS(TM), Global Portfolio System(R), GPS(R),
OpenPerformanceSystem(TM), OPS(TM), Integrated Pharmacy Network System(TM),
IPNS(R), Automated Work Distributor(TM), AWD(R), TRAC-2000(R), GPS2000(TM),
HiPortfolio/2(TM), Impart/2(TM), Uptix(TM), Paladign(TM), FAST2000(TM),
FAN(R), FanMail(R), Vision Mutual Fund Gateway(R), EnCorr(R), PowerStore(R),
Customer Service Workstation(R), Financial Asset Network(R) referred to in
this Report are included among the Company's trademarks. DirecTV(TM) referred
to in this Report is a trademark of Hughes Electronics, Inc. Fund/Serv(TM) and
Networking(TM) referred to in this Report are trademarks of National
Securities Clearing Corporation. Windows NT(R) and Windows(R) referred to in
this Report are trademarks of Microsoft Corporation. OS/2(R) and AS/400(R)
referred to in this Report are trademarks of IBM Corporation UNIX(R) referred
to in this Report is a trademark of X/Open Company, Ltd.
C-1
<PAGE>
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS
The discussions set forth in this Annual Report on Form 10-K contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Annual Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by their
use of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results
could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or
combination of factors including, but not limited, to, those factors
identified in the Company's Current Report on Form 8-K dated March 22, 1996,
which is hereby incorporated by reference. This report has been filed with the
United States Securities and Exchange Commission (the "SEC") or the
"Commission" in Washington, D.C. and can be obtained by contacting the SEC's
Public Reference Branch. Readers are strongly encouraged to obtain and
consider the factors listed in the March 22, 1996 Current Report and any
amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company will not update any forward-
looking statements in this Annual Report to reflect future events or
developments.
PART 1
ITEM 1. BUSINESS
This discussion of the Company's business should be read in conjunction with,
and is qualified by reference to, Management's Discussion and Analysis of the
Company's Financial Condition and Results of Operations ("MD&A") under Item 7
herein. In addition, pursuant to rule 12b-23 under the Securities Exchange Act
of 1934, as amended, the information set forth under the headings
"Introduction" and "Seasonality" in the MD&A and the geographic information
included in Item 8, Note 15 are incorporated herein by reference in partial
response to this Item 1.
The Company was originally established in 1969. Through a reorganization in
August 1995, the Company is now a corporation organized in the State of
Delaware. The Company operates in one segment.
RECENT DEVELOPMENTS IN THE COMPANY'S BUSINESS
The recent business developments of the Company and the Company's subsidiaries
follow.
SECURITIES TRANSFER DEVELOPMENTS
On February 10, 1998, Boston EquiServe, LLP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50%
owned joint venture of the Company and State Street Corporation) and Bank of
Boston Corporation, announced an agreement to merge with First Chicago Trust
Company of New York ("First Chicago") which would create the largest
securities transfer agent in the United States, processing approximately 25
million accounts. The merger of the two businesses, to be named EquiServe, LLP
("EquiServe"), is expected to be completed in the second quarter of 1998.
DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with
the merger, DST entered into a memorandum of understanding with Boston
EquiServe and First Chicago to complete development of the system for the
exclusive use by EquiServe to process all of its accounts. The Company has
also agreed with EquiServe to provide data processing services for EquiServe
to use Fairway. The terms and conditions of this memorandum of understanding
will be set forth in a definitive agreement, the completion of which is a
condition to the closing of the merger agreement between Boston EquiServe and
First Chicago. Upon acceptance of defined components of Fairway, DST will
C-2
<PAGE>
contribute Fairway and its non-EquiServe stock transfer processing business
(approximately 2 million accounts) to EquiServe for a direct ownership
interest in EquiServe. DST will also continue to hold an indirect ownership
interest in EquiServe through BFDS.
DBS SYSTEMS CORPORATION
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation ("DBS") for $13.2 million in cash. The $11.6 million
excess of the purchase price over the net assets acquired has been assigned a
useful life of 12 years. On a pro forma basis, the acquisition did not have a
material impact on the Company's historical results of operations or financial
position.
DST CATALYST, INC.
In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST
Catalyst, Inc. provides software and services to support automated securities
exchange activities and broker order interfaces primarily outside the United
States. On a pro forma basis, the acquisition did not have a material impact
on the Company's historical results of operations or financial position.
NARRATIVE DESCRIPTION OF BUSINESS
The Company provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance
companies, banks and other financial services organizations. Set forth below
is information regarding the Company's sources of revenue.
<TABLE>
<CAPTION>
SOURCES OF REVENUE
YEARS ENDED DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
U.S. Revenues
Mutual Fund and Investment
Management
Data Processing Services......... $221.5 45.8% $257.8 44.4% $285.4 43.9%
Output Services.................. 60.2 12.4 77.7 13.4 84.5 13.0
------ ----- ------ ----- ------ -----
281.7 58.2 335.5 57.8 369.9 56.9
Other Output Processing............ 81.4 16.8 90.5 15.6 97.4 15.0
Other.............................. 60.1 12.4 70.4 12.1 82.5 12.6
------ ----- ------ ----- ------ -----
Total U.S. revenues.................. 423.2 87.4 496.4 85.5 549.8 84.5
International revenues............... 60.9 12.6 84.4 14.5 100.9 15.5
------ ----- ------ ----- ------ -----
Total Revenues....................... $484.1 100.0% $580.8 100.0% $650.7 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
The Company's revenue growth is attributable to the growth of the mutual fund
industry and the implementation of the Company's business strategy. The
primary components of the Company's ongoing business strategy are: (i)
enhancement of the Company's technology base and development of new services
and products to strengthen its position as the leading provider of information
processing services to the United States mutual fund market; (ii) expansion
into markets where the Company can provide similar information processing and
computer software services and products; and (iii) formation of strategic
alliances and joint ventures with and acquisitions of established companies
operating in the Company's target markets, both in the United States and
internationally.
The growing volume and complexity of transactions in the financial services
market and other markets have resulted in increasing demand for more
sophisticated systems to process information in a timely and accurate manner.
Computer technology has provided an effective means of addressing this demand,
but requires
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<PAGE>
significant capital investment and expertise. As a result, many organizations
have relied on outside providers, such as the Company. The Company expects the
information processing needs of these organizations to continue to grow in
volume and complexity and believes that this will present the Company with
significant opportunities for its services and products.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
OTHER OPERATING AND FINANCIAL DATA 1995 1996 1997
- ---------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Investment Market Values (in
thousands)(1)
Computer Sciences Corporation (2)..... $354,466 $360,400
State Street Corporation.............. $134,375 192,992 347,509
Euronet Services, Inc. (3)............ $ 1,167 $ 9,136
Other Operating Data
Mutual fund shareowner accounts
processed (millions)
U.S................................. 36.5 41.1 45.0
Canada.............................. 0.1 0.3 0.9
United Kingdom...................... 0.2 0.4 1.0
TRAC-2000 mutual fund accounts
(millions)(4)........................ 1.4 1.3 1.9
TRAC-200 participants (thousands)..... 588 560 696
Portfolio Accounting System
portfolios........................... 1,526 1,725 1,925
Automated Work Distributor
workstations......................... 10,700 19,700 35,100
Output Technologies pages printed
(millions)........................... 936 1,230 1,440
Argus pharmaceutical claims processed
(millions)........................... 129 129 145
</TABLE>
- --------
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2) On August 1, 1996, Continuum merged with Computer Sciences Corporation
("CSC") in a tax-free share exchange and as a result became a wholly owned
subsidiary of CSC. DST, which prior to the merger owned approximately 23%
of Continuum, received in the exchange CSC common stock with a value of
$295 million based upon the closing price of CSC common stock on August 1,
1996.
(3) Euronet Services, Inc. finalized its initial public offering in March
1997.
(4) Included in TA2000 mutual fund shareowner accounts processed.
UNITED STATES MUTUAL FUND AND INVESTMENT MANAGEMENT
Most of the Company's mutual fund clients are "open-end" mutual fund
companies, which obtain funds for investment by making a continuous offering
of their shares. Purchases and sales (referred to as "redemptions") of open-
end mutual fund shares are typically effected between shareowners and the
fund, rather than between shareowners. These transactions are based on the net
asset value of the mutual funds on the date of purchase or redemption, which
requires that the assets of the fund and the interests of its shareowners be
valued daily. Accordingly, the timely and accurate accounting and
recordkeeping of shareowner and fund investment activity is a critical
function.
In addition, as investors have been attracted to the wide array of investment
products with increasingly specialized features offered by mutual funds, the
mutual fund market has seen a significant increase in the number of mutual
fund shareowner accounts, in the volume of transactions and in the complexity
of the recordkeeping. The Company has made significant investments in computer
capacity and systems to handle the increasing volumes, to maintain its
leadership position and to improve quality and productivity.
The Company typically enters into multi-year written agreements with its
clients. The Company has long-term relationships with its mutual fund clients
and most of the shareowner accounts serviced by the Company are at mutual fund
organizations that have been clients of the Company for more than five years.
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<PAGE>
SHAREOWNER ACCOUNTING AND RECORDKEEPING
The Company's proprietary applications system for mutual fund recordkeeping
and accounting is TA2000, which performs shareowners related functions for
mutual funds, including processing purchases, redemptions, exchanges and
transfers of shares; maintaining shareowner identification and share ownership
records; reconciling cash and share activity; calculating and disbursing
commissions to broker-dealers and other distributors; processing dividends;
creating and tabulating proxies; reporting sales; and providing information
for printing of shareowner transaction data and year-end tax statements. The
system processes load, no-load, multi-class and money funds. TA2000 also
performs many specialized tasks, such as asset allocation, wrap fee
calculations and broker commissions. At December 31, 1997, the Company
provided shareowner accounting processing services for approximately 45
million U.S. mutual fund shareowner accounts.
The Company offers its mutual fund shareowner services on a wide range of
levels. "Full" service processing includes all necessary administrative and
clerical support to process and maintain shareowner records, answer telephone
inquiries from shareowners, broker-dealers and others, and handle the TA2000
functions described above. "Remote" service processing is designed to allow
clients to have their own administrative and clerical staff access TA2000 at
the Winchester Data Center using the Company's telecommunications network.
Selection by a client of the level of service is influenced by a number of
factors, including cost and level of desired control over interaction with
fund shareowners. To address clients' desires to control shareowner
interaction, the Company structured its services to allow the clients'
personnel to handle customer telephone inquiries while the Company's or an
affiliate's personnel retain transaction processing functions. This service
was facilitated by the implementation of Automated Work Distributor (AWD),
which images transactions and makes them, together with the status of the
transactions, electronically available to the personnel handling the telephone
calls.
The Company derives revenues from its mutual fund shareowner accounting
services through fees charged for use of the Company's proprietary software
systems, clerical processing services and other related products. These fees
are generally charged on an account and number of funds basis, for system
processing services and on an account, funds and transaction basis for
clerical services. The Company's policy is not to license TA2000.
RETIREMENT PLAN ACCOUNTING AND RECORDKEEPING
The Company's TRAC-2000 product provides recordkeeping and administration for
defined contribution plans, including 401(k), 403b and 457 plans, Simplified
Employee Pensions and profit sharing plans that invest in mutual funds,
company stock guaranteed investment contracts and other investment products.
TRAC-2000 interfaces directly with TA2000 thereby eliminating the normal
reconciliation problems which occur when different systems are used for the
participant recordkeeping and mutual fund shareowner accounting. TRAC-2000 is
offered on a full-service basis through BFDS and on a remote basis by the
Company. The Company regards the retirement plan market as a significant
growth opportunity for its services and products because: (i) that market is
relatively new and experiencing significant expansion as more employers shift
away from defined benefit programs; (ii) mutual funds, because of their
features, are increasingly popular selections for investment by such plans;
and (iii) each retirement plan participant normally elects to use multiple
mutual fund investment accounts.
Revenues from these services are based generally on the number of participants
in the defined contribution plans.
ADDITIONAL MUTUAL FUND SERVICES AND PRODUCTS
The Company has developed products to meet the changing service requirements
and distribution channels of the mutual fund market as well as the increasing
regulatory requirements affecting that market.
The Company maintains a high volume interface with Fund/Serv and Networking,
two systems developed by the National Securities Clearing Corporation for
broker-dealer distributed mutual funds. The Company has also
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<PAGE>
developed systems and communication infrastructure products that facilitate
emerging channels of mutual fund sales and distribution. One of these systems,
FanMail, provides independent financial planners with trade confirmations,
account positions and other data via public network access. A Windows-based
enhancement to FanMail called Vision Mutual Fund Gateway provides real-time
inquiry capabilities for broker-dealers and the financial planning community.
The Company has developed the Financial Access Network (FAN) to support
emerging forms of electronic distribution for mutual funds. FAN enables mutual
fund companies to transmit mutual fund literature via the Internet to
shareowners and potential investors who visit their proprietary web page. In
addition, mutual fund shareowners can review their accounts and direct mutual
fund transactions, such as purchases, redemptions and exchanges from personal
computers.
Revenues from these new services and products are based generally on the
number of transactions processed.
BOSTON FINANCIAL SERVICES, INC. ("BFDS")
An important distribution channel for the Company's services and products is
its joint ventures. BFDS is a 50% owned joint venture with State Street
Corporation ("State Street"), the parent company of State Street Bank & Trust
Company. BFDS combines use of the Company's proprietary applications and
output processing capabilities with the marketing capabilities and custodial
services of State Street to provide full-service shareowner accounting and
recordkeeping services to U.S. mutual funds. BFDS also offers remittance and
proxy processing, class action administration services, teleservicing and
full-service support for defined contribution plans using the Company's TRAC-
2000 system. BFDS is the Company's largest customer, accounting for
approximately 11% of the Company's revenues in 1997.
AUTOMATED WORKFLOW MANAGEMENT
The Company's Automated Work Distributor (AWD) system is an image-based,
intelligent workflow management and customer support system. Introduced to
enhance the Company's mutual fund shareowner recordkeeping system, AWD
captures transactions at their source (such as paper, phone calls or faxes),
converts them into electronic images, stores them and electronically moves
them to the appropriate work area and person for processing. AWD integrates
high-speed scanning, character recognition, voice recognition, optical storage
and automated correspondence to automate work processes traditionally
performed by hand. AWD also performs statistical quality control sampling and
provides productivity reporting for each individual using the system.
AWD was designed to interface with a wide range of high volume application
processing systems. AWD utilizes a client server architecture that enables it
to operate on AS/400, Windows NT or UNIX servers utilizing either Windows or
OS/2 client desktops. AWD interfaces with existing mainframe or other server
lines of business applications. AWD is primarily installed in investment
management firms, insurance companies and banks located in the United States,
Canada, United Kingdom, Europe, Australia, South Africa and Asia-Pacific. In
addition, Computer Sciences Corporation Financial Services Group ("CSC-FSG")
has the exclusive right to distribute the Company's AWD product to life and
property and casualty insurance companies worldwide and a non-exclusive right
in the banking industry.
The Company's Advanced Technology Group has developed a number of other
products that can be used with AWD. These products include Customer Service
Work Station, which presents all available customer information at the
telephone representative's workstation; EnCorr, which automates the creation
and printing of correspondence; and PowerStore, which enables optical media
access for stand-alone PCs, client/servers and other computer platforms.
The Company derives AWD revenues from license fees based on the number of
workstations accessing the software, fees for customized installation and
programming services and annual maintenance fees.
C-6
<PAGE>
OUTPUT PROCESSING
Output Technologies, Inc., a wholly owned subsidiary of the Company, performs
electronic printing, variable and selective insertion, pre-sorted mailing and
distribution of custom designed shareowner and other customer communications,
including transaction confirmations, dividend checks, account statements and
year-end tax reports. Additionally, Output Technologies offers
telemarketing/fulfillment services, computer output archival services, design
services and offset printing. Output Technologies has multiple locations
throughout the United States and Canada.
Output Technologies' strategy is to use technology to provide high volume
products and services of superior quality. Output Technologies' products
enable the Company to broaden its product offerings to its clients. Although
Output Technologies provides services to mutual fund and securities transfer
clients of the Company, significant revenues are derived from customers who
are not otherwise clients of DST.
Output Technologies holds a 20% interest in PSI Technologies Corporation
("PSI"), the developer of a Computer Output to Laser Disk (COLD) software
product for archiving documents. In conjunction with this investment, Output
Technologies exclusively markets a customized product using PSI's COLD
software to the mutual fund industry. The revenues generated from Output
Technologies' activities are generally dependent on the volume of output
transactions processed.
PORTFOLIO ACCOUNTING AND INVESTMENT MANAGEMENT PRODUCTS
DST offers products that support the portfolio accounting and investment
management functions of the financial services industry. These products
include the Portfolio Accounting System (PAS), Global Portfolio System (GPS),
HiPortfolio/2 and OpenPerformanceSystems (OPS). DST offers a complete solution
to firms managing mutual funds, institutional advisory accounts, or both.
PAS is an integrated multi-currency fund accounting system that maintains
accounting records for mutual funds and unit investment trusts with U.S. and
international assets, computes daily income and expense for each portfolio and
calculates the fund's daily net asset value (NAV) which appears in the
financial media.
GPS is designed for medium and large investment management companies with
advisory accounts who want a customized solution. The system is a rules-based,
multi-currency transaction processing and portfolio accounting system with a
Windows-based graphical user interface (GUI) and a variety of reporting
alternatives. With its client server, relational database architecture (Sybase
or Oracle), GPS has seamless integration with OPS and can interface with a
wide range of third-party systems offering trading, portfolio management and
custodian communication.
HiPortfolio/2 is also designed for medium and large investment management
firms who are seeking a turnkey system for investment accounting that can meet
their requirements with a minimum amount of customization. HiPortfolio/2
includes OpenFrontOffice, a front office GUI-based trading system as well as
OpenDataWarehouse, a complete data warehouse and reporting system.
OPS is a multi-currency performance measurement and attribution system that
enables investment companies to calculate and evaluate the performance of
their portfolios against industry standard benchmarks while adhering to the
performance presentation standards of the Association for Investment
Management and Research. OPS uses relational database architecture (Sybase or
Oracle), and offers multiple delivery options. OPS is available as a remote
product or for in-house installation on UNIX or Windows NT server platforms.
OPS is offered both on a fully integrated basis with the PAS, GPS or
HiPortfolio/2 products or on a stand-alone basis.
SECURITIES TRANSFER MARKET
The Company's existing system to support the securities transfer market, the
Securities Transfer System (STS), provides a wide array of corporate stock and
bond security holder recordkeeping services, including maintaining
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<PAGE>
ownership records, recording ownership changes, issuing certificates, issuing
and tabulating proxies, calculating and disbursing dividends and interest,
processing dividend reinvestments, tax reporting and responding to shareowner
inquiries through on-line data access. STS also maintains shareowner activity
for closed-end mutual funds and unit investment trusts.
DST provides remote system access to a wide range of customers, including
BFDS. Significant consolidation of service providers in the 1990s has allowed
DST to pursue end user clients through BFDS.
The Company's largest STS customer is Boston EquiServe, which was created by
the result of the 1995 merger of BFDS's securities transfer business with the
Bank of Boston Corporation's securities transfer business. This joint venture
created one of the largest securities transfer agents in the United States,
processing approximately 14 million accounts. Boston EquiServe currently uses
STS to process approximately 4 million accounts with the remaining accounts
processed by the Bank of Boston on a system owned by the Bank of Boston. DST
is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. Initial conversions
of Boston EquiServe's accounts onto Fairway commenced in late 1997 and other
accounts will be converted as additional functionality is delivered.
As discussed under Item 1. Business, Recent Developments in the Company's
Business, Boston EquiServe announced an agreement to merge with First Chicago
Trust Company of New York. In conjunction with the merger, DST entered into a
memorandum of understanding to complete development of Fairway for the
exclusive use by EquiServe to process all of its accounts. DST believes that
an ownership in EquiServe provides the most effective participation in the
opportunities presented by the continued consolidation of the stock transfer
industry.
WINCHESTER INFORMATION PROCESSING SERVICES
Winchester Information Processing Services supports DST's computing needs with
two data centers in Kansas City.
The Winchester Data Center ("Winchester"), provides the Company's primary
central computer operations and data processing facility. Winchester has a
total of 161,000 square feet, of which 74,000 square feet is a raised floor
computer room. Winchester has mainframe computers with a combined processing
capacity of over 3,300 million instructions per second (MIPS) and direct
access storage devices (DASD) with an aggregate storage capacity which exceeds
16 terrabytes. Winchester also contains over 100 servers supporting NT, UNIX,
and AS/400 small and midrange computing environments. These servers are used
to support DST's products, automated voice response, Internet services and
processing for certain of the Company's affiliates. The facility is virtually
disaster-proof and is able to withstand tornado-force winds of over 260 miles
per hour.
The Poindexter Data Center ("Poindexter") provides the Company's AWD Image
processing services. Poindexter has a total of 11,500 square feet, of which
8,500 are currently used for the computer room. Poindexter contains IBM AS/400
computers and optical storage systems, which support over 1,600 AWD Image
users. AWD users include DST's Full-Service area as well as several of the
Company's remote AWD customers. Poindexter also houses over 100 servers
supporting DST's products. Winchester's remote tape storage using IBM's
automated tape libraries and IBM's SP/2 computers, which support Argus Health
System, Inc. processing.
Both data centers are staffed 24-hours-a-day, seven-days-a-week and have self-
contained power plants with mechanical and electrical systems that operate
virtually without interruption in the event of commercial power loss. The data
centers utilize fully redundant telecommunications networks serving the
Company's clients. The network, which serves more than 92,000 computer users,
has redundant pathing and software which provides for automatic rerouting of
data transmission in the event of carrier circuit failure.
The Company has an agreement with a commercial disaster recovery provider for
computer processing in the event of a computer failure at Winchester. The
Company's data communications network is linked to the disaster
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<PAGE>
recovery provider's facility and network to enable client access to the
disaster recovery facility. Poindexter's AS/400 Processors are backed up real-
time to Winchester. The Company test the disaster recovery processes for both
data centers on a regularly scheduled basis.
SATELLITE TV SUBSCRIBER MANAGEMENT
DBS Systems Corporation ("DBS"), a wholly owned subsidiary of the Company, is
a developer and provider of subscriber management software for the DirecTV
satellite system, a product of DirecTV, Inc., a Hughes Electronics company.
DBS's software system manages DirecTV satellite television billing and
subscriber-related activities for DirecTV's U.S. residential satellite
television subscribers. Output Technologies performs the electronic printing
and mailing of subscriber invoices for DBS.
INTERNATIONAL BUSINESSES
EUROPE AND OTHERS
DST INTERNATIONAL LIMITED ("DST INTERNATIONAL")
DST International, a United Kingdom company, provides investment management
and portfolio accounting software and services with over 500 installations in
various countries worldwide, serviced by offices in the United Kingdom,
Australia, New Zealand, Hong Kong, Singapore, Thailand and South Africa. Its
primary applications include HiPortfolio/2, a client server based investment
management system and OpenProducts, a series of GUI front end and back end
products directly integrated with HiPortfolio/2. Among DST International's
other products are Impart/2, Uptix and Paladign. In addition to investment
management and portfolio accounting software and services, DST International
distributes and supports AWD outside North America.
EUROPEAN FINANCIAL DATA SERVICES LIMITED ("EFDS")
A United Kingdom joint venture of DST and State Street Corporation, EFDS
provides full and remote service processing for unit trust and related
products serving nearly one million unit holder accounts at December 31, 1997.
In 1998, EFDS expects to implement FAST2000, a new unit trust accounting
system developed by EFDS for the United Kingdom market.
DST CATALYST, INC. ("DST CATALYST")
DST Catalyst develops, markets, installs and maintains computer systems to
support securities exchanges and brokerage firms and performs research and
consulting related to the development of financial markets and institutions.
During 1997, DST Catalyst primarily derived its revenues from international
projects in Bangkok, Manila, Johannesburg, Tel Aviv and Athens.
CANADA
DST CANADA, INC. ("DST CANADA")
DST Canada, formerly Corfax Benefit Systems Limited, provides remote mutual
fund shareowner processing and licenses its mutual fund shareowner system to
mutual fund companies primarily in the Canadian financial services market.
XEBEC IMAGING SERVICES, INC. ("XEBEC")
Xebec, located principally in Toronto, provides computer output, archival and
print/mail services for various Canadian financial services companies.
CFDS LIMITED ("CFDS")
A Canadian subsidiary of BFDS, CFDS provides full-service processing to the
Canadian mutual fund industry using DST Canada's mutual fund system and full-
service processing for United States off-shore mutual funds using TA2000.
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<PAGE>
PRESCRIPTION CLAIM PROCESSING
Argus Health Systems, Inc. ("Argus") is a 50% owned joint venture of the
Company and a privately held life insurance holding company. Argus provides
managed care pharmaceutical claim processing services using its proprietary
computer processing system, Integrated Pharmacy Network System ("IPNS"). IPNS
is an interactive, database managed processing system for administration of
prescription drug claims, pharmacy and member reimbursement and drug
utilization review. IPNS, which provides substantial flexibility to
accommodate varying provider requirements, allows point-of-sale monitoring and
control of pharmacy plan benefits with on-line benefit authorization and
alerts dispensing pharmacists to potential medication problems arising from
such factors as duplicate prescriptions, incorrect dosage and drug
interactions. Argus is currently developing a new client/server-based claims
processing system which will replace IPNS.
The Company provides data processing, telecommunications and output services
to Argus and Argus operates IPNS at Winchester and Poindexter. Its primary
clients are providers of pharmacy benefit plans including insurance companies,
health maintenance organizations, preferred provider organizations and other
pharmacy benefit managers.
MARKETING/DISTRIBUTION
The Company's mutual fund systems and related services and products are
marketed to mutual fund management firms and to distributors of mutual fund
shares, such as banks, insurance companies, brokerage firms and third-party
administration firms. Increasingly, such firms manage multiple mutual fund
products to address different investment objectives. Generally, mutual fund
products are promoted and distributed in fund groups which provide investors
with a variety of mutual fund investments and the ability to exchange
investments from one fund to another within the group. This often means that a
single service agent, such as the Company, is used for all funds in the group.
The Company's output processing business has sixteen offices across North
America and distributes its products to the mutual fund, banking, brokerage,
insurance, healthcare, telecommunications, transportation and utilities
industries. A team of client administrators manages the needs of clients and
national sales force supports efforts in the U.S. and Canada.
DST International markets its investment management and portfolio accounting
software and services to medium and large investment management firms through
its offices in the United Kingdom, Australia, New Zealand, Hong Kong,
Singapore, Thailand and South Africa. Generally, DST International's customers
are seeking a turnkey system for investment accounting that can meet their
requirements with a minimum amount of customization. Each of DST
International's offices has a dedicated sales force and a team of consultants
who can sell, install and implement these products.
The Company identifies potential users of its products and services and
tailors its marketing programs to focus on their needs. The Company's
marketing efforts also include cross-selling the Company's wide range of
services and products to its existing clients. The Company's sales efforts are
closely coordinated with its joint venture and strategic alliance partners.
Sources of new business for the Company include (i) existing clients of the
Company, particularly with respect to complementary and new services and
products; (ii) companies relying on their own in-house capabilities and not
using outside vendors; (iii) companies using competitors' systems; and (iv)
new entrants into the markets served by the Company. The Company considers its
existing client base to be one of its best sources of new business.
SOFTWARE DEVELOPMENT AND MAINTENANCE
The Company continually upgrades and enhances its proprietary products and
services to meet the needs of its clients and the financial services industry.
The Company's Advanced Technology Group develops new products
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<PAGE>
designed to address emerging information processing needs of both existing and
potential markets. Operating costs include approximately $59.1 million, $82.1
million and $92.1 million during the years ended December 31, 1995, 1996 and
1997, respectively, for software development and maintenance and enhancements
to its proprietary systems and software products.
COMPETITION
The Company believes that competition in the markets in which it operates is
based largely on quality of service, features offered including the ability to
handle rapidly changing transaction volumes, commitment to hardware capacity
and software development, and price. The Company believes there is significant
existing competition in its markets.
The Company's shareowner accounting systems compete not only with third-party
providers but also with in-house systems and broker-dealer firms distributing
mutual funds who retain the shareowner account processing. Financial
institutions competing with the Company may have an advantage because they can
take into consideration the value of their clients' funds on deposit in
pricing their services. The Company's ability to compete effectively is
dependent on the availability of capital. Some of the Company's competitors
have greater resources and greater access to capital than the Company and its
affiliates.
The Company has significant competition with its portfolio accounting and
investment management systems. Principal competitors are third-party software
service providers and those companies which license their products. The key
competitive factors in the investment management systems are the accuracy and
timeliness of processed information provided to customers, features and
adaptability of the software, level and quality of customer support, level of
software development expertise and price. The Company believes that it
competes effectively in the market by its ongoing investment in its products
and the development of new products to meet the needs of the portfolio
accountants and investment managers.
The Company's automated workflow system competes with other data processing
and financial software vendors. Competitive factors include features and
adaptability of the software, level and quality of customer support, level of
software development expertise and price. The Company believes that it can
compete effectively in those markets the Company chooses to pursue.
The key competitive factors in output services of the Company are quality of
services, quality of customer support, ability to handle large volumes at
month and quarter ends and speed of production. The Company's principal
competitors in this business are local companies in the cities where the
Company's printing operations are located and several large national
organizations. The Company believes that it competes effectively with others
in the market.
EMPLOYEES
As of December 31, 1997, the Company and its majority owned subsidiaries
employed approximately 6,000 employees. In addition, 50% owned unconsolidated
affiliates of the Company and its subsidiaries employed approximately 3,200
employees, including approximately 2,400 at BFDS.
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<PAGE>
ITEM 2. PROPERTIES
PROPERTIES
The following table provides certain summary information with respect to the
principal properties owned or leased by the Company. The Company believes the
facilities, office space and other properties owned or leased are adequate for
its current operations.
<TABLE>
<CAPTION>
LOCATION USE(1) OWNED/LEASED(2) SQUARE FEET
-------- ------ --------------- -----------
<S> <C> <C> <C>
Kansas City, MO Data Center Owned 161,000
Kansas City, MO Office Space/Data Center Owned 477,000
Kansas City, MO(3) Office Space Leased 671,000
Kansas City, MO Production Owned 1,114,000
Kansas City, MO Production Leased 32,000
Boston, MA Office Space Leased 21,000
Charlotte, NC Office Space Leased 31,000
Denver, CO Production Leased 94,000
East Hartford, CT Production Leased 75,000
Miami, FL Production Leased 25,000
Mt. Prospect, IL Production Leased 110,000
New York, NY Production Leased 27,000
Phoenix, AZ Production Leased 20,000
St. Louis, MO Production Leased 39,000
Westwood, MA Production Leased 128,000
Wheeling, IL Production Leased 26,000
Australia Office Space Leased 30,000
Canada Office Space Leased 34,000
Canada Production Leased 88,000
United Kingdom Office Space Leased 49,000
</TABLE>
- --------
(1) Property specified as being used for production in the above table
includes space used for storage and manufacturing and as warehouse space.
(2) Excluded from the table are a number of surface parking lots in the
downtown Kansas City, Missouri area. The table also excludes nine
properties outside the Kansas City, Missouri metropolitan area having an
aggregate 57,353 square feet of office or production space, which are each
less than 20,000 square feet. In addition to the property listed in the
table and discussed above, the Company, through its subsidiaries and joint
ventures, leases space in the Netherlands, Switzerland, Belgium, South
Africa, Hong Kong, Singapore, Thailand and New Zealand. The property
listed in the table as owned by the Company is subject to mortgage
indebtedness in an aggregate amount of approximately $34 million as of
December 31, 1997.
(3) Includes 352,680 square feet master-leased by a wholly owned subsidiary of
the Company, of which 122,318 square feet is subleased to the Company or
its other subsidiaries.
The discussion under "Winchester Information Processing Services" in Item 1
hereto is hereby incorporated by reference in partial response to this Item 2.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of their businesses. While the ultimate outcome
of these legal proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with legal counsel, that the final
outcome in such proceedings, in the aggregate, would not have a material
adverse effect on the consolidated financial condition or results of
operations of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to security holders during the fourth
quarter of calendar year 1997.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included as
an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of
being included in the Company's Definitive Proxy Statement in connection with
its annual meeting of stockholders scheduled for May 12, 1998.
All executive officers are elected by and serve at the discretion of the
Company's Board of Directors. Certain of the executive officers have
employment agreements with the Company. There are no arrangements or
understandings between the executive officers and any other person pursuant to
which he or she was or is to be selected as an officer, except with respect to
the executive officers who have entered into employment agreements, which
agreements designate the position or positions to be held by the executive
officer. None of the executive officers are related to one another by family.
THOMAS A. MCDONNELL, age 52, has served as director of the Company since 1971.
He has served as Chief Executive Officer of the Company since October 1984 and
as President of the Company since January 1973 (except for a 30-month period
from October 1984 to April 1987). He served as Treasurer of the Company from
February 1973 to August 1995 and as Vice Chairman of the Board from June 1984
to September 1995. He served as Executive Vice President of Kansas City
Southern Industries ("KCSI") from February 1987 until October 1995 and as a
director of KCSI from 1983 until October 1995. He is a director of BHA Group,
Inc., Cerner Corporation, Computer Sciences Corporation, Euronet Services,
Inc., and Informix Software, Inc.
THOMAS A. MCCULLOUGH, age 55, is Executive Vice President of the Company. He
has served as a director of the Company since 1990 and as Executive Vice
President since April 1987. His responsibilities include full-service mutual
fund processing, remote-service mutual fund client servicing, information
systems, portfolio accounting, securities transfer and product sales and
marketing.
ROBERT C. CANFIELD, age 59, has served as Senior Vice President, General
Counsel and Secretary since August 1995 and as Senior Vice President-Law of
the Company from March 1992 to August 1995.
MORTON B. COMER, age 65, has served as Senior Vice President of the Company
since April 1991. He was responsible for the Company's full-service mutual
fund processing and corporate support until February 1998 at which time he
assumed duties at the Company's affiliate, Boston EquiServe, LLP.
KENNETH V. HAGER, age 47, has served as Vice President and Chief Financial
Officer of the Company since April 1988 and as Treasurer since August 1995. He
is responsible for the financial, internal audit and data security functions
of the Company. He is a director of Digital Holdings, Inc.
JAMES P. HORAN, age 54, has served as Chief Information Officer of the Company
since July 1988. He is responsible for the Advanced Technology Group, AWD and
the Information Systems Division which includes mutual fund systems
development and support and remote mutual fund services.
JONATHAN J. BOEHM, age 37, joined the Company as a Group Vice President in
November 1997. He is responsible for the Company's full-service mutual fund
processing and corporate support. Prior to joining the company, he had been a
First Vice President with Kemper Service Company from July 1993 to November
1997 and a Vice President of Kemper Service Company from October 1990 through
July 1993.
JOHN W. MCBRIDE, age 55, has served as Group Vice President of the Company
since 1993 and as Vice President of the Company from December 1985 to May
1993. He is responsible for the operations of the Company's Winchester and
Poindexter Data Centers.
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ROBERT L. TRITT, age 42, has served as Group Vice President of the Company
since 1989. He is responsible for the Company's remote mutual fund processing
operations.
MICHAEL A. WATERFORD, age 55, has served as Group Vice President of the
Company since 1986. He is responsible for certain of the Company's development
projects and Year 2000 readiness.
J. PHILIP KIRK, JR., age 60, has served as Vice President of the Company since
January 1988 and as Chairman of DST Realty, Inc. since July 1996. From March
1987 to July 1996 he served as President of DST Realty, Inc.
CHARLES W. SCHELLHORN, age 49, has served as President of Output Technologies,
Inc. since 1990 and Chairman of the Board of Output Technologies, Inc. since
1991.
J. MICHAEL WINN, age 50, has served since June 1993 as Managing Director of
DST International Limited, a wholly owned subsidiary of the Company. From
February 1992 to June 1993, he was Managing Director of Clarke & Tilley Ltd.
when it was acquired by the Company.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades under the symbol "DST" principally on the
New York Stock Exchange ("NYSE"). Additionally, the Company listed its common
stock on the Chicago Stock Exchange on January 21, 1998. As of February 27,
1998, there were approximately 14,000 beneficial owners of the Company's
common stock.
No cash dividends have been paid since the initial public offering of the
Company's common stock on October 31, 1995. The Company intends to retain its
earnings for use in its business and therefore does not anticipate paying any
cash dividends in the foreseeable future.
The information set forth in response to Item 201 of Regulation S-K in Part II
Item 8, Financial Statements, and Supplementary Data at Note 16, Quarterly
Financial Data (Unaudited) ("Note 16"), in this Form 10-K is incorporated by
reference in partial response to this Item 5. The prices set forth in Note 16
do not include commissions and do not necessarily represent actual
transactions. The closing price of the Company's common stock on the NYSE on
December 31, 1997 was $42.6875.
The Company did not have any unregistered sales of securities in 1997.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth in the following table have
been derived from the consolidated financial statements for the Company and
notes thereto. The consolidated statement of income data for the years ended
December 31, 1995, 1996 and 1997, and the consolidated balance sheet data as
of December 31, 1996 and 1997, are derived from the consolidated financial
statements of the Company and the related notes thereto, which have been
audited by Price Waterhouse LLP, independent accountants and which are
included in Item 8 elsewhere in this Form 10-K. The consolidated income
statement data for the years ended December 31, 1993 and 1994, and the
consolidated balance sheet data as of December 31, 1993, 1994 and 1995, are
derived from the consolidated financial statements and notes thereto of the
Company, which have also been audited by Price Waterhouse LLP, but which are
not contained herein. This data should be read in conjunction with and is
qualified by reference to, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Item 7 in this Form 10-K and
the Company's audited consolidated financial statements, including the notes
thereto and the independent accountants report thereon and the other financial
information included in Item 8 in this Form 10-K.
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<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................... $341.2 $401.7 $484.1 $ 580.8 $ 650.7
Income from operations............. 29.6 35.0 40.8 57.0 92.2
Interest expense................... (10.9) (14.0) (22.0) (6.9) (7.7)
Gains on sales of equity
investments*...................... 44.9 223.4 1.5
Equity in earnings (losses) of
unconsolidated affiliates......... 11.7 22.2 6.5 (4.0) (1.3)
Income before income taxes and
minority interests................ 31.7 46.6 73.8 273.6 88.7
Income from continuing operations*. 22.8 33.4 27.7 167.2 59.0
Income per share from continuing
operations
Basic**.......................... 0.74 1.09 0.82 3.35 1.20
Diluted**........................ 0.74 1.09 0.82 3.32 1.18
Total assets....................... 401.7 510.4 749.5 1,121.6 1,355.4
Long-term obligations.............. $146.0 $175.8 $ 52.5 $ 75.9 $ 92.0
Cash dividends per common share**.. $ -- $ --
</TABLE>
- --------
*In the third quarter of 1996, the Company recognized a one-time gain on the
CSC/Continuum merger. See Note 4 to the consolidated financial statements.
**The Company's capital structure substantially changed as a result of the
initial public offering of the Company's common stock in the fourth quarter
of 1995. Earnings per share data prior to the public offering is reflective
of being a wholly owned subsidiary of Kansas City Southern Industries, Inc.
("KCSI"). The Company paid cash dividends of $6.2 million, $6.2 million and
$150 million to KCSI in 1993, 1994 and 1995, respectively, which have been
excluded from this table. The declaration and payment of dividends is at
the discretion of the Board of Directors which, prior to the public
offering, was controlled by KCSI.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions set forth in this Annual Report on Form 10-K contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Annual Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by their
use of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results
could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or
combination of factors including, but not limited to, those factors identified
in the Company's Current Report on Form 8-K dated March 22, 1996, which is
hereby incorporated by reference. This report has been filed with the United
States Securities and Exchange Commission (the "SEC" or the "Commission") in
Washington, D.C. and can be obtained by contacting the SEC's Public Reference
Branch. Readers are strongly encouraged to obtain and consider the factors
listed in the March 22, 1996 Current Report and any amendments or
modifications thereof when evaluating any forward-looking statements
concerning the Company. The Company will not update any forward-looking
statements in this Annual Report to reflect future events or developments.
INTRODUCTION
The Company provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance
providers, banks and other financial services organizations.
The Company's revenues are generated from a variety of sources. The Company's
mutual fund, securities transfer and portfolio accounting processing revenues
are primarily dependent upon base or maintenance fees per account or
portfolio. Revenues from output services for printing and mailing of customer
documents and archival are dependent upon the volume of output transactions
processed. The Company provides data processing services to Argus and Computer
Sciences Corporation Financial Services Group ("CSC-FSG") to process their
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proprietary applications. Revenues from Argus and CSC-FSG are primarily based
upon data center capacity that is utilized, which is significantly influenced
by each company's volume of transactions. The Company also licenses its work
management software, certain investment management and portfolio accounting
software and securities exchange systems and, outside the United States,
certain mutual fund shareowner account systems. Revenues for licensed software
products are primarily comprised of: (i) license fees; (ii) consulting and
development revenues which are based primarily on time and materials billings;
and (iii) annual maintenance fees. The license fee component of these revenues
is not material to the Company as a whole.
The Company derives part of its net income from its pro rata share in the
earnings (losses) of certain unconsolidated affiliates, primarily BFDS, Argus,
EFDS and prior to its merger with CSC discussed below, Continuum. BFDS
provides full-service transfer agency functions for mutual funds utilizing
DST's proprietary TA2000 system. BFDS also offers remittance and proxy
processing, class action administrative services teleservicing and full-
service support for defined contribution plans using the Company's TRAC2000
system. Argus provides managed care pharmacy claim processing services to the
health insurance industry utilizing the Company's data center facilities. EFDS
provides full and remote services in the United Kingdom for unit trusts and
related products, servicing nearly one million unitholder accounts in the
United Kingdom at December 31, 1997.
RECENT EVENTS
SECURITIES TRANSFER DEVELOPMENTS
On February 10, 1998, Boston EquiServe, LLP ("Boston EquiServe") a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50%
owned joint venture of the Company and State Street Corporation) and Bank of
Boston Corporation, announced an agreement to merge with First Chicago Trust
Company of New York ("First Chicago") which would create the largest
securities transfer agent in the United States, processing approximately 25
million accounts. The merger of the two businesses to be named EquiServe, LLP,
is expected to be completed in the second quarter of 1998.
DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with
the merger, DST entered into a memorandum of understanding with Boston
EquiServe and First Chicago to complete development of the system for the
exclusive use by EquiServe to process all of its accounts. The Company has
also agreed with EquiServe to provide data processing services for EquiServe
to use the new system. The terms and conditions of this memorandum of
understanding will be set forth in a definitive agreement, the completion of
which is a condition to the closing of the merger agreement between Boston
EquiServe and First Chicago. Upon acceptance of defined components of Fairway,
DST will contribute Fairway and its non-EquiServe stock transfer processing
business (approximately 2 million accounts) to EquiServe for a direct
ownership interest in EquiServe. DST will also continue to hold an indirect
ownership interest in EquiServe through BFDS.
DBS SYSTEMS CORPORATION
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation ("DBS") for $13.2 million in cash. The $11.6 million
excess of the purchase price over the net assets acquired has been assigned a
useful life of 12 years. The Company had previously acquired 60% of DBS for
$3.0 million in May 1993 and an additional 20% of DBS for $6.0 million in
December 1995. On a pro forma basis, the acquisition did not have a material
impact on the Company's historical results of operations or financial
position.
DST CATALYST, INC.
In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST
Catalyst, Inc. provides software and services to support automated securities
exchange activities and broker order interfaces primarily outside the United
States. On a pro forma basis, the acquisition did not have a material impact
on the Company's historical results of operations or financial position.
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FIRST OF MICHIGAN
In July 1997, the Company sold its interest in First of Michigan Capital
Corporation for $9.6 million. The transaction, on an after-tax basis did not
have a material effect on the Company's financial position or results of
operations.
CONTINUUM
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged with
Computer Sciences Corporation ("CSC") in a tax-free share exchange and as a
result became a wholly owned subsidiary of CSC. DST, which prior to the merger
owned approximately 23% of Continuum, received in the exchange CSC common
stock with a value of $295 million based upon the closing price of CSC common
stock on August 1, 1996. DST recognized a one-time gain after taxes and other
expenses of $127.6 million. In connection with the merger, the Company elected
to make a one-time $13.7 million ESOP contribution to provide funding for
certain Continuum employee withdrawals from DST's ESOP. DST's shares of CSC
represent an approximate 6% interest in the combined company. As a result of
the merger, Continuum ceased to be an unconsolidated equity affiliate of DST
and under generally accepted accounting principles, no part of Continuum or
CSC future earnings since that time have been recognized by DST. DST
recognized equity in losses of Continuum of $1.1 million and $4.9 million in
1995 and 1996, respectively. The Company's investment in CSC is accounted for
as available-for-sale securities. Although CSC does not currently pay cash
dividends, DST will recognize dividend income on any cash dividends received
from CSC.
DST currently provides data processing operations for Computer Sciences
Corporation Financial Services Group ("CSC-FSG"), formerly Continuum, through
DST's Winchester Data Center. The merger has not affected the Company's
existing agreements with CSC-FSG for distribution of DST's AWD work flow
management software to the insurance and banking industries.
Although DST has limited registration rights with respect to the sale of the
CSC stock DST owns, any dispositions of such stock may be restricted by
securities laws. DST has no present intention to dispose of such stock.
In March 1996, Continuum, a then 29% owned unconsolidated affiliate of the
Company, announced the completion of its merger with Hogan Systems, Inc. ("the
Hogan Merger"), a provider of software to banks and financial institutions,
for shares of Continuum stock. As a result of this merger, the Company's
common stock interest in Continuum was reduced from approximately 29% to
approximately 23%. As a result, the Company recorded in March 1996 its
estimated $9.4 million after-tax share of a non-recurring charge recorded by
Continuum in connection with the Hogan Merger.
In December 1995, Continuum acquired SOSC Groupe SA, a French insurance
software firm. The Company recorded in December 1995 its estimated $7.7
million after-tax share of a non-recurring charge in connection with this
acquisition.
STOCK REPURCHASE PROGRAM
In May 1996, the Board of Directors determined it was necessary for the
Company to have common stock available to provide to employees under its stock
award program and to provide to option holders who exercise options. The Board
of Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to
such variations as management considers appropriate. All such purchases are
made in compliance with applicable SEC regulations. The Company has
repurchased 1.0 million shares as of December 31, 1997 for approximately $32.7
million.
INITIAL PUBLIC OFFERING
In the fourth quarter of 1995, the Company and Kansas City Southern
Industries, Inc. ("KCSI") completed an initial public offering ("the
Offerings") of 25.3 million shares of the Company's common stock at an
offering price of $21 per share. Of the 25.3 million shares offered,
19,450,000 were sold by the Company and 5,850,000
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were sold by KCSI. The Company received net proceeds of approximately $384.8
million which were used primarily to repay all debt to KCSI and certain bank
term notes. In conjunction with the Offerings, KCSI exchanged 4,253,508 shares
of its DST common stock for 1,820,000 shares of KCSI stock held by The
Employee Stock Ownership Plan ("ESOP").
CREDIT AGREEMENTS
In December 1996, the Company entered into an amended and restated five-year
revolving credit facility of $105 million (increased to $125 million in
February 1997) with a syndicate of U.S. and international banks. The facility
replaced the three year $150 million agreement entered into in May 1995.
Borrowings under the facility are available at rates based on the Eurodollar,
Prime, Base CD, or Federal Funds rates. A commitment fee of 0.085% per annum
is required on the total amount of the facility. An additional utilization fee
of .050% is required if the principal amount outstanding is greater than 50%
of the total facility. At December 31, 1997, borrowings of $30 million were
outstanding.
The Company also maintains a $50 million bank line of credit to finance
working capital requirements which is available through May 1998. Borrowings
under the facility are available at rates tied to the Eurodollar or federal
funds rates. A commitment fee of 0.105% per annum is required on the unused
portion of the line of credit. At December 31, 1997, borrowings of $25.0
million were outstanding.
KCSI DIVIDEND
In May 1995, the Company paid a cash dividend of $150 million to KCSI ("KCSI
Dividend"), which was financed by the Company's revolving credit facilities.
OUTPUT PROCESSING EXPANSION
In January 1996, the Company's subsidiary, Output Technologies, acquired for
$5.5 million, Xebec Imaging Services, Inc. ("Xebec"), a Canadian company
engaged in output processing.
During 1997, Output Technologies increased its ownership in PSI Technologies
Corporation ("PSI") to 20% for $2.0 million. Output Technologies had
previously acquired a 15% interest in PSI for $2.9 million in 1996. PSI has
developed a Computer Output to Laser Disk (COLD) software product for
archiving documents. In conjunction with the investment, Output Technologies
retains the exclusive right to market a customized product using PSI's COLD
software to the mutual fund industry.
KEMPER AGREEMENTS
In April 1995, the Company purchased substantially all of the assets and
business operations of Supervised Service Company, Inc. ("SSC"), a subsidiary
of Kemper Financial Services, Inc. ("Kemper"). The Company also acquired
certain assets, including computer software from Kemper. The total
consideration for these asset purchases was approximately $39.4 million. In
addition, the Company entered into long-term contracts with Kemper to provide
mutual fund shareowner system services and portfolio accounting system
services for the Kemper Mutual Funds including certain Kemper funds that had
been previously processed by Kemper. As a result of these transactions (the
"Kemper Agreements"), the Company continued to process the Kemper accounts
already processed by the Company for Kemper and began processing the
additional accounts previously processed by Kemper and SSC.
DST INTERNATIONAL EXPANSION
In February 1995, DST International purchased HiPortfolio Pty Ltd.
("HiPortfolio"), an Australian provider of portfolio accounting software and
services for $16.0 million. The acquisition was financed through borrowings
from KCSI.
IFTC TRANSACTION
In January 1995, the Company received shares of State Street Corporation
common stock with a then-market value of $98.2 million in a tax-free exchange
for the Company's 50% interest in Investors Fiduciary Trust
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Company (the "IFTC Transaction"). The Company recognized a pretax gain of
$43.6 million and recorded deferred income taxes of $35.0 million resulting in
a net after-tax gain of $8.6 million on the transaction. As a result of the
IFTC Transaction, equity in IFTC's earnings is no longer included in the
Company's results of operations and dividends on State Street's common stock
are recorded as other income.
MIDLAND DATA SYSTEMS, INC.
In August 1995, the Company sold its joint venture interests in Midland Data
Systems, Inc. ("MDS") and Midland Loan Services L.P. ("MLS") to KCSI. The
transaction did not result in a material net gain or loss to the Company,
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results for the years
ended December 31, (dollars in millions, except per share amounts).
<TABLE>
<CAPTION>
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
OPERATING RESULTS
Revenues $484.1 $580.8 $650.7
Costs and expenses................................... 373.6 431.6 479.1
Depreciation and amortization........................ 69.7 78.5 79.4
Other expense........................................ 13.7
Income from operations................................. 40.8 57.0 92.2
Interest expense..................................... (22.0) (6.9) (7.7)
Other income, net.................................... 3.6 4.1 4.0
Gains on sales of equity investments................. 44.9 223.4 1.5
Equity in earnings (losses) of unconsolidated
affiliates.......................................... 6.5 (4.0) (1.3)
Income before income taxes and minority interests...... 73.8 273.6 88.7
Income taxes......................................... 46.1 105.9 29.2
Minority interests................................... 0.5 0.5
Net income............................................. $ 27.7 $167.2 $ 59.0
Basic earnings per share............................... $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share............................. $ 0.82 $ 3.32 $ 1.18
AS A PERCENTAGE OF REVENUES
Revenues............................................... 100.0% 100.0% 100.0%
Costs and expenses................................... 77.2 74.3 73.6
Depreciation and amortization........................ 14.4 13.5 12.2
Other expense........................................ 2.4
Income from operations................................. 8.4 9.8 14.2
Interest expense..................................... (4.5) (1.2) (1.2)
Other income, net.................................... 0.7 0.7 0.6
Gains on sales of equity investments................. 9.3 38.5 0.2
Equity in earnings (losses) of unconsolidated
affiliates.......................................... 1.3 (0.7) (0.2)
Income before income taxes and minority interests...... 15.2 47.1 13.6
Income taxes......................................... 9.5 18.2 4.4
Minority interests................................... 0.1 0.1
Net income............................................. 5.7% 28.8% 9.1%
</TABLE>
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Consolidated revenues for the year ended December 31, 1997 increased
12.0% over the prior year to $650.7 million. U.S. revenues increased 10.7% to
$549.8 million in 1997. U.S. mutual fund processing revenues for 1997
increased 11.5% over the prior year as shareowner accounts serviced increased
9.5% from 41.1 million at December 31, 1996 to 45.0 million at December 31,
1997. Accounts serviced at December 31, 1997 include approximately 900,000
accounts which were converted to TA2000 during the fourth quarter. A remote
client of the Company internalized its processing subsequent to year-end
causing a loss of approximately one million accounts. Output Technologies'
U.S. revenues in 1997 increased 8.1% over the prior year due to increased
business volumes including a 16.8% increase in pages printed. U.S. AWD product
revenues for 1997 increased 10.5% over the prior year primarily due to an
increase in the number of AWD workstations licensed. Subscriber management
revenues increased over 50% versus the prior year due to increases in the
number of DirecTV satellite subscribers serviced by DBS Systems Corporation.
Revenues from international operations for the year increased 19.6% to $100.9
million, driven primarily by increases in investment accounting and AWD
license and service revenues. In addition, revenues of $1.3 million were
recorded by DST Catalyst, Inc. which was acquired in August 1997.
COSTS AND EXPENSES. Consolidated costs and expenses for 1997 increased 11.0%
to $497.1 million.
U.S. costs and expenses increased $34.4 million or 9.8%. Personnel costs
increased 12.8% over 1996 as a result of increased staff levels to support
volume growth and increased wages primarily for data processing professionals.
Occupancy costs also increased to support increased staffing and business
volumes. Costs and expenses from international businesses for the year
increased $13.1 million or 16.5% due to the continued development of DST
International's new portfolio accounting system, GPS2000, and additional
staffing to support the increased investment management and AWD business
volumes.
The Company has experienced some increases in costs necessary to hire and
retain computer programmers and other systems professionals. While these cost
increases have not materially affected the Company's overall cost structure to
date, the Company believes that the costs associated with computer programmers
and other systems professionals may continue to increase at least through the
Year 2000 at rates above general inflation.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the year
increased $0.8 million, or 1.0%. The containment of depreciation and
amortization expenses in 1997 is primarily the result of lower capital
expenditures in 1996 and 1997 compared to prior years, decreases in the unit
costs of electronic data processing equipment and the Company's use of
accelerated depreciation methods.
OTHER EXPENSE. In connection with the CSC/Continuum merger in 1996, the
Company accrued a one-time $13.7 million ESOP contribution which provided
funding for certain Continuum employee withdrawals from the ESOP.
INTEREST EXPENSE. Interest expense increased to $7.7 million, or 10.5% for the
year on higher average debt balances.
OTHER INCOME. Other income consists mainly of dividends received on shares of
State Street stock held by the Company and amortization of deferred non-
operating gains.
GAINS ON SALES OF EQUITY INVESTMENTS. The 1997 amount primarily represents the
Company's gain on sale of its investment in First of Michigan. The 1996 amount
represents the Company's gain on the CSC/Continuum merger.
UNCONSOLIDATED AFFILIATES. Equity in earnings of unconsolidated affiliates
decreased $2.2 million in 1997 (excluding equity in earnings of Continuum from
1996 results) as a result of increased losses at EFDS, partially offset by
improved earnings at BFDS and Argus. Argus has received notice of termination
from a significant
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<PAGE>
client whose contract terminates in the first quarter 1998. DST recorded
losses of $11.8 million from EFDS in 1997 as compared to $6.0 million in 1996.
Increased losses at EFDS were the result of continued development of the new
FAST2000 software and a $1.0 million (DST share) write-off of costs associated
with hardware which is expected to be replaced by FAST2000 and software in
1998. 1997 EFDS costs were also impacted by business growth as accounts
serviced increased to approximately one million, an increase of 634,000, or
179% over the prior year.
INCOME TAXES. The Company's effective tax rate for 1997 was 32.9%. If all
Continuum related equity in earnings, gains and charges previously discussed
were eliminated, the Company's effective tax rate for 1996 would have been
35.2%. The primary difference between the Company's effective tax rate and the
combined federal and state statutory rates is the result of deferred taxes
being provided for unremitted earnings of U.S. unconsolidated affiliates net
of the dividends received deduction provided under current tax law and
increased tax benefits associated with international operations.
NET INCOME. The Company's 1997 net income was $59.0 million or $1.20 basic
earnings per share and $1.18 diluted earnings per share as compared to $167.2
million or $3.35 basic earnings per share and $3.32 diluted earnings per share
in 1996. If all Continuum related equity in earnings, gains and charges
previously discussed were eliminated, DST's net income for 1996 would have
been $44.0 million, or $0.88 earnings per share on both a basic and diluted
basis.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES. Consolidated revenues increased 20% to $580.8 million in 1996
primarily due to increased U.S. mutual fund processing, AWD and subscriber
management revenues, higher U.S. output volumes at Output Technologies and the
acquisition of Xebec in January 1996.
Total U.S. revenues increased 17% to $496.4 million in 1996. U.S. mutual fund
processing revenues for 1996 increased 15% over the prior year as shareowner
accounts serviced increased 13% from 36.5 million at December 31, 1995 to 41.1
million at December 31, 1996. In the last quarter of 1996, two new clients
were added with approximately 700,000 accounts. Output Technologies' U.S.
revenues in 1996 increased 19% over the prior year due to increased business
volumes including a 32% increase in pages printed. U.S. AWD product revenues
for 1996 increased 42% over the prior year primarily due to an increase in the
number of AWD workstations installed and increased royalties from workstations
installed internationally. Subscriber management revenues increased
substantially over the prior year on increases in the number of DirecTV
satellite subscribers serviced by DBS Systems Corporation. Revenues from
international operations for the year increased 39% to $84.4 million. The
increase is primarily attributable to the addition of $14.4 million in
Canadian revenues resulting from the acquisition of Xebec by Output
Technologies in January 1996 and increased license and development revenues
from DST International.
COSTS AND EXPENSES. Consolidated costs and expenses for 1996 increased 16% to
$431.6 million, primarily as a result of higher operating volumes, increased
costs of international operations partially offset by the absence in 1996 of
certain other costs that were incurred in 1995.
U.S. costs and expenses increased $37.5 million or 12% primarily due to
increased business volumes and increased compensation and staffing to support
mutual fund, Output Technologies and AWD products. In addition, the
development and partial implementation of a new manufacturing and
administration system at Output Technologies increased 1996 costs by $4.3
million. Partially offsetting these increases were certain costs incurred in
1995 which did not recur in 1996, including (i) an accrual of $7.3 million for
a performance-based incentive compensation program at an Output Technologies
subsidiary, which was completed as of December 31, 1995, and (ii) costs of
approximately $3.0 million in transition activities associated with the Kemper
Agreements, which activities were substantially concluded at December 31,
1995.
Costs and expenses from international businesses for the year increased $20.5
million, or 35% due to the continued development of new international
investment management and portfolio accounting applications,
C-21
<PAGE>
increased staffing to support the investment management and AWD businesses and
the addition of $11.9 million of costs and expenses from the operations of
Xebec which was acquired in January 1996.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased $8.8
million, or 13%, for the year primarily because of increased operating
capacities at the Winchester Data Center and Output Technologies and increased
amortization expense related to the April 1995 Kemper Agreements.
OTHER EXPENSES. In connection with the CSC/Continuum merger, the Company
accrued a one-time $13.7 million ESOP contribution which provided funding for
certain Continuum employee withdrawals from the ESOP.
INTEREST EXPENSE. Interest expense decreased $15.0 million, or 68%, for the
year primarily from the retirement of debt with proceeds from the Company's
initial public offering in the fourth quarter of 1995. Additionally, the
Company capitalized $1.1 million of interest expense in 1996 related to
certain construction activities as compared to $1.6 million in the prior year.
OTHER INCOME. Other income increased $0.5 million in 1996 due primarily to the
increased dividends received on shares of State Street stock held by the
Company.
GAINS ON SALES OF EQUITY INVESTMENTS. The 1996 amount represents the Company's
gain on the CSC/Continuum merger. The 1995 amount includes the sales of the
Company's joint venture interests in IFTC to State Street and MDS and MLS to
KCSI.
UNCONSOLIDATED AFFILIATES. Equity in earnings of unconsolidated affiliates
decreased $10.5 million in 1996 primarily as a result of the discontinuance of
recording equity in Continuum earnings beginning in third quarter 1996 and the
Company's $10.3 million share (before taxes) of a non-recurring charge
recorded by Continuum related to the Hogan Merger in the first quarter of
1996. Argus recorded lower earnings as a result of increased development costs
for a new claims processing system and lower unit revenues. Increased costs
were also incurred at EFDS due to an acceleration of the delivery timetable
for the FAST2000 unit trust product, which is currently expected to be
substantially completed in 1998. 1995 also included $1.1 million of equity in
earnings of Midland joint ventures which were sold in August 1995.
INCOME TAXES. 1996 income tax expense increased $59.7 million, or 129%,
primarily resulting from the Company's gain on the CSC/Continuum merger. The
Company recorded $82.1 million of income tax expense in 1996 as a result of
the Continuum/CSC merger to recognize the deferred tax liability on the
difference between the value of CSC stock received and the Company's tax basis
in Continuum less previous deferred taxes provided respecting Continuum and
less the current tax benefit of the ESOP contribution which provided funding
for certain Continuum employee withdrawals from the ESOP. The Company recorded
$35.0 million of deferred income tax expense in the first quarter 1995 as a
result of the IFTC transaction to recognize the deferred tax liability on the
difference between the value of State Street stock received and the Company's
tax basis in IFTC less previous deferred taxes provided.
Excluding the effects of the Continuum/CSC merger, ESOP contribution and the
effect of the one-time charge taken by Continuum in connection with the Hogan
Merger, the Company's effective tax rate for 1996 was approximately 33%. The
primary difference between the Company's effective tax rate and the combined
federal and state statutory rates is the result of deferred taxes being
provided for unremitted earnings of U.S. unconsolidated affiliates net of the
dividends received deduction provided under current tax law and certain tax
credits recognized by the Company in conjunction with the rehabilitation of
historic property that will be used as office space.
NET INCOME. The Company's net income was $167.2 million, or $3.35 basic
earnings per share and $3.32 diluted earnings per share, as compared to $27.6
million, or $0.82 earnings per share on both a basic and diluted basis in
1995. If all Continuum related equity in earnings, gains and charges
previously discussed were eliminated, DST's net income for 1996 would have
been $44.0 million, or $0.88 earnings per share on both a basic and diluted
basis.
C-22
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash available from operating activities, borrowings from
banks and financing from third-party vendors and others to fund operating,
investing and financing activities.
The Company's cash flow from operating activities totaled $51.7 million,
$112.2 million and $127.4 million for the years ended December 31, 1995, 1996
and 1997, respectively. 1997 operating cash flows were partially offset by a
$13.7 million ESOP contribution (accrued in 1996) to fund the withdrawal of
certain Continuum employees from the ESOP.
Operating costs include software development and maintenance costs relating to
proprietary systems of approximately $59.1 million, $82.1 million and $92.1
million for the years ended December 31, 1995, 1996 and 1997, respectively.
During the years ended December 31, 1995, 1996 and 1997, the Company expended
approximately $95.6 million, $78.7 million and $73.8 million, respectively, in
capital expenditures for equipment and facilities which includes amounts
directly paid by third-party lenders. Capital expenditures in 1995 include
approximately $12.6 million in facility additions and improvements related to
the expansion of the Winchester Data Center, which was substantially completed
in 1995. The Company incurred an additional $21.0 million in mortgage
indebtedness in 1995 to finance, in part, these capital additions. Future
capital expenditures are expected to be funded primarily by cash flows from
operating activities, secured term notes or bank lines of credit as required.
The Company expended approximately $9.2 million, $23.3 million and $37.8
million primarily for investments and advances to unconsolidated affiliates
during 1995, 1996 and 1997, respectively. In addition, the Company expended
$53.3 million, $3.2 million and $14.8 million during 1995, 1996 and 1997,
respectively, for acquisitions previously described, net of cash acquired. The
Company received proceeds of $12.4 million in 1997 from the sale of equity
investments including $9.6 million from the sale of First of Michigan.
The Company paid a cash dividend to KCSI of $150.0 million in 1995. As
previously noted, the Company has not paid any dividends since the initial
public offering and does not expect to pay any cash dividends in the
foreseeable future.
In May 1996, the Board of Directors determined it was necessary for the
Company to have common stock available to provide to employees under its stock
award program and to provide to option holders who exercise options. The Board
of Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to
such variations as management deems appropriate. The Company has purchased 1.0
million shares through December 31, 1997 for approximately $32.7 million.
The Company maintains a $50 million bank line of credit to finance working
capital requirements of the Company which is available through May 1998. The
Company also maintains a $125 million line of credit with a syndicate of U.S.
and international banks which is available through December 2001. Borrowings
under these facilities totaled $55.0 million in December 31, 1997.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will be sufficient to meet the
Company's operating and debt service requirements and other current
liabilities for at least the next 12 months. Further, the Company believes
that its longer term liquidity and capital requirements will also be met
through cash provided by operating activities and bank credit facilities, as
well as the Company's $125 million revolving credit facility described above.
OTHER
SEASONALITY. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March
C-23
<PAGE>
31 due primarily to processing year-end transactions and printing and mailing
of year-end statements and tax forms during January. The Company has
historically added operating equipment in the last half of the year in
preparation for processing year-end transactions which has the effect of
increasing costs for the second half of the year. Revenues and operating
results from individual license sales depend heavily on the timing and size of
the contract.
UNREALIZED GAIN ON SECURITIES. The Company holds, among others, approximately
4.3 million shares of Computer Sciences Corporation common stock and
approximately 6.0 million shares of State Street Corporation common stock as
investments. At December 31, 1996, the market value of the Company's
investments in available-for-sale securities reflected an aggregate unrealized
gain of $155.3 million. At December 31, 1997, these investments had an
aggregate unrealized gain of $323.2 million. The $167.9 million unrealized
gain in 1997 on the Company's investments in these securities, net of deferred
taxes of $65.5 million, has been recorded in stockholders' equity in
accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities."
FOREIGN CURRENCY TRANSLATION. The Company's international subsidiaries use the
local currency as the functional currency. The Company translates all assets
and liabilities at year-end exchange rates and income and expense accounts at
average rates during the year. Foreign currency fluctuations have historically
had an immaterial effect on the Company and the comparability of financial
information. While it is generally not the Company's practice to enter into
derivative contracts, from time to time the Company and its subsidiaries do
utilize forward foreign currency exchange contracts to minimize the impact of
currency movements.
COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued
Statement No. 130, "Reporting Comprehensive Income" in June 1997. The new
statement requires that all changes in equity during a period except those
resulting from investments by and distributions to owners be reported as
"comprehensive income" in the financial statements beginning in 1998. Upon
implementation, the Company will include the net unrealized gain or loss on
its available-for-sale securities and foreign currency translation effects in
the computation of comprehensive income.
YEAR 2000. Many computer programs use only two digits to identify a year in a
date field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000. These Year 2000-
related issues are of particular importance to the Company. The Company
depends upon its computer and other systems and the computer and other systems
of third-parties to conduct and manage the Company's business. Additionally,
the Company's products and services are dependent upon using accurate dates in
order to function properly. These Year 2000-related issues may also adversely
affect the operations and financial performance of one or more of the
Company's customers or suppliers. As a result, the failure of the Company's
computer and other systems, products or services, the computer systems and
other systems upon which the Company depends, or of the Company's customers or
suppliers to be Year 2000 ready could have a material adverse effect on the
Company's results of operations, financial position and cash flows.
The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a corporate-wide structure of project teams, a
governance structure and a central Project Office. The Project Office was
established to lead the readiness efforts for the Company and manage the
overall progress of the project. The Company has redirected some of its
development employees to address the Year 2000 issues.
The program's purpose is to identify, evaluate and resolve potential Year 2000
related issues for the Company's products, services, internal systems,
hardware, communications and other systems. The program includes the following
key steps:
1.Identification of systems and applications that must be modified.
2.Evaluation of alternatives (modification, replacement or discontinuance)
3. Establishment of plans which include timely milestones and appropriate
testing to ensure that the systems and applications are ready for the
Year 2000.
C-24
<PAGE>
The program also includes:
1.Projects to ensure that external vendors and services are also ready.
2.The development of alternatives where necessary.
3.Interoperability testing with clients and key organizations in the
financial services industry.
The Company's goal is to be ready, internally, for the Year 2000 by December
31, 1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is under way,
and the Company expects to achieve its goal.
The expenses associated with the program will be expensed as incurred. The
Company does not believe the amount to be spent on Year 2000 issues will be
material to the Company's results of operations, liquidity or capital
resources.
However, although the Company is not aware of any material operational or
financial Year 2000-related issues, the Company cannot make any assurances
that its computer systems, products, services or other systems or the
computers and other systems of others upon which the Company depends will be
Year 2000 ready on schedule, that the costs of its Year 2000 program will not
become material or that the Company's alternative plans will be adequate. The
Company is currently unable to anticipate accurately the magnitude, if any, of
the Year 2000-related issues arising from the Company's customers and
suppliers. If any such risks (either with respect to the Company or its
customers or suppliers) materialize, the Company could experience material
adverse consequences to its business which could have material adverse effects
on the Company's results of operations, financial position and cash flows.
SEGMENT INFORMATION. The Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. This statement requires that publicly traded companies report
certain information about their operating segments, products and services,
geographic areas in which they operate, and major customers beginning in 1998.
The Company is currently evaluating the effect that implementation of the new
standard will have on the information disclosed in its financial statements.
EARNINGS PER SHARE. The Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share" ("EPS") ("SFAS 128") in February 1997. SFAS 128
replaces the presentation of "Primary EPS" and "Fully Diluted EPS" with "Basic
EPS" and "Diluted EPS", respectively. The Company's financial statements have
been adjusted for the required new disclosures.
SOFTWARE REVENUE RECOGNITION. The Accounting Standards Executive Committee
("ACSEC") of the American Institute of Certified Public Accountants recently
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
providing guidance on applying Generally Accepted Accounting Principles in
recognizing revenue from software transactions. The Company believes
implementation of the new statement will not have a material effect on the
consolidated results of operations of the Company.
INTERNAL USE SOFTWARE. The ACSEC recently issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The new
statement is effective for fiscal periods beginning after December 15, 1998
and concludes that costs for the development of internal use software are an
asset. Accordingly, certain primary types of development activities should be
capitalized, including coding and software configuration costs, costs of
testing and installing the software, and when clearly distinguishable from
maintenance, the costs of upgrades and enhancements. The Company currently
expenses costs of internally developed proprietary software as it is incurred.
The Company is currently evaluating the effect that implementation of the new
standard will have on its software development accounting policies and is
unable to determine the effects on the Company's results of operations at this
time.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
C-25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Stockholders of DST Systems, Inc.
The accompanying consolidated financial statements of DST Systems, Inc. and
its subsidiaries were prepared by management in conformity with generally
accepted accounting principles. In preparing the financial statements,
management has made judgments and estimates based on currently available
information. Other financial information included in this annual report is
consistent with that in the consolidated financial statements.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurances that assets are safeguarded and that its
financial records are reliable. Management monitors the system for compliance,
and the Company's internal auditors measure its effectiveness and recommend
possible improvements thereto.
Independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the system of internal accounting controls and perform such
tests and other procedures as they deem necessary to express an opinion on the
fairness of the consolidated financial statements.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting controls through its Audit Committee which
is composed solely of directors who are not officers or employees of the
Company. This committee meets regularly with the independent accountants,
management and internal auditors to discuss the scope and results of their
work and their comments on the adequacy of internal accounting controls and
the quality of external financial reporting.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of DST Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
DST Systems, Inc. and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
Kansas City, Missouri
February 26, 1998
C-26
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
---------- ----------
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 8,279 $ 15,833
Accounts receivable....................................... 138,622 158,069
Accounts receivable--related parties...................... 15,472 12,630
Inventories............................................... 10,690 11,369
Other assets.............................................. 28,232 33,423
---------- ----------
201,295 231,324
Investments................................................. 620,437 820,577
Properties.................................................. 243,989 242,153
Intangibles and other assets................................ 55,867 61,350
---------- ----------
Total assets............................................ $1,121,588 $1,355,404
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities
Debt due within one year.................................. $ 15,159 $ 13,898
Accounts payable.......................................... 44,944 49,763
Accrued compensation and benefits......................... 33,276 28,319
Deferred revenues and gains............................... 14,553 22,679
Other liabilities......................................... 17,772 26,334
---------- ----------
125,704 140,993
Long-term debt.............................................. 75,895 92,005
Deferred income taxes....................................... 180,853 241,782
Other liabilities........................................... 42,939 43,534
---------- ----------
425,391 518,314
---------- ----------
Commitments and contingencies (Note 14).....................
---------- ----------
Minority interests.......................................... 972 1,380
---------- ----------
Stockholders' equity
Preferred stock, $0.01 par, 10,000,000 shares authorized
and unissued.............................................
Common stock, $0.01 par, 125,000,000 shares authorized,
50,000,000 shares issued................................. 500 500
Additional paid-in capital................................ 408,807 408,610
Retained earnings......................................... 203,638 261,010
Treasury stock, at cost................................... (12,345) (31,404)
Net unrealized gain on investments........................ 94,625 196,994
---------- ----------
Total stockholders' equity.............................. 695,225 835,710
---------- ----------
Total liabilities and stockholders' equity............ $1,121,588 $1,355,404
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-27
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues......................................... $380,187 $470,705 $538,074
Revenues--related parties........................ 103,944 110,103 112,604
-------- -------- --------
Total revenues............................... 484,131 580,808 650,678
Cost and expenses................................ 373,561 431,563 479,103
Depreciation and amortization.................... 69,749 78,572 79,335
Other expense.................................... 13,700
-------- -------- --------
Income from operations........................... 40,821 56,973 92,240
Interest expense................................. (21,964) (6,940) (7,670)
Other income, net................................ 3,627 4,176 4,020
Gains on sales of equity investments............. 44,895 223,438 1,464
Equity in earnings (losses) of unconsolidated af-
filiates, net of income taxes................... 6,452 (4,028) (1,345)
-------- -------- --------
Income before income taxes and minority
interests....................................... 73,831 273,619 88,709
Income taxes..................................... 46,174 105,920 29,178
-------- -------- --------
Income before minority interests................. 27,657 167,699 59,531
Minority interests............................... 17 497 534
-------- -------- --------
Net income....................................... $ 27,640 $167,202 $ 58,997
======== ======== ========
Average common shares outstanding................ 33,791 49,871 49,308
Basic earnings per share......................... $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share....................... $ 0.82 $ 3.32 $ 1.18
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-28
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
$.01
$.01 PAR PAR ADDITIONAL NET UNREALIZED TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY GAINS (LOSS) ON STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK INVESTMENTS EQUITY
--------- ------ ---------- --------- -------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994................... $ $ 306 $ 24,214 $ 157,676 $ $ (1,635) $ 180,561
Net income............ 27,640 27,640
Dividend to KCSI...... (150,000) (150,000)
Issuance of 19,450,000
shares of common
stock, net of
issuance costs....... 194 384,593 384,787
Unrealized gain on
investments, net..... 23,698 23,698
Other................. (328) (328)
------ ------ -------- --------- -------- -------- ---------
BALANCE, DECEMBER 31,
1995................... 500 408,807 34,988 22,063 466,358
Net income............ 167,202 167,202
Purchase of 400,000
shares of common
stock................ (12,470) (12,470)
Unrealized gain on
investments, net..... 72,562 72,562
Other................. 1,448 125 1,573
------ ------ -------- --------- -------- -------- ---------
BALANCE, DECEMBER 31,
1996................... 500 408,807 203,638 (12,345) 94,625 695,225
Net income............ 58,997 58,997
Purchase of 600,000
shares of common
stock................ (20,256) (20,256)
Unrealized gain on
investments, net..... 102,369 102,369
Other................. (197) (1,625) 1,197 (625)
------ ------ -------- --------- -------- -------- ---------
BALANCE, DECEMBER 31,
1997................... $ $ 500 $408,610 $ 261,010 $(31,404) $196,994 $ 835,710
====== ====== ======== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-29
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income.................................. $ 27,640 $ 167,202 $ 58,997
--------- --------- ---------
Depreciation and amortization............... 69,749 78,572 79,335
Equity in (earnings) losses of
unconsolidated affiliates.................. (6,452) 4,028 1,345
Cash dividends received from unconsolidated
affiliates................................. 853 8,000
Gains on sales of equity investments........ (44,895) (223,438) (1,464)
Deferred taxes on gains on sales of equity
investments................................ 35,028 87,254
Changes in accounts receivable.............. (29,415) (16,995) (16,305)
Changes in other current assets............. (6,103) 862 (5,782)
Changes in accounts payable and accrued
liabilities................................ (2,383) 6,376 11,505
Other, net.................................. 7,646 342 (240)
--------- --------- ---------
Total adjustments to net income............. 24,028 (54,999) 68,394
--------- --------- ---------
Net....................................... 51,668 112,203 127,391
--------- --------- ---------
CASH FLOWS--INVESTING ACTIVITIES:
Investments and advances to unconsolidated
affiliates................................. (9,150) (23,336) (37,759)
Capital expenditures........................ (65,449) (73,935) (67,063)
Payment for purchases of subsidiaries, net
of cash acquired........................... (53,303) (3,183) (14,788)
Other, net.................................. 6,470 3,930 14,838
--------- --------- ---------
Net....................................... (121,432) (96,524) (104,772)
--------- --------- ---------
CASH FLOWS--FINANCING ACTIVITIES:
Proceeds from issuance of common stock,
net........................................ 384,787
Proceeds from issuance of long-term debt--
KCSI....................................... 24,000
Proceeds from issuance of long-term debt--
other...................................... 171,000
Principal payments on long-term debt........ (342,083) (20,430) (14,261)
Net increase (decrease) in short-term notes
payable.................................... (1,334) (11,999) 2,574
Net increase in revolving credit
facilities................................. 33,554 21,496
Dividends to KCSI........................... (150,000)
Common stock repurchased.................... (12,470) (20,256)
Other, net.................................. (7,520) (9,112) (4,618)
--------- --------- ---------
Net....................................... 78,850 (20,457) (15,065)
--------- --------- ---------
Net increase (decrease) in cash............... 9,086 (4,778) 7,554
Cash at beginning of year..................... 3,971 13,057 8,279
--------- --------- ---------
Cash at end of year........................... $ 13,057 $ 8,279 $ 15,833
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
C-30
<PAGE>
DST SYSTEMS, INC.
Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
DST Systems, Inc. (the "Company" or "DST") provides sophisticated information
processing and computer software services and products, primarily to mutual
funds, insurance providers, banks and other financial organizations. Its
software systems include shareowner accounting and recordkeeping systems
offered to the U.S. mutual fund industry; shareowner accounting and
recordkeeping systems offered to non-U.S. mutual funds and unit trusts; a
securities transfer system offered primarily to corporate trustees and
securities transfer agents; a variety of portfolio accounting and investment
management systems offered to U.S. and international fund accountants and
investment management firms; an image-based work management system offered
primarily to mutual funds, insurance companies and other financial services
businesses; a subscriber management system for the satellite television
industry; and securities exchange and broker order systems offered to brokers
and companies involved in the exchange of equity, bond and derivative
securities primarily outside the U.S. Its output products include customized
printing and mailing, computer output archival services, design services and
offset printing.
The Company licenses its work management software and certain investment
management software, non-U.S. mutual fund shareowner accounting software and
securities exchange and broker order systems. The Company distributes its
services and products on a direct basis and through various subsidiaries or
joint venture affiliates in the U.S., Canada, United Kingdom, Europe,
Australia, South Africa and Asia-Pacific.
The Company and Kansas City Southern Industries, Inc. ("KCSI") completed an
initial public offering ("the Offerings") in the fourth quarter of 1995 of
25.3 million shares of the Company's common stock. KCSI owned approximately
41% of the Company's outstanding common stock at December 31, 1997.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include all
majority-owned subsidiaries of DST. All significant intercompany balances and
transactions have been eliminated.
USE OF ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles ("GAAP") 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.
REVENUE RECOGNITION. Computer processing and output revenues are recognized
upon completion of the service provided. Software license fees, maintenance
fees and other ancillary fees are recognized as services are provided or
delivered and all customer obligations have been met. The Company generally
does not have customer obligations that extend past one year.
COSTS AND EXPENSES. Costs and expenses include all costs, excluding
depreciation and amortization, incurred by the Company to produce revenues.
The Company believes that the nature of its business as well as its
organizational structure, in which virtually all officers and associates have
operational responsibilities, does not allow for a meaningful segregation of
selling, general and administrative costs. These costs, which the Company
believes to be immaterial, are also included in costs and expenses.
Substantially all depreciation and amortization are directly associated with
the production of revenues.
SOFTWARE DEVELOPMENT AND MAINTENANCE. Purchased software is recorded at cost
and is amortized over the estimated economic lives of three to ten years.
Costs of internally developed proprietary software, used for producing
processing revenues, are expensed as incurred. Costs of internally developed
software, that will be
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exclusively sold or licensed to third parties, have not been material and have
been expensed as incurred. A portion of the Company's development costs is
funded by customers through various programs, including product support and
shared-cost arrangements.
Operating costs include software development and maintenance costs relating to
internal proprietary systems of approximately $59.1 million, $82.1 million,
and $92.1 million for the years ended December 31, 1995, 1996 and 1997,
respectively.
CASH EQUIVALENTS. Short-term liquid investments with a maturity of three
months or less are considered cash equivalents. Due to the short-term nature
of these investments, carrying value approximates market value.
INVENTORIES. Inventories are valued at the lower of cost or market. Cost is
determined on the specific identification or first-in, first-out basis.
Inventories are comprised of paper and envelope stocks.
INVESTMENTS IN SECURITIES. The equity method of accounting is used for all
entities in which the Company or its subsidiaries have at least 20% but not
more than 50% voting control interest or significant influence; the cost
method of accounting is used for investments of less than 20% voting control
interest. Investments classified as available-for-sale securities are reported
at fair value, with unrealized gains and losses excluded from earnings and
recorded net of deferred taxes directly to stockholders' equity as net
unrealized holding gains or losses.
PROPERTY AND EQUIPMENT. Property and equipment are recorded at cost with major
additions and improvements capitalized. Cost includes the net amount of
interest cost associated with significant capital additions. Depreciation of
buildings is recorded using the straight-line method over 15 to 30 years.
Equipment and furniture are depreciated using straight-line and accelerated
methods over the estimated useful lives, principally 5 to 7 years. Leasehold
improvements are depreciated using the straight-line method over the term of
the leases. The Company reviews, on a quarterly basis, its property and
equipment for possible impairment. In management's opinion, no such impairment
exists at December 31, 1997.
INTANGIBLES. Goodwill resulting from the cost of investment in excess of the
underlying fair value of identifiable net assets acquired is amortized over
periods ranging from 7 to 20 years. On a quarterly basis, the Company reviews
the recoverability of goodwill. The measurement of possible impairment is
based primarily on the ability to recover the balance of the goodwill from
expected future operating cash flows on an undiscounted basis. These analyses
are performed on an individual investment basis with the primary focus of the
analyses being the expected future cash flows from significant products of
each of the investments. In management's opinion, no such impairment exists at
December 31, 1997.
INCOME TAXES. Deferred income tax effects of transactions reported in
different periods for financial reporting and income tax return purposes are
recorded by the liability method. This method gives consideration to the
future tax consequences of deferred income or expense items and immediately
recognizes changes in income tax laws upon enactment. The income statement
effect is generally derived from changes in deferred income taxes on the
balance sheet.
Prior to 1993, the Company generally did not provide deferred income taxes for
unremitted earnings of certain investees accounted for under the equity method
in so much as those earnings have been and will continue to be reinvested.
Beginning in 1993, pursuant to the provisions of Statement of Financial
Accounting Standards No. 109 ("SFAS 109") (Note 10), the Company began
providing deferred taxes for unremitted earnings of U.S. unconsolidated
affiliates net of the 80% dividends received deduction provided for under
current tax law. Through December 31, 1997, the cumulative amount of such
unremitted earnings was $36,981,000. These amounts would become taxable to the
Company if distributed by the affiliates as dividends, in which case the
Company would be entitled to the dividends received deduction for 80% of the
dividends; alternatively, these earnings could be realized by the sale of the
affiliates' stock, which would give rise to tax at federal capital gains rates
and state ordinary income tax rates, to the extent the stock sale proceeds
exceeded the Company's tax basis. Deferred taxes provided on unremitted
earnings through December 31, 1996 and 1997 were $1,785,000 and
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$2,343,000, respectively. Determination of the amount of the unrecognized
deferred tax liability related to investments in international subsidiaries,
including but not limited to unremitted earnings and cumulative translation
adjustments, is not practicable.
FOREIGN CURRENCY TRANSLATION. The Company's international subsidiaries use the
local currency as the functional currency. The Company translates all assets
and liabilities at year-end exchange rates and income and expense accounts at
average rates during the year. Translation adjustments are recorded in
stockholders' equity and were not material at December 31, 1996 and 1997.
While it is generally not the Company's practice to enter into derivative
contracts, from time to time the Company and its subsidiaries do utilize
forward foreign currency exchange contracts to minimize the impact of currency
movements.
EARNINGS PER SHARE. The Company adopted Statement of Financial Accounting
Standards No. 128 in 1997 and accordingly restated prior year amounts. Basic
earnings per share is determined by dividing net income by the weighted
average number of common shares outstanding during the year. The dilutive
effect of all potential common shares outstanding during the year has been
included in diluted earnings per share. The computation of basic and diluted
earnings per share for the years ended December 31 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Net income............................................ $27,640 $167,202 $58,997
======= ======== =======
Average common shares outstanding..................... 33,791 49,871 49,308
Incremental shares from assumed conversions of stock
options.............................................. 57 464 530
------- -------- -------
Dilutive potential common shares...................... 33,848 50,335 49,838
======= ======== =======
Basic earnings per share.............................. $ 0.82 $ 3.35 $ 1.20
Diluted earnings per share............................ $ 0.82 $ 3.32 $ 1.18
</TABLE>
Options to purchase 61,500 shares and 204,000 shares of common stock,
respectively, at weighted average exercise prices of $34.75 and $36.33,
respectively, were outstanding during 1996 and 1997, but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares and
therefore, the effect would be antidilutive.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation in
accordance with the Accounting Principles Board Opinion No. 25 and has
presented the required pro forma disclosures in Note 11.
NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME. The Financial Accounting Standards Board issued
Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income" in June 1997.
The new statement requires that all changes in equity during a period except
those resulting from investments by and distributions to owners be reported as
"comprehensive income" in the financial statements beginning in 1998.
The Company holds, among others, approximately 4.3 million shares of Computer
Sciences Corporation common stock and approximately 6.0 million shares of
State Street Corporation common stock as investments. At December 31, 1996,
the market value of the Company's investments in available-for-sale securities
reflected an aggregate unrealized gain of $155.3 million. At December 31,
1997, these investments had an aggregate unrealized gain of $323.2 million.
The $167.9 million unrealized gain in 1997 on the Company's investments in
these securities, net of deferred taxes of $65.5 million, has been recorded in
stockholders' equity in accordance with SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities." Upon implementation of SFAS 130,
DST will include the net unrealized gain or loss on its available-for-sale
securities in the computation of comprehensive income.
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SEGMENT INFORMATION. The Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. This statement requires that publicly traded companies report
certain information about their operating segments, products and services,
geographic areas in which they operate, and major customers beginning in 1998.
The Company is currently evaluating the effect that implementation of the new
standard will have on the information disclosed in its financial statements.
SOFTWARE REVENUE RECOGNITION. The Accounting Standards Executive Committee
("ACSEC") of the American Institute of Certified Public Accountants recently
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
providing guidance on applying GAAP in recognizing revenue from software
transactions. The Company believes the implementation of the new statement
will not have a material effect on the consolidated results of operations of
the Company.
INTERNAL USE SOFTWARE. The ACSEC recently issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." The new
statement is effective for fiscal periods beginning after December 15, 1998
and concludes that costs for the development of internal use software are an
asset. Accordingly, certain primary types of development activities should be
capitalized, including coding and software configuration costs, costs of
testing and installing the software, and when clearly distinguishable from
maintenance, the costs of upgrades and enhancements. The Company currently
expenses costs of internally developed proprietary software as it is incurred.
The Company is currently evaluating the effect that implementation of the new
standard will have on its software development accounting policies and is
unable to determine the effects of the Company's results of operations at this
time.
3. MAJOR CUSTOMER
Boston Financial Data Services, Inc. (Note 7) is the Company's largest
customer representing 12%, 12% and 11% of consolidated revenues for the years
ended December 31, 1995, 1996 and 1997, respectively.
4. ACQUISITIONS AND DISPOSITIONS
CONTINUUM
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged with
Computer Sciences Corporation ("CSC") in a tax-free share exchange accounted
for as a pooling-of-interests. DST, which prior to the merger owned
approximately 23% of Continuum, received in the exchange shares of CSC common
stock with a value of $295 million based upon the closing price of CSC common
stock on August 1, 1996. DST recognized a one-time gain after taxes and other
expenses of $127.6 million. In connection with the merger, the Company elected
to make a one-time $13.7 million ESOP contribution to provide funding for
certain Continuum employee withdrawals from DST's ESOP. DST's shares of CSC
represent an approximate 6% interest in the combined company. As a result,
Continuum ceased to be an unconsolidated equity affiliate of DST and under
generally accepted accounting principles, no part of Continuum or CSC earnings
since that time have been recognized by DST. DST recognized equity in losses
of Continuum of $1.1 million and $4.9 million in 1995 and 1996, respectively.
The Company's investment in CSC is accounted for as available-for-sale
securities. Although CSC does not currently pay cash dividends, DST will
recognize dividend income on any cash dividends received from CSC.
In March 1996, Continuum, a then 29% owned unconsolidated affiliate of the
Company, announced the completion of its merger with Hogan Systems, Inc., (the
"Hogan Merger") a provider of software to banks and financial institutions,
for shares of Continuum stock. As a result of this transaction, the Company's
common stock interest in Continuum was reduced from approximately 29% to
approximately 23%. The Company recorded in March 1996 its estimated $9.4
million after-tax share of a non-recurring charge recorded by Continuum in
connection with the Hogan Merger.
In December 1995, Continuum acquired SOCS Groupe SA, a French insurance
software firm. The Company recorded in December 1995 its estimated $7.7
million after-tax share of a non-recurring charge in connection with this
acquisition.
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OTHER ACQUISITIONS AND DISPOSITIONS
Boston EquiServe, LLP ("Boston EquiServe") is a 50% owned joint venture
between Boston Financial Data Services, Inc. ("BFDS") (a 50% owned joint
venture of the Company and State Street Corporation) and Bank of Boston
Corporation. In February 1998, Boston EquiServe and First Chicago Trust
Company of New York announced an agreement to merge operations which would
create the largest securities transfer agent in the United States, which is to
be called EquiServe. In conjunction with the merger, DST entered into a
memorandum of understanding to complete development of a new securities
transfer system ("Fairway") for the exclusive use of EquiServe to process all
of its accounts. The Company has also agreed to provide data processing
services for EquiServe. Upon acceptance of defined components of Fairway, DST
will contribute the software and its non-EquiServe stock transfer processing
business to EquiServe for a direct ownership interest in EquiServe.
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems Corporation for $13.2 million in cash. The excess of the purchase
price over the net assets acquired of $11.6 million has been assigned to a
useful life of 12 years. The Company had previously acquired 60% of DBS for
$3.0 million in May 1993 and an additional 20% of DBS for $6.0 million in
December 1995. On a pro forma basis, the acquisition did not have a material
impact on the Company's historical results of operations or financial
position.
In August 1997, the Company formed DST Catalyst, Inc. by purchasing an 81%
interest in the international information technology subsidiary of the Chicago
Stock Exchange and the consulting practice of Catalyst Institute. DST Catalyst
provides software and services to support automated securities exchange
activities and broker order interfaces primarily outside the United States. On
a pro forma basis, the acquisition did not have a material impact on the
Company's historical results of operations or financial position.
In July 1997, the Company sold its interest in First of Michigan Capital
Corporation for $9.6 million. The transaction, on an after-tax basis, did not
have a material effect on the Company's financial position or results of
operations.
During 1997, Output Technologies increased its ownership in PSI Technologies
Corporation ("PSI") to 20% for $2.0 million. Output Technologies had
previously acquired a 15% interest in PSI for $2.9 million in 1996. PSI has
developed a Computer Output to Laser Disk (COLD) software product for
archiving documents. In conjunction with the investment, Output Technologies
retains the exclusive right to market a customized product using PSI's COLD
software to the mutual fund industry.
The Company established its output services business in the Canadian market
with the $5.5 million acquisition of Xebec Imaging Services, Inc. which was
completed in January 1996.
In August 1995, the Company sold its joint venture interests in Midland Data
Systems, Inc. ("MDS") and Midland Loan Services, L.P. ("MLS") to KCSI for
approximately $5.7 million. The transaction did not result in a material net
gain or loss to the Company. The Company recorded equity in income of MDS and
MLS of $1,053,000 for the year ended December 31, 1995.
In April 1995, the Company purchased substantially all of the assets and
business operations of Supervised Service Company, Inc. ("SEC"), a subsidiary
of Kemper Financial Services, Inc. ("Kemper") and the mutual fund shareowner
servicing system software owned by Kemper Services Company used to service
certain of the Kemper Mutual Funds as well as various third-party mutual
funds. In conjunction with and subject to the SSC transaction, DST also agreed
to enter into long-term contracts with Kemper to provide mutual fund
shareowner systems services and portfolio accounting systems services for the
Kemper Mutual Funds. Total consideration of these asset purchases was
approximately $39.4 million and was financed from the Company's revolving
credit facilities. Of the total consideration, the Company allocated $17.4
million to data processing software and $22.0 million to intangible assets to
be amortized over a seven-year life. On a pro forma basis, the acquisition did
not have a material impact on the Company's historical results of operations
or financial position.
In February 1995, the Company's wholly owned subsidiary, DST International
Limited ("DST International"), purchased HiPortfolio Pty Ltd. ("HiPortfolio"),
an Australian provider of portfolio accounting software and
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services for $16.0 million in cash. The acquisition was financed through
borrowings from KCSI. On a pro forma basis, the acquisition did not have a
material impact on the Company's historical results of operations or financial
positions.
On January 31, 1995, the Company closed the sale of its 50% interest in
Investors Fiduciary Trust Company ("IFTC") to State Street Corporation ("State
Street"). At closing, DST received shares of State Street common stock with a
then-market value of $98.2 million, in a tax-free exchange. DST recognized a
pre-tax gain on the transaction of $43.6 million and deferred taxes of $35.0
million resulting in a net book gain of $8.6 million. With the closing of the
transaction, IFTC ceased to be an unconsolidated equity affiliate of the
Company and no further equity in earnings of IFTC were recorded by the
Company. The Company records income on dividends received from State Street.
The Company's investment in State Street is accounted for as available-for-
sale securities.
5. ACCOUNTS RECEIVABLE AND RELATED PARTY INFORMATION
Accounts receivable information is as follows at December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Accounts receivable (including related parties)...... $139,616 $158,619 $176,960
Less allowance for doubtful accounts................. 3,302 4,525 6,261
-------- -------- --------
Accounts receivable, net............................. $136,314 $154,094 $170,699
-------- -------- --------
Doubtful accounts expense............................ $ 2,477 $ 3,314 $ 4,384
======== ======== ========
</TABLE>
The Company has entered into various agreements with related parties to
utilize the Company's data processing facilities and its computer software
systems. The Company believes that the terms of the contracts with related
parties are fair to the Company and are no less favorable to the Company than
those obtained from unaffiliated parties.
Accounts receivable from unconsolidated affiliates aggregated $14,172,000,
$11,850,000 and $9,493,000 at December 31, 1995, 1996 and 1997, respectively.
Accounts receivable from other related parties aggregated $5,009,000,
$3,622,000 and $3,137,000 at December 31, 1995, 1996 and 1997 respectively.
Revenues earned by the Company from unconsolidated affiliates aggregated
$85,501,000, $89,588,000 and $90,214,000 in 1995, 1996 and 1997, respectively,
including revenues from Continuum through July 1996. Revenues earned by the
Company from other related parties aggregated $18,443,000, $20,515,000 and
$22,390,000 in 1995, 1996 and 1997, respectively.
6. PROPERTIES
Properties and related accumulated depreciation are as follows at December 31,
(in thousands):
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Land................................................... $ 13,269 $ 16,884
Buildings.............................................. 92,482 100,668
Data processing equipment.............................. 193,399 217,044
Data processing software............................... 87,261 93,217
Furniture, fixtures and other equipment................ 121,791 134,823
Leasehold improvements................................. 22,370 23,274
Capitalized leases..................................... 6,103 4,701
Construction-in-progress............................... 5,755 8,556
-------- --------
542,430 599,167
Less accumulated depreciation and amortization......... 298,441 357,014
-------- --------
Net properties......................................... $243,989 $242,153
======== ========
</TABLE>
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Depreciation expense for the years ended December 31, 1995, 1996, and 1997,
was $62,063,000, $70,818,000 and $71,286,000, respectively. Cost includes the
net amount of interest cost associated with significant capital additions.
Capitalized interest was $1,565,000, $1,135,000 and $51,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
7. INVESTMENTS
Investments are as follows at December 31, (in thousands):
<TABLE>
<CAPTION>
1997
OWNERSHIP CARRYING VALUE
PERCENTAGE 1996 1997
---------- -------- --------
<S> <C> <C> <C>
Computer Sciences Corporation................ 6% $354,466 $360,400
State Street Corporation..................... 4% 192,992 347,509
Boston Financial Data Services, Inc.......... 50% 26,032 32,262
Argus Health Systems, Inc. .................. 50% 6,140 10,649
Euronet Services, Inc. ...................... 7% 1,167 9,136
European Financial Data Services Ltd. ....... 50% 4,447 6,196
Other........................................ 35,193 54,425
-------- --------
$620,437 $820,577
======== ========
</TABLE>
Computer Sciences Corporation ("CSC") is a provider of outsourcing, system
integration, information technology, management consulting and other
professional services to industry and government. The Company's investment in
CSC is a result of the merger of CSC with The Continuum Company, Inc. on
August 1, 1996, as described in Note 4. Continuum is an international software
systems and services provider specializing in the development and installation
of advanced computing software for life and property and casualty insurance,
annuities and other financial services products. The aggregate market value of
the Company's investment in CSC's common stock at December 31, 1996 and 1997,
respectively, was $354.5 million and $360.4 million based on the closing price
on the New York Stock Exchange.
State Street Corporation ("State Street") is a leading provider of securities
custody and recordkeeping services to the mutual fund industry. State Street
also provides corporate banking services to New England middle market
companies, as well as specialized lending and international banking services.
The aggregate market value of the Company's investment in State Street's
common stock at December 31, 1996 and 1997 was $193.0 million and $347.5
million, respectively, based on the closing price on the New York Stock
Exchange. The Company received $1.5 million, $2.2 million and $2.5 million in
dividends from State Street in 1995, 1996 and 1997, respectively, which have
been recorded in other income.
Boston Financial Data Services, Inc. ("BFDS") is a corporate joint venture of
the Company and State Street Corporation, the parent of State Street Bank and
Trust Company. BFDS performs shareowner accounting services for mutual fund
companies using the Company's proprietary application system for mutual fund
shareowner recordkeeping, TA2000, and retirement plan recordkeeping services
using TRAC2000. BFDS also performs remittance and proxy processing,
teleservicing and class action administration services.
Argus Health Systems, Inc. ("Argus") is a corporate joint venture of the
Company and a privately held life insurance holding company. Argus provides
pharmacy benefit plan processing services to the health care industry. Argus
utilizes the Company's data processing facility for its claims processing
services. In December 1996, the Company received a $9.5 million dividend from
Argus, of which $8.0 million was cash. The dividend was recorded as a
reduction of the Company's investment in Argus.
Euronet Services, Inc. operates an independent, non-bank owned automatic
teller machine network in Hungary and Poland as a service provider to banks
and other financial institutions. Euronet consummated an initial public
offering of its common stock in March 1997. Since that date, the Company's
investment in Euronet has been
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accounted for as available-for-sale securities in accordance with Statement of
Financial Accounting Standards No. 115. Prior to March 1997, the Company's
investment was carried at cost. The aggregate market value of the Company's
investment in Euronet's common stock at December 31, 1997 was approximately
$9.1 million based on the closing price on the New York Stock Exchange.
European Financial Data Services Limited ("EFDS") is a United Kingdom joint
venture of DST and State Street. EFDS provides full and remote processing for
United Kingdom unit trusts and related products. EFDS is also developing a new
unit trust accounting system for the United Kingdom market.
The Company's retained earnings include equity in the unremitted earnings of
its unconsolidated affiliates of $17,060,000 and $12,233,000 at December 31,
1996 and 1997, respectively.
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization is
as follows for the years ended December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Boston Financial Data Services, Inc........... $ 5,159 $ 5,421 $ 6,226
Argus Health Systems, Inc..................... 4,144 1,743 4,509
The Continuum Company, Inc.*.................. (1,151) (4,891)
European Financial Data Services Limited...... (2,705) (5,969) (11,832)
Other......................................... 1,005 (332) (248)
------- ------- --------
$ 6,452 $(4,028) $ (1,345)
======= ======= ========
</TABLE>
*Through the period ended June 30, 1996.
Certain condensed financial information of the unconsolidated affiliates
follows (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX
ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
<S> <C> <C>
THE CONTINUUM COMPANY, INC.
Revenues...................................... $388,625 $271,037
Costs and expenses............................ 381,672 292,417
Net income (loss)............................. 6,953 (21,380)
Current assets................................ 218,800
Noncurrent assets............................. 136,364
Current liabilities........................... 168,909
Noncurrent liabilities........................ 57,401
Stockholders' equity.......................... 128,854
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
BOSTON FINANCIAL DATA SERVICES, INC.
Revenues.................................... $158,452 $194,385 $224,128
Costs and expenses.......................... 148,134 183,543 211,676
Net income.................................. 10,318 10,842 12,452
Current assets.............................. 55,080 55,598
Noncurrent assets........................... 28,061 35,887
Current liabilities......................... 26,374 22,120
Noncurrent liabilities...................... 4,749 5,109
Stockholders' equity........................ 52,018 64,256
</TABLE>
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<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
OTHER UNCONSOLIDATED AFFILIATES (COMBINED)
Revenues................................. $153,832 $149,310 $112,012
Costs and expenses....................... 147,131 157,470 125,905
Net income (loss)........................ 6,701 (8,160) (13,893)
Current assets........................... 121,247 44,275
Noncurrent assets........................ 113,115 159,583
Current liabilities...................... 86,423 19,424
Noncurrent liabilities................... 105,422 169,561
Partners' and stockholders' equity....... 42,517 14,873
</TABLE>
8. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets include the following items at December 31, (in
thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Intangibles.............................................. $75,340 $91,048
Less accumulated amortization............................ 24,641 32,185
------- -------
Net...................................................... 50,699 58,863
Other assets............................................. 5,168 2,487
------- -------
Total................................................ $55,867 $61,350
======= =======
</TABLE>
Intangibles exclude goodwill of $1,122,000 and $370,294 at December 31, 1996
and 1997, respectively, related to unconsolidated affiliates which is
classified as part of the investments in the unconsolidated affiliates.
Amortization expense, including amortization related to goodwill recorded in
investments, totaled $10,024,000, $8,983,000 and $8,116,000 for the years
ended December 31, 1995, 1996 and 1997, respectively.
9. LONG-TERM DEBT
The Company is obligated under notes and other indebtedness as follows at
December 31, (in thousands):
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Secured notes payable.................................... $17,469 $11,463
Revolving credit facilities.............................. 33,620 57,690
Mortgage notes........................................... 36,202 33,985
Other.................................................... 3,763 2,765
------- -------
91,054 105,903
Less debt due within one year............................ 15,159 13,898
------- -------
Long-term debt........................................... $75,895 $92,005
======= =======
</TABLE>
In December 1996, the Company entered into an amended and restated five-year
revolving credit facility of $105 million (increased to $125 million in
February 1997) with a syndicate of U.S. and international banks. Borrowings
under the facility are available at rates based on the Eurodollar, Prime, Base
CD, or Federal Funds rates. A commitment fee of 0.085% per annum is required
on the total amount of the facility. An additional utilization fee of .050% is
required if the principal amount outstanding is greater than 50% of the total
facility. Among other provisions, the agreement limits subsidiary indebtedness
and sales of assets and requires the Company to maintain certain coverage and
leverage ratios. Borrowings of $30.0 million were outstanding at December 31,
1996 and 1997.
The Company also maintains a $50 million line of credit used to finance
working capital requirements of the Company available through May 1998.
Borrowings under the facility are available at rates tied to the Eurodollar
C-39
<PAGE>
or federal funds rates. A commitment fee of 0.105% per annum is required on
the unused portion of the $50 million line of credit. Borrowings of $3.5
million and $25.0 million were outstanding at December 31, 1996 and 1997,
respectively.
The secured notes payable primarily represent notes which are secured by data
processing and production equipment. Equipment notes are generally payable
over 24 to 60 month periods with interest rates from 3.9% to 6.5% at December
31, 1997.
The mortgage notes represent real estate borrowings due in installments with
the balance due at the end of the term. Interest rates are based on floating
prime or fixed and range from 8.39% to 10.0% at December 31, 1997.
Future principal payments of indebtedness at December 31, 1997 are as follows
(in thousands):
<TABLE>
<S> <C>
1998............................ $ 13,898
1999............................ 6,115
2000............................ 4,327
2001............................ 57,863
2002............................ 3,074
Thereafter...................... 20,626
--------
Total........................... $105,903
========
</TABLE>
Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
fair value of debt was approximately $91.7 million and $109.1 million at
December 31, 1996 and 1997, respectively.
10. INCOME TAXES
The Company and its consolidated U.S. subsidiaries join in filing a
consolidated federal income tax return. Prior to the initial public offering
on October 31, 1995, the Company and its consolidated U.S. subsidiaries were
included in the consolidated federal income tax return filed by KCSI and other
members of KCSI's group of consolidated U.S. subsidiaries. For 1995, the
Company was included in the KCSI consolidated federal income tax return from
January 1, 1995, through October 31, 1995. The Company filed a separate
consolidated return for the period from November 1, 1995, to December 31,
1995. While a member of the KCSI consolidated federal income tax return, the
Company computed federal income tax expense and current federal income taxes
payable to KCSI using an intercompany tax allocation policy. The federal
income tax expense using this policy was, in all material respects, in
accordance with the separate return method.
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these
differences reverse. Deferred tax expense (benefit) is generally the result of
changes in the assets or liabilities for deferred taxes.
Prior to 1993, the Company did not provide deferred taxes for unremitted
earnings of certain investees accounted for under the equity method in so much
as those earnings have been and will continue to be reinvested. Beginning in
1993, pursuant to SFAS 109, the Company began providing deferred taxes for
unremitted earnings for U.S. unconsolidated affiliates net of the 80%
dividends received deduction provided under current tax law.
The following summarizes pretax income (loss) for the years ended December 31,
(in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
U.S.......................................... $79,027 $281,829 $ 99,977
International................................ (5,196) (8,210) (11,268)
------- -------- --------
Total........................................ $72,831 $273,619 $ 88,709
======= ======== ========
</TABLE>
C-40
<PAGE>
Income tax expense consists of the following components for the years ended
December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Current
Federal..................................... $11,149 $ 16,789 $27,934
State and local............................. 1,800 2,154 4,268
International............................... 652 469 3,077
------- -------- -------
Total current............................. 13,601 19,412 35,279
------- -------- -------
Deferred
Federal..................................... 28,304 72,842 (3,437)
State and local............................. 5,316 13,833 (1,416)
International............................... (1,047) (167) (1,248)
------- -------- -------
Total deferred............................ 32,573 86,508 (6,101)
------- -------- -------
Total income tax expense................ $46,174 $105,920 $29,178
======= ======== =======
</TABLE>
Differences between the Company's effective income tax rate and the U.S.
federal income tax statutory rate are as follows for the years ended December
31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Income tax expense using the statutory rate in
effect............................................ $25,841 $ 95,767 $31,048
Tax effect of:
State and local income taxes, net................ 4,626 10,391 1,854
International income taxes, net.................. 374 1,087 1,534
Losses of international unconsolidated
affiliates...................................... 1,050 2,089
Earnings of U.S. unconsolidated affiliates....... (2,890) (1,724) (3,104)
Sale of IFTC (Note 4)............................ 16,118
Other............................................ 1,055 (2,140) (2,154)
------- -------- -------
Total income tax expense....................... $46,174 $105,920 $29,178
======= ======== =======
Effective tax rate................................. 62.5% 38.7% 32.9%
Statutory federal tax rate......................... 35.0% 35.0% 35.0%
</TABLE>
The federal and state deferred tax assets (liabilities) recorded on the
Consolidated Balance Sheet at December 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Liabilities:
Investments in available for sale securities........... $(189,784) $(255,371)
Unconsolidated affiliates and investments.............. (3,208) (2,832)
--------- ---------
Gross deferred tax liabilities......................... (192,992) (258,203)
--------- ---------
Assets:
Book reserves not currently deductible for tax......... 9,094 10,016
Deferred compensation and other employee benefits...... 2,948 3,215
International operating loss carryforwards............. 998 2,180
Vacation accrual....................................... 1,366 1,611
Deferred gains......................................... 625 255
Depreciation and amortization.......................... 1,636 6,037
Other, net............................................. 399 657
--------- ---------
Gross deferred tax assets.............................. 17,066 23,971
--------- ---------
Deferred tax asset valuation allowance................... (314) (1,949)
--------- ---------
Net deferred tax liability........................... $(176,240) $(236,181)
========= =========
</TABLE>
C-41
<PAGE>
The Company had federal operating loss carryforwards from DBS of $1.3 million
at December 31, 1995 which were used to reduce taxable income in 1996.
Additionally, the Company had operating loss carryforwards related to certain
international operations of approximately $2.5 million at December 31, 1996
and $4.4 million at December 31, 1997. There is no assurance that certain loss
carryforwards will be utilized. Accordingly, the Company has recognized a
valuation allowance for the benefit of certain loss carryforwards of $0.3
million at December 31, 1996 and $1.9 million at December 31, 1997.
11. STOCKHOLDERS' EQUITY
In August 1995, the Company was merged into a Delaware corporation. Upon
completion of the merger, the Company had 125 million shares of $.01 par value
common stock authorized of which 28.5 million shares were issued and
outstanding and held by its sole shareowner, KCSI. In addition, the Company is
authorized to issue 10 million shares of preferred stock, par value $.01 per
share. No preferred shares have been issued.
On October 31, 1995, in conjunction with and immediately prior to the
Offerings, the Company distributed to KCSI a stock dividend of 2,050,000
shares of common stock. Appropriate share data has been retroactively restated
in the consolidated balance sheet to reflect the effect of the stock dividend
and merger into a Delaware corporation.
On October 31, 1995, the Company and KCSI completed an initial public offering
("the Offerings") of 22 million shares of the Company's common stock at an
offering price of $21 per share. Of the 22 million shares offered, 19,450,000
were sold by the Company and 2,550,000 were sold by KCSI. The Company received
net proceeds of approximately $384.8 million which were used to repay all debt
to KCSI and certain bank term notes. In conjunction with the Offerings, KCSI
exchanged 4,253,508 shares of its DST common stock for 1,820,000 shares of
KCSI stock held by The Employee Stock Ownership Plan. On November 6, 1995,
over-allotment options granted by KCSI to the underwriters totaling 3,300,000
shares of the Company's common stock were exercised in full.
In September 1995, the Company established the Stock Option and Performance
Award Plan which provides for the availability of 6,000,000 shares of the
Company's common stock for the grant of awards to officers, directors and
other designated employees. The awards may take the form of an option, stock
appreciation right, limited right, performance share or unit, dividend
equivalent, or any other right, interest or option relating to shares of
common stock granted under the plan. The option prices must be at least equal
to the fair market value of the underlying shares on the date of grant.
Options become exercisable and expire as determined by the Compensation
Committee of the Board of Directors at or subsequent to the date of grant.
A summary of stock option activity is presented in the table below:
<TABLE>
<CAPTION>
1995 1996 1997
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000'S) PRICE (000'S) PRICE (000'S) PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January
1...................... 2,281 $21.00 2,262 $21.41
Granted................. 2,287 $21.00 72 33.95 918 33.66
Exercised............... (40) 21.00
Canceled................ (6) 21.00 (91) 21.00 (79) 22.45
------ ------ ------
Outstanding at December
31..................... 2,281 $21.00 2,262 $21.41 3,061 $25.06
====== ====== ======
Exercisable at December
31..................... 887 $21.11 1,261 $21.20
<CAPTION>
EXERCISE PRICE RANGES: LOW HIGH LOW HIGH LOW HIGH
- ---------------------- ------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
for all outstanding
options................ $21.00 $21.00 $21.00 $35.56 $21.00 $38.38
for all exercisable
options................ $21.00 $32.69 $21.00 $35.31
</TABLE>
C-42
<PAGE>
Had compensation cost been determined consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," the
Company's net income would have been reduced to the following pro forma
amounts:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C> <C>
Net income (000's): As reported $27,640 $167,202 $58,997
Pro forma 26,931 162,787 52,024
Basic earnings per share: As reported $0.82 $3.35 $1.20
Pro forma 0.80 3.26 1.06
Diluted earnings per share: As reported $0.82 $3.32 $1.18
Pro forma 0.80 3.23 1.04
</TABLE>
The weighted average fair value of options granted was $7.10, $11.64 and
$11.78 for 1995, 1996 and 1997, respectively. The fair value of each option
granted is estimated on the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants
in 1995, 1996 and 1997, respectively; expected option terms of 5.3, 5.0 and
5.0 years, volatility of 22%, 23% and 24%, dividend yield of 0% and risk-free
interest rates of 5.9%, 6.3% and 6.3%. Given the limited trading history of
DST's common stock, the volatility factor was determined by using the average
of the volatility, calculated weekly over the three preceding calendar years,
of the stock of three peer companies.
In May 1996, the Board of Directors determined it was necessary for the
Company to have common stock available to provide to employees under its stock
award program and to provide to option holders who exercise options. The Board
of Directors authorized the purchase of up to 1.2 million shares during a
twenty-four month period in approximately equal monthly amounts subject to
such variations as management deems appropriate. All such purchases are in
compliance with applicable SEC regulations. The Company has purchased 1.0
million shares as of December 31, 997 for approximately $32.7 million. The
Company had 396,000 and 956,942 shares held in treasury at December 31, 1996
and 1997, respectively. After considering shares held in treasury, the Company
had 49,604,000 and 49,043,058 shares of common stock outstanding at December
31, 1996 and 1997, respectively.
The Company entered into a Stockholder's Right Agreement (the "Rights Plan")
in 1995. Each share of the Company's common stock held of record on October
18, 1995, (KCSI was then the sole stockholder) and all shares of common stock
issued in the Offerings received one Right. Each Right entitles their holder
(other than those held by an acquiring person or group) to purchase 1/1000th
share of preferred stock of the Company or in some circumstances, other
securities of the Company. In certain circumstances the Rights entitle their
holders (other than those held by an acquiring person or group) to purchase
shares in a surviving entity or its affiliates resulting from transactions in
which the Company is not the surviving entity or disposes of more than 50% of
the Company's assets or earnings power.
The Rights, which are automatically attached to common stock, are not
exercisable or transferable separately from shares of common stock until ten
days following the earlier of an announcement that a person or group has
acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding shares of the Company's common stock, or ten days
following the commencement or announcement of an intention to make a tender
offer or exchange offer that would result in an acquiring person or group
owning 15% or more of the outstanding common stock, unless the Board of
Directors sets a later date in either event. KCSI is excluded from the
definition of an acquiring person under the Rights Plan unless there is a
change in control of KCSI, followed by acquisition of additional company
common stock.
The Rights Plan is intended to encourage a potential acquiring person or group
to negotiate directly with the Board of Directors, but may have certain anti-
takeover effects. The Rights Plan could significantly dilute the interests in
the Company of an acquiring person or group. The Rights Plan may therefore
have the effect of delaying, deterring or preventing a change in control of
the Company.
C-43
<PAGE>
On May 8, 1995, the Company paid a cash dividend of $150 million to KCSI, the
proceeds for which were obtained through the Company's long-term revolving
agreement.
Net unrealized gains on investments represents the Company's unrealized
holding gains on its investments in available-for-sale securities. At December
31, 1996 and 1997, the Company's unrealized gains were $94,625,000 and
$196,994,000, respectively, which were net of deferred taxes of $60,625,000
and $126,212,000, respectively.
12. RETIREMENT PLANS
The Company has a qualified profit sharing plan which covers all of its
employees following the completion of an eligibility period. Contributions to
the plan are made at the discretion of the Board of Directors, with the
limitation that the annual contribution may not exceed the maximum allowable
income tax deduction. Profit sharing expense was $129,000, $2,686,000 and
$2,500,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company has a 401(k) plan which covers all of its employees following the
completion of an eligibility period. Contributions to the plan are made at the
discretion of the Board of Directors. No discretionary contributions were made
during 1995, 1996 or 1997.
Prior to the Offerings in 1995, the Company participated in the KCSI ESOP. In
connection with the Offerings, the KCSI ESOP was renamed The Employee Stock
Ownership Plan ("ESOP") and amended to consist of two portions: a KCSI portion
and a Company portion. The account balances in the ESOP attributable to
Company employees became the Company portion of the ESOP. The Company portion
initially was invested in KCSI stock. Approximately one half of the value of
the account balances of Company employees at the time of the IPO were
converted into common stock of the Company through an exchange with KCSI of
KCSI stock held by the ESOP for shares of the Company's common stock. As of
January 1, 1998, the Company formed The DST Systems, Inc. Employee Stock
Ownership Plan ("DST ESOP") and transferred all balances from the Company
portion of the ESOP to the DST ESOP.
For the years ended December 31, 1995, 1996 and 1997, ESOP expense was
$11,021,000, $13,700,000 and $2,000,000, respectively. In 1995, such amounts
represent an allocated portion of the consolidated KCSI ESOP expense. Interest
incurred on the indebtedness was $0.4 million in 1995; this amount includes an
allocated portion of interest expense on ESOP debt guaranteed by KCSI. All
ESOP indebtedness was retired in 1995. The ESOP loan principal payments were
accounted for as employee benefit expense in the year of allocation to
participants; interest payments were recorded as interest expense using an
accrual method.
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December
31, (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Interest paid during the year.................... $25,307 $ 7,930 $ 6,727
Income taxes paid during the year................ 15,892 21,098 30,495
</TABLE>
In December 1996, the Company received a $9.5 million dividend from Argus,
$8.0 million of which was received in cash and $1.5 million of which was
received in the form of a note receivable from a related party.
In connection with the Offerings in 1995, the Company incurred underwriting
commissions of approximately $22.6 million which have been reflected in the
net proceeds from the Offerings.
The Company purchased mainframe computer equipment and other capital additions
in the amount of $30,163,000, $4,754,000 and $5,964,000 in 1995, 1996 and
1997, respectively, through secured notes payable or vendor financed
installment notes which required no direct outlay of cash.
The Company acquired an additional 20% interest in DBS Systems Corporation in
December 1995 for a $6.0 million note payable which was paid in January 1996.
C-44
<PAGE>
14. COMMITMENTS AND CONTINGENCIES
The Company leases facilities, data processing and other equipment under
various operating leases. Lease terms generally range from 1 to 25 years not
including options to extend the leases for various lengths of time. Rental
expense was $24,519,000, $30,825,000 and $33,356,000 for the years ended
December 31, 1995, 1996 and 1997, respectively. Future minimum rentals for the
non-cancelable term of all operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998............................. $19,711
1999............................. 14,497
2000............................. 10,851
2001............................. 5,646
2002............................. 4,953
Thereafter....................... 15,643
-------
Total............................ $71,301
=======
</TABLE>
Certain leases have clauses that call for the annual rents to be increased
during the term of the lease. Such lease payments are expensed on a straight-
line basis.
The Company leases certain facilities from an unconsolidated affiliate and
incurred occupancy expenses of $4,158,000, $4,674,000 and $6,642,000 for the
years ended December 31, 1995, 1996 and 1997, respectively.
The Company has also entered into agreements with co-participants in certain
joint venture subsidiaries whereby upon defined circumstances constituting a
change in control of either party to the venture, the other party has the
right to acquire, at a specified price, the entire interest in the joint
venture.
The Company has entered into agreements with the minority stockholders of DST
Catalyst whereby the minority stockholder has the option to sell to the
Company shares of DST Catalyst stock. If the provisions of the agreements were
exercised, the Company would be required to purchase the respective minority
interests at fair market value, currently estimated at approximately $1.0
million.
The Company has committed to make additional investments approximating $3.0
million related to certain private equity partnerships.
The Company has entered into agreements with certain officers whereby upon
defined circumstances constituting a change in control of the Company, certain
benefit entitlements are automatically funded and such officers are entitled
to specific cash payments upon termination of employment.
The Company has also established trusts to provide for the funding of
corporate commitments and entitlements of Company officers, directors,
employees and others in the event of a change in control of the Company.
Assets held in such trusts at December 31, 1997 were not significant.
The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of their businesses. While the ultimate outcome
of these legal proceedings cannot be predicted with certainty, it is the
opinion of management, after consultation with legal counsel, that the final
outcome in such proceedings, in the aggregate, would not have a material
adverse effect on the consolidated financial condition or results of
operations of the Company.
C-45
<PAGE>
15. GEOGRAPHIC INFORMATION
Financial information by geographic region for the Company is presented below
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $ 319,294 $ 7,924 $ 52,969 $ 380,187
Revenues--related parties.......... 103,944 103,944
---------- -------- -------- ----------
Total............................ $ 423,238 $ 7,924 $ 52,969 $ 484,131
========== ======== ======== ==========
Income (loss) from operations...... $ 42,689 $(1,904) $ 36 $ 40,821
Equity in earnings (losses) of
unconsolidated affiliates, net of
affiliate taxes................... 9,822 (3,370) 6,452
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $ 389,964 $ 21,071 $ 59,670 $ 470,705
Revenues--related parties.......... 106,471 3,632 110,103
---------- -------- -------- ----------
Total............................ $ 496,435 $ 24,703 $ 59,670 $ 580,808
========== ======== ======== ==========
Income (loss) from operations...... $ 58,635 $ 276 $ (1,938) $ 56,973
Equity in earnings (losses) of
unconsolidated affiliates, net of
affiliate taxes................... 4,106 (1,068) (7,066) (4,028)
Total assets....................... 1,041,155 15,965 64,468 1,121,588
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
UNITED EUROPE
STATES CANADA & OTHERS TOTAL
---------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues........................... $ 440,865 $ 22,341 $ 74,868 $ 538,074
Revenues--related parties.......... 108,910 3,568 126 112,604
---------- -------- -------- ----------
Total............................ $ 549,775 $ 25,909 $ 74,994 $ 650,678
========== ======== ======== ==========
Income (loss) from operations...... $ 91,108 $ (4,570) $ 5,702 $ 92,240
Equity in earnings (losses) of
unconsolidated affiliates, net of
affiliate taxes................... 13,036 (1,271) (13,110) (1,345)
Total assets....................... 1,255,147 19,708 80,549 1,355,404
</TABLE>
C-46
<PAGE>
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data follows (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $144,262 $143,216 $139,569 $153,761 $580,808
Cost and expenses....... 106,389 106,565 104,343 114,266 431,563
Depreciation and
amortization........... 18,688 19,192 19,804 20,888 78,572
Other expenses.......... 13,700 (2) 13,700
-------- -------- -------- -------- --------
Income from operations.. 19,185 17,459 1,722 18,607 56,973
Interest expense........ (2,102) (1,653) (1,356) (1,829) (6,940)
Other income, net....... 931 981 912 1,352 4,176
Gain on sale of equity
investment............. 223,438 (2) 223,438
Equity in earnings
(losses) of
unconsolidated
affiliates, net of
taxes.................. (7,641)(1) 3,140 (45) 518 (4,028)
-------- -------- -------- -------- --------
Income before income
taxes and minority
interests.............. 10,373 19,927 224,671 18,648 273,619
Income taxes............ 5,963 7,549 85,897 6,511 105,920
-------- -------- -------- -------- --------
Income before minority
interests.............. 4,410 12,378 138,774 12,137 167,699
Minority interests...... (7) 51 144 309 497
-------- -------- -------- -------- --------
Net income.............. $ 4,417 $ 12,327 $138,630 $ 11,828 $167,202
======== ======== ======== ======== ========
Basic average shares
outstanding............ 50,000 49,965 49,841 49,679 49,871
Basic earnings per
share.................. $ 0.09 $ 0.25 $ 2.78 $ 0.24 $ 3.35 (3)
Diluted average shares
outstanding............ 50,465 50,496 50,238 50,142 50,335
Diluted earnings per
share.................. $ 0.09 $ 0.24 $ 2.76 $ 0.24 $ 3.32 (3)
Common stock price
ranges--High........... $ 34.88 $ 37.75 $ 32.75 $ 34.38 $ 37.75
- --Low................... $ 27.38 $ 29.50 $ 25.63 $ 29.00 $ 25.63
</TABLE>
- --------
(1) Includes one-time Continuum charge from Hogan Merger (Note 4)
(2) Gain on CSC/Continuum Merger and related charges (Note 4)
(3) The accumulation of 1996's quarterly earnings per share is greater than
the earnings per share for the year ended December 31, 1996 due to
repurchases of the Company common stock throughout the year.
C-47
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1997
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenues..................... $158,684 $155,394 $159,863 $176,737 $650,678
Cost and expenses............ 115,354 114,983 118,811 129,955 479,103
Depreciation and
amortization................ 19,629 19,468 19,453 20,785 79,335
-------- -------- -------- -------- --------
Income from operations....... 23,701 20,943 21,599 25,997 92,240
Interest expense............. (2,163) (1,884) (1,960) (1,663) (7,670)
Other income, net............ 979 1,019 989 1,033 4,020
Gains on sales of equity
investments................. 212 1,252 1,464
Equity in earnings (losses)
of unconsolidated
affiliates, net of taxes.... 1,044 820 (507) (2,702) (1,345)
-------- -------- -------- -------- --------
Income before income taxes
and minority interests...... 23,561 21,110 21,373 22,665 88,709
Income taxes................. 8,302 7,064 7,097 6,715 29,178
-------- -------- -------- -------- --------
Income before minority
interests................... 15,259 14,046 14,276 15,950 59,531
Minority interests........... 156 229 222 (73) 534
-------- -------- -------- -------- --------
Net income................... $ 15,103 $ 13,817 $ 14,054 $ 16,023 $ 58,997
======== ======== ======== ======== ========
Basic average shares
outstanding................. 49,529 49,374 49,236 49,099 49,308
Basic earnings per share..... $ 0.30 $ 0.28 $ 0.29 $ 0.33 $ 1.20
Diluted average shares
outstanding................. 50,021 49,762 49,804 49,770 49,838
Diluted earnings per share... $ 0.30 $ 0.28 $ 0.28 $ 0.32 $ 1.18
Common stock price ranges--
High........................ $ 35.63 $ 33.31 $ 37.81 $ 44.56 $ 44.56
- --Low........................ $ 28.50 $ 24.25 $ 32.19 $ 34.56 $ 24.25
</TABLE>
C-48
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company has incorporated by reference certain information in response or
partial response to the Items under this Part III of this Annual Report on
Form 10-K pursuant to General Instruction G(3) of this Form 10-K and Rule 12b-
23 under the Exchange Act. The Company's definitive proxy statement in
connection with its annual meeting of stockholders scheduled for May 12, 1998
(the "Definitive Proxy Statement") will be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 1997.
(A) DIRECTORS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal--Election of Two Directors" and "The Board of Directors" in
the Company's Definitive Proxy Statement is hereby incorporated herein by
reference in partial response to this Item 10.
(B) EXECUTIVE OFFICERS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
heading "Executive Officers of the Company" in Part I of this Form 10-K is
incorporated herein by reference in partial response to this Item 10. The
information set forth in response to Item 405 of Regulation S-K under the
heading "Other Matters--Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's Definitive Proxy Statement is hereby incorporated
herein by reference in partial response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in response to Item 402 of Regulation S-K under "The
Board of Directors--Compensation of Directors" and under "Executive
Compensation" in the Company's Definitive Proxy Statement (other than The
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph) is hereby incorporated herein by reference in response to
this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stockholdings of Management" in the
Company's Definitive Proxy Statement is hereby incorporated herein by
reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at
a subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in response to Item 404 of Regulation S-K under the
heading "Compensation Committee Interlocks and Insider Participation" in the
Company's Proxy Statement is incorporated herein by reference in response to
this Item 13.
C-49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this Report
(1) Consolidated Financial Statements
The consolidated financial statements and related notes, together with the
report of Price Waterhouse LLP dated February 26, 1998 appear in Part II Item
8 Financial Statements and Supplementary Data of this Form 10-K.
(2) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not applicable, insignificant
or the required information is shown in the consolidated financial statement
or notes thereto.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.
<TABLE>
<C> <S>
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession
Not applicable.
3. Articles of Incorporation and by-laws
3.1 The Company's Amended Delaware Certificate of Incorporation, as
restated, which is attached as exhibit 3.1 to the Company's
Registration Statement dated September 1, 1995, as amended August 31,
1995 (Commission file no. 33-96526) (the "Registration Statement"), is
hereby incorporated by reference as Exhibit 3.1.
3.2 The Company's Amended and Restated By-laws as adopted August 28, 1995,
which are attached as Exhibit 3.2 to the Company's Registration
Statement, are hereby incorporated by reference as Exhibit 3.2.
4. Instruments defining the rights of security holders, including
indentures
4.1 The Registration Rights Agreement dated October 24, 1995, between the
Company and Kansas City Southern Industries, Inc. ("KCSI"), which is
attached as Exhibit 4.1 to the Company's Registration Statement, is
hereby incorporated by reference as Exhibit 4.1.
4.2 The Certificate of Designations dated October 16, 1995, establishing
the Series A Preferred Stock of the Company, which is attached as
Exhibit 4.3 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 4.2
4.3 The Summary of the preferred stock purchase rights set forth in Form 8-
A dated November 15, 1995 (Commission file no. 1-14036), and the
related Rights Agreement dated as of October 6, 1995, between the
Company and State Street Bank and Trust Company, as rights agent, which
is attached as exhibit 4.4 to the Company's Registration Statement, are
hereby incorporated by reference as Exhibit 4.3.
4.4 The Registration Rights Agreement dated October 31, 1995, between the
Company and UMB Bank, N.A. as trustee of The Employee Stock Ownership
Plan of DST Systems, Inc. ("UMB") which is attached as Exhibit 4.4 to
the Company's Annual Report for the year ended December 31, 1995
(Commission file no. 1-14036), is hereby incorporated by reference as
Exhibit 4.4.
4.5 The Stock Exchange Agreement dated October 26, 1995, between KCSI and
UMB, which is attached as Exhibit 4.6 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 4.5.
</TABLE>
C-50
<PAGE>
<TABLE>
<C> <S>
4.6 The description of the Company's common stock, par value $0.01 per
share, set forth under the headings "Description of Capital Stock"
and "Dividend Policy" in the Company's Registration Statement of the
common stock on Form 8-A declared effective October 31, 1995
(Commission file no. 1-14036), is hereby incorporated by reference
as Exhibit 4.6.
4.7 Paragraphs fourth, fifth, sixth, seventh, tenth, eleventh, and
twelfth of the Exhibit 3.1 are hereby incorporated by reference as
Exhibit 4.7.
4.8 Article I, Sections 1, 2, 3, and 11 of Article II, Article V,
Article VIII, Article IX of Exhibit 3.2 are hereby incorporated by
reference as Exhibit 4.8.
The Company agrees to furnish to the Commission a copy of any long-term debt
agreements that do not exceed 10 percent of the total assets of the Company
upon request.
9. VOTING TRUST AGREEMENT
Not applicable.
10. MATERIAL CONTRACTS
10.1 The Registration Rights Agreement incorporated by reference as
Exhibit 4.1 hereto, is also hereby incorporated by reference as
Exhibit 10.1.
10.2 The Company's Executive Plan effective as of October 31, 1995,
attached as Exhibit 10.2 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995 (Commission file no. 1-14036),
is hereby incorporated by reference as Exhibit 10.2.
10.3 The Company's 1995 Stock Option and Performance Award Plan,
effective September 1, 1995, which is attached as Exhibit 10.3 to
the Company's Registration Statement on Form S-1 dated September 1,
1995 (Commission file no. 33-96526), is hereby incorporated by
reference as Exhibit 10.3.
10.3.1 The First Amendment to the 1995 Stock Option and Performance Award
Plan approved May 13, 1997, is attached as Exhibit 10.3.1 to the
Company's Annual Report on Form 10-K for the year ended December 31,
1997 (Commission file no. 1-14036).
10.4 The Tax Disaffiliation Agreement between the Company and KCSI dated
October 23, 1995, which is attached as Exhibit 10.4 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.4.
10.5 The Stock Purchase, Sale of Assets, Assignment and Assumption
Agreement dated August 30, 1995, among the Company, DST Realty,
Inc., Tolmak, Inc., Mulberry Western Company and KCSI, which is
attached as Exhibit 10.5 to the Company's Registration Statement, is
hereby incorporated by reference as Exhibit 10.5.
10.6 The Employee Stock Ownership Plan and Trust Agreement of DST
Systems, Inc. dated January 1, 1998 is attached as Exhibit 10.6 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1997 (Commission file no. 1-14036).
10.7 The 1996 Restatement of the Company's Profit Sharing Plan and Trust
Agreement dated December 31, 1996 (the "1996 Profit Sharing Plan"),
is attached as Exhibit 10.7 to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 (Commission file no. 1-
14036).
10.7.1 The First Amendment, dated February 27, 1998, to the 1996 Profit
Sharing Plan is attached as Exhibit 10.7.1 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 (Commission
file no. 1-14036).
10.8 The Employment Agreement among the Company, KCSI and Thomas A.
McDonnell, Amended and Restated as of March 18, 1993 and October 9,
1995, which is attached as Exhibit 10.8 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.8.
</TABLE>
C-51
<PAGE>
<TABLE>
<C> <S>
10.8.1 The Employment Agreement between the Company and Thomas A.
McDonnell dated October 9, 1995, which is attached as Exhibit
10.8.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.8.1.
10.9 The Employment Agreement between the Company, KCSI and Thomas A.
McCullough dated April 1, 1992, as amended October 9, 1995, which
is attached as Exhibit 10.9 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.9.
10.10 The Employment Agreement between the Company, KCSI and James P.
Horan dated April 1, 1992, as amended October 9, 1995, which is
attached as Exhibit 10.10 to the Company's Registration Statement,
is hereby incorporated by reference as Exhibit 10.10.
10.11 The Employment Agreement between the Company, KCSI and Robert C.
Canfield, dated April 1, 1992, as amended October 9, 1995, which is
attached as Exhibit 10.11 to the Company's Registration Statement,
is hereby incorporated by reference as Exhibit 10.11.
10.12 The Employment Agreement between the Company, KCSI and Charles W.
Schellhorn, dated April 1, 1992, as amended October 9, 1995, which
is attached as Exhibit 10.12 to the Company's Annual Report on Form
10-K for the year ended December 31, 1996 (Commission file no. 1-
14036), is hereby incorporated by reference as Exhibit 10.12.
10.13 The Company's 1994 Restatement of its 401(k) Plan and Trust
Agreement dated September 12, 1994 (the "1994 401(k) Plan"), which
is attached as Exhibit 10.13 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.13.
10.13.1 The First Amendment dated June 1, 1995, to the Company's 1994
401(k) Plan, which is attached as Exhibit 10.13.1 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.13.1.
10.13.2 The Second Amendment dated October 31, 1995, to the Company's 1994
401(k) Plan is attached as Exhibit 10.13.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1995
(Commission file no. 1-14036), is hereby incorporated by reference
as Exhibit 10.13.2.
10.13.3 The Third Amendment dated March 21, 1996, to the Company's 1994
401(k) Plan is attached as Exhibit 10.13.3 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).
10.13.4 The Fourth Amendment dated February 9, 1998, to the Company's 1994
401(k) Plan is attached as Exhibit 10.13.4 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1997
(Commission file no. 1-14036).
10.14 The Agreement between State Street Boston Financial Corporation and
Data-Sys-Tance dated June 1, 1974 (the "State Street Agreement"),
which is attached as Exhibit 10.14 to the Company's Registration
Statement, is hereby incorporated by reference as Exhibit 10.14.
10.14.1 The Amendment to the State Street Agreement between the Company and
State Street, dated October 1, 1987, which is attached as Exhibit
10.14.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.14.1.
10.15 The Data Processing Services Agreement between The Company and The
Continuum Company, Inc. dated October 1, 1993, which is attached as
Exhibit 10.15 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.15.
10.16 The Agreement among the Company, Financial Holding Corporation,
KCSI and Argus Health Systems, Inc. dated June 30, 1989, which is
attached as Exhibit 10.16 to the Company's Registration Statement,
is hereby incorporated by reference as Exhibit 10.16.
10.16.1 The Stock Transfer Restriction and Option Agreement between the
Company, Argus Health Systems, Inc. and Financial Holding
Corporation dated June 30, 1989, which is attached as Exhibit
10.16.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.16.1.
</TABLE>
C-52
<PAGE>
<TABLE>
<C> <S>
10.17 The Five-Year Competitive Advance and Revolving Credit Facility
Agreement among the Company, the lenders named therein, The Chase
Manhattan Bank, N.A. as Documentation, Syndication, and
Administrative Agent dated December 30, 1996, which is attached as
Exhibit 10.17 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 (Commission file no. 1-14036), is
hereby incorporated by reference as Exhibit 10.17.
10.18 The Master Lease Agreement between the Company and Irkan Corp.
dated December 30, 1987 for property at 1004 Baltimore in Kansas
City, Missouri which is attached as Exhibit 10.18 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.18.
10.18.1 The Master Lease Agreement between the Company and Irkan Corp.
dated December 30, 1987 for property at 127 West Tenth Street in
Kansas City, Missouri which is attached as Exhibit 10.18.1 to the
Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.18.1.
10.18.2 The Lease Agreement dated February 24, 1998, between the Company
and Broadway Square Partners for property at 1055 Broadway in
Kansas City, Missouri, which is attached as Exhibit 10.18.2 to the
Company's Registration Statement, is hereby incorporated by
reference as Exhibit 10.18.2.
10.19 The Company's Directors' Deferred Fee Plan effective September 1,
1995, which is attached at Exhibit 10.19 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.19.
10.20 The Trust Agreement between the Company as settlor and United
Missouri Bank of Kansas City, N.A. as Trustee dated December 31,
1987, which is attached as Exhibit 10.20 to the Company's
Registration Statement, is hereby incorporated by reference as
Exhibit 10.20.
10.20.1 Trust Agreement by and between the Company as settlor and United
Missouri Bank of Kansas City, N.A., Trustee dated June 30, 1989,
for the benefit of James Horan, which is attached as
Exhibit 10.20.1 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.20.1.
10.21 DST Systems, Inc. Master Trust agreement dated December 31, 1997 is
attached as Exhibit 10.21 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 (Commission file
no. 1-14036).
11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Not applicable.
12. STATEMENTS RE COMPUTATION OF RATIOS
Not applicable.
13. ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO
SECURITY HOLDERS
Not applicable.
16. LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
18. LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
21. SUBSIDIARIES OF THE COMPANY
The list of the Company's significant subsidiaries, which is
attached as Exhibit 21.1 to the Company's Annual Report on Form 10-
K for the year ended December 31, 1997 (Commission file no. 1-
14036).
22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY
HOLDERS
Not applicable.
</TABLE>
C-53
<PAGE>
<TABLE>
<C> <S>
23. CONSENTS OF EXPERTS AND COUNSEL
The consent dated March 16, 1998 of Price Waterhouse LLP to the
incorporation by reference of their report included in this Annual Report
on Form 10-K is attached hereto as Exhibit 23.1.
24. POWER OF ATTORNEY
Not applicable.
27. FINANCIAL DATA SCHEDULE
A Financial Data Schedule prepared in accordance with Item 601 (c) of
Regulation S-K is attached hereto as Exhibit 27.1.
99. ADDITIONAL EXHIBITS
Not applicable.
</TABLE>
(B) REPORTS ON FORM 8-K DURING THE LAST CALENDAR QUARTER
The Company filed a Form 8-K dated October 16, 1997, under Item 5 of such
form, reporting the announcement of financial results for the quarter ended
September 30, 1997.
C-54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DST Systems, Inc.
By: /s/ Thomas A. McDonnell
----------------------------------
Thomas A. McDonnell
President and Chief Executive
Officer,
Director
Dated: February 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the Company
and in capacities indicated on February 26, 1998.
<TABLE>
<S> <C> <C>
/s/ Thomas A. McDonnell /s/ A. Edward Allinson
___________________________________________ ___________________________________________
Thomas A. McDonnell A. Edward Allinson
resident and Chief Executive Officer, DirectorP Director
/s/ Thomas A. McCullough /s/ Michael G. Fitt
___________________________________________ ___________________________________________
Thomas A. McCullough Michael G. Fitt
Executive Vice President, Director Director
/s/ Kenneth V. Hager /s/ William C. Nelson
___________________________________________ ___________________________________________
Kenneth V. Hager William C. Nelson
Vice President, Chief Financial Officer and Director
Treasurer (Principal Financial Officer)
/s/ John J. Faucett /s/ M. Jeannine Strandjord
___________________________________________ ___________________________________________
John J. Faucett M. Jeannine Strandjord
Controller (Principal Accounting Officer) Director
</TABLE>
C-55
<PAGE>
DST SYSTEMS, INC.,
1997 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
The following Exhibits are attached hereto.* See Part IV of this Annual Report
on Form 10-K for a complete list of exhibits.
<TABLE>
<CAPTION>
EXHIBIT DOCUMENT
NUMBER --------
-------
<C> <S>
10.3.1 First Amendment to the 1995 Stock Option and Performance Award
Plan
10.6 The Employee Stock Ownership Plan and Trust Agreement of DST
Systems, Inc.
10.7 DST Systems, Inc. Profit Sharing and Trust Agreement (1996
Restatement)
10.7.1 First Amendment to the 1996 Restatement of the Profit Sharing Plan
10.13.3 Third Amendment to the Company's 1994 401(k) Plan
10.13.4 Fourth Amendment to the Company's 1994 401(k) Plan
10.21 DST Systems, Inc. Master Trust
21 Subsidiaries of the Company
23.1 Consent of Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- -------------------------------------------------------------------------------
* The above exhibits are not included in this Form 10-K, but are on file with
the Securities and Exchange Commission
- -------------------------------------------------------------------------------
C-56
<PAGE>
APPENDIX D
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
----------------
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER 1-14036
DST SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1581814
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 WEST 11TH STREET, KANSAS CITY, 64105
MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(816) 435-1000
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGES
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
----------------
Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Number of shares outstanding of the Company's common stock as of April 30,
1998:
Common Stock $.01 par value--48,965,043
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
MARCH 31, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments................................................ 3
Condensed Consolidated Balance Sheet--December 31, 1997 and March 31,
1998................................................................ 4
Condensed Consolidated Statement of Income--Three Months Ended March
31, 1997 and 1998................................................... 5
Condensed Consolidated Statement of Cash Flows--Three Months Ended
March 31, 1997 and 1998............................................. 6
Notes to Condensed Consolidated Financial Statements................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-13
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 13
Item 2. Changes in Securities.......................................... 14
Item 3. Defaults Upon Senior Securities................................ 14
Item 4. Submission of Matters to a Vote of Security Holders............ 14
Item 5. Other Information.............................................. 14-15
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES............................................................... 16
</TABLE>
The Company's service marks and trademarks include without limitation,
DST(TM), Securities Transfer System(TM), TA2000(R), Portfolio Accounting
System(TM), Automated Work Distributor(TM), AWD(R), TRAC-2000(R), FAST2000(TM)
referred to in this Report.
D-2
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
MARCH 31, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST"
or the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the United States Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to enable a reasonable understanding of the information presented.
These Condensed Consolidated Financial Statements should be read in
conjunction with the audited financial statements and the notes thereto for
the year ended December 31, 1997. Additionally, the Condensed Consolidated
Financial Statements should be read in conjunction with Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Form 10-Q.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the full year 1998.
D-3
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ ----------
ASSETS
------
<S> <C> <C>
Current assets
Cash and cash equivalents........................... $ 15,833 $ 30,846
Accounts receivable................................. 170,699 184,819
Other assets........................................ 44,792 38,962
---------- ----------
231,324 254,627
Investments........................................... 820,577 1,003,450
Properties............................................ 242,153 231,042
Intangibles and other assets.......................... 61,350 56,315
---------- ----------
Total assets...................................... $1,355,404 $1,545,434
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities
Debt due within one year............................ $ 13,898 $ 11,804
Accounts payable.................................... 49,763 28,712
Accrued compensation and benefits................... 28,319 24,983
Deferred revenues and gains......................... 22,679 24,343
Other liabilities................................... 26,334 33,585
---------- ----------
140,993 123,427
Long-term debt........................................ 92,005 121,501
Deferred income taxes................................. 241,782 312,124
Other liabilities..................................... 43,534 27,774
---------- ----------
518,314 584,826
---------- ----------
Commitments and contingencies.........................
---------- ----------
Minority interest..................................... 1,380 1,043
---------- ----------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares
authorized, 50,000,000 shares issued............... 500 500
Additional paid-in capital.......................... 408,610 409,322
Retained earnings................................... 261,589 280,162
Treasury stock, 956,942 and 1,053,593 shares,
respectively), at cost............................. (31,404) (37,960)
Accumulated other comprehensive income.............. 196,415 307,541
---------- ----------
Total stockholders' equity........................ 835,710 959,565
---------- ----------
Total liabilities and stockholders' equity........ $1,355,404 $1,545,434
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-4
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------
1997 1998
-------- --------
<S> <C> <C>
Revenues................................................... $158,684 $187,423
Costs and expenses......................................... 115,354 134,421
Depreciation and amortization.............................. 19,629 21,780
-------- --------
Income from operations..................................... 23,701 31,222
Interest expense........................................... (2,163) (2,301)
Other income, net.......................................... 979 841
Equity in earnings (losses) of unconsolidated affiliates,
net of income taxes....................................... 1,044 (444)
-------- --------
Income before income taxes and minority interest........... 23,561 29,318
Income taxes............................................... 8,302 10,792
-------- --------
Income before minority interest............................ 15,259 18,526
Minority interests in income (losses)...................... 156 (47)
-------- --------
Net income................................................. $ 15,103 $ 18,573
======== ========
Average common shares outstanding.......................... 49,529 49,002
Basic earnings per share................................... $ 0.30 $ 0.38
Diluted shares outstanding................................. 50,021 49,905
Diluted earnings per share................................. $ 0.30 $ 0.37
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-5
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
Cash flows--operating activities:
Net income........................................... $ 15,103 $ 18,573
---------- ----------
Depreciation and amortization........................ 19,629 21,780
Undistributed (earnings) losses of unconsolidated
affiliates.......................................... (1,044) 444
Cash dividends received from unconsolidated
affiliates.......................................... 6,993
Changes in accounts receivable....................... (1,626) (14,120)
Changes in other current assets...................... (247) 5,515
Changes in accounts payable and accrued liabilities.. (16,718) (11,009)
Other, net........................................... (2,452) 528
---------- ----------
Total adjustments to net income.................... (2,458) 10,131
---------- ----------
Net................................................ 12,645 28,704
---------- ----------
Cash flows--investing activities:
Investments and advances to unconsolidated affiliates.. (8,444) (7,687)
Capital expenditures................................... (12,629) (13,895)
Other, net............................................. 101 (149)
---------- ----------
Net................................................ (20,972) (21,731)
---------- ----------
Cash flows--financing activities:
Principal payments on long-term debt................... (4,077) (2,315)
Net increase in credit facilities and notes payable.... 20,521 29,684
Common stock repurchased............................... (5,016) (10,009)
Other, net............................................. (9,320)
---------- ----------
Net................................................ 11,428 8,040
---------- ----------
Net increase in cash................................... 3,101 15,013
Cash at beginning of period............................ 8,279 15,833
---------- ----------
Cash at end of period.................................. $ 11,380 $ 30,846
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
D-6
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST"
or the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These Condensed
Consolidated Financial Statements should be read in conjunction with the
audited financial statements and the notes thereto for the year ended December
31, 1997. Additionally, the Condensed Consolidated Financial Statements should
be read in conjunction with Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this Form 10-Q.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of normal
interim closing procedures) necessary to present fairly the financial position
of DST Systems, Inc. (the "Company") and its subsidiaries at December 31, 1997,
and March 31, 1998, and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the full year 1998.
Earnings per share. The computation of basic and diluted earnings per share
for the three months ended March 31 is as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Net income............................................... $15,103 $18,573
======= =======
Average common shares outstanding........................ 49,529 49,002
Incremental shares from assumed conversions of stock
options................................................. 492 903
------- -------
Dilutive potential common shares......................... 50,021 49,905
------- -------
Basic earnings per share................................. $ 0.30 $ 0.38
Diluted earnings per share............................... $ 0.30 $ 0.37
</TABLE>
Comprehensive income. As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
new statement requires that all changes in equity during a period except those
resulting from investments by and distributions to owners be reported as
"comprehensive income" in the financial statements. Upon implementation, the
Company included the net unrealized gain or loss on available-for-sale
securities and foreign currency translation adjustments together with net
income in the computation of comprehensive income. For the quarter ended March
31, 1998, comprehensive income was $129.7 million as compared to a loss of
$22.4 million for the quarter ended March 31, 1997.
Software revenue recognition. As of January 1, 1998, the Company adopted
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which was
effective for software licensing transactions entered into beginning in 1998.
Certain of the Company's products are licensed, however revenues for licensed
software products are not material to the Company as a whole. Implementation of
the new statement did not have a material effect on the quarter and the Company
does not expect the statement to have a material effect on the future
consolidated results of operations of the Company.
D-7
<PAGE>
2. EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------
1997 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Boston Financial Data Services, Inc.............. $ 1,619 $ 1,640
Argus Health Systems, Inc........................ 1,238 620
European Financial Data Services Limited......... (1,683) (2,626)
Other............................................ (130) (78)
---------- ----------
$ 1,044 $ (444)
========== ==========
</TABLE>
D-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussions set forth in this Quarterly Report on Form 10-Q contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Quarterly Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by their use
of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results could
materially differ from those anticipated by such forward-looking statements.
The differences could be caused by a number of factors or combination of
factors including, but not limited to, those factors identified in the
Company's Current Report on Form 8-K/A dated April 13, 1998, which is hereby
incorporated by reference. This report has been filed with the United States
Securities and Exchange Commission (the "SEC" or the "Commission") in
Washington, D.C. and can be obtained by contacting the SEC's Public Reference
Branch or in the SEC's EDGAR database accessible through the SEC's web site on
the World Wide Web at www.sec.gov. Readers are strongly encouraged to obtain
and consider the factors listed in the April 13, 1998 Current Report and any
amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company will not update any forward-
looking statements in this Quarterly Report to reflect future events or
developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the Condensed Consolidated Financial Statements and Notes thereto included
in this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
INTRODUCTION
The Company provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance companies,
banks and other financial services organizations.
RECENT EVENTS
On February 10, 1998, Boston EquiServe, LP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50%
owned joint venture of the Company and State Street Corporation) and BankBoston
Corporation, announced an agreement to merge with First Chicago Trust Company
of New York ("First Chicago") which would create the largest corporate
securities transfer agent in the United States, processing approximately 25
million accounts. The merger of the two businesses, to be named EquiServe, LP,
is expected to be completed in mid 1998.
DST is currently developing a new securities transfer system ("Fairway") to
be used by Boston EquiServe to process all of its accounts. In conjunction with
the merger, DST entered into a memorandum of understanding with Boston
EquiServe and First Chicago to complete development of Fairway for the
exclusive use by EquiServe to process all of its accounts. The Company has also
agreed with EquiServe to provide data processing services for EquiServe to use
Fairway. The terms and conditions of this memorandum of understanding will be
set forth in a definitive agreement, the completion of which is a condition to
the closing of the merger agreement between Boston EquiServe and First Chicago.
Upon acceptance of defined components of Fairway, DST will contribute Fairway
and its non-EquiServe securities transfer processing business (approximately 2
million accounts) to EquiServe for a direct ownership interest in EquiServe.
DST will also continue to hold an indirect ownership interest in EquiServe
through BFDS.
RESULTS OF OPERATIONS
First Quarter 1997 versus First Quarter 1998
For the quarter ended March 31, 1998, DST's consolidated net income was $18.6
million, or $0.38 basic and $0.37 diluted earnings per share, as compared to
$15.1 million, or $0.30 basic and diluted earnings per share for the quarter
ended March 31, 1997.
D-9
<PAGE>
Revenues
Consolidated revenues for the quarter ended March 31, 1998 increased 18.1%
over the prior year to $187.4 million primarily due to increased U.S. mutual
fund, output and satellite television subscriber management processing and an
increase in international revenues.
U.S. revenues increased 13.6% to $157.5 million resulting from higher levels
of mutual fund, output processing, Automated Work Distributor (AWD) and
subscriber management volumes. U.S. mutual fund processing revenues increased
approximately 14.2% as shareowner accounts serviced increased to 45.9 million
at March 31, 1998, an increase of 9.8% from 41.8 million at March 31, 1997 and
2.0% from 45.0 million at December 31, 1997. As expected and earlier reported,
Prudential Financial Management Services ("Prudential") internalized the
processing for approximately 900,000 mutual fund shareowner accounts during the
quarter which have been excluded from the account totals at March 31, 1998.
Excluding the Prudential accounts removed, accounts serviced grew by 12.2% from
March 31, 1997 and 4.1% from December 31, 1997. Increased individual retirement
account (IRA) activity contributed to the account growth during the quarter.
For the quarter ended March 31, 1998, new IRA accounts opened increased by
470,000 accounts over the 1997 quarter, and approximately two-thirds of the
increase were the new Roth IRA or Educational IRA accounts. U.S. mutual fund
output processing revenues increased 9.6% as pages printed for the quarter
increased 9.1% over first quarter 1997 volumes to 428.1 million pages. U.S. AWD
workstations licensed increased 4.6% over year-end 1997 levels. Satellite
television subscriber management revenues increased 71.2% over the prior year
quarter due to an increased number of subscribers and continuing systems
development activities. Additionally, the Company received a one-time $2.6
million contract termination fee from a portfolio accounting client during the
1998 quarter.
International revenues for the quarter ended March 31, 1998 increased 49.6%
over the prior year quarter. The increase was attributable to significantly
higher software and services revenues from the Company's investment accounting
products. Canadian mutual fund processing and international AWD revenues also
increased.
Costs and expenses
Consolidated costs and expenses for the first quarter 1998 increased 16.5% to
$134.4 million, primarily as a result of higher operating volumes and increased
personnel costs to support increased revenues both in the U.S. and
internationally. U.S. costs and expenses for the first quarter 1998 increased
15.7%. International costs and expenses increased 20.2%
The Company continued to experience increases in compensation necessary to
hire and retain computer programmers and other systems professionals. While
these cost increases have not materially affected the Company's overall cost
structure to date, the Company believes that the costs associated with computer
programmers and other systems professionals may continue to increase at rates
above general inflation at least through 2000.
Depreciation and amortization
Consolidated depreciation and amortization increased 11.0% to $21.8 million
for the first quarter 1998. U.S depreciation and amortization increased 10.4%
as a result of a one-time write-off of intangible assets totaling $3.2 million,
primarily associated with the $2.6 million contract termination fee referred to
above. International depreciation and amortization increased 16.4% due to
related increases in capital additions.
Interest expense
Interest expense for the first quarter 1998 increased 6.4% to $2.3 million on
higher average debt balances.
D-10
<PAGE>
Equity in earnings (losses) of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates was a loss of $0.4 million
for the quarter ended March 31, 1998 as compared to income of $1.0 million for
the quarter ended March 31, 1997. Increased losses were recorded at European
Financial Data Services Limited ("EFDS") due to continuing development costs of
FAST2000 which costs are being expensed as incurred and costs of conversions of
new and existing client accounts to the new system. Lower earnings were
recorded by Argus Health Systems due to the contract termination of a large
client. Slightly higher operating earnings were recorded at Boston Financial
Data Services, Inc.
Income taxes
Income tax expense increased $2.5 million, or 30.0%, primarily as a result of
an increase in pretax income. The Company's effective tax rate for the first
quarter 1998 was approximately 36.8% as compared to 35.2% for the prior year
quarter, primarily caused by changes in the components of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash available from operating activities, borrowings
from banks and financing from third-party vendors and others to fund operating,
investing and financing activities.
Cash flows from operating activities totaled $28.7 million for the quarter
ended March 31, 1998. Operating cash flows for the quarter were affected by a
$6.8 million dividend from Argus Health Systems and a $14.1 million increase in
accounts receivable related to revenue growth.
Cash flows used in investing activities totaled $21.7 million for the
quarter. The Company expended $13.9 million during the quarter for capital
additions. Investments and advances to unconsolidated affiliates totaled $7.7
million, relating to funding the development of FAST2000 at EFDS and other
investments.
Cash flows provided by financing activities totaled $8.0 million for the
quarter. During the first quarter, the Company repurchased 200,000 shares of
common stock for $10.0 million, completing its 1.2 million share repurchase
program. Financing activities also include $10.8 million in payments relating
to accrued settlements of prior years sales and use tax matters.
The Company maintains a $50 million bank line of credit facility to finance
short-term working capital requirements available through May 1998, of which
total borrowings were $25.5 million as of March 31, 1998. The Company
anticipates this line to be renewed for at least another year. Additionally,
the Company maintains a five-year revolving credit facility of $125 million
with a syndicate of U.S. and international banks. Total borrowings of $60.0
million were outstanding on this facility at March 31, 1998.
The Company believes that its existing cash balances and other current
assets, together with cash provided by operating activities and, as necessary,
the Company's credit facilities, will be sufficient to meet the Company's
operating and debt service requirements and other current liabilities for at
least the next twelve months. Further, the Company believes that its longer-
term liquidity and capital requirements will be met through cash flows from
operations and existing bank credit facilities, as well as the Company's $125
million revolving credit facility described above.
Other
Unrealized gain on securities. The Company holds, among others, approximately
8.6 million shares of Computer Sciences Corporation common stock and
approximately 6.0 million shares of State Street Corporation common stock as
investments. At December 31, 1997 and March 31, 1998, the market value of the
D-11
<PAGE>
Company's investments in available-for-sale securities reflected aggregate
unrealized gains (net of deferred taxes) of $197.0 million and $307.6 million,
respectively, which are included in Accumulated Other Comprehensive Income on
the Condensed Consolidated Balance Sheet. The $110.6 million net unrealized
gain on the Company's investments in these securities during the first quarter
1998 and the $35.7 million unrealized loss during the first quarter 1997, are
included in the computation of comprehensive income in accordance with
Statement on Financial Accounting Standards No. 130, "Reporting Comprehensive
Income."
Software usage agreement. On March 31, 1998, the Company entered into a
software usage and maintenance agreement for certain computer software to be
utilized at the Winchester Data Center. The new software agreement replaces an
existing agreement with the same vendor, extending the term from 2000 until
2003 and provides for an increase in software usage capacity. Under the
previous agreement, the Company capitalized the total fixed costs to be
incurred under the agreement and recorded a corresponding liability.
Capitalized costs under the previous agreement were depreciated over the period
of the contract while variable payments for incremental usage were recorded as
costs and expenses when incurred. Based on the terms of the new agreement,
annual payments will be recorded as costs and expenses over the period which
they benefit. As a result of replacing the previous agreement, approximately
$9.0 million of computer software previously capitalized by the Company and
related short-term and long-term liabilities were removed from the Company's
balance sheet. Although the new agreement will result in certain future costs
being recorded as costs and expenses instead of depreciation expense, the
Company does not believe that the new agreement will have an adverse affect on
the Company's operating expenses.
Segment information. The Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in June 1997. This statement requires that publicly traded
companies report certain information about their operating segments, products
and services, geographic areas in which they operate, and major customers
beginning with the 1998 annual report. The Company is currently evaluating the
effect that implementation of this new standard will have on the information
disclosed in its financial statements.
Internal use software. The Accounting Standards Executive Committee recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The new statement is
effective for fiscal periods beginning after December 15, 1998 and concludes
that certain costs for the development of internal use software are an asset.
Accordingly, certain primary types of development activities should be
capitalized, including coding and software configuration costs, costs of
testing and installing the software, and when clearly distinguishable from
maintenance, the costs of upgrades and enhancements. The Company currently
expenses costs of internally developed proprietary software as it is incurred.
The Company is currently evaluating the effect that implementation of this new
standard will have on its software development accounting policies and is
unable to determine the effects on the Company's results of operations at this
time.
Seasonality. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March 31 due
primarily to processing year-end transactions and printing and mailing of year
end statements and tax forms during January. The Company has historically added
operating equipment in the last half of the year in preparation for processing
year-end transactions which has the effect of increasing costs for the second
half of the year. Software license revenues and operating results are dependent
upon the timing, size, and terms of the license.
Year 2000. Many computer programs use only two digits to identify a year in a
date field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000. These Year 2000
related issues are of particular importance to the Company. The Company depends
upon its computer and other systems and the computer and other systems of
third-parties to conduct and manage the Company's business. Additionally, the
Company's products and services are dependent upon using accurate dates in
order to function properly. These Year 2000-related issues may also adversely
affect the operations and financial performance of one or more of
D-12
<PAGE>
the Company's customers or suppliers. As a result, the failure of the Company's
computer and other systems, products or services, the computer systems and
other systems upon which the Company depends, or of the Company's customers or
suppliers to be Year 2000 ready could have a material adverse effect on the
Company's results of operations, financial position and cash flows.
The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a corporate-wide structure of project teams, a
governance structure and a central Project Office. The Project Office was
established to lead the readiness efforts for the Company and manage the
overall progress of the project. The Company has redirected some of its
development employees to address the Year 2000 issues.
The program's purpose is to identify, evaluate and resolve potential Year
2000 related issues for the Company's products, services, internal systems,
hardware, communications and other systems. The program includes the following
key steps:
1. Identification of systems and applications that must be modified
2. Evaluation of alternatives (modification, replacement or discontinuance)
3. Establishment of plans which include timely milestones and appropriate
testing to ensure that the systems and applications are ready for the
Year 2000.
The program also includes:
1. Projects to ensure that external vendors and services are also ready
2. The development of alternatives where necessary
3. Interoperability testing with clients and key organizations in the
financial services industry.
The Company's goal is to be ready, internally, for the Year 2000 by December
31, 1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is under way,
and the Company expects to achieve its goal.
The expenses associated with the program will be expensed as incurred. The
Company does not believe the amount to be spent on Year 2000 issues will be
material to the Company's results of operations, liquidity or capital
resources.
However, although the Company is not aware of any material operational or
financial Year 2000 related issues, the Company cannot make any assurances that
its computer systems, products, services or other systems or the computers and
other systems of others upon which the Company depends will be Year 2000 ready
on schedule, that the costs of its Year 2000 program will not become material
or that the Company's alternative plans will be adequate. The Company is
currently unable to anticipate accurately the magnitude, if any, of the Year
2000 related issues arising from the Company's customers and suppliers. If any
such risks (either with respect to the Company or its customers or suppliers)
materialize, the Company could experience material adverse consequences to its
business which could have material adverse effects on the Company's results of
operations, financial position and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the
ordinary course of its business. Currently, there are no legal proceedings that
management believes would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company.
D-13
<PAGE>
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted by the Company to security holders during the
quarter ended March 31, 1997. The Company has scheduled its annual shareholder
meeting for May 12, 1998.
ITEM 5. OTHER INFORMATION
The following table presents the sources of the Company's revenues:
<TABLE>
<CAPTION>
SOURCES OF REVENUE
THREE MONTHS ENDED MARCH 31,
-------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. revenues
Mutual fund and Investment management
Data processing services............. $ 70,512 44.4% $ 80,495 42.9%
Output processing.................... 24,572 15.5% 26,933 14.4%
-------- ------ -------- ------
95,084 59.9% 107,428 57.3%
Other output processing................ 31,837 20.1% 29,383 15.7%
Other.................................. 11,788 7.4% 20,738 11.1%
-------- ------ -------- ------
Total U.S. revenues...................... 138,709 87.4% 157,549 84.1%
International revenues................... 19,975 12.6% 29,874 15.9%
-------- ------ -------- ------
Total revenues..................... $158,684 100.0% $187,423 100.0%
======== ====== ======== ======
</TABLE>
The following table identifies geographic operating results:
<TABLE>
<CAPTION>
FOR THE THREE
MONTHS ENDED
MARCH 31,
------------------
1997 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Geographic information
Domestic revenues................................... $138,709 $157,549
Domestic income from operations..................... 26,057 28,130
International revenues.............................. 19,975 29,874
International income (losses) from operations....... (2,356) 3,092
</TABLE>
D-14
<PAGE>
The following table summarizes certain key operating and financial data for
the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH
1997 31, 1998
------------ --------
<S> <C> <C>
Investment Market Values (in thousands) (1)
Computer Sciences Corporation..................... $360,400 $474,779
State Street Corporation.......................... 347,509 406,487
Euronet Services, Inc............................. $ 9,136 $ 8,988
Other Operating Data
Mutual fund shareowner accounts processed
(millions)
U.S............................................. 45.0 45.9
Canada.......................................... 0.9 1.2
United Kingdom.................................. 1.0 1.2
TRAC-2000 mutual fund accounts (millions) (2)..... 1.9 2.1
TRAC-2000 participants (thousands)................ 696 801
Portfolio Accounting System portfolios............ 1,925 1,998
Automated Work Distributor workstations........... 35,100 36,200
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1998
------------ --------
<S> <C> <C>
Output Technologies pages printed (millions) 402.8 444.3
Argus pharmaceutical claims processed (millions) 37.5 32.3
</TABLE>
- --------
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2)Included in TA2000 mutual fund shareowner accounts processed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
Exhibit 27.1--Financial Data Schedule
(b) REPORTS ON FORM 8-K:
The Company filed a Form 8-K dated January 22, 1998, under Item 5 of such
form, reporting the announcement of financial results for the quarter and
year ended December 31, 1997.
D-15
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND IN THE CAPACITIES INDICATED ON MAY
15, 1998.
DST Systems, Inc.
/s/ Kenneth V. Hager
_____________________________________
Kenneth V. Hager
Vice President and Chief Financial
Officer
(Principal Financial Officer)
D-16
<PAGE>
APPENDIX E
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER 1-14036
DST SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1581814
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
333 WEST 11TH STREET, KANSAS CITY, 64105
MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(816) 435-1000
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGES
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X]No [_]
Number of shares outstanding of the Company's common stock as of July 27,
1998: Common Stock $.01 par value--48,991,152
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments............................................. 3
Condensed Consolidated Balance Sheet - December 31, 1997 and June
30, 1998......................................................... 4
Condensed Consolidated Statement of Income - Three and Six Months
Ended June 30, 1997 and 1998..................................... 5
Condensed Consolidated Statement of Cash Flows - Six Months Ended
June 30, 1997 and 1998........................................... 6
Notes to Condensed Consolidated Financial Statements.............. 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................. 9-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.... 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 14
Item 2. Changes in Securities......................................... 14
Item 3. Defaults Upon Senior Securities............................... 14
Item 4. Submission of Matters to a Vote of Security Holders........... 14
Item 5. Other Information............................................. 15-16
Item 6. Exhibits and Reports on Form 8-K.............................. 16
SIGNATURES............................................................... 17
</TABLE>
The Company's service marks and trademarks include without limitation, DST(TM),
Securities Transfer System(TM), TA2000(R), Portfolio Accounting System(TM),
Automated Work Distributor(TM), AWD(R), TRAC-2000(R), FAST2000(TM) referred to
in this Report.
E-2
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
JUNE 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Introductory Comments
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST"
or the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the United States Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Company believes that the disclosures are
adequate to enable a reasonable understanding of the information presented.
These Condensed Consolidated Financial Statements should be read in
conjunction with the audited financial statements and the notes thereto for
the year ended December 31, 1997. Additionally, the Condensed Consolidated
Financial Statements should be read in conjunction with Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in this Form 10-Q.
The results of operations for the three and six months ended June 30, 1998,
are not necessarily indicative of the results to be expected for the full year
1998.
E-3
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................... $ 15,833 $ 24,971
Accounts receivable................................. 170,699 187,226
Other assets........................................ 44,792 43,468
---------- ----------
231,324 255,665
Investments........................................... 820,577 1,091,384
Properties............................................ 242,153 229,953
Intangibles and other assets.......................... 61,350 55,096
---------- ----------
Total assets...................................... $1,355,404 $1,632,098
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Debt due within one year............................ $ 13,898 $ 9,815
Accounts payable.................................... 49,763 27,249
Accrued compensation and benefits................... 28,319 30,035
Deferred revenues and gains......................... 22,679 24,967
Other liabilities................................... 26,334 33,992
---------- ----------
140,993 126,058
Long-term debt........................................ 92,005 103,572
Deferred income taxes................................. 241,782 344,712
Other liabilities..................................... 43,534 29,581
---------- ----------
518,314 603,923
---------- ----------
Commitments and contingencies
---------- ----------
Minority interest..................................... 1,380 947
---------- ----------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares
authorized, 50,000,000 shares issued............... 500 500
Additional paid-in capital.......................... 408,610 409,305
Retained earnings................................... 261,589 297,712
Treasury stock, (956,942 and 1,019,367 shares,
respectively), at cost............................. (31,404) (36,758)
Accumulated other comprehensive income.............. 196,415 356,469
---------- ----------
Total stockholders' equity........................ 835,710 1,027,228
---------- ----------
Total liabilities and stockholders' equity........ $1,355,404 $1,632,098
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-4
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS ENDED JUNE MONTHS ENDED JUNE
30, 30,
------------------ ------------------
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $155,394 $184,292 $314,077 $371,715
Costs and expenses..................... 114,983 137,219 230,337 271,640
Depreciation and amortization.......... 19,468 19,022 39,097 40,802
-------- -------- -------- --------
Income from operations................. 20,943 28,051 44,643 59,273
Interest expense....................... (1,884) (1,957) (4,046) (4,258)
Other income, net...................... 1,231 1,150 2,210 1,990
Equity in earnings (losses) of
unconsolidated affiliates, net of
income taxes.......................... 820 77 1,864 (367)
-------- -------- -------- --------
Income before income taxes and minority
interest.............................. 21,110 27,321 44,671 56,638
Income taxes........................... 7,064 9,866 15,366 20,658
-------- -------- -------- --------
Income before minority interest........ 14,046 17,455 29,305 35,980
Minority interests in income (losses).. 229 (95) 385 (142)
-------- -------- -------- --------
Net income........................... $ 13,817 $ 17,550 $ 28,920 $ 36,122
======== ======== ======== ========
Average common shares outstanding...... 49,374 48,967 49,451 48,984
Basic earnings per share............... $ 0.28 $ 0.36 $ 0.58 $ 0.74
Diluted average shares outstanding..... 49,762 49,966 49,891 49,935
Diluted earnings per share............. $ 0.28 $ 0.35 $ 0.58 $ 0.72
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-5
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED JUNE 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flows-operating activities:
Net income............................................... $ 28,920 $ 36,122
-------- --------
Depreciation and amortization.......................... 39,097 40,802
Undistributed (earnings) losses of unconsolidated
affiliates............................................ (1,864) 367
Cash dividends received from unconsolidated affiliates. 8,303
Changes in accounts receivable......................... 1,963 (16,528)
Changes in other current assets........................ (5,301) 1,010
Changes in accounts payable and accrued liabilities.... (22,473) (6,324)
Other, net............................................. 983 310
-------- --------
Total adjustments to net income...................... 12,405 27,940
-------- --------
Net.................................................. 41,325 64,062
-------- --------
Cash flows--investing activities:
Investments and advances to unconsolidated affiliates.... (12,318) (13,444)
Capital expenditures..................................... (25,697) (31,352)
Other, net............................................... 1,132 784
-------- --------
Net.................................................. (36,883) (44,012)
-------- --------
Cash flows--financing activities:
Principal payments on long-term debt..................... (7,406) (5,762)
Net increase in credit facilities and notes payable...... 20,188 13,219
Common stock repurchased................................. (9,353) (10,009)
Other, net............................................... (6,387) (8,360)
-------- --------
Net.................................................. (2,958) (10,912)
-------- --------
Net increase in cash................................. 1,484 9,138
Cash at beginning of period.......................... 8,279 15,833
-------- --------
Cash at end of period................................ $ 9,763 $ 24,971
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
E-6
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST"
or the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate
to enable a reasonable understanding of the information presented. These
Condensed Consolidated Financial Statements should be read in conjunction with
the audited financial statements and the notes thereto for the year ended
December 31, 1997. Additionally, the Condensed Consolidated Financial
Statements should be read in conjunction with Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations included in this
Form 10-Q.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (consisting of
normal interim closing procedures) necessary to present fairly the financial
position of the Company and its subsidiaries at December 31, 1997 and June 30,
1998, the results of operations for the three and six months ended June 30,
1997 and 1998, and cash flows for the six months ended June 30, 1997 and 1998.
The results of operations for the three and six months ended June 30, 1998,
are not necessarily indicative of the results to be expected for the full year
1998.
Earnings Per Share. The computation of basic and diluted earnings per share
is as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
--------------- ---------------
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income..................................... $13,817 $17,550 $28,920 $36,122
======= ======= ======= =======
Average common shares outstanding.............. 49,374 48,967 49,451 48,984
Incremental shares from assumed conversions of
stock options................................. 388 999 440 951
------- ------- ------- -------
Dilutive potential common shares............... 49,762 49,966 49,891 49,935
======= ======= ======= =======
Basic earnings per share....................... $ 0.28 $ 0.36 $ 0.58 $ 0.74
Diluted earnings per share..................... $ 0.28 $ 0.35 $ 0.58 $ 0.72
</TABLE>
Comprehensive Income. As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The new statement requires that all changes in equity during a period except
those resulting from investments by and distributions to owners be reported as
"comprehensive income" in the financial statements. Upon implementation, the
Company included the net unrealized gain or loss on available-for-sale
securities and foreign currency translation adjustments together with net
income in the computation of comprehensive income. For the three months ended
June 30, 1998, comprehensive income was $66.5 million as compared to $81.9
million for the three months ended June 30, 1997. For the six months ended
June 30, 1998, comprehensive income was $196.2 million as compared to $59.5
million for the six months ended June 30, 1997.
Software Revenue Recognition. As of January 1, 1998, the Company adopted
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which was
effective for software licensing transactions entered into beginning in 1998.
Certain of the Company's products are licensed, however revenues for licensed
E-7
<PAGE>
software products are not material to the Company as a whole. Implementation
of the new statement did not have a material effect on the three and six
months ended June 30, 1998 and the Company does not expect the statement to
have a material effect on the future consolidated results of operations of the
Company.
2. EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
1997 1998 1997 1998
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Boston Financial Data Services, Inc......... $ 1,541 $ 1,987 $ 3,160 $ 3,627
Argus Health Systems, Inc................... 1,475 549 2,713 1,169
European Financial Data Services Limited.... (2,111) (2,162) (3,794) (4,788)
Other....................................... (85) (297) (215) (375)
------- ------- ------- -------
$ 820 $ 77 $ 1,864 $ (367)
======= ======= ======= =======
</TABLE>
E-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussions set forth in this Quarterly Report on Form 10-Q contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Quarterly Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by their
use of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results
could materially differ from those anticipated by such forward-looking
statements. The differences could be caused by a number of factors or
combination of factors including, but not limited to, those factors identified
in the Company's Current Report on Form 8-K/A dated August 4, 1998 ("Form 8-
K/A"), which is hereby incorporated by reference. The Form 8-K/A has been
filed with the United States Securities and Exchange Commission (the "SEC" or
the "Commission") in Washington, D.C. and can be obtained by contacting the
SEC's Public Reference Branch or in the SEC's EDGAR database accessible
through the SEC's web site on the World Wide Web at www.sec.gov. Readers are
strongly encouraged to consider the factors listed in the Form 8-K/A and any
amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company does not currently intend to
update any forward-looking statements in this Quarterly Report to reflect
future events or developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the Condensed Consolidated Financial Statements and Notes thereto
included in this Form 10-Q and the audited financial statements and notes
thereto in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
Introduction
The Company provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance
companies, banks and other financial services organizations.
Recent Events
On February 10, 1998, Boston EquiServe, LP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50%
owned joint venture of the Company and State Street Corporation) and
BankBoston Corporation, announced an agreement to merge with First Chicago
Trust Company of New York ("First Chicago") which would create the largest
corporate securities transfer agent in the United States, processing
approximately 25 million accounts. The merger of the two businesses, to be
named EquiServe, LP ("EquiServe"), is expected to be completed during the
latter half of 1998.
DST is currently developing a new securities transfer system ("Fairway") to
be used by Boston EquiServe to process all of its accounts. In conjunction
with the merger, DST entered into a memorandum of understanding with Boston
EquiServe and First Chicago to complete development of Fairway for the
exclusive use by EquiServe to process all of its accounts. The Company has
also agreed with EquiServe to provide data processing services for EquiServe
to use Fairway. The terms and conditions of this memorandum of understanding
will be set forth in a definitive agreement, the completion of which is a
condition to the closing of the merger agreement between Boston EquiServe and
First Chicago. Upon acceptance of defined components of Fairway, DST will
contribute Fairway and its non-EquiServe securities transfer processing
business (approximately 2 million accounts) to EquiServe for a direct
ownership interest in EquiServe. DST will also continue to hold an indirect
ownership interest in EquiServe through BFDS.
Results of Operations
Second Quarter and Year to Date 1997 Versus Second Quarter and Year to Date
1998
For the quarter ended June 30, 1998, DST's consolidated net income was $17.5
million, or $0.36 basic and $0.35 diluted earnings per share, as compared to
$13.8 million, or $0.28 basic and diluted earnings per share for the quarter
ended June 30, 1997.
E-9
<PAGE>
For the six months ended June 30, 1998, DST's consolidated net income was
$36.1 million, or $0.74 basic and $0.72 diluted earnings per share, as
compared to $28.9 million, or $0.58 basic and diluted earnings per share for
the six months ended June 30, 1997.
Revenues
Consolidated revenues for the three and six months ended June 30, 1998 were
$184.3 million and $371.7 million, respectively, which represent increases of
18.6% and 18.4%, respectively, over the comparable 1997 periods.
U.S. revenues for the three and six months ended June 30, 1998 were $152.3
million and $309.8 million, respectively, which represent increases of 15.3%
and 14.4%, respectively, over the comparable 1997 periods. This revenue
increase resulted from growth in mutual fund, output processing, automated
work distributor (AWD) and satellite television subscriber management fees.
U.S. mutual fund processing revenues for the three and six months ended June
30, 1998 have increased approximately 14.3% and 13.1%, respectively, over the
prior year as shareowner accounts serviced increased to 48.2 million at June
30, 1998, an increase of 7.1% from 45.0 million at December 31, 1997 and 13.7%
from 42.4 million at June 30, 1997. Increased IRA activity continued to
contribute to account growth. For the quarter ended June 30, 1998, new IRA
accounts opened increased by 700,000 accounts over the 1997 quarter, with
approximately 13% of the increase being new Roth or Educational IRA accounts.
U.S. mutual fund output processing revenues for the three and six months ended
June 30, 1998 increased 17.2% and 12.8%, respectively, and total pages printed
for the three and six month periods increased 20.3% and 19.2%, respectively,
over the comparable 1997 periods. U.S. AWD workstations licensed increased
9.7% over year-end 1997 levels. Satellite television subscriber management
revenues have increased nearly 50% over the prior year quarter due to an
increased number of subscribers and continuing systems development activities.
Additionally, the Company received a one-time $2.6 million contract
termination fee from a portfolio accounting client during the first quarter
1998.
The Company expects approximately 2.1 million mutual fund accounts from new
clients to be converted onto its system during the second half of 1998. As
expected and earlier reported, Prudential Financial Management Services
("Prudential") internalized the processing for approximately 1,100,000 mutual
fund shareowner accounts during the six months ended June 30, 1998. Also, an
existing mutual fund remote processing client with approximately 650,000
accounts is expected to convert off of the Company's system in the last half
of 1998.
International revenues for the three and six months ended June 30, 1998 were
$32.0 million and $61.9 million, respectively, which represent increases of
37.4% and 43.0%, respectively, over the comparable 1997 periods. The increase
in international revenues was attributable to higher investment accounting
software and services revenues and increased Canadian mutual fund processing
revenues. The introduction of the European Monetary Unit, which will be
effective beginning January 1, 1999, contributed to increased demand for the
Company's investment management products.
Costs and Expenses
Consolidated costs and expenses for the three and six months ended June 30,
1998 increased 19.3% and 18.0%, respectively, over the comparable 1997 periods
to $137.2 million and $271.6 million, respectively, primarily as a result of
higher operating volumes and increased personnel costs to support increased
revenues both in the U.S. and internationally. In addition, the renegotiation
of certain third party software agreements, effective March 31, 1998, resulted
in certain amounts being recorded as costs and expenses instead of
depreciation expense. U.S. costs and expenses for the three and six months
1998 increased 17.5% and 16.6%, respectively. International costs and expenses
for the three and six months 1998 increased 27.6% and 23.9%, respectively.
E-10
<PAGE>
The Company has continued to experience increases in compensation necessary
to hire and retain computer programmers and other systems professionals. While
these cost increases have not materially affected the Company's overall cost
structure to date, the Company believes that the costs associated with
computer programmers and other systems professionals may continue to increase
at rates above general inflation at least through 2000.
Depreciation and Amortization
Consolidated depreciation and amortization for the three months ended June
30, 1998 decreased 2.2% to $19.0 million. The decrease in depreciation is
primarily attributable to the renegotiation of certain third party software
agreements noted above. Consolidated depreciation and amortization for the six
months ended June 30, 1998 increased 4.4% as a result of a one-time write-off
of intangible assets totaling $3.2 million in the first quarter, primarily
associated with the $2.6 million contract termination fee referred to above.
Interest Expense
Interest expense for the three and six months ended June 30, 1998 increased
3.9% and 5.2%, respectively over the comparable 1997 periods on higher average
debt balances.
Equity in Earnings (Losses) of Unconsolidated Affiliates
Equity in earnings of unconsolidated affiliates was $0.1 million for the
quarter ended June 30, 1998 as compared to $0.8 million for the quarter ended
June 30, 1997. Year-to-date, equity in earnings of unconsolidated affiliates
was a loss of $0.4 million in 1998 as compared to income of $1.9 million in
1997. The Company's share of losses recorded at European Financial Data
Services Limited ("EFDS") of $2.2 million during the second quarter 1998 were
approximately even with the prior year quarter. Year-to-date, losses recorded
from EFDS totaled $4.8 million in 1998 as compared to $3.8 million in 1997 due
to continuing development costs of FAST2000, which costs are being expensed as
incurred and costs of conversions of new and existing client accounts to the
new system. Lower earnings were recorded by Argus Health Systems due to the
contract termination of a large client in late 1997. Higher operating earnings
were recorded at Boston Financial Data Services, Inc. from increased levels of
mutual fund activity.
INCOME TAXES
DST's effective income tax rate was 36.1% and 36.5% for the three and six
months ended June 30, 1998, as compared to 33.5% and 34.4% for the three and
six months ended June 30, 1997. The Company's 1997 tax rate was affected by
tax benefits relating to certain international operations.
Liquidity and Capital Resources
The Company uses its cash available from operating activities, borrowings
from banks and financing from third-party vendors and others to fund
operating, investing and financing activities.
Cash flows from operating activities totaled $64.1 million for the six
months ended June 30, 1998. Operating cash flows were affected by an $8.0
million dividend from Argus Health Systems and a $16.5 million increase in
accounts receivable related to revenue growth.
Cash flows used in investing activities totaled $44.0 million for the six
months ended June 30, 1998. The Company has expended $31.4 million year-to-
date for capital additions. Investments and advances to unconsolidated
affiliates totaled $13.4 million, primarily for funding the development of
FAST2000 at EFDS and for other investments.
Cash flows used in financing activities totaled $10.9 million for the six
months ended June 30, 1998. During the first quarter 1998, the Company
repurchased 200,000 shares of common stock for $10.0 million, completing its
1.2 million share repurchase program. Financing activities also include $10.8
million in payments relating to accrued settlements of prior years' sales and
use tax matters.
E-11
<PAGE>
The Company maintains a $50 million bank line of credit facility to finance
short-term working capital requirements available through May 1999, of which
total borrowings were $19.7 million as of June 30, 1998. Additionally, the
Company maintains a five-year revolving credit facility of $125 million with a
syndicate of U.S. and international banks. Total borrowings of $50.0 million
were outstanding on this facility at June 30, 1998.
The Company believes that its existing cash balances and other current
assets, together with cash provided by operating activities and, as necessary,
the Company's credit facilities, will be sufficient to meet the Company's
operating and debt service requirements and other current liabilities for at
least the next twelve months. Further, the Company believes that its longer-
term liquidity and capital requirements will be met through cash flows from
operations and existing bank credit facilities, as well as the Company's $125
million revolving credit facility described above.
Other
Unrealized Gains on Securities. The Company holds, among others,
approximately 8.6 million shares of Computer Sciences Corporation common stock
and approximately 6.0 million shares of State Street Corporation common stock
as investments. At December 31, 1997 and June 30, 1998, the market value of
the Company's investments in available-for-sale securities reflected aggregate
unrealized gains (net of deferred taxes) of $197.0 million and $357.3 million,
respectively, which are included in Accumulated Other Comprehensive Income on
the Condensed Consolidated Balance Sheet. Included in the computation of
comprehensive income in accordance with Statement on Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" are the $67.2 million and
$49.7 million net unrealized gains for the second quarter 1997 and 1998
respectively. For the six months ended June 30, 1997 and 1998, net unrealized
gains of $31.4 million and $160.3 million were included respectively.
Software Usage Agreement. On March 31, 1998, the Company entered into a
software usage and maintenance agreement for certain computer software to be
utilized at the Winchester Data Center. The new software agreement replaces an
existing agreement with the same vendor, extending the term from 2000 until
2003 and provides for an increase in software usage capacity. Under the
previous agreement, the Company capitalized the total fixed costs to be
incurred under the agreement and recorded a corresponding liability.
Capitalized costs under the previous agreement were depreciated over the
period of the contract while variable payments for incremental usage were
recorded as costs and expenses when incurred. Based on the terms of the new
agreement, annual payments will be recorded as costs and expenses over the
period which they benefit. As a result of replacing the previous agreement,
approximately $9.0 million of computer software previously capitalized by the
Company and related short-term and long-term liabilities were removed from the
Company's balance sheet on March 31, 1998. Although the new agreement will
result in certain future costs being recorded as costs and expenses instead of
depreciation expense, the Company does not believe that the new agreement will
have a material adverse affect on the Company's operating expenses.
Segment Information. The Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in June 1997. This statement requires that publicly traded
companies report certain information about their operating segments, products
and services, geographic areas in which they operate, and major customers
beginning with the 1998 annual report. The Company is currently evaluating the
effect that implementation of this new standard will have on the information
disclosed in its financial statements.
Internal Use Software. The Accounting Standards Executive Committee recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The new statement is
effective for fiscal periods beginning after December 15, 1998 and requires
that certain costs for the development of internal use software be recorded as
an asset. Accordingly, certain primary types of development activities will be
required to be capitalized, including coding and software configuration costs,
costs
E-12
<PAGE>
of testing and installing the software, and when clearly distinguishable from
maintenance, the costs of upgrades and enhancements. The Company currently
expenses costs of internally developed proprietary software as incurred. The
Company is currently evaluating the effect that implementation of this new
standard will have on its software development accounting policies and is
unable to determine the effects on the Company's results of operations at this
time.
Derivative Instruments and Hedging Activities. The Financial Accounting
Standards Board recently issued Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
statement is effective for fiscal quarters of fiscal years beginning after
June 15, 1999 and requires that a company recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The Company does not generally use derivative
instruments and believes that implementation of this new standard will not
have a material impact on the Company's results of operations.
Seasonality. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March 31
due primarily to processing year-end transactions and printing and mailing of
year end statements and tax forms during January. The Company has historically
added operating equipment in the last half of the year in preparation for
processing year-end transactions which has the effect of increasing costs for
the second half of the year. Software license revenues and operating results
are dependent upon the timing, size, and terms of the license.
Year 2000. Many computer programs use only two digits to identify a year in
a date field within the program (e.g., "98" or "02"). If not corrected,
computer applications making calculations and comparisons in different
centuries may cause inaccurate results, or fail by or at the Year 2000. These
Year 2000 related issues are of particular importance to the Company. The
Company depends upon its computer and other systems and the computer and other
systems of third-parties to conduct and manage the Company's business.
Additionally, the Company's products and services are dependent upon using
accurate dates in order to function properly. These Year 2000-related issues
may also adversely affect the operations and financial performance of one or
more of the Company's customers or suppliers. As a result, the failure of the
Company's computer and other systems, products or services, the computer
systems and other systems upon which the Company depends, or of the Company's
customers or suppliers to be Year 2000 ready could have a material adverse
effect on the Company's results of operations, financial position and cash
flows.
The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a corporate-wide structure of project teams, a
governance structure and a central Project Office. The Project Office was
established to lead the readiness efforts for the Company and manage the
overall progress of the project. The Company has redirected some of its
development employees to address the Year 2000 issues.
The program's purpose is to identify, evaluate and resolve potential Year
2000 related issues for the Company's products, services, internal systems,
hardware, communications and other systems. The program includes the following
key steps:
1. Identification of systems and applications that must be modified
2. Evaluation of alternatives (modification, replacement or
discontinuance)
3. Establishment of plans which include timely milestones and appropriate
testing to ensure that the systems and applications are ready for the Year
2000.
The program also includes:
1. Projects to ensure that external vendors and services are also ready
2. The development of alternatives where necessary
3. Interoperability testing with clients and key organizations in the
financial services industry.
The Company's goal is to be ready, internally, for the Year 2000 by December
31, 1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is well under
way, and the Company expects to achieve its goal.
E-13
<PAGE>
The expenses associated with the program will be expensed as incurred. The
Company does not believe the amount to be spent on Year 2000 issues will be
material to the Company's results of operations, liquidity or capital
resources.
However, although the Company is not aware of any material operational or
financial Year 2000 related issues, the Company cannot make any assurances
that its computer systems, products, services or other systems or the
computers and other systems of others upon which the Company depends will be
Year 2000 ready on schedule, that the costs of its Year 2000 program will not
become material or that the Company's alternative plans will be adequate. The
Company is currently unable to anticipate accurately the magnitude, if any, of
the Year 2000 related issues arising from the Company's customers and
suppliers. If any such risks (either with respect to the Company or its
customers or suppliers) materialize, the Company could experience material
adverse consequences to its business which could have material adverse effects
on the Company's results of operations, financial position and cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the
ordinary course of its business. Currently, there are no legal proceedings
that management believes would have a material adverse effect upon the
consolidated results of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 12, 1998. Proxies
for the meeting were solicited pursuant to Regulation 14A; there was no
solicitation in opposition to management's nominees for directors as listed in
such Proxy Statement and all such nominees were elected. Listed below is the
matter voted on at the Company's Annual Meeting. This matter is fully
described in the Company's Definitive Proxy Statement dated March 31, 1998. A
total of 45,128,415 shares of Common Stock, or 92.2% of the shares of Common
Stock outstanding on the record date, were present in person or by proxy at
the annual meeting. These shares were voted on the following matter as
follows:
1) Election of two directors for terms ending in 2001
<TABLE>
<CAPTION>
A. EDWARD MICHAEL G.
ALLINSON FITT
---------- ----------
<S> <C> <C>
For................................................. 44,984,901 44,973,669
Withheld............................................ 143,514 154,746
========== ==========
Total............................................. 45,128,415 45,128,415
========== ==========
</TABLE>
Based upon votes required for approval, this matter passed.
The terms of office of Directors Thomas A. McDonnell and M. Jeannine
Standjord will continue until the Annual Meeting of Stockholders in 1999. The
terms of office Directors Thomas A. McCullough and William C. Nelson will
continue until the Annual Meeting of Stockholders in 2000.
E-14
<PAGE>
If a stockholder desires to have a proposal included in DST's Proxy
Statement for next year's annual meeting of stockholders, the Corporate
Secretary of DST much receive such proposal on or before December 1, 1998, and
the proposal must comply with the applicable SEC regulations.
ITEM 5. OTHER INFORMATION
A. The following table presents the sources of the Company's revenues:
<TABLE>
<CAPTION>
SOURCES OF REVENUE
SIX MONTHS ENDED JUNE 30,
-------------------------------
1997 1998
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. revenues
Mutual fund and Investment management
Data processing services.................... $139,801 44.5% $161,679 43.5%
Output processing........................... 44,968 14.3% 50,698 13.6%
-------- ------ -------- ------
184,769 58.8% 212,377 57.1%
Other output processing....................... 49,621 15.8% 56,008 15.1%
Other......................................... 36,434 11.6% 41,474 11.2%
-------- ------ -------- ------
Total U.S. revenues....................... 270,824 86.2% 309,859 83.4%
International revenues.................... 43,253 13.8% 61,856 16.6%
-------- ------ -------- ------
Total revenues............................ $314,077 100.0% $371,715 100.0%
======== ====== ======== ======
</TABLE>
B. The following table identifies geographic operating results:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE SIX
MONTHS MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- ------------------
GEOGRAPHIC INFORMATION 1997 1998 1997 1998
---------------------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. revenues............................. $132,116 $152,310 $270,824 $309,859
U.S. income from operations............... 19,913 24,432 45,969 52,562
International revenues.................... 23,278 31,982 43,253 61,856
International income (losses) from
operations............................... 1,030 3,619 (1,326) 6,711
</TABLE>
C. The following table summarizes certain key operating and financial data
for the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ --------
<S> <C> <C>
Investment Market Values (in thousands) (1)
Computer Sciences Corporation............................ $360,400 $552,470
State Street Corporation................................. 347,509 415,069
Euronet Services, Inc.................................... $ 9,136 $ 5,157
Other Operating Data
Mutual fund shareowner accounts processed (millions)
U.S.................................................... 45.0 48.2
Canada................................................. 0.9 1.4
United Kingdom......................................... 1.0 1.4
TRAC-2000 mutual fund accounts (millions) (2)............ 1.9 2.3
TRAC-2000 participants (thousands)....................... 696 768
Portfolio Accounting System portfolios................... 1,925 2,012
Automated Work Distributor workstations.................. 35,100 36,800
</TABLE>
E-15
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE
30,
-----------
1997 1998
----- -----
<S> <C> <C>
Output Technologies pages printed (millions)........................ 740.6 890.3
Argus pharmaceutical claims processed (millions).................... 74.0 65.7
</TABLE>
- --------
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2) Included in TA2000 mutual fund shareowner accounts processed.
D. The SEC recently amended its proxy rules to require a registrant, such as
the Company, to disclose the date after which stockholder proposals that are
not to be included in the Company's proxy statement are considered "untimely"
for proxy solicitation purposes. Under the Company's By-laws, in order for
such a stockholder proposal to be timely and otherwise validly brought before
the Company's 1999 Annual Meeting of Stockholders, a stockholder must notify
the Company's Corporate Secretary no earlier than February 11, 1999 and no
later than March 13, 1999. The calculation of this notice period and By-law
requirements for the contents of such notice are set forth in the Company's
1998 Proxy Statement, which can be obtained by contacting the SEC's Public
Reference Branch or in the SEC's EDGAR database accessible through the SEC's
web site on the World Wide Web at www.sec.gov.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
------- --------
<C> <S> <C>
4.3.1 The First Amendment dated as of July 9, 1998 to the Rights
Agreement dated as of October 6, 1995 between the
Registrant and State Street Bank and Trust Company
attached as Exhibit 99 to Amendment No. 1, dated July 30,
1998, to the Company's Registration Statement on Form 8-A
for its preferred Share Purchase Rights (Commission file
no. 1- 14036) is hereby incorporated by reference as
Exhibit 4.3.1
10.6.1 First Amendment to the Employee Stock Ownership Plan and
Trust Agreement of DST Systems, Inc.
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K/A dated
April 13, 1998 amending and restating its Form 8-K dated March 15, 1996
setting forth certain cautionary statements identifying important factors that
either individually or in combination with other factors could cause the
Company's actual operating results to differ materially from those projected
in forward-looking statements, whether oral or written, concerning the Company
and made by, or on behalf of, the Company.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
April 22, 1998, reporting the announcement of financial results for the
quarter ended March 31, 1998.
E-16
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND IN THE CAPACITIES INDICATED ON
AUGUST 7, 1998.
DST Systems, Inc.
/s/ Kenneth V. Hager
_____________________________________
Kenneth V. Hager
Vice President and Chief Financial
Officer
(Principal Financial Officer)
E-17
<PAGE>
APPENDIX F
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A-2
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) AUGUST 4, 1998
DST SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION)
1-14036
(COMMISSION FILE NUMBER)
43-1581814
(I.R.S. EMPLOYER IDENTIFICATION NO.)
333 WEST 11TH STREET, KANSAS CITY, MISSOURI 64105
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (816) 435-6568
NOT APPLICABLE
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT.)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SECOND AMENDMENT AND RESTATEMENT TO CAUTIONARY STATEMENTS
FORM 8-K
DST SYSTEMS, INC.
ITEM 1 CHANGES IN CONTROL OF REGISTRANT
Not applicable.
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
Not applicable.
ITEM 3 BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 5 OTHER EVENTS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, DST Systems, Inc. (the "Company") is hereby
amending and restating its Form 8-K dated March 15, 1996, amended and restated
April 13, 1998, setting forth certain cautionary statements identifying
important factors that either individually or in combination with other
factors could cause the Company's actual operating results to differ
materially from those projected in forward-looking statements, whether oral or
written, concerning the Company and made by, or on behalf of, the Company.
ITEM 6 RESIGNATIONS OF REGISTRANT'S DIRECTORS
Not applicable.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
Cautionary statements for purposes of the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 are attached hereto as
Restated and Amended Exhibit 99.
ITEM 8 CHANGE IN FISCAL YEAR
Not applicable.
F-2
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED HEREUNTO DULY AUTHORIZED.
DST Systems, Inc.
/s/ Robert C. Canfield
-------------------------------------
Robert C. Canfield
Senior Vice President, General
Counsel,and Secretary
Date: August 4, 1998
F-3
<PAGE>
RESTATED AND AMENDED
EXHIBIT 99
CAUTIONARY STATEMENTS AS AMENDED AND RESTATED
AUGUST 4, 1998 WITH RESPECT TO FORWARD-LOOKING COMMENTS
FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
DST Systems, Inc. desires to take advantage of the "safe harbor" provisions
of the Private Securities Litigation Act of 1995 and is filing this Form 8-
K/A-2 in order to do so. The Company or others on behalf of the Company may
make from time to time (whether orally or in writing) forward-looking comments
or statements concerning potential future events, including but not limited
to, the results of the Company's operations. Such forward-looking statements
are based upon assumptions by the Company's management at the time the
statements are made, including assumptions about risks and uncertainties faced
by the Company. If any of management's assumptions prove incorrect or should
unanticipated circumstances arise, the actual results could materially differ
from those anticipated by such forward-looking statements. The differences
could be caused by a number of factors or combinations of factors including,
but not limited to, those factors set forth below. Persons hearing or reading
such forward-looking comments should consider carefully the following factors,
in addition to the other information contained in the Company's public
documents, when evaluating such forward-looking comments. The Company does not
currently intend to update any forward-looking statement made or published to
reflect events or developments occurring after the making or publishing of
such statement.
DEPENDENCE ON U.S. MUTUAL FUND INDUSTRY
The Company's future growth and success will depend in part upon the further
growth of the mutual fund industry in the United States. The Company derives a
substantial proportion of its consolidated revenues from the delivery of
services and products to United States mutual fund industry clients. Any event
affecting the mutual fund industry which results in a significant decline in
the number of shareowner accounts could have a material adverse effect on the
Company.
IMPACT OF TECHNOLOGICAL CHANGE
The markets served by the Company require the use of advanced computer
hardware and Software technology, and the development of new products and
services to meet increasingly complex and rapidly changing client and
regulatory requirements. The Company's future success depends in part on its
ability to continue to adapt its technology, on a timely and cost effective
basis, to meet these requirements. There can be no assurance that the Company
will be able to respond adequately to these technological demands or that its
competitors will not develop more advanced technology that will place the
Company's products and services at a competitive disadvantage.
RELIANCE ON CENTRALIZED PROCESSING FACILITY
The Company's processing services are primarily dependent on the Winchester
Data Center, the Company's central computer operations and information
processing facility located in Kansas City, Missouri. Although the Company has
taken what it considers to be sufficient precautions to protect this facility
and to provide processing alternatives, a natural disaster or other calamity
that causes long-term damage to the facility could have a material adverse
effect on the company.
IMPORTANCE OF KEY PERSONNEL
The Company's operations and the continuing implementation of its business
strategy are dependent upon the efforts of its technical personnel and senior
management. Recruiting and retaining capable personnel, particularly those
with expertise in the types of computer hardware and software utilized by the
Company, are
F-4
<PAGE>
vital to the Company's success. There is substantial competition for qualified
technical and management personnel and there can be no assurance that the
Company will be able to attract or keep the qualified personnel it requires.
The loss of key personnel or the failure to hire qualified personnel could
have a material adverse effect on the Company.
POTENTIAL PAYMENTS UNDER INCENTIVE COMPENSATION PLAN
Under the Company's incentive compensation plan, officers and other key
employees of the Company are eligible to receive annual cash bonuses based
upon the achievement of targeted performance levels. The total annual amount
payable under the plan may be as much as 10 percent of the Company's pretax
profits, as defined in the plan.
CONTROL OF JOINT VENTURES
The Company's business strategy for growth and expansion includes a reliance
on joint ventures. The Company can derive a significant part of its net income
from its pro rata share in the earnings of these unconsolidated companies.
Although the Company owns significant equity interests in these companies and
has representation on their Boards of Directors, the Company is not in a
position to exercise control over their operations, strategies or financial
decisions without the concurrence of its equity partners. The Company's equity
interests in Boston Financial Data Services, Inc. ("BFDS") and Argus Health
Systems, Inc. also are subject to contractual buy/sell arrangements that
restrict the Company's ability to fully dispose of its interest in these
companies and that under certain circumstances permit such companies to
purchase the Company's interest.
INFLUENCE BY CURRENT STOCKHOLDER
Kansas City Southern Industries, Inc. ("KCSI") currently owns approximately
41 percent of the outstanding common stock of the Company. In addition, two
directors of KCSI are also directors of the Company and KCSI is generally
exempted from the restrictions in the Company's Stockholders' Rights Plan. As
a result, KCSI may be able to significantly influence matters affecting the
Company, including matters submitted to a vote of the Company's stockholders,
such as the election of directors and the approval of corporate transactions.
The existence of cumulative voting and the exemption of KCSI from the
Company's Stockholders' Rights Plan provide KCSI with the potential to
effectively control the corporate governance of the Company.
COMPETITION
The Company, its subsidiaries, joint ventures and strategic associations
encounter significant competition for the Company's services and products from
other third-party providers of similar services and products and from in-house
providers who have chosen not to outsource their own business. The Company's
ability to compete effectively is, in part, dependent on the availability of
capital and other resources, and some of these competitors have greater
resources and greater access to capital than the Company. The Company also
competes for shareowner accounting services with brokerage firms that perform
sub-accounting services for the brokerage firms' customers who purchase or
sell shares of mutual funds of the Company's clients. Such brokerage firms
maintain only an "omnibus" account or accounts with the Company representing
the aggregate number of shares of the Company's mutual fund client owned by
the brokerage firms' customers, thus resulting in fewer mutual fund shareowner
accounts being maintained by the Company.
REGULATION
As registered transfer agents, the Company, BFDS and BFDS' subsidiary,
National Financial Data Services, Inc. ("NFDS"), are subject to the Securities
Exchange Act of 1934, as amended, (the "Exchange Act") and to the rules and
regulations of the Securities and Exchange Commission ("SEC") under the
Exchange Act which require the Company, BFDS, and NFDS to register with the
SEC and which impose on them recordkeeping and reporting requirements. Certain
of the operations and records of the Company, BFDS, and NFDS are subject to
F-5
<PAGE>
examination by the SEC and, as providers of services to financial
institutions, to examination by bank and thrift regulatory agencies. Material
noncompliance with the Exchange Act or SEC rules and regulations by the
Company, BFDS, or NFDS could result in their suspension or in the revocation
of their transfer agent registrations, which could have a material adverse
effect on the Company. In addition, CFDS Limited, a subsidiary of BFDS, and
European Financial Data Services Limited, a joint venture of the Company and
State Street Corporation, are subject to regulation of similar regulatory
agencies in Canada and the United Kingdom, respectively. Either of these
companies could have its regulatory authorizations suspended or revoked if it
were to materially violate applicable regulations, which could have an adverse
effect on the Company.
YEAR 2000
Many computer programs use only two digits to identify a year in a date
field with the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000. These Year 2000-
related issues are of particular importance to the Company. The Company
depends upon its computer and other systems, and the computer and other
systems of third-parties to conduct and manage the Company's business.
Additionally, the Company's products and services are dependent upon using
accurate dates in order to function properly. These Year 2000-related issues
may also adversely affect the operations and financial performance of one or
more of the Company's customers or suppliers. As a result, the failure of the
Company's computer and other systems, products or services, the computer
systems and other systems upon which the Company depends, or of the Company's
customers or suppliers to be Year 2000 ready could have a material adverse
effect on the Company.
The Company's goal is to be ready, internally, for the Year 2000 by December
31, 1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is underway,
and the Company expects to achieve its goal.
Although the Company is not aware of any material operational or financial
Year 2000-related issues, the Company cannot make any assurances that its
computer systems, products, services or other systems or the computers and
other systems of others upon which the Company depends will be Year 2000 ready
on schedule, that the costs of its Year 200 program will not become material
or that the Company's alternative plans will be adequate. The Company is
currently unable to anticipate accurately the magnitude, if any, of the Year
2000-related issues arising from the Company's customers or suppliers. If any
such risks (either with respect to the Company or its customers or suppliers)
materialize, the Company could experience material adverse consequences to its
business.
NON-U.S. OPERATIONS
Consolidated revenues outside the U.S. account for a significant percentage
of the Company's revenues. The Company derives revenues from a large number of
countries primarily in Europe and Canada. Economic or political events which
affect the economies of these countries could result in material adverse
consequences to the Company.
MISCELLANEOUS
In addition to the factors noted above, there may be other factors that
cause any forward-looking comment not to materialize. Other factors include,
but are not limited to, changes in management strategies; changes in lines of
business; failure of anticipated opportunities to materialize; changes in the
cost of necessary supplies; changes in the economic, political or regulatory
environments in the United States and/or the international countries where the
Company now competes or may compete in the future; and litigation involving
the Company.
F-6
<PAGE>
APPENDIX G
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER 1-14036
DST SYSTEMS, INC.
(EXACT NAME OF COMPANY AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-1581814
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYERIDENTIFICATION NO.)
OFINCORPORATION OR ORGANIZATION)
333 WEST 11TH STREET,KANSAS CITY, 64105
MISSOURI (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
(816) 435-1000
(COMPANY'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NO CHANGES
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the Company (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
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Number of shares outstanding of the Company's common stock as of October 31,
1997: Common Stock $.01 par value--49,111,261
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
GENERAL
In this first amendment to the Company's Form 10-Q/A for the quarter ended
September 30, 1997, the Company, in accordance with Rule 601(c)(2)(iii) of
Regulation S-K, is providing an amended and restated Financial Data Schedule
in Exhibit 27.1 for the 1996 quarters, a restated Financial Data Schedule in
Exhibit 27.2 for the year ended 1996, and an amended and restated Financial
Data Schedule in Exhibit 27.3 for the 1997 quarters.
The Company is adding "diluted" earnings per share in each of the schedules
to reflect the new reporting requirements imposed by Statement of Financial
Accounting Standards No. 128 ("SFAS 128"), which requires the computation of
earnings per share under both the "basic" and "diluted" methods. The original
Financial Data Schedules showed earnings per share calculated under the basic
method only. The 1997 10-K reflected the new SFAS 128 reporting requirements,
and therefore, the Company has not restated the Financial Data Schedule for
the year ended 1997.
The amended and restated Financial Data Schedule for the 1997 quarters
(Exhibit 27.3) contains information filed for the first time pertaining to the
quarter ended March 31, 1997, and to the quarter ended June 30, 1997. The
amended and restated Financial Data Schedule for the 1996 quarters (Exhibit
27.1) corrects for the period ended September 30, 1996 a typographical error
in the original filing for total assets and for total liabilities and equity.
None of the restated Financial Data Schedules contains any change in
previously reported information other than as described above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
All information provided under Part II. Item 6. Exhibits and Reports on Form
8-K, except for the information within this Form 10-Q/A Amendment No. 1 as
provided below, remains unchanged from the Company's Form 10-Q filed with the
Securities and Exchange Commission on November 14, 1997.
(a) EXHIBITS:
(27) Financial Data Schedule
<TABLE>
<C> <S>
27.1 Amended and restated Financial Data Schedules are attached to
this Form 10-Q/A Amendment No. 1 as Exhibit 27.1
27.2 Restated Financial Data Schedules are attached to this Form 10-
Q/A Amendment No. 1 as Exhibit 27.2
27.3 Amended and restated Financial Data Schedules are attached to
this Form 10-Q/A Amendment No. 1 as Exhibit 27.3
</TABLE>
G-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, AND IN THE CAPACITIES INDICATED ON JULY
14, 1998.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President and Chief Financial
Officer
(Principal Financial Officer)
G-3
<PAGE>
APPENDIX H
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. 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
For the fiscal year ended December 31, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NO. 0-28268
----------------
USCS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1727009
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
2969 PROSPECT PARK DRIVE
RANCHO CORDOVA, CALIFORNIA 95670-6148
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 636-4600
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
None None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
<TABLE>
<CAPTION>
COMMON STOCK PAR VALUE $.05 PER SHARE
--- -------------------------------------
<S> <C>
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the Registrant's Common Stock held by non-
affiliates as of March 10, 1998 was $268,425,630.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of March 10, 1998: 23,109,269 shares of $.05 par
value Common Stock.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
DOCUMENT DESCRIPTION 10-K PART
- -------------------- -----------------------------
<S> <C>
Proxy Statement for the 1998 Annual Meeting of
Stockholders dated April 17, 1998............... Part I--Item 4
Pages 1 through 10............................... Part III--Item 10, 11, 12, 13
</TABLE>
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
1. Business.............................................................. 3
2. Properties............................................................ 9
3. Legal Proceedings..................................................... 9
4. Submission of Matters to a Vote of Security Holders................... 10
PART II
5. Market for the Registrant's Common Equity and Related Stockholder
Matters.................................................................. 10
6. Selected Financial Data............................................... 11
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................... 12
8. Financial Statements and Supplementary Data........................... 22
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure..................................................... 39
PART III
10. Directors and Executive Officers of the Registrant.................... 39
11. Executive Compensation................................................ 41
12. Security Ownership of Certain Beneficial Owners and Management........ 41
13. Certain Relationships and Related Transactions........................ 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8K....... 42
Signatures............................................................ 45
</TABLE>
H-2
<PAGE>
PART I
ITEM 1. BUSINESS
The statements that are not historical fact or that are not statements of
current status are forward-looking statements. The Company's future results
may differ significantly from the results and forward-looking statements
discussed in this report. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Factors That May Affect Future
Results."
THE COMPANY
USCS International, Inc. (USCS) is a leading global provider of customer
management software and statement processing to the communications and other
service industries, which serve more than 80 million end-users world-wide. The
Company's software clients include cable television, wireless and wire-line
telephony, direct broadcast satellite (DBS) and multi-service providers in
more than 20 countries. The Company's software solutions enable its clients to
manage mission-critical customer relationships functions, including new
account set-up, order processing, customer support, management reporting and
marketing analysis. The Company also provides complete bill processing
services, including electronic bill presentment, which include generation of
customized billing statements that are produced in sophisticated automated
facilities designed to minimize turnaround time and mailing costs. The
Company's bill processing clients include providers of cable television,
telecommunications, financial services, utilities and other industries
requiring high quality, accurate statement/order processing. USCS also offers
a variety of complementary professional services, including consulting,
application development and client training, as well as statement design and
formatting services that allow clients to use the billing statement as a
communication and marketing tool.
USCS has been providing comprehensive customer management and bill
processing software and services to the cable television industry for more
than 25 years, and more than five years ago, the Company expanded the scope of
its software and services to address the global communications market. The
Company's software currently supports more than 50% of U.S. cable television
subscribers and is used by a majority of the largest cable television service
providers in the U.S. In recent years, the Company has expanded its customer
management software base to clients in more than 20 countries, as well to
providers of emerging convergence services. The Company currently provides
bill processing services to clients serving more than 50% of U.S. cable
television subscribers, 40% of U.S. cellular users and 11% of U.S. wire-line
telephony customers and to a variety of other service providers. The Company's
bill processing clients include substantially all of its domestic customer
management software clients and other service providers such as Ameritech,
AT&T, Cincinnati Bell Information Systems, Inc. ("CBIS"), NationsBanc
Montgomery Securities and Federal Express. At year end, the Company's monthly
statement production had risen to approximately 75 million bills. The Company
is among the largest centralized first class mailers in the U.S., responsible
for generating approximately 1.7% of the total volume of all U.S. first class
mail, including customer remittance volume. Bill processing services are
generally provided to software clients in bundled contracts and are also sold
separately.
In 1993, the Company deployed CableData's Intelecable(R), which the Company
believes is the first customer management software product designed for multi-
service providers. At year end, there were over 80 Intelecable installations
worldwide. Services supported by Intercable include integrated
cable/telephony, integrated cable/wireless DBS, interactive video, telephony-
only and cable-only installations.
The Company has expanded its bill processing services by offering technology
licensing, currently being used by AT&T and Bell Atlantic, and consolidated
billing statements that combine data from multiple services, such as wireless
and wire-line telephony, into a single integrated billing statement. In
addition, the Company has introduced electronic bill presentment products
which enable customers to provide electronic statements in place of paper
based statements.
U.S. Computer Services, the predecessor to USCS International, Inc., was
incorporated in California on November 18, 1969, and was reincorporated as
USCS International, Inc., in Delaware effective May 31, 1996. Unless the
context otherwise requires, all references in this annual report to "USCS" or
the "Company" refer to USCS International, Inc., a Delaware corporation, its
predecessor, U.S. Computer Services, a California corporation, and their
consolidated subsidiaries.
H-3
<PAGE>
PRODUCTS AND SERVICES
CUSTOMER MANAGEMENT SOFTWARE
The Company's primary customer management software products are Intelecable
and DDP/SQL(TM). Intelecable is designed to support single and multi-service
providers worldwide. The Company markets DDP/SQL to the traditional North
American cable television provider market. The Company also offers
CableWorks(TM), a PC-based system for smaller operators. Additionally, a small
number of clients continue to use earlier generations of the Company's
software that are no longer marketed to new clients. Both Intelecable and
DDP/SQL are scaleable, and are available in basic systems with optional
modules, including the Company's new internet-based customer support products,
CyberCSR(TM) and TechConnect(TM), which allow the service provider to design a
customized system which can effectively manage a growing customer base.
The Company licenses its software products to its clients under multi-year
license agreements. License fees are generally paid monthly based on the
number of subscribers or end-users served by the client. These agreements are
typically subject to periodic renewals and inflation-based license fee
adjustments.
INTELECABLE: The Company believes that Intelecable is the world's first
customer management software system designed for multi-service providers in
the global communications marketplace. First installed in 1993, Intelecable is
available on either a standalone or, more recently, on a service bureau basis
and supports a diverse array of communications services, including cable
television, telephony, combined cable/telephony, interactive video and DBS. At
year end, there were over 80 installations of Intelecable worldwide.
Intelecable is enabled with National Language Support double-byte capability,
which allows operations in a variety of foreign languages, including Japanese
and Chinese. The Company believes that Intelecable is the only customer
management software system currently operational that has multiplatform
capabilities. Initially offered on IBM's AIX (UNIX) operating system.
Intelecable has been ported to Tandem's Integrity NR, Silicon Graphics
Challenge, Group Bull Escala and the Hewlett-Packard 9000.
Intelecable is based on an open systems architecture, which facilitates
customization and interoperability with other information systems. The
Intelecable system has been developed using standard design methodologies and
transaction processing monitor architecture. Intelecable also uses an embedded
standard query language (SQL), which facilitates access to the database by
user-created applications. The design of Intercable delivers a high-level
programming interface, which allows extensive customization without complex
code changes. Intelecable uses an Oracle relational database, which allows
clients to maintain an integrated database for each service offered by the
client.
DDP/SQL: DDP/SQL is the Company's primary software system for cable
television companies in North America. Currently, a majority of the largest
cable television service providers in the U.S. use the DDP/SQL system. DDP/SQL
offers a basic system with optional modules for expanded functionality.
DDP/SQL uses a relational database which allows the user to query logical
relationships without the need to predefine or describe a specific access path
to the data. Information generated by DDP/SQL can be used with the client's
internal information systems and off-the-shelf software programs. This
interoperability allows users, for example, to easily create financial
spreadsheets based on information generated by DDP/SQL.
The Company offers DDP/SQL on either a stand-alone or a service bureau
basis. Stand-alone systems currently support approximately 80% of the
Company's client subscriber base, while approximately 20% are supported on a
service bureau basis. For stand-alone clients, the Company installs a complete
DDP/SQL system at the provider's facility, including necessary hardware and
peripherals. Clients using a service bureau arrangement to access the
Company's on-line processors via wide area networks. The Company's Technical
Response Center monitors traffic and network availability to identify and
respond to outages in the system. DDP/SQL runs on massively parallel
processing hardware manufactured by Tandem. The Company is a value-added
reseller of Tandem equipment. The Company also sells to its clients peripheral
hardware made by manufacturers other than Tandem, and generally enters into
hardware maintenance agreements with its clients. The Company also provides
lease financing and maintenance services primarily for companies operating
systems on a stand-alone basis. See "Products And Services--Hardware Leasing
and Sales" and "Product And Services--Client Support and Care."
H-4
<PAGE>
ENTERPRISE REAL-TIME RATING SYSTEMS (ERTRS): In 1997, the Company acquired
CableData Telecommunications, Inc., formerly Lynn-Arthur Associates, a company
specializing in the development and marketing of rating technology for
telephony and other usage based applications. ERTRS is a rating engine
designed to rate cellular, wireline, data and Internet services to provide a
complete convergence rating system for carriers who bundle multiple service
offerings to meet customers' needs. The Company is currently marketing the
ERTRS system on a stand-alone basis and intends to integrate the ERTRS
capability into the Intelecable product.
CABLEWORKS: The Company markets its CableWorks PC-based customer management
software product to domestic and international cable operators that have lower
transaction volume requirements than operators supported by DDP/SQL or
Intelecable. CableWorks is designed to introduce smaller cable operators to
the Company's products, with the expectation that such operators will migrate
to Intelecable or DDP/SQL as their businesses grow.
PROFESSIONAL SERVICES, TRAINING AND SUPPORT: The Company maintains various
professional services groups to provide global consulting services to its
software customers, including assistance with database definition and
initialization, system operations, network consolidation, and performance and
decision support services. These groups also provide clients with assistance
in developing custom-tailored applications and interfaces that are operable
with the Company's customer management software to enhance client operations.
The Company provides complete product documentation and training services to
users of its software products, including CD-ROM-based product documentation
and training. The Company's ClassROM(R) software provides interactive
instruction and product training on CD-ROM. The Company maintains training
facilities in California and the U.K.
BILL PROCESSING SERVICES
The Company provides bill processing services and solutions in a fully
integrated and automated production environment that rapidly and cost-
effectively transforms electronic data received from the client into
informative, accurate and customized billing statements. Because of its highly
automated production environment, the Company is able to maximize postal
savings while minimizing delivery time for its clients. In addition, the
Company's statement-based marketing services allow clients to use the billing
statement as a marketing tool to reinforce a corporate image, advertise
special offers and features and otherwise market its services to its
customers. To address the needs of multi-service providers, the Company offers
billing statements that combine data from multiple services, such as wireless
and wire-line telephony, into a consolidated billing statement. In addition,
the Company has also introduced an electronic billing capability that enables
its clients to offer their customers either a paper-based or an electronic
statement option. Also, the Company offers its advanced technology on a
licensed basis.
BILL PROCESSING: The Company operates two statement production facilities in
the Northern California area. These facilities receive a data stream from the
client's customer management software (whether a client's legacy or third
party system, a competitor's system or the Company's software), manipulate the
data into a usable format and create cost-effective, informative, easy-to-read
and accurate customized billing statements or statement images.
Using patented processes and technologies, the Company provides a fully
integrated, computerized and automated production environment that (i)
processes, logs, verifies and authenticates all customer data, (ii) creates
automated production controls for every statement, including form bar codes,
weight and thickness parameters, unique statement tracking numbers, "due out"
dates, address correction, carrier route/delivery point bar codes and postal
processing parameters, (iii) models every production run on-line before
printing or electronic transmission, and (iv) enables postal processing,
sorting and discounting to be performed on-line.
Full real-time automation enables the Company to monitor quality, control
remakes, predict and schedule production loading, verify customer data,
forecast production volumes and maintain production system history on-line.
The system is controlled by an on-line production control system that is based
on advanced client/server
H-5
<PAGE>
architecture and has high-speed data-transmission capabilities. A local area
network links the production equipment to the production control system. To
provide clients with real-time information regarding the progress of the
billing statement production process, the Company has developed its Direct
Access(TM) client information system, which provides a customized view into
the facility to allow clients to monitor the status of their jobs. Direct
Access, which is currently installed in a number of client sites, includes a
client/server architecture and a PC-based graphical user interface that
permits tracing an individual statement from the beginning of statement
production until some period after distribution.
The Company also offers consolidated billing statements for multi-service
providers, which combine data from multiple services, such as wireless and
wire-line telephony, into a single integrated statement. Consolidated
statements can offer clients significant savings both in paper and mailing
costs. Consolidated statements can also be a powerful marketing tool for
companies seeking to establish brand name recognition and sell combined
services.
The Company offers a full range of technical support for the Company's bill
processing clients. Customized programming tools have been developed that
allow it to receive electronic information streams from a variety of client
systems without the need to make changes to the customer's system. These tools
allow for rapid and smooth transitions when clients outsource bill processing
functions to the Company.
TECHNOLOGY LICENSING: To attract clients who want to take advantage of the
Company's advanced processing and functions in their own facilities, rather
than on an outsourced basis, the Company has licensed its statement processing
technology. AT&T and Bell Atlantic currently license the Company's statement
processing software. The Company intends to pursue additional technology
licensing opportunities domestically as well as in the international market.
STATEMENT-BASED MARKETING SERVICES: The Company provides statement-based
marketing services that allow its clients to transform regular customer
billing statements into communication tools. The billing statement is often
the only form of regular communication between a service provider and its
customers. Many clients have the opportunity, through the Company's statement-
based marketing and creative design services, to use the paper or electronic
billing statement to reinforce a corporate image, advertise special offers and
features, deliver customer-specific messages and otherwise market their
services to their customers.
ELECTRONIC DELIVERY ALTERNATIVES: The Company's automated information and
technology infrastructure, which electronically prepares and monitors the
statement until final printing, provides the basis for the Company's
development of electronic bill presentment. The proliferation of on-line
services and the Internet provides an opportunity for communications service
providers to bill customers electronically through a PC or other device. The
Company believes that, as electronic billing and payment solutions become more
accepted, communications service providers, utilities, financial services and
other industries will require electronic statement presentment capabilities.
USCS has developed an electronic statement-processing product and has
announced marketing alliances with several companies including CyberCash,
Checkfree, Microsoft, Intuit, NETdelivery and others to begin actively
marketing an electronic billing alternative. Because of its existing volume,
state-of-the-art processing systems, and client relationships, the Company
believes it is in a unique position to become a one-stop, full-service
supplier of either paper-based or electronically delivered statements.
HARDWARE LEASING AND SALES
The Company sells computer equipment and provides leasing and maintenance
services to selected software clients that purchase stand-alone systems
primarily in the U.S. Maintenance is typically billed in advance of providing
the service. Revenue from sales of computer hardware and providing associated
maintenance and leasing services has been declining as a percentage of total
revenue. The Company will continue to offer hardware and related services to
current and future clients, but expects the decline to continue.
H-6
<PAGE>
CLIENTS
The Company provides customer management software and services to clients in
more than 20 countries. In addition to communications service providers, the
Company provides bill processing services to companies in other service
industries requiring high quality, accurate and marketing-oriented statements,
including utilities and financial services. The Company intends to seek
additional non-communications clients as well as pursue international
opportunities for its bill processing services.
Aggregate revenue from the Company's ten largest clients accounted for
approximately two-thirds of total revenue in 1997, 1996 and 1995. Three
clients accounted for 40%, 47% and 46% of total revenue in 1997, 1996 and
1995, respectively.
Tele-Communications, Inc. ("TCI"), the Company's largest customer, accounted
for $53.1 million or 18%, $55.7 million or 21%, and $47.3 million or 21% of
total revenue in 1997, 1996, and 1995, respectively. TCI has advised the
Company of its plan to migrate its subscribers to a competitor's product by
the end of 1998. See "Management's Discussion And Analysis Of Financial
Condition And Results Of Operations--Revenue."
The Company's largest bill processing client, Ameritech, accounted for $39.3
million or 13%, $41.1 million or 16%, and $38.8 million or 17% of total
revenue in 1997, 1996, and 1995, respectively. Ameritech became a client early
in 1994 and has contracts with the Company expiring in 2000 and 2001. Another
bill processing client, CBIS, a client since 1990, accounted for $27.4 million
or 9%, $25.0 million or 10% and $17.9 million or 8% of total revenue in 1997,
1996 and 1995, respectively, In early 1997, the Company entered into a new
contract with CBIS expiring in 2002. See "Management's Discussion And Analysis
Of Financial Condition And Results Of Operations--Factors That May Affect
Future Results" regarding dependence on certain marketplaces, concentration of
client base, and other factors that may have an impact on the Company's
relationship with its clients and on the Company's future revenue and net
income.
CLIENT SUPPORT AND CARE
USCS provides world-wide training and support to its clients. In the U.S.,
client care is divided into product-specific teams, with one team focusing on
customer management software and the other team focusing on bill processing
services. Both teams provide broad-based, 24-hour, 7-day support and technical
assistance. The Company has developed a full range of training products and
documentation including ClassROM(R), which the Company believes to be the
first CD-ROM-based training product, for its software clients. Supplementing
the front line software support groups for service bureau software customers
is the Company's Technical Response Center, which monitors traffic and network
availability to identify and respond to outages in the system.
Internationally, Intelecable is supported by teams located in the U.S. and the
U.K. as well as by alliance partners. The Company's customer-management
software support environment has received ISO 9001 Compliance certification.
In early 1998, the Company announced that it would be opening satellite
offices in Brazil and Australia to provide regional support to its rapidly
growing world-wide base of customers.
SALES AND MARKETING
Software and services are sold primarily to cable, DBS and multi-service
providers through direct sales channels and in conjunction with international
alliance partners. In North America, the Company operates a software and
services sales and marketing team, including account management, product
management and technical support teams.
The Company's international sales staff is coordinated by geographic area,
including dedicated account and technical support personnel located in the
U.K., Brazil and Australia. In addition to direct sales, the Company has
contracted with 16 alliance partners throughout the world who are responsible
for sales, marketing, support and local customization.
H-7
<PAGE>
The Company believes that sales of separate bill processing services to
telecommunications service providers such as Regional Bell Operating Companies
("RBOCs"), cellular, utility, financial services and other service providers
offer both increased revenue opportunities as well as increased visibility for
the Company. The Company maintains a sales staff, including account management
and technical support teams and significant design resources, to target these
market segments. The Company has begun an international bill processing
marketing effort that seeks to exploit what the Company believes is
significant growth potential in that market. In 1997, the Company entered into
a contract with its first multi-national bill processing client, Global One,
and intends to pursue additional international contract and technology
licensing opportunities. The Company has also entered into alliances with
partners such as Xerox, Mellon Bank, LHS Group, Microsoft, Intuit, CheckFree
and CyberCash to jointly market its bill processing and electronic presentment
capabilities.
COMPETITION
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company competes with both independent providers and developers of in-house
systems. The Company believes its most significant competitors for software
systems are CBIS and CSG Systems International, Inc. The most significant
competitors for bill processing services are in-house service providers. Other
competitors include Moore Corporation Ltd. and Output Technologies, Inc.
The Company believes that the principal competitive factors in the market
for customer management software include functionality and features of
software, quality of client care and support, type of hardware platform used,
quality of research and development and value. The principal competitive
factors for bill processing services include statement production accuracy,
ability to meet statement production deadlines, product quality and price. The
Company believes that it competes favorably with respect to these factors.
However, the Company believes that to remain competitive it will require
significant financial resources in order to market its existing products and
services, to maintain customer service and support and to invest in research
and development. Many of the Company's existing and potential competitors may
have greater resources than the Company. The Company expects its competitors
to continue to improve the design and performance of their current systems and
processes and to introduce new systems and processes with improved
price/performance characteristics. No assurance can be given that the Company
will be able to compete successfully in the U.S. or internationally.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are focused on introducing
new products and services as well as ongoing enhancement of its existing
products and services. The Company believes that its investment in research
and development is critical to maintaining its leadership position. The
Company works closely with international and domestic hardware, software and
system integration partners to enhance its products. The Company's research
and development partnerships typically provide for funding by development
partners and include joint marketing and other arrangements. In software
product development, significant emphasis is placed on compliance with world-
wide development standards and quality benchmarks. The Company's processes
used at its research and development center in El Dorado Hills, California,
have received ISO 9001 Compliance certification, the globally recognized
quality standard. The Company also continually enhances its bill processing
services by developing software and processes that increase production
efficiency and aid clients in accessing bill processing information.
INTELLECTUAL PROPERTY
The Company holds sixteen U.S. patents covering various aspects of its bill
processing services. In addition, the Company has applied for ten additional
U.S. patents. The Company has no foreign patents. The Company believes that
although the patents it holds are valuable, they are not critical to the
Company's success, which depends principally upon its product quality,
marketing and service skills. However, despite patent protection,
H-8
<PAGE>
the Company may be vulnerable to competitors who attempt to imitate the
Company's systems or processes and manufacturing techniques and processes. In
addition, other companies and inventors may receive patents that contain
claims applicable to the Company's system and processes. The sale of the
Company's systems covered by such patents could require licenses that may not
be available on acceptable terms, if at all. In addition, there can be no
assurance that patent applications will result in issued patents.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately.
There can be no assurance that any patent applications that the Company may
file will be issued or that foreign intellectual property laws will protect
the Company's intellectual property rights. There can also be no assurance
that others will not independently develop similar systems, duplicate the
Company's systems or design around the patents licensed by or issued to the
Company. See "Management's Discussion And Analysis Of Financial Condition And
Results Of Operations--Factors That May Affect Future Results."
EMPLOYEES
As of December 31, 1997, the Company had 2,067 employees, of which 2,016
were full-time employees and 51 were part-time employees. None of the
Company's employees are represented by a labor union or covered by a
collective bargaining agreement. The Company considers its employee relations
to be good.
ITEM 2. PROPERTIES
The Company owns two buildings in El Dorado Hills, California on
approximately 29 acres. One building of approximately 247,000 square feet is
utilized for statement processing operations and supporting activities, with
an additional 119,000 square feet expansion currently in process. The other
building of approximately 48,000 square feet is the Company's system and
software research and development center. In addition, the Company owns
approximately 278 acres of undeveloped land adjacent to its buildings. The
Company leases a total of approximately 486,000 square feet in Rancho Cordova
and El Dorado Hills, California of which approximately 298,000 square feet is
utilized primarily for statement processing operations and warehousing. The
other 189,000 square feet is utilized primarily for corporate headquarters,
sales and marketing, customer support and research and development.
The Company leases approximately 15,000 square feet in Norcross, Georgia for
its Eastern Regional Data Center, approximately 2,000 square feet in Harrison,
Arkansas for use by its subsidiary, CableData Desktop Solutions, Inc.,
formerly CUO, Inc., and approximately 3,200 square feet in Ann Arbor, Michigan
for use by its subsidiary, CableData Tele-Communications, Inc. The Company
also leases approximately 9,600 square feet in the U.K. The leases for these
facilities expire in the years 1998 through 2018.
The Company believes that its facilities are adequate for its proposed needs
through 1998 and that additional suitable space will be available or can be
constructed as required.
ITEM 3. LEGAL PROCEEDINGS
The Company has legal proceedings incidental to its normal business
activities. In the opinion of the Company, the outcome of the proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows. However, litigation by its
nature is subject to inherent uncertainties and there can be no assurance that
any ongoing legal proceedings or those that may arise in the future will not
have a material adverse affect on the Company's consolidated financial
position, results of operations or cash flows.
H-9
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information Regarding Submission Of Matters To A Vote Of Security Holders is
set forth under "Actions Taken Since 1997 Stockholder Meeting" on page 3 of
the Company's Proxy Statement for the 1998 Annual Meeting of Stockholders,
dated April 17, 1998, which page is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The common stock of USCS International, Inc. is listed and traded on the
Nasdaq National Market under the trading symbol "USCS".
As of March 10, 1998, the number of record holders of USCS International,
Inc. was 226. The table below shows the high and low prices of the Company's
common stock as reported by the Nasdaq National Market for each quarter from
the date of the Company's initial public offering (IPO) on June 20, 1996. The
Company has not paid cash dividends on its common stock to date. The Company
currently intends to retain any future earnings for its business and does not
anticipate paying any cash dividends on its common stock in the foreseeable
future.
<TABLE>
<CAPTION>
1997 1996
----------------- ---------------
HIGH LOW HIGH LOW
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Calendar Quarter
(2nd Quarter 1996 to 1st Quarter 1998)
1st $21 $16 1/8 -- --
2nd 33 15 5/8 $19 3/4 $17
3rd 35 1/2 16 3/4 19 7/8 13 1/8
4th 22 11/16 14 7/8 18 1/2 14 3/4
1st (through March 10, 1998) 21 3/8 15 1/4 -- --
</TABLE>
H-10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The consolidated statements of operations data presented below for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, and the consolidated
balance sheet data as of December 31, 1997, 1996, 1995, 1994 and 1993 are
derived from the consolidated financial statements of the Company, which have
been audited. The data set forth below should be read in conjunction with, and
are qualified by reference to, "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations" and the Consolidated Financial
Statements and the Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Revenue:
Software and services;
Customer management $157,151 $138,157 $116,855 $101,431 $ 95,869
Bill processing 118,912 102,691 80,427 53,816 20,694
-------- -------- -------- -------- --------
Total 276,063 240,848 197,282 155,247 116,563
Equipment sales and services 23,823 22,366 31,981 33,558 49,501
-------- -------- -------- -------- --------
Total revenue 299,346 263,214 229,263 188,805 166,064
-------- -------- -------- -------- --------
Cost of revenue:
Software and services:
Customer management 72,120 73,408 66,465 60,664 56,261
Bill processing 86,636 74,335 61,237 42,382 16,497
-------- -------- -------- -------- --------
Total 158,756 147,743 127,702 103,046 72,758
Equipment sales and services 14,192 13,180 19,538 19,476 31,561
-------- -------- -------- -------- --------
Total cost of revenue 172,948 160,923 147,240 122,522 104,319
-------- -------- -------- -------- --------
Gross profit 126,398 102,291 82,023 66,283 61,745
-------- -------- -------- -------- --------
Operating expenses:
Research and development 30,034 25,140 17,815 16,700 16,007
Selling, general and
administrative 58,340 49,631 42,102 34,160 28,148
Consolidation and relocation -- -- -- (364) 4,096
-------- -------- -------- -------- --------
Total operating expenses 88,374 74,771 59,917 50,496 48,251
-------- -------- -------- -------- --------
Operating income 38,024 27,520 22,106 15,787 13,494
Interest expense, net 554 3,185 4,966 4,284 4,609
-------- -------- -------- -------- --------
Income before income taxes and
cumulative effect of
accounting change 37,470 24,335 17,140 11,503 8,885
Income tax provision 15,010 9,826 6,770 5,334 4,330
-------- -------- -------- -------- --------
Income before cumulative effect
of accounting change(1) 22,460 14,509 10,370 6,169 4,555
Cumulative effect of accounting
change(1) -- -- -- -- 2,408
-------- -------- -------- -------- --------
Net income $ 22,460 $ 14,509 $ 10,370 $ 6,169 $ 6,963
======== ======== ======== ======== ========
Income before cumulative effect
of accounting change per
share(2):
Basic $0.97 $0.69 $0.53 $0.31 $0.23
Diluted $0.93 $0.66 $0.51 $0.30 $0.22
Net income per share(2):
Basic $0.97 $0.69 $0.53 $0.31 $0.35
Diluted $0.93 $0.66 $0.51 $0.30 $0.33
Shares used in per share
computation:
Basic 23,164 21,178 19,452 19,798 20,010
Diluted 24,203 22,075 20,159 20,622 20,816
</TABLE>
H-11
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash $ 2,787 $ 8,452 $ 6,627 $ 1,966 $ 8,158
Working capital 49,709 37,041 23,440 11,454 20,029
Total Assets 238,619 205,559 180,450 157,331 140,922
Long-term debt less current por-
tion(3) 5,453 5,647 51,155 37,647 40,167
Stockholders' equity 131,361 115,333 46,590 39,861 35,633
</TABLE>
- --------
(1) In 1993, the Company adopted SFAS 109, resulting in an accumulated credit
to income for an adjustment in the calculation of income tax expense.
(2) The Company has presented earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). All previously reported amounts were restated to conform to SFAS
128. In addition, pursuant to Securities and Exchange Commission ("SEC")
guidelines, earnings per share for all periods prior to the IPO have been
restated in accordance with SEC Staff Accounting Bulletin No. 98 (SAB 98).
See Notes 2 and 11 of Notes to Consolidated Financial Statements. Prior to
the adoption of SFAS 128 and SAB 98, earnings per share were $0.93, $0.64,
$0.49, $0.28 and $0.31 in 1997, 1996, 1995, 1994 and 1993, respectively.
(3) See Note 5 of Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements that are not historical fact or that are not statements of
current status are forward-looking statements. The Company's future results may
differ significantly from the results and forward-looking statements discussed
in this Report. See "Factors That May Affect Future Results."
OVERVIEW
Founded in 1969, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers world-wide, and bill
processing services to cable television, telecommunications, financial
services, utilities and other service industries, Software and bill processing
services are generally offered to the North American cable television providers
under bundled service arrangements. Outside North America software is generally
sold exclusive of the bill processing. Most of the Company's revenue is based
on the number of subscribers or end-users of the Company's clients, the number
of billing statements mailed and/or the number of images produced under
contracts with terms ranging from three to seven years. Clients are billed
monthly, generally based on the number of end-users they serve. As a result, a
significant portion of the Company's revenue is recurring and increases as the
service provider's customer base grows. In 1997, the Company's revenue totaled
$299.3 million, of which over 70% was generated from companies which have been
clients of USCS for three or more years.
Over the three years ended December 31, 1997, the Company's revenue from
software and services has increased at an average rate of 20% and has grown
from 86% of revenue in 1995 to over 92% in 1997. Revenue from selling computer
hardware and providing associated maintenance and leasing services has been
declining as a percentage of total revenue. Revenue from these activities
represented 14% of total revenues in 1995 and had declined to less than 8% of
total revenue in 1997.
The Company sells its software and services to cable television and multi-
service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software primarily through strategic alliances with companies specializing in
system
H-12
<PAGE>
integration or computer hardware manufacturing that are capable of providing
local sales and support. Building and maintaining relationships with its
clients is an important part of the Company's strategy because selling cycles
can extend a year longer. The Company has committed increased resources to the
diversification of its customer base, focusing primarily on international,
multi-service, telecommunications and other high volume markets because it
believes these represent opportunities to grow at rates greater than, and
decrease its dependence upon, the U.S. cable television marketplace.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated statements of operations and the percentage of revenue
represented by each line item (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------- ----------------------------
1997 1996 1995 1997 1996
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management $157,151 52.5% $138,157 52.5% $116,855 51.0% $42,071 51.0% $34,789 49.7%
Bill Processing 118,912 39.7 102,691 39.0 80,427 35.1 31,995 38.7 29,709 42.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total 276,063 92.2 240,808 91.5 197,282 86.1 74,066 89.7 64,498 92.1
Equipment sales and
services 23,283 7.8 22,366 8.5 31,981 13.9 8,489 10.3 5,532 7.9
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total revenue 299,346 100.0 263,214 100.0 229,263 100.0 82,555 100.0 70,030 100.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Cost of revenue:
Software and services:
Customer management 72,120 24.1 73,408 27.9 66,465 29.0 18,450 22.4 18,056 25.8
Bill Processing 86,636 28.9 74,335 28.2 61,237 26.7 23,789 28.8 20,206 28.8
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total 158,756 53.0 147,743 56.1 127,702 55.7 42,239 51.2 38,262 54.6
Equipment sales and
services 14,192 4.8 13,180 5.0 19,538 8.5 6,130 7.4 3,085 4.4
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total cost of revenue 172,948 57.8 160,923 61.1 147,240 64.2 48,369 58.6 41,347 59.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Gross profit 126,398 42.2 102,291 38.9 82,023 35.8 34,186 41.4 28,683 41.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Operating expenses:
Research and develop-
ment 30,034 10.0 25,140 9.5 17,815 7.8 7,980 9.6 6,840 9.8
Selling, general and
administrative 58,340 19.5 49,631 18.9 42,102 18.3 16,079 19.5 13,519 19.3
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total operating ex-
penses 88,374 29.5 74,771 28.4 59,917 26.1 24,059 29.1 20,359 29.1
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Operating income 38,024 12.7 27,520 10.5 22,106 9.7 10,127 12.3 8,324 11.9
Interest expense, net 554 0.2 3,185 1.3 4,966 2.2 90 0.1 79 0.1
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Income before income
taxes 37,470 12.5 24,335 9.2 17,140 7.5 10,037 12.2 8,245 11.8
Income tax provision 15,010 5.0 9,826 3.7 6,770 3.0 4,023 4.9 3,470 5.0
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Net income $ 22,460 7.5% $ 14,509 5.5% $ 10,370 4.5% $ 6,014 7.3% $ 4,775 6.8%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
H-13
<PAGE>
The following table sets forth revenue and percentage of revenue by line item
exclusive of a discontinued customer, revenue of a discontinued customer and
total revenue (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31,
---------------------------------------------- ----------------------------
1997 1996 1995 1997 1996
-------------- -------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management $113,773 38.0% $ 95,382 36.2% $ 81,069 35.4% $30,817 37.3% $22,347 31.9%
Bill processing 117,186 39.2 100,897 38.4 77,545 33.8 31,317 37.9 29,154 41.7
Equipment sales and
services 15,285 5.1 11,284 4.3 23,362 10.2 6,655 8.1 2,473 3.5
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total 246,244 82.3 207,563 78.9 181,976 79.4 68,789 83.3 53,974 77.1
Discontinued customer 53,102 17.7 55,651 21.1 47,287 20.6 13,766 16.7 16,056 22.9
-------- ----- -------- ----- -------- ----- ------- ----- ------- -----
Total $299,346 100.0% $263,214 100.0% $229,263 100.0% $82,555 100.0% $70,030 100.0%
======== ===== ======== ===== ======== ===== ======= ===== ======= =====
</TABLE>
REVENUE
Revenue is derived primarily from providing customer management software and
services to cable television and multi-service providers in more than 20
countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the Company sells computer hardware
and associated maintenance and leasing services to cable television service
providers in connection with providing the Company's software and provides
design, printing and graphics services in connection with its bill processing
services. Most of the software and services revenue is based on the number of
end-users of the services of the Company's clients, the number of bills mailed
and/or the number of images produced under long-term contracts, which usually
have terms ranging from three to seven years. The Company generally recognizes
software and bill processing services revenue (collectively referred to as
"software and services revenue") as services are performed. Certain of the
Company's software licenses provide for fixed or minimum fees. Fixed fees and
the present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased by 18% to $82.6 million in the fourth quarter of 1997
from $70.0 million in the comparable quarter in 1996. The 1996 fourth quarter
revenue increased by 10% over 1995 fourth quarter revenue of $63.4 million. The
increase in the 1997 fourth quarter was attributable to growth in revenue from
software and services of $9.6 million or 15% and an increase in equipment sales
and services revenue of $3.0 million or 53% over the same period in 1996.
In 1997, total revenue increased by 14% to $299.3 million from $263.2 million
in 1996. The growth was the result of a 15% increase in software and services
revenue and a 4% increase in equipment sales and services. Total revenue for
1996 increased by 15% to $263.2 million from $229.3 million in 1995. The growth
in 1996 revenue is primarily the result of the increase in software and
services revenue of $43.6 million or 22%, partially offset by a decrease in
equipment sales and services revenue of $9.6 million.
TCI represented approximately 17% and 18% of the Company's revenue in the
fourth quarter and year ended December 31, 1997, respectively, and 23% and 21%
in the same periods in 1996, respectively. More than two years ago, TCI
announced and began development of an in-house system to replace the Company's
customer management software. On August 11, 1997, TCI informed the Company that
it had agreed to sell its partially developed in-house system to a competitor
and was going to enter into an exclusive long-term contract for customer
management software with that competitor. Under the contract between TCI and
the Company, which expires on December 31, 1999, TCI may remove subscribers
after giving ninety days' notice without significant economic penalty. Although
TCI has not provided the Company with a definitive schedule for conversion of
the TCI subscribers to the competitor's software, the conversions have begun
and it is believed that TCI and the
H-14
<PAGE>
competitor wish to complete the transfer by the end of 1998. TCI revenue has
declined as a percentage of total revenue to 18% in 1997 from 21% in both 1996
and 1995. Also, it has declined in absolute dollars from $55.7 million in 1996
to $53.1 million in 1997 or 5%, primarily from a reduction in the number of
subscribers serviced by TCI and in services purchased by TCI. The Company
intends to mitigate the impact of this by aggressively pursuing other domestic
and international opportunities and to allocate the Company's resources to
other existing or new customers. If these efforts are not fully successful in
mitigating the loss of TCI business, the Company believes that it has
sufficient financial resources and borrowing ability to meet its obligations
and fulfill its customer commitments during and after the conversion period. To
the extent the Company is not successful in generating additional revenue to
offset the expected decline in revenue from TCI, such decline in revenue could
have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
Customer management software and services revenue, exclusive of TCI revenue,
increased by 38% to $30.8 million in the fourth quarter of 1997 from $22.3
million in the comparable 1996 quarter. Bill processing revenue as a stand-
alone service increased by 7% to $31.3 million in the fourth quarter of 1997
from $29.2 million in the comparable quarter of the prior year. Equipment sales
and services revenue increased to $6.7 million in the fourth quarter of 1997
from $2.5 in the fourth quarter of 1996.
Total revenue in 1997, exclusive of TCI revenue, increased by 19% to $246.2
million from $207.6 million in 1996. Revenue in 1996, exclusive of TCI,
increased by 14% over 1995 revenue of $182.0 million. The increase in 1997 was
attributable to growth in revenue from customer management software and
services of $18.4 million or 19%, bill processing software and services of
$16.3 million or 16%, and an increase in equipment sales and services revenue
of $4 million or 35%. Customer management software and services revenue,
exclusive of TCI revenue, increased by 18% to $95.4 million in 1996 from $81.1
million in 1995. Bill processing software and services revenue increased by 30%
to $100.9 million in 1996 from $77.5 million in 1995. Equipment sales and
services revenue declined to $11.3 million in 1996 from $23.4 million in 1995.
Growth in customer management software and services revenue for the fourth
quarter and the year ended December 31, 1997 compared to the same periods in
1996, exclusive of TCI revenue, came primarily from sales of additional
services, increases in the number of subscribers of existing and new clients in
the U.S. and international markets, increases in prices allowed by existing
contracts, and migration of clients to higher-priced services. Growth in bill
processing revenue was derived primarily from the sale of additional services,
an increase in the volume of statements and images produced because of the
internal growth of customers and the acquisition of new customers. The increase
in equipment sales and services revenue was primarily the result of unusually
high demand for additional equipment in the fourth quarter of 1997.
The increase in revenue in customer management software and services for the
year ended December 31, 1996 compared to the same period in 1995, exclusive of
TCI revenue, was the result of sales of additional services, increases in
prices allowed by existing contracts, migration of clients to higher-priced
services and growth in international revenue. Bill processing software and
services revenue increased in the 1996 year compared to the 1995 year because
of an increase in the volume of statements and images produced due to the
internal growth of existing customers, acquisition of new customers, increases
in prices allowed by existing contracts and the sale of additional services.
The decline in equipment sales and services in 1996 compared to 1995 was
expected and was the result of lower equipment sales as a result of market
condition changes.
Three significant clients, including TCI, accounted for $119.8 million,
$121.7 million and $104.0 million or 40%, 47% and 46% of total revenue in 1997,
1996 and 1995, respectively. See "Products And Services--Clients" and "Factors
That May Affect Future Results" regarding these clients and other factors that
may impact future revenue.
COST OF REVENUE AND GROSS PROFIT
Cost of software and services revenue consists primarily of direct labor,
equipment-related expenses, cost of materials such as paper, and facilities
expense. Cost of equipment sales and services revenue consists primarily of
computer hardware purchased for resale or lease and third-party maintenance.
H-15
<PAGE>
The Company's gross profit margin of approximately 41% in the fourth quarter
of 1997 was unchanged from the fourth quarter of 1996. Software and services
gross profit margin increased to 43% in the fourth quarter of 1997 from 41%.
Customer management software and services gross profit margin increased to 56%
in the fourth quarter of 1997 from 48%. Bill processing services gross profit
margin decreased to 26% in the fourth quarter of 1997 from 32%. The gross
profit margin on equipment-related revenue decreased to 28% in the fourth
quarter of 1997 from 44%.
For the year, the Company's gross profit margin in 1997 increased to
approximately 42% from approximately 39% in 1996. The gross profit margin in
1995 was 36%. Software and services gross profit margin increased to 42% in
1997 from 39% in 1996 and 35% in 1995. Customer management software and
services gross profit margin increased to 54% in 1997 from 47% in 1996 and 43%
in 1995. Bill processing services gross profit margin slightly declined to
approximately 27% in 1997 from 28% in 1996. Bill processing services gross
margin was 24% in 1995. The gross profit margin on equipment sales and service
revenue was 39% in 1997 versus 41% in 1996 and 39% in 1995.
The gross margin increases in customer management software and services are
attributed to economies of scale associated with increased revenue,
productivity improvements as well as cost containment efforts. The decline in
1997 and fourth quarter of bill processing services gross margin is attributed
to costs associated with facility expansion, the improvement and expansion of
certain bill processing lines and new customer conversions. Gross margins on
equipment sales and services typically vary based on the mix of equipment sales
and services and underlying demand. The decline in the 1997 fourth quarter
equipment gross margin in comparison to the same period in the prior year was
primarily attributable to significant volume discounting.
RESEARCH AND DEVELOPMENT
Research and development costs relate primarily to ongoing product
development and consist of personnel costs, consulting, testing, supplies,
facilities and depreciation expenses. Once the product under development
reaches technological feasibility, the development expenditures are capitalized
and amortized. See Note 2 of Notes to Consolidated Financial Statements.
Research and development expense was $8.0 million or 10% of revenue in the
fourth quarter of 1997 compared to $6.8 million or also 10% of revenue and $5.1
million or 8% of revenue for the same periods in 1996 and 1995, respectively.
For the year ended December 31, 1997, research and development expense was
$30.0 million or 10% of revenue compared to $25.1 million or 10% of revenue and
$17.8 million or 8% of revenue for the same periods in 1996 and 1995,
respectively. The increased expenditures are attributable to the Company's
commitment to the development of new products and enhancements to existing
products.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance.
The Company has identified, assessed and remedied some known "Year 2000" date
issues and is continuing to identify, assess and evaluate the full scope of
this issue as it relates to its software products, infrastructure-related
hardware and software, and third-party products. While identification and
assessment is an ongoing process, the Company believes, based on current known
information, that it can effectively mitigate any "Year 2000" date issues,
dependent upon cooperation from third parties. However, such modification of
software products, infrastructure-related hardware and software and third-party
products is subject to all the risks of development. If the Company's efforts
and/or third parties are not successful in the timely mitigation of "Year 2000"
issues, the impact on the Company would be significant.
H-16
<PAGE>
The cost of remediating "Year 2000" issues has not been determined; however,
management believes the cost of this effort will not have a material adverse
effect on the Company's results of operations. However, there can be no
assurance that the software or systems of other companies, on which certain of
the Company's software and systems rely, will be timely converted, or that a
failure to convert by another company would not have a material adverse effect
on the Company.
SELLING, GENERAL AND ADMINISTRATIVE
Selling expenses consist of compensation for sales and marketing personnel
including commissions and related bonuses, travel, trade shows and promotional
expenses. General and administrative expenses consist of compensation for
administration, finance and general management personnel, as well as legal and
accounting fees.
Total selling, general and administrative expenses increased by 19% in the
fourth quarter of 1997 in comparison to the fourth quarter of 1996 and 18% for
the 1997 year compared to 1996. Selling and marketing expenditures increased
by 30% in the fourth quarter of 1997 compared to the forth quarter of 1996 and
26% for the 1997 year compared to 1996. As a percentage of revenue, selling
and marketing expenditures increased by approximately 1% in 1997 compared to
1996. In 1996, total sales and marketing expenditures increased by 29% in
comparison to 1995 and, as a percentage of revenue, increased by approximately
1%. The increase in sales and marketing expenditures was primarily because of
the addition of sales and marketing personnel and additional resources to
support increased sales and marketing activities in the international, multi-
service and telecommunications markets as well as the expansion into other
service industries such as financial services and transportation and the
introduction of electronic bill presentment services.
General and administrative expenses for the fourth quarter and year
increased approximately 11% in 1997 compared to 1996. The increase in general
and administrative expenses is attributable to support for the increased
selling and marketing efforts, ongoing expansion into international markets as
well as costs related to general company growth. General and administrative
expenses increased by 11% in 1996 compared to 1995 related to costs to support
higher levels of sales and marketing activity in both the domestic and
international markets, general company expansion, and the costs associated
with being a publicly held entity. As a percentage of revenue, general and
administrative expense in the fourth quarter and years 1997 and 1996 did not
change from comparable prior periods.
INTEREST EXPENSE
Interest expense consists of interest on borrowings under revolving credit
agreements, revenue bonds pertaining to certain of the Company's facilities
and notes and credit agreements related to the Company's leasing subsidiary.
Interest expense for the 1997 year decreased by $2.6 million, or 83%
compared to the same period in 1996. Proceeds of the IPO in 1996 were utilized
to pay down existing debt and resulted in decreased interest expense on a
comparative basis.
INCOME TAXES
The Company's provision for income taxes represents estimated federal, state
and foreign income taxes. The income tax rate for the fourth quarter was 40%,
approximately two percentage points lower than the 1996 comparable quarter. An
additional tax provision was made in the fourth quarter of 1996 resulting in
an annual rate of approximately 40%. The income tax rate was approximately 40%
in 1997, 1996 and 1995.
NET INCOME
Net income increased by $1.2 million or 26% in the fourth quarter of 1997
compared to the same quarter in 1996. In 1997, net income increased to $22.5
million or 55% over 1996 net income of $14.5 million. Earnings per share for
the year was $0.93 per share (diluted) in 1997 compared to $0.66 per share
(diluted) in 1996. This represents a 41% increase despite a 10% increase in
the number of shares outstanding in 1997 over 1996. The increase in net income
for the fourth quarter and 1997 year compared to 1996 is attributable to the
factors cited
H-17
<PAGE>
above. Net income and earnings per share increased by 40% and 29%,
respectively, in 1996 compared to 1995 due to higher earnings despite a 10%
increase in shares used in the calculation. Earnings per share calculations
were made in accordance with recently effective accounting and SEC standards
and bulletins. See Note 11 of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION AND LIQUIDITY
The Company's financial condition and liquidity remained strong in 1997. The
Company continues to reduce its debt and repurchase stock because of positive
operating cash flow. Total long-term debt, including the current portion, was
$9.3 million as of December 31, 1997 compared to $10.4 million at December 31,
1996. Of the debt outstanding at December 31, 1997, $5.3 million pertains to
the Company's leasing subsidiary and is collaterlized, without recourse, by
rents receivable. As of December 31, 1997, the Company had an available $50
million line of credit against which the Company had borrowed $4 million at
the end of 1997. Total capital expenditures in 1997 were $34.6 million
compared to $29.4 million in 1996. The increase is primarily related to the
expansion of the Company's bill processing facilities. In addition, the
Company, in 1997, has expended approximately $10.2 million for the repurchase
of stock. The repurchases will be used to meet stock issuance obligations
under the Company's incentive stock option, employee stock purchase, and
401(k) retirement plans.
The Company collects from its clients and remits to the U.S. Postal Service
a significant amount of postage. Substantially all contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect on
cash flow. As of December 31, 1997 and 1996, accounts receivable were $97.7
million and $73.5 million, respectively, including $25.7 million and $21.5
million in amounts due from clients for postage. Accounts receivable, net of
postage, increased in 1997 by approximately $20 million or 38% primarily
because of the increase in revenue and significant fourth quarter equipment
sales for which payments were received after year end.
The Company continues to make significant investments in capital equipment,
facilities, research and development as well as to expand into new domestic
and international markets. The Company believes that net cash from operations
and the Company's borrowing availability will be sufficient to support
operations through the next twelve months.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in
the global communications market, as well as other high-volume service
industries, the Company's continuing ability to develop products that are
responsive to the evolving needs of its customers, increased competition,
changes in operating expenses, changes in government regulation of the
Company's customers and general economic factors in the U.S. as well as the
international marketplace.
CHANGING COMMUNICATIONS MARKET AND DEVELOPMENT OF SOFTWARE AND SERVICES
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend,
in part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and
respond promptly to new client requirements and evolving industry standards.
The Company has expended considerable funds to develop products to serve the
changing communications market. If the communications market grows or
converges more slowly than anticipated or the Company's products and services
fail to achieve market acceptance, there could be a material adverse effect on
the financial condition and results of operations of the Company.
The Company's development projects are subject to all of the risks
associated with the development of new software and other products based on
innovative technologies. The failure of such development projects could have a
material adverse effect on the financial condition and results of operations
of the Company.
H-18
<PAGE>
DEPENDENCE ON THE CABLE TELEVISION MARKET
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. In both 1997 and
1996, more than 60% of the Company's revenue was derived from sales to cable
television service providers. Although the cable television industry outside
of North America is generally expanding, the number of providers of cable
television service in the U.S. has been declining, due to industry
consolidation, resulting in a reduction of the number of potential cable
television clients in the U.S. As the number of companies serving the
available subscriber base decreases, the loss of a single client could have a
greater adverse impact on the Company than in the past. Even if the number of
clients remains the same, a decrease in the number of subscribers served by
the Company's cable television clients would result in lower revenue for the
Company. Furthermore, a decrease in the number of cable subscribers or any
adverse development in the cable television market could have a material
adverse effect on the financial condition and results of operations of the
Company.
CONCENTRATION OF CLIENT BASE
Aggregate revenue from the Company's ten largest clients accounted for
approximately 68% of total revenue. Loss of all or a significant part of the
business of any of these clients or a decrease in their respective customer
bases would have a material adverse effect on the financial condition and
results of operations of the Company. Three of the Company's clients
represented approximately 40% and 47% of total revenue in 1997 and 1996,
respectively. See "Business--Clients" regarding these clients and other
factors that may impact future revenue.
VARIABILITY OF QUARTERLY OPERATING RESULTS
The Company's quarterly and annual operating results may fluctuate from
quarter-to-quarter and year-to-year depending on various factors, including
the impact of significant start-up costs associated with initiating the
delivery of contracted services to new clients, the hiring of additional
staff, new product development and other expenses, introduction of new
products by competitors, pricing pressures, the evolving and unpredictable
nature of the markets in which the Company's products and services are sold
and general economic conditions.
YEAR 2000 COMPLIANCE
The cost of remediating "Year 2000" issues has not been determined; however,
management believes that the cost of this effort will not have a material
adverse effect on the Company's results of operations. However, there can be
no assurance that the software or systems of other companies, on which certain
of the Company's software and systems rely, will be timely converted, or that
a failure to convert by another company would not have a material adverse
effect on the Company. See "Management's Discussion and Analysis Of Financial
Condition And Results Of Operations--Year 2000 Compliance."
NEW PRODUCTS, RAPID TECHNOLOGICAL CHANGES AND COMPETITION
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company believes its most significant competitors for customer management
software and services are independent providers of such software and services
and in-house systems.
A client that accounted for approximately 6% of total revenue in 1997 orally
advised the Company more than two years ago that it may move to an alternate
solution for its customer management software requirements. Through 1997, no
transfers of this customer's business to this alternate solution have been
made. The Company believes its relations with this customer, as well as its
other customers, are good.
H-19
<PAGE>
In addition, competitive factors could influence or alter the Company's
overall revenue mix between customer management software, services, including
bill processing services, and equipment sales and leasing. Any of these events
could have a material adverse effect on the financial condition and results of
operations, including gross profit margins, of the Company.
ELECTRONIC BILL PRESENTMENT
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based
statements and related materials. A number of companies, many with resources
greater than the Company, are developing and introducing electronic bill
presentment services that could reduce, if not eliminate, the need for paper
statements.
The Company has introduced products and has formed alliances with other
companies for the introduction, marketing and deployment of electronic bill
presentment and other electronic services. The maintenance of the Company's
paper statement expertise, successful development and marketing of electronic
services and rate of customer acceptance of such services are all subject to
the technological, competitive and market condition risks discussed in various
sections of "Factors That May Affect Future Results."
CLIENT FAILURE TO RENEW OR UTILIZE CONTRACTS
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
does not have the unilateral option to extend the terms of such contracts upon
their expiration. In addition, certain of the Company's contracts do not
require clients to make any minimum purchase. Others require minimum purchases
that are substantially below the current level of business under such
contracts, and all such contracts are cancelable by clients under certain
conditions. The failure of clients to renew contracts, a reduction in usage by
clients under any contracts or the cancellation of contracts could have a
material adverse effect on the Company's financial condition and results of
operations.
INTERNATIONAL BUSINESS ACTIVITIES
The Company's strategy to diversify its customer base includes the selling
of its products in a variety of international markets. To date, the Company's
primary customer management software has been installed in more than 20
countries. Generally, the Company operates in U.S. dollars, which reduces but
does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, more that 5% of the Company's customer management software and
services revenue comes from international sources, and the Company is
expanding its international presence, primarily through third party marketing
and distribution alliances. The Company's current and proposed international
business activities are subject to certain inherent risks, including but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national
priorities of any given country and cultural differences. There can be no
assurance that such risks will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's
business, operating results and financial condition.
DEPENDENCE ON PROPRIETARY TECHNOLOGY
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures
to protect its proprietary technology. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. Although the
Company believes that its products and services do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or the
Company's clients.
H-20
<PAGE>
The Company has been advised by a cable customer that a third party has
orally asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company. To
the best of the Company's knowledge, no legal proceedings with regard to this
matter have been instituted against the customer or the Company as of the date
of this Report. The Company believes that it has a substantial defense against
the third party's patent infringement claims, and the Company does not believe
that efforts by the third party to enforce the patents against the Company or
its clients are likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows. There can be no
assurance, however, that such claims, if brought, would not have a material
adverse effect on the Company.
MANAGEMENT OF GROWTH AND ATTRACTION AND RETENTION OF KEY PERSONNEL
Management of the Company's growth may place a considerable strain on the
Company's management, operations and systems. The Company's ability to execute
its business strategy will depend in part upon its ability to manage the
demands of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel.
The Company believes that its future success also depends on its ability to
attract and retain skilled technical, managerial and marketing personnel,
including, in particular, additional personnel in the areas of research and
development and technical support. Competition for qualified personnel is
intense. The Company has from time to time experienced difficulties in
recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
GOVERNMENT REGULATION
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the world-wide communications industry. In addition,
the Company's clients are subject to certain regulations governing the privacy
and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect
on the financial condition and results of operations of the Company.
VOLATILITY OF STOCK PRICE
Although the Company believes that it has the product offerings and
resources needed for continuing success, future revenue and margin trends
cannot be reliably predicted and may cause the Company to adjust its
operations. The Company's stock price, like that of other technology
companies, is subject to significant volatility. The announcement of new
products, services or technologies by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community and speculation in
the press or investment community are among the factors affecting the
Company's stock price. In addition, the stock price may be affected by general
market conditions and domestic and international macroeconomic factors
unrelated to the Company's performance. Because of the foregoing reasons,
recent trends should not be considered reliable indicators of future stock
prices or financial results.
H-21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements andFinancial Statement Schedules
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Management 24
Report of Independent Accountants 25
Consolidated Balance Sheets as of December 31, 1997 and 1996 26
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995 27
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995 28
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 29
Notes to Consolidated Financial Statements 30
Quarterly Financial Information (Unaudited) 41
</TABLE>
H-22
<PAGE>
REPORT OF MANAGEMENT
Stockholders of
USCS International, Inc.
The Company's management is responsible for the preparation, integrity and
objectivity of the consolidated financial statements and other financial
information presented in this report. The accompanying financial statements
have been prepared in conformity with generally accepted accounting principles
and reflect the effects of certain estimates and judgments made by management.
Management maintains an effective system of internal control that is
designed to provide reasonable assurance that assets are safeguarded and
transactions are properly recorded and executed in accordance with
management's authorization. The system is continuously monitored by direct
management review and by internal audit. The Company selects and trains
qualified people who are provided with and expected to adhere to the Company's
standards of business conduct. These standards, which set forth the highest
principles of business ethics and conduct, are a key element of the Company's
control system. It is management's responsibility to proactively foster an
environment conducive to these principles.
The Company's consolidated financial statements have been audited by Price
Waterhouse LLP, independent accountants. Their audits were conducted in
accordance with generally accepted auditing standards and included a review of
financial controls and such tests of accounting records and procedures as they
considered necessary in the circumstances. Management made available to them
all of the Company's financial records and data. Management believes that all
representations made to Price Waterhouse LLP were valid.
The Audit Committee of the Board of Directors meets regularly with
management and the independent accountants to review accounting, reporting,
auditing and internal control matters. The committee has direct and private
access to external auditors.
/s/ James C. Castle /s/ Douglas L. Shurtleff
By: By:
_________________________________ _________________________________
James C. Castle Douglas L. Shurtleff,
Chief Executive Officer and Senior Vice President of Finance
Chairman of the Board of and Chief Financial Officer
Directors (Principal Executive (Principal Financial Officer)
Officer)
H-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USCS International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of USCS
International, Inc. and its subsidiaries at December 31, 1997 and 1996, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- -------------------------------------
Price Waterhouse LLP
Sacramento, California
February 6, 1998
H-24
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- --------
ASSETS
<S> <C> <C>
Current Assets:
Cash $ 2,787 $ 8,452
Accounts receivable, net 97,654 73,458
Current portion of net investment in leases (note 9) 5,892 4,922
Paper products and other inventory 4,573 4,418
Other 9,853 8,972
-------- --------
Total current assets 120,759 100,222
Property and equipment, net (note 3) 101,631 94,350
Net investment in leases, net of current portion (note 9) 4,686 6,252
Other 11,543 4,735
-------- --------
Total assets $238,619 $205,559
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses (note 3) $ 62,656 $ 48,975
Current portion of long-term debt (note 5) 3,865 4,772
Deferred revenue 4,529 9,434
-------- --------
Total current liabilities 71,050 63,181
Long-term debt, net of current portion (note 5) 5,453 5,647
Customer deposits 18,170 12,752
Other liabilities 12,585 8,646
-------- --------
Total liabilities 107,258 90,226
-------- --------
Commitments and Contingencies (note 6)
Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares
authorized;
no shares issued and outstanding -- --
Common Stock, $.05 par value Authorized 40,000,000
shares; 23,427,582 shares issued and 22,947,233 shares
outstanding at December 31, 1997 and 23,068,826 shares
issued and outstanding at December 31, 1996 1,171 1,153
Additional paid-in capital 56,504 53,902
Retained earnings 82,897 60,437
Treasury stock (9,047) --
Foreign currency translation adjustment (164) (159)
-------- --------
Total stockholders' equity 131,361 115,333
-------- --------
Total liabilities and stockholders' equity $238,619 $205,559
======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
H-25
<PAGE>
USCS INTERNATIONAL
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Software and services:
Customer management $157,151 $138,157 $116,855
Bill processing 118,912 102,691 80,427
-------- -------- --------
Total 276,063 240,848 197,282
Equipment sales and services 23,283 22,366 31,981
-------- -------- --------
Total revenue 299,346 263,214 229,263
-------- -------- --------
Cost of revenue:
Software and services:
Customer management 72,120 73,408 66,465
Bill processing 86,636 74,335 61,237
-------- -------- --------
Total 158,756 147,743 127,702
Equipment sales and services 14,192 13,180 19,538
-------- -------- --------
Total cost of revenue 172,948 160,923 147,240
-------- -------- --------
Gross profit 126,398 102,291 82,023
-------- -------- --------
Operating expenses:
Research and development 30,034 25,140 17,815
Selling, general and administrative 58,340 49,631 42,102
-------- -------- --------
Total operating expenses 88,374 74,771 59,917
-------- -------- --------
Operating income 38,024 27,520 22,106
Interest expense, net 554 3,185 4,966
-------- -------- --------
Income before income taxes 37,470 24,335 17,140
Income tax provision (note 7) 15,010 9,826 6,770
-------- -------- --------
Net income $ 22,460 $ 14,509 $ 10,370
======== ======== ========
Earning per share (notes 10 and 11):
Basic $ 0.97 $ 0.69 $ 0.53
Diluted $ 0.93 $ 0.66 $ 0.51
Weighted average common shares and
equivalents:
Basic 23,164 21,178 19,452
Diluted 24,203 22,075 20,159
</TABLE>
The accompanying notes are an integral part of the financial statements.
H-26
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK
------------------
FOREIGN
ADDITIONAL CURRENCY
NUMBER OF PAR PAID-IN RETAINED TREASURY TRANSLATION
SHARES VALUE CAPITAL EARNINGS STOCK ADJUSTMENT
---------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 19,378,143 $ 969 $ -- $39,185 $ -- $(293)
Issuance of common
stock 708,393 35 1,608 -- -- --
Repurchase of common
stock (1,044,521) (52) (1,608) (3,589) -- --
Translation adjustment -- -- -- -- -- (35)
Net income -- -- -- 10,370 -- --
---------- ------ ------- ------- ------- -----
Balance, December 31,
1995 19,042,015 952 -- 45,966 -- (328)
Issuance of common
stock 4,034,240 201 53,902 -- -- --
Repurchase of common
stock (7,429) -- -- (38) -- --
Translation adjustment -- -- -- -- -- 169
Net income -- -- -- 14,509 -- --
---------- ------ ------- ------- ------- -----
Balance, December 31,
1996 23,068,826 1,153 53,902 60,437 -- (159)
Issuance of common
stock 358,756 18 1,451 -- -- --
Purchase of treasury
stock (541,595) -- -- -- (10,237) --
Issuance of treasury
stock 61,246 -- (849) -- 1,190 --
Stock option income
tax benefit -- -- 2,000 -- -- --
Translation adjustment -- -- -- -- -- (5)
Net income -- -- -- 22,460 -- --
---------- ------ ------- ------- ------- -----
Balance, December 31,
1997 22,947,233 $1,171 $56,504 $82,897 $(9,047) $(164)
========== ====== ======= ======= ======= =====
</TABLE>
The accompanying notes are an integral part of the financial statements.
H-27
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 22,460 $ 14,509 $ 10,370
Adjustments to net income:
Depreciation and amortization 25,060 20,311 16,000
Loss on disposition of assets 904 583 102
Changes in operating assets and
liabilities:
Accounts receivable (24,023) (13,551) (8,388)
Net investment in leases (8,029) (7,440) (7,230)
Collections on leases 8,625 10,454 13,745
Inventory and other assets (6,129) (3,782) (1,456)
Customer deposits 5,418 (745) 1,857
Other liabilities 15,329 9,526 4,022
---------- ---------- ----------
Net cash provided by operating
activities 39,615 29,865 29,022
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures, net (32,579) (29,397) (29,231)
Capitalized software development
costs, net (3,127) (293) (2,000)
Purchase of subsidiary (2,046) -- --
---------- ---------- ----------
Net cash used in investing activities (37,752) (29,690) (31,231)
---------- ---------- ----------
Cash flows from financing activities:
Net borrowings (paydown) under
revolving credit agreements 4,000 (30,000) 22,000
Proceeds from issuance of long-term
debt -- 2,765 4,096
Payments on long-term debt (5,101) (25,180) (15,620)
Proceeds from issuance of common
stock less expenses 3,469 54,103 1,643
Repurchase of common stock -- (38) (5,249)
Purchase of treasury stock, net (9,896) -- --
---------- ---------- ----------
Net cash (used in) provided by
financing activities (7,528) 1,650 6,870
---------- ---------- ----------
Net (decrease) increase in cash (5,665) 1,825 4,661
Cash at beginning of year 8,452 6,627 1,966
---------- ---------- ----------
Cash at end of year $ 2,787 $ 8,452 $ 6,627
========== ========== ==========
Supplemental Cash Flow Information:
Cash paid during the year for:
Interest $ 871 $ 4,595 $ 5,145
Income taxes 13,106 9,748 4,210
</TABLE>
The accompanying notes are an integral part of the financial statements.
H-28
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
USCS International, Inc. (the Company), a Delaware corporation, provides
transaction-based comprehensive customer management software and services and
bill processing services and solutions to the global communications industry
and other high volume services companies and sells, maintains and leases
computer systems primarily in North America. The Company generally provides
software and bill processing services to cable television and multi-service
providers under long-term bundled service contracts. The Company also provides
bill processing services on a stand-alone basis primarily to clients in the
telecommunications market. In June 1996, the Company completed an initial
public offering (IPO) of its common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation--The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries after elimination of
intercompany accounts and transactions.
Financial Statement Preparation--The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Revenue Recognition--The Company recognizes services revenue monthly as the
services are performed. Fixed fees and the present value of minimum fees under
software licenses are recognized as revenue upon installation. Variable
software license fees are a component of fees billed under bundled service
contracts and are recognized as revenue over the life of the license based on
usage. Revenue from equipment sales is recognized as equipment is shipped.
Income from sales-type leases is recognized as revenue at a constant periodic
rate of return on the net investment in the lease. Billing for services in
advance of performance is recorded as deferred revenue.
In November 1997, the AICPA issued Statement of Position No. 97-2 "Software
Revenue Recognition" (SOP 97-2), which is effective for fiscal years beginning
after December 15, 1997. The Company has evaluated the provisions of SOP 97-2
to have a material impact on the Company's revenue recognition policies.
Concentration of Credit Risk--Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist principally
of trade accounts receivable. A majority of the Company's trade receivables
are derived from sales to the cable television and telecommunications
industries. The Company performs ongoing credit evaluations of its customer's
financial condition and, generally, requires no collateral. The Company
maintains an allowance for doubtful accounts on its receivables based upon
expected collectibility of all accounts receivable. Uncollectible amounts have
not been significant.
Paper Products and other Inventory--Paper products and other inventory is
stated at the lower of standard cost, which approximates actual cost
(determined on a first-in, first-out basis), or market.
Property and Equipment--Property and equipment is recorded at cost.
Depreciation and amortization expense is recognized on the declining balance
and straight-line methods over useful lives ranging from two to seven years on
equipment and thirty-one to forty years on buildings.
Research and Development--Research and development costs are expensed as
incurred and consist primarily of software development costs incurred prior to
the achievement of technological feasibility. The Company capitalizes software
development costs after the products reach technological feasibility. These
costs are amortized on a product-by-product basis using the greater of the
amount computed by taking the ratio of current year net revenue to estimated
future net revenue or the amount computed by the straight-line method over the
estimated useful life of the product. No amortization has been recorded to
date. The Company evaluates the net realizable value of capitalized software
development costs on a product-by-product basis in accordance with SFAS 86.
The cost of custom development that is required by a specific client is
charged to cost of revenue.
H-29
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Customer Deposits--The Company requires postage deposits of its clients
based on long-term contractual arrangements. The Company does not anticipate
repaying in the next year amounts classified as non-current.
Foreign Currency Translation--The functional currency of the Company's
foreign subsidiary is the foreign currency. Adjustments arising from the
translation of balance sheets to U.S. dollars at the year-end exchange rates
are included in stockholder's equity. Income and expenses are translated at
the average prevailing rate during the year.
Earnings Per Share--The Company has presented earnings per share in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). All previously reported amounts have been restated to
conform to SFAS 128. In addition, pursuant to Securities and Exchange
Commission ("SEC") guidelines, earnings per share for all periods prior to the
IPO have been restated in accordance with SEC Staff Accounting Bulletin No. 98
("SAC 98"). See Note 11.
Stock-Based Compensation--The Company accounts for stock-based compensation
arrangements with employees and directors in accordance with the provisions of
APB No. 25 "Accounting For Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation cost is recognized based on the
difference, if any, on the date of grant between the fair value of the
Company's stock and the amount an employee or director must pay to acquire the
stock.
Treasury Stock--The Company, from time to time, at the authorization of the
Board of Directors, repurchases shares of the Company's common stock to be
held as treasury stock with reservation of such treasury stock for future
issuance under various employee stock purchase and incentive stock option
plans, and for distributions to the Company's 401(k) Retirement Plan.
Recent Accounting Pronouncements--In June 1997, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130")
and Statement of Financial Accounting Standard No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") were issued.
The adoption of both statements is required for years beginning after December
31, 1997. SFAS 130 requires, in addition to net income, the identification,
classification and presentation of items of comprehensive income, as defined
by the statement, in the Company's financial statements and notes thereto.
SFAS 131 requires separate reporting in the financial statements certain
financial and descriptive information about operating segments. The Company
will report comprehensive income for the first quarter of 1998 and segment
reporting for the year ended December 31, 1998. The Company does no expect the
adoption of the statements to have a material impact on its consolidated
financial statements.
3. BALANCE SHEET COMPONENTS AT DECEMBER 31 (IN THOUSANDS)
Property and equipment, net, consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Computer and production equipment $122,324 $122,105
Plant and property 36,222 32,545
Leasehold improvements 10,834 12,715
Office equipment 10,575 8,674
Capital projects-in-progress 13,211 5,723
-------- --------
193,166 181,762
Less accumulated depreciation and amortization 91,535 87,412
-------- --------
$101,631 $ 94,350
======== ========
</TABLE>
H-30
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Accounts payable and accrued expenses consists of the following:
<TABLE>
<S> <C> <C>
Trade accounts payable $31,177 $20,791
Accrued payroll and related expenses 14,321 13,915
Accrued retirement plan contributions 6,971 5,218
Other accrued expenses 6,529 3,498
Income taxes payable 3,658 5,553
------- -------
$62,656 $48,975
======= =======
</TABLE>
4. BENEFITS PLANS
The Company has an employee savings and pension benefit plan (known as the
401(k) Retirement Plan). This plan covers substantially all employees. The
Company matches employee contributions of up to six percent of compensation at
a rate of fifty percent. The Company is required to make a contribution of 3%
of each eligible employee's annual compensation. Commencing in 1996, under the
plan's profit sharing element, the Company also contributes 10% of pretax
profits. Prior to 1996, under the plan's profit-sharing element, the Company
could contribute up to 3% of each eligible employee's compensation determined
at the discretion of the Board of Directors. The Company's contribution
expense was $6,737,000, $5,179,000 and $4,204,000 in 1997, 1996 and 1995.
The Company may fund the plan's profit-sharing element either with cash or
with shares of the Company's common stock. The Company intends to fund the
1997 obligation to the 401(k) with shares held in treasury at the fair market
value on the date of contribution.
The Company had two defined contribution stock ownership plans (ESOP)
covering substantially all employees who were employed by the Company as of
February 18, 1993. There were no contributions to the plans in 1997, 1996 and
1995. Under the plans, the Company was obligated, at the employee's option, to
repurchase vested shares at the current fair market value upon termination or
retirement. Substantially all share repurchases in 1996 and prior years
resulted from the repurchase of shares from former employees. The Company's
repurchase obligations under the plans lapsed effective with the IPO. In 1997,
the Board of Directors terminated the Company's ESOP effective January 1,
1997. An initial distribution from the ESOP trust occurred in August 1997,
with a total of approximately 518,000 shares and cash of $579,000 distributed
to the participants. In December 1997, the remaining approximately 2,900,000
shares and cash of $97,000 were distributed.
The Company has non-qualified deferred compensation plans for senior
management and certain highly compensated employees. The plans permit
participants to defer a portion of their compensation and may provide
additional life insurance benefits until termination of their employment at
which time payment of amounts deferred is made in a lump sum or annual
installments. Deferred amounts accrue interest at a rate determined by the
Board of Directors or are credited with deemed gains or losses of the
underlying investments. At December 31, 1997, amounts deferred under the plans
and the related accrued interest were not material.
H-31
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
MATURITIES 1997 1996
---------- ------ -------
<S> <C> <C> <C>
Credit agreement with a finance company,
collateralized, without recourse, by minimum rentals
receivables of $5,728; principal and interest
payable monthly at fixed interest rates resulting in
a weighted average interest rate of 8.81% at 1998 to
December 31, 1997 2000 $4,559 $ 8,027
Credit line with two banks 2001 4,000 --
Bonds payable, with interest (rate of 6.83% at
December 31, 1997) and principal repayable in
approximately equal monthly installments,
collateralized by first deeds of trust on building
and land with a net book value of $4,716 1999 759 2,392
------ -------
9,318 10,419
Less current portion 3,865 4,772
------ -------
Total long-term debt $5,453 $ 5,647
====== =======
</TABLE>
The Company has an unsecured revolving credit line with two banks in the
amount of $50 million. Borrowings under the agreement bear interest at the
Company's choice of LIBOR (plus a margin ranging from .55% to 1.25%), the
bank's base rate or a quoted rate (rate of 6.94% at December 31, 1997).
Under the borrowing agreements, the Company is required to maintain certain
financial ratios and meet a net worth test. In addition, the Company has four
outstanding standby letters of credit totaling $4,684,000 at December 31,
1997. Based on the borrowing rates currently available to the Company for
credit facilities and bonds with similar terms and average maturities, the
carrying value of long-term debt at December 31, 1997 is considered to
approximate fair value.
Maturities of long-term debt at December 31, 1997 are as follows (in
thousands):
<TABLE>
<S> <C>
1998 3,865
1999 1,395
2000 58
2001 4,000
------
$9,318
======
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain facilities and equipment under operating leases
with terms ranging from one to twenty years. Rental expense was $9,844,000,
$9,594,000 and $8,798,000 in 1997, 1996 and 1995.
Future minimum rental commitments under operating leases are (in thousands):
<TABLE>
<S> <C>
1998 $6,736
1999 5,549
2000 3,866
2001 2,074
2002 1,074
Thereafter 3,206
</TABLE>
H-32
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has legal proceedings incidental to its normal business
activities. In the opinion of the Company, the outcome of the proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
7. INCOME TAXES
The deferred tax assets and liabilities are comprised of the following at
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ -------
<S> <C> <C>
Deferred tax assets:
Compensation and employee benefits related items $3,132 $ 4,714
Differences in revenue recognition for book and tax purposes 665 2,840
Accruals and other non-deductible reserves 3,645 3,542
------ -------
Total deferred tax assets 7,442 11,096
------ -------
Deferred tax liabilities:
Tax in excess of book depreciation 6,102 6,163
Capital leases recorded as operating leases for tax purposes 1,523 1,762
Other 1,607 674
------ -------
Total deferred tax liabilities 9,232 8,599
------ -------
Net deferred tax liability (asset) $1,790 $(2,497)
====== =======
</TABLE>
The income tax provision is comprised of the following for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Current:
Federal $ 9,029 $11,675 $4,883
State 1,694 1,786 838
------- ------- ------
10,723 13,461 5,721
------- ------- ------
Deferred:
Federal 3,436 (3,311) 924
State 851 (324) 125
------- ------- ------
4,287 (3,635) 1,049
------- ------- ------
$15,010 $ 9,826 $6,770
======= ======= ======
</TABLE>
The income tax rate varies from amounts computed by applying the U.S.
statutory rate to income before provision for income taxes. The tax rates for
the years ended December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income tax computed using U.S. statutory rate 34.3% 34.4% 34.7%
State income taxes, net of federal benefits 6.8 4.4 6.1
Effect of income of foreign subsidiary (1.1) -- --
Other -- 1.6 (1.3)
---- ---- ----
Income tax provision 40.0% 40.4% 39.5%
==== ==== ====
</TABLE>
H-33
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. SIGNIFICANT CUSTOMERS AND RELATED PARTY TRANSACTIONS
The Company has three significant customers. Revenue from the largest
customer was $53,101,000, $55,651,000 and $47,287,000 or 18%, 21% and 21% of
total revenue in 1997, 1996 and 1995. This customer is in the process of
transferring its business to another company. Revenue and percentage of total
revenue, respectively, from the other significant customers totaled
$39,262,000 or 13% and $27,417,000 or 9% in 1997, $41,066,000 or 16% and
$25,013,000 or 10% in 1996, $38,849,000 or 17% and $17,858,000 or 8% in 1995.
Advisory services were provided to the Company for approximately $400,000 in
1997, 1996 and 1995 by Westar Capital. Three Directors of the Company are
associated with Westar.
9. LEASING ACTIVITIES
LEASES
The net investment in sales-type leases held by the Company and its leasing
subsidiary reflects the gross lease receivable and the estimated residual
value of the leased equipment less unearned income. The net investment in
sales-type leases consists of the following at December 31 (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Total minimum lease payments receivable $12,858 $15,616
Estimated unguaranteed residual value of leased property 10 8
------- -------
Gross investment in leases 12,868 15,524
Less unearned income 2,290 4,350
------- -------
Net investment in leases 10,578 11,174
Less current portion 5,892 4,922
------- -------
Non-current portion $ 4,686 $ 6,252
======= =======
</TABLE>
Lease transactions which do not meet the criteria of a sales-type lease are
accounted for as operating leases. Leased equipment is recorded at cost and
depreciated on a straight-line basis over the life of the lease term to the
estimated residual value at the expiration of the lease term. Income is
recognized monthly on a straight-line basis over the life of the lease.
Operating leases are non-cancelable. At December 31, 1997, equipment leased to
clients under operating leases had a cost of $7,462,000 and a net book value
of $4,951,000.
Future payments to be received under leases are (in thousands):
<TABLE>
<CAPTION>
SALES-
TYPE OPERATING
------- ---------
<S> <C> <C>
1998 $ 7,871 $2,075
1999 3,375 2,062
2000 1,612 938
------- ------
$12,858 $5,075
======= ======
</TABLE>
The Company performs ongoing credit evaluations of its clients and generally
maintains a perfected security interest on all equipment leased under sales-
type and operating leases as collateral for lease payments receivable.
Substantially all lease contracts have been pledged and the related receipts
have been assigned to various lenders as collateral for nonrecourse
borrowings. The borrowing agreements provide that the debt is to be satisfied
solely from amounts due under the terms of the lease contracts and the value
of the leased equipment. The lenders' collateral interest in both the lease
agreement and the equipment terminates upon repayment of the debt.
H-34
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SUBSIDIARY
At December 31, 1997 and 1996, the Company's wholly owned leasing subsidiary
had total assets of $17,061,000 and $16,197,000 and long-term debt of
$4,558,000 and $8,027,000, respectively. Net income was $1,794,000, $1,147,000
and $1,352,000 in 1997, 1996 and 1995.
10. STOCK-BASED COMPENSATION
STOCK OPTION PLANS
The Company has five stock option plans under which shares of the Company's
common stock have been reserved for issuance to directors, officers and key
employees.
Under the 1988, 1990, 1993 and 1996 Stock Option Plans, options may be
granted at prices and with terms and conditions established by the Company's
Board of Directors at the date of grant. Options vest over periods of up to
sixty months and expire ten years after the date of grant.
Under the Director's Stock Option Plan, options may be granted at fair
market value. Options vest annually over three years and expire five years
after the date of grant.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Shares under option:
Outstanding at January 1, 1995 2,182,887 $ 2.25
Granted 551,775 5.05
Exercised (708,393) 1.44
Canceled (241,773) 3.00
---------
Outstanding at December 31, 1995 1,784,496 3.34
Granted 1,229,074 13.20
Exercised (538,412) 2.10
Canceled (160,603) 6.93
---------
Outstanding at December 31, 1996 2,314,555 8.62
Granted 666,930 17.46
Exercised (406,034) 3.33
Canceled (79,935) 11.06
---------
Outstanding at December 31, 1997 2,495,516 $11.76
</TABLE>
At December 31, 1997, 1,962,936 shares were available for future grants
under the stock option plans.
For purposes of the following pro forma disclosures required by SFAS 123,
the estimated fair value of options is amortized to expense over the options'
vesting period. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option valuation model. The Black-Scholes
option model was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, option valuation models, such as the Black-Scholes model, require
the input of highly subjective assumptions, including the expected stock price
volatility, which are subject to change from time to time. For this reason,
and because the SFAS 123 fair-value based method of accounting has not been
applied to options granted prior to January 1, 1995, the resulting pro forma
compensation costs are not necessarily indicative of costs to be expected in
future years.
H-35
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following pro forma information has been prepared as if the Company had
accounted for its employee stock options using the fair value based method of
accounting established by SFAS 123. Earnings per share amounts have been
restated for 1996 and 1995 in accordance with SFAS 128 (see note 12):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income (in thousands):
As reported $22,460 $14,509 $10,370
Pro forma 21,312 14,036 10,265
Earnings per share:
As reported--Basic 0.97 0.69 0.53
Pro forma--Basic 0.92 0.66 0.53
As reported--Diluted 0.93 0.66 0.51
Pro forma--Diluted 0.88 0.64 0.51
</TABLE>
SFAS 123 pro forma calculations are based on the following assumptions for
grants in 1997, 1996 and 1995, respectively: risk-free weighted-average
interest rates of 5.9%, 5.7% and 5.9%; volatility factors of the expected
market price of the Company's common stock of 45.1%, 43.3% and 43.3%; and
weighted average expected option lives of 7.1, 7.3 and 6.9 years.
Summary information concerning outstanding and exercisable employee option
as of December 31, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- -------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ .20-$ 4.35 332,657 5.57 $ 3.34 310,166 $ 3.27
5.05- 7.38 389,471 7.57 5.09 125,425 5.07
12.50 895,389 8.28 12.50 170,268 12.50
13.33- 17.50 523,525 9.61 16.14 34,710 15.69
17.55- 23.56 354,474 8.77 18.66 37,081 17.90
--------- ---- ------ ------- ------
$ .20-$23.56 2,495,516 8.16 $11.76 677,650 $ 7.36
========= ==== ====== ======= ======
</TABLE>
Exercise prices of some options differ from the market price of the stock on
the grant date. During 1997, 1996 and 1995, options for 561,190, 1,229,074 and
551,775 shares of stock were granted at a weighted average exercise price of
$17.45, $13.20 and $5.05 per share, respectively, which equaled the weighted
average fair value on the date of grant.
In addition, during 1997, options to purchase 105,740 shares were granted at
$17.55 per share. The fair value on the date of grant was $16.63 per share.
The optionees are entitled to receive a bonus of $16.55 per share exercised.
There were no grants in 1997, 1996, or 1995 with exercise prices greater than
the market price at the date of grant.
Total compensation recognized under APB 25 was immaterial.
EMPLOYEE STOCK PURCHASE PLAN
In April 1996, the Company adopted an Employee Stock Purchase Plan (the
"Plan") which was implemented in 1997. Under the Plan, shares are purchased on
a quarterly basis at 95% (90% as of January 1, 1998) of the lower of fair
market value of the Company's common stock on the first or last business day
of each calendar quarter. Shares purchased under the Plan may not be sold or
otherwise transferred for six months after
H-36
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
issuance. Common stock purchases under the Plan totaled approximately 19,000
shares at a weighted average purchase price of $18.41. The weighted average
fair value of the employee purchase rights and compensation expense, as
calculated under SFAS 123 using the Black-Scholes option valuation model, was
immaterial.
11. EARNINGS PER SHARE
The Company has presented earnings per share in accordance with SFAS 128.
Under SFAS 128, basic earnings per share is computed using the weighted
average number of outstanding registered shares. Diluted earnings per share
are computed using weighted average registered shares and common stock
equivalents, including the net shares issuable upon exercise of stock options
when dilutive.
Pursuant to SEC guidelines, the Company's earnings per share calculation for
all periods prior to the IPO included additional dilution from certain common
stock and common stock equivalents issued within one year prior to the IPO.
These shares were included in the calculation as if they were outstanding for
all periods prior to their issuance. In February 1998, the SEC issued SAB 98
which amends this treatment and requires all earnings per share calculations
presented to conform with SFAS 128. All earnings per share amounts presented
have been restated to reflect the application of SFAS 128 and SAB 98.
The following table reconciles net income and weighted average shares
outstanding for the basic earnings per share and the diluted earnings per
share computation. Common stock equivalents consist solely of the net shares
issuable upon the exercise of stock options when dilutive.
PER SHARE AMOUNT RECONCILIATION
(amounts in thousands except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net Income $22,460 $14,509 $10,370
======= ======= =======
Weighted average shares outstanding 23,164 21,178 19,452
Common stock equivalents 1,039 897 707
------- ------- -------
Diluted shares outstanding 24,203 22,075 20,159
======= ======= =======
Basic earnings per share $ 0.97 $ 0.69 $ 0.53
======= ======= =======
Diluted earnings per share $ 0.93 $ 0.66 $ 0.51
======= ======= =======
</TABLE>
Earnings per share amounts would have been $0.93, $0.64 and $0.49 in 1997,
1996 and 1995, respectively, had the amounts been calculated in accordance
with pronouncements in effect prior to the adoption of SFAS 128 and SAB 98.
H-37
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997
Total revenue $70,970 $72,698 $73,123 $82,555
Gross profit 28,784 31,523 31,905 34,186
Operating income 8,648 9,466 9,783 10,127
Net income 5,053 5,602 5,791 6,014
Basic net income per share 0.22 0.24 0.25 0.26
Diluted net income per share 0.21 0.23 0.24 0.25
YEAR ENDED DECEMBER 31, 1996
Total revenue $60,255 $63,572 $69,357 $70,030
Gross profit 22,094 23,801 27,713 28,683
Operating income 5,443 5,841 7,912 8,324
Net income 2,563 2,843 4,328 4,775
Basic net income per share 0.14 0.15 0.19 0.21
Diluted net income per share 0.13 0.14 0.18 0.20
YEAR ENDED DECEMBER 31, 1995
Total revenue $53,012 $56,151 $56,677 $63,423
Gross profit 19,498 19,053 20,044 23,428
Operating income 4,937 5,016 5,965 6,188
Net income 2,281 2,287 2,794 3,008
Basic net income per share 0.12 0.12 0.14 0.16
Diluted net income per share 0.11 0.11 0.14 0.15
</TABLE>
H-38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors of the Company who are standing for
reelection is set forth under "Election of Directors" on pages 1 and 2 of the
Company's Proxy Statement for the 1998 Annual Meeting of Stockholders, dated
April 17, 1998, which pages are incorporated herein by reference.
The executive officers and directors of the Company and their ages as of
March 10, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
James C. Castle, Ph.D. 61 Chairman of the Board and Chief Executive Officer
Michael F. McGrail 50 President of CableData, Inc. and Director
C. Randles Lintecum 53 President of International Billing Services, Inc.
Douglas L. Shurtleff 51 Senior Vice President, Finance and Chief Financial Officer
Claudia D. Coleman 46 Vice President, Corporate Development
George L. Argyros, Sr.
(1)(2) 61 Director
John W. Clark (1) 53 Director
James L. Hesburgh (2) 64 Director
Daniel R. Hesse (1) 44 Director
Charles D. Martin (2) 61 Director
Thomas A. Page (1) 64 Director
Larry W. Wangberg (2) 55 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
James C. Castle, Ph.D. joined the Company as Chairman of the Board and Chief
Executive Officer in August 1992. Prior to joining USCS, Dr. Castle served as
Chief Executive Officer and Director of Teradata Corporation, a manufacturer
of high capacity, high performance parallel processing database systems, from
August 1991 until April 1992. Dr. Castle served as President and Chief
Executive Officer of Infotron Systems Corporation, a manufacturer of data and
voice transmission equipment, from October 1987 until August 1991 and was
named Chairman of the Board in May 1989. Prior to October 1987, Dr. Castle
held various senior management positions with TBG Information Systems, Inc.,
Memorex Corporation, Honeywell, Inc. and General Electric. Dr. Castle is also
a Director of PAR Technology Corp., Leasing Solutions, Inc., The PMI Group,
Inc. and ADC Telecommunications, Inc. Dr. Castle received his B.S. from the
U.S. Military Academy at West Point and a M.S.E.E. and Ph.D. in Computer and
Information Sciences from the University of Pennsylvania.
Michael F. McGrail has been President of CableData, Inc., the Company's
wholly owned subsidiary, and a Director of the Company since April 1995. Since
December 1993, Mr. McGrail has been President and Managing Director of
CableData International, Ltd., a wholly owned subsidiary of CableData, Inc.
Prior to his joining CableData, Mr. McGrail served as President of Gandalf
International, Ltd. ("Gandalf"), a wide and local area network communications
products company. He was also Managing Director of Infotron Systems
International, Ltd., which was acquired by Gandalf in 1991. Mr. McGrail
received a B.Sc. with honors from the University of Sussex and an M.Sc. in
Management from Trinity College, Dublin.
C. Randles Lintecum has been the President of International Billing
Services, Inc. ("IBS"), a wholly owned subsidiary of the Company, since July
1995. From February 1995 to July 1995, Mr. Lintecum was Senior Vice President,
Marketing and Business Development of USCS, and from May 1993 to February 1995
Mr. Lintecum
H-39
<PAGE>
was Vice President, Corporate Development of USCS. From 1989 to May 1993, Mr.
Lintecum was Executive Vice President of Corporate Marketing for Infonet
Services Corporation ("Infonet"), an international data network services
company. From 1988 to 1989, Mr. Lintecum was division Vice President of
Marketing for Computer Science Corporation, a computer services company. From
1985 to 1987, Mr. Lintecum was division Vice President of New Business
Development for Computer Science Corporation. Mr. Lintecum received a B.S. in
Business Administration from the University of Kansas and a M.B.A. from the
University of Missouri.
Douglas L. Shurtleff has been Senior Vice President, Finance, and Chief
Financial Officer of the Company since May 1995. From September 1988 to May
1995, Mr. Shurtleff was Vice President, Finance and Administration, and
Treasurer of Infonet. From October 1984 to September 1988, Mr. Shurtleff was
Group Vice President, Finance and Administration, of Computer Sciences
Corporation. Previously, Mr. Shurtleff held various senior management positions
at Pacesetter Systems, Inc., and Deloitte & Touche. Mr. Shurtleff received a
B.S. in Accounting and his M.B.A. from the University of Southern California
and is a certified public accountant.
Claudia D. Coleman has been Vice President, Corporate Development, of the
Company since December 1995. From March 1988 to December 1995, Ms. Coleman held
various positions, including Principal, in the investment banking division of
Alex. Brown & Sons ("Alex. Brown"). Prior to joining Alex. Brown, Ms. Coleman
was a Vice President in the investment banking division of Drexel Burnham
Lambert from 1984 to 1988. From 1979 to 1984, Ms. Coleman held various
positions, including Vice President, Corporate Planning, at Bank of America.
Ms. Coleman received a B.A. and a M.B.A. from the University of California.
George L. Argyros, Sr. has been a Director of the Company since November
1990. Mr. Argyros is Chairman and Chief Executive Officer of Arnel &
Affiliates, a West Coast diversified investment company. He is a General
Partner and the principal financial partner in Westar Capital, a private
investment company. Mr. Argyros serves as a member on the Boards of First
American Financial Corporation, The Newhall Land and Farming Company, Rockwell
International Corporation, Tecstar Inc., All Post, Inc., and Doskocil
Manufacturing Company, Inc. and is Non-executive Chairman of Apria Healthcare
Group. Since 1976 he has served as Chairman of the Board of Trustees of Chapman
University and is a member of the Board of Trustees of the California Institute
of Technology. Mr. Argyros is Chairman of the Board of Directors of The Beckman
Foundation and Founding Chairman for the Nixon Center for Peace and Freedom in
Washington, D.C. In 1993, he received the Horatio Alger Award of Distinguished
Americans and currently serves as President and CEO of the Washington, D.C.
based Horatio Alger Association.
John Clark became a director of the Company in January 1998. He is the
Managing Partner of Westar Capital, a private equity firm with a portfolio of
nine companies and a total amount invested in excess of $50 million. Mr. Clark
was founding President and CEO of Valentec International, a producer of metal
and electronic components for military and commercial products that was
ultimately sold to Insilco, a Fortune 500 Company. Mr. Clark was founder and
managing partner of Coyne and Clark, a CPA firm which was merged into Ernst
&Whinney (now Ernst & Young) in 1982, and he served as managing partner of
Ernst & Whinney's Newport Beach, California office. Mr. Clark is a Certified
Public Accountant and a member of World Presidents Organization. He serves on
the board of directors of various Westar portfolio companies and of Amerigon,
Inc.
James L. Hesburgh became a Director of the Company in January 1998. He is
President and CEO of James L. Hesburgh International, Inc., an international
consulting and export management company, as well as President and CEO of
Battley, Inc., a subsidiary of a French holding company. He serves as a
Director of both companies and was a Director of Logicon until 1997.
Previously, Mr. Hesburgh was Chairman of the Board of Hiller Aviation, Inc., a
manufacturer of helicopters, and President, Director and Member of the
Executive Committee of Intercole Automation, Inc. Mr. Hesburgh is a Director of
First Federal Bank of California, First Fed Corporation, Toastmaster Inc.,
Sinto America, Robert Sinto Corporation, Fremont Funding, Inc., Chief
Executives Organization, Inc. and DocuSource, Inc. He is also a member of the
Business Advisory Council of the University of Notre Dame, and a director
emeritus of Saint John's Health Center Foundation.
H-40
<PAGE>
Daniel Hesse joined the Company's Board of Directors in January 1998. He is
the President and Chief Executive Officer of AT&T Wireless Services, the
nation's largest wireless operator with 8 million customers and over $4 billion
in revenues, and serves as an Executive Vice President of AT&T. Previously, Mr.
Hesse served as Vice President and General Manager of Business Development for
AT&T and as Vice President and General Manager for the AT&T Online Services
Group. From 1991 to 1995, he was President and Chief Executive Officer of AT&T
Network Systems International, in which capacity he managed all AT&T Network
Systems activities (now known as Lucent Technologies) in Europe, the Middle
East and Africa. Mr. Hesse serves on the advisory boards of Cornell University
and Cornell's Johnson Graduate School of Management, where he serves as
Chairman of the Dean's Society. He also serves on the advisory board of the
University of Washington School of Business Administration and the University
of Notre Dame College of Business Administration.
Charles D. Martin has been a Director of the Company since November 1990. Mr.
Martin has been a general partner of Enterprise Partners, a Southern
California-based venture capital firm, since its formation in 1985. He has also
been a general partner of Westar Capital Associates, which is the sole general
partner of Westar, since its formation in 1987. Mr. Martin also serves on the
Board of Directors Tecstar, Inc., All Post, Inc., Doskocil Manufacturing, Inc.,
ObjectAutomation and El Dorado Communications. Mr. Martin also serves as a
Trustee of Chapman University and is Chairman of the Board of Trustees of the
Orange County Museum of Art.
Thomas A. Page became a Director of the Company in February 1998. He recently
retired as Chairman of Enova Corporation and San Diego Gas and Electric
(SDG&E). Enova Corporation is the parent company of SDG&E and six other U.S.-
based subsidiaries involved in energy-related services and investments. He is
the former CEO of SDG&E serving in that capacity from 1981 to 1995 and
continued as chairman of Enova and SDG&E through 1997. Mr. Page will continue
as a Director of Enova and SDG&E until their 1998 annual meetings. Prior to
joining SDG&E in 1978, Mr. Page was executive vice president and a member of
the board of Gulf States Utilities, and treasurer and controller of Wisconsin
Power and Light Company. Mr. Page is currently a Director of Burnham Pacific
Properties, a member of the Board of Overseers at U.C. San Diego and a director
of the California Chamber of Commerce.
Larry Wangberg has been a Director of the Company since 1996. Mr. Wangberg is
President and Chief Executive Officer of ZDTV (Ziff-Davis TV). Prior to joining
Ziff-Davis, he was Chairman and CEO of StarSight Telecast, Inc., an
interactive, on-screen TV guide and navigator software service company. Mr.
Wangberg previously served as Chairman and CEO of Times Mirror Cable
Television, Inc., a provider of broadband-based network and cable broadcast
services. Mr. Wangberg simultaneously served as Senior Vice President of the
parent The Times Mirror Company, a major information provider. In 1995 he
engineered the merger of Times Mirror Cable Television into Cox Communications.
Mr. Wangberg is a past chairman of the National Cable Television Association
(NCTA), and has served as vice chairman of the National Cable Television
Association (NCTA), and served as vice chairman of the National Academy of
Cable Programming. He previously served on the boards of C-SPAN, Cable Labs and
Zilog, Inc.
There are no family relationships between any directors or executive officers
of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding the Company's compensation of its executive officers is
set forth under "Information Regarding Executive Officers Compensation" on
pages 7 through 9 of the Company's Proxy Statement for the 1998 Annual Meeting
of Stockholders, dated April 17, 1998, which pages are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding security ownership of certain beneficial owners and
management is set forth under "Beneficial Ownership Of Principal Stockholders,
Directors And Management" on pages 4 through 6 of the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders, dated April 17, 1998, which pages
are incorporated herein by reference.
H-41
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is set
forth under "Certain Relationships And Related Transactions" on page 10 of the
Company's Proxy Statement for the 1998 Annual Meeting of Shareholders, dated
April 17, 1998, which pages are incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements
Financial Statements and Report of Independent Accountants: See Part
II, Item 8 hereof.
2. Financial Statement Schedule
All Schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are
omitted because such schedules are not required under the related
instructions, are not applicable or the required information is given
in the financial statements.
(b) Reports of Form 8-K
No reports on Form 8-K were filed by the Registrant during the quarter
ended December 31, 1997.
H-42
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
<C> <S> <C>
3.1 Second Amended and Restated Certificate of Incorporation
of USCS International, Inc. (3)
3.2 Bylaws of the Registrant. (1)
3.3 Certificate of Designation of Rights, Preferences and
Privileges of Series A Preferred Stock. (1)
4.1 Reference Exhibit 3.1.
4.2 Stockholder Rights Plan. (1)
10.1 Amended and Restated 1988 Stock Option Plan.
10.2 Amended and Restated 1993 Stock Option Plan.
10.3 Amended and Restated 1990 Stock Option Plan.
10.4 Amended and Restated 1996 Directors' Stock Option Plan.
10.5 Amended and Restated 1996 Stock Option Plan.
10.6 Amended Employee Stock Purchase Plan.
10.7 Deferred Compensation Plan.
10.8 Bonus Deferral Plan. (4)
10.9 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file Trust
Indenture dated as of June 30, 1989 between the Registrant
and Sun Bank, as Trustee. (1)
10.10 Agreement pursuant to Rule 601(b)(4)(iii)(A) to file
Reimbursement Agreement dated as of June 30, 1989 between
the Registrant and Sanwa Bank of California. (1)
10.11 Credit Agreement dated as of February 15, 1996 among
International Billing Services, Nationsbank of Texas and
the Lender Parties named therein. (1)
10.12 Credit Agreement dated as of February 15, 1996 among the
Registrant, Nationsbank of Texas and the Lender Parties
named therein. (1)
10.13 Strategic Business Agreement dated January 19, 1992
between the Registrant and International Business Machines
Corporation and Addendum Number One to Strategic Business
Agreement dated June 4, 1993 between the Registrant and
International Business Machines Corporation. (1)
10.14 Business Alliance Program Agreement between Oracle
Corporation and CableData. (1)
10.15 Amended, Consolidated and Restated Credit Agreement dated
as of September 30, 1996 among the Registrant as borrower
and NationsBank, N.A. and Mellon Bank, N.A. as lender. (2)
10.16 On/Line Operating and License Agreement dated June 7, 1996
between CableData, Inc. and TCI Cable Management
Corporation. (1)
10.17 On/Line Operating and Licensing Agreement dated December
17, 1993 between the Registrant dba CableData and
Continental Cablevision. (1)
10.18 Statement Production Services Agreement dated August 20,
1993 between the Registrant dba International Billing
Services and Ameritech Corporation. (1)
10.19 Software License and Service Agreement and Network User
License Addendum dated May 18, 1994 between the Registrant
and Oracle Corporation. (1)
10.20 Strategic Business Alliance Agreement dated February 28,
1997 between the Registrant and CBIS. (3)
10.21 Tandem Alliance Agreement dated January 1, 1995 between
Tandem and CableData. (1)
10.22 Contract for Computer Software (Postalsoft Software
License Agreement) dated February 13, 1996 between IBS and
Postalsoft, Inc. (1)
</TABLE>
H-43
<PAGE>
<TABLE>
<CAPTION>
<C> <S> <C>
10.23 Employment Agreement dated August 10, 1992 between the
Registrant and James C. Castle. (1)
10.24 Employment Agreement dated June 29, 1995 with Michael
McGrail. (1)
10.25 Form of Severance Agreement. (1)
10.26 Building Lease for property located at 2969 Prospect Park
Drive and 11020 Sun Center Drive between the Registrant
and F.I.A. Profile Fund I dated January 19, 1994. (1)
10.27 Alternate Mailing System Agreement dated March 28, 1996
between the United States Postal Service and IBS. (1)
10.28 Alternate Mailing Systems Agreement dated April 18, 1996
between the United Postal Service and International
Billing Services, Inc. (1)
10.29 For of Directors' Indemnification Agreement. (1)
11. Statement re: computation of earnings per share.
21. List of Subsidiaries. (1)
23. Consent of Independent Public Accountants.
24. Power of Attorney. Contained in page 44 of this Annual
Report on Form 10-K and incorporated herein by reference.
27. Financial data schedule.
</TABLE>
- --------
(1) Incorporated by reference to Registrant's Registration Statement on Form
S-1, Registration No. 333-3842, filed pursuant to Section 5 of the
Securities Act of 1933, as amended.
(2) Incorporated by reference to Registrant's Quarterly Report on Form 10-Q
for the quarterly period ended September 30, 1996.
(3) Incorporated by reference to Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
(4) Incorporated by reference to Registrant's Registration Statement on Form
S-8, Registration No. 333-34801, filed pursuant to Section 5 of the
Securities Act of 1933, as amended.
H-44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Rancho
Cordova, State of California, on the 23rd day of March, 1998.
USCS International, Inc.
/s/ Douglas L. Shurtleff
By: _________________________________
Douglas L. Shurtleff,
Senior Vice-President of Finance
and
Chief Financial Officer
(Principal Financial Officer)
POWER OF ATTORNEY
Each of the officers and directors of USCS International, Inc. whose
signature appears below hereby constitutes and appoints James C. Castle and
Douglas L. Shurtleff, and each of them, their true and lawful attorneys-in-
fact and agents, with full power of substitution, each with power to act
alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this report and to file the same, with exhibits thereto, and
other documents in connection therewith, and to perform any acts necessary in
order to file such amendment or amendments, exhibits and documents with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratify and confirm all that said attorneys-in-fact and agents, or their or his
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ James C. Castle Chief Executive Officer March 23, 1998
______________________________________ and Chairman of the Board
James C. Castle of Directors (Principal
Executive Officer)
/s/ George L. Argyros, Sr. Director March 23, 1998
______________________________________
George L. Argyros, Sr.
/s/ Charles D. Martin Director March 23, 1998
______________________________________
Charles D. Martin
/s/ Michael F. McGrail Director March 23, 1998
______________________________________
Michael F. McGrail
/s/ Larry W. Wanberg Director March 23, 1998
______________________________________
Larry W. Wangberg
/s/ Douglas L. Shurtleff Senior Vice-President of March 23, 1998
______________________________________ Finance and Chief
Douglas L. Shurtleff Financial Officer
(Principal Financial
Officer)
/s/ Zaida A. Klein Vice-President, Controller March 23, 1998
______________________________________ and Chief Accounting
Zaida A. Klein Officer (Principal
Accounting Officer)
</TABLE>
H-45
<PAGE>
APPENDIX I
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER: 0-28268
----------------
USCS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1727009
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION)
INCORPORATION OR ORGANIZATION)
2969 PROSPECT PARK DRIVE, RANCHO 95670-6148
CORDOVA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (916) 636-4500
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT APRIL 30, 1997
----- -----------------------------
<S> <C>
Common Stock, $.05 par value 23,374,890 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements............................................ 3
Consolidated Condensed Balance Sheets March 31, 1998 (Unaudited) and
December 31, 1997.................................................... 4
Consolidated Condensed Statements of Operations (Unaudited) Three
months ended March 31, 1998 and 1997................................. 5
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
Three months ended March 31, 1998 and 1997........................... 6
Consolidated Condensed Statements of Cash Flows (Unaudited) Three
months ended March 31, 1998 and 1997................................. 7
Notes to Consolidated Condensed Financial Statements.................. 8
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors That May Affect Future
Results............................................................ 9-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 17
Part II. Other Information
Item 1. Legal Proceedings............................................... 17
Item 2. Changes in Securities........................................... 17
Item 3. Defaults Upon Senior Securities................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............. 18
Item 5. Other Information............................................... 18
Item 6. Exhibits and Reports on Form 8-K................................ 18
Signature............................................................ 19
</TABLE>
I-2
<PAGE>
USCS INTERNATIONAL, INC.
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated condensed financial statements, except for the
balance sheet as of December 31, 1997, have been prepared by USCS
International, Inc. (the "Company") without audit by independent public
accountants, but in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results for each period shown. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report to Stockholders and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
the three months ended March 31, 1998 are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1998.
I-3
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
ASSETS
------
<S> <C> <C>
Current Assets:
Cash................................................ $ 9,503 $ 2,787
Accounts receivable................................. 94,972 97,654
Current portion of net investment in leases......... 5,966 5,892
Paper products and other inventory.................. 5,238 4,573
Other............................................... 7,557 9,853
-------- --------
Total current assets.............................. 123,236 120,759
Property and equipment, net........................... 99,968 101,631
Net investment in leases, net of current portion...... 4,166 4,686
Other................................................. 17,131 11,543
-------- --------
Total assets...................................... $244,501 $238,619
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses............... $ 53,602 $ 62,656
Current portion of long-term debt................... 6,159 3,865
Deferred revenue.................................... 6,055 4,529
-------- --------
Total current liabilities......................... 65,816 71,050
Long-term debt, net of current portion................ 4,611 5,453
Customer deposits..................................... 18,425 18,170
Other liabilities..................................... 13,028 12,585
-------- --------
Total liabilities................................. 101,880 107,258
-------- --------
Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares
authorized; no shares issued and outstanding....... -- --
Common Stock, $.05 par value, 40,000,000 shares
authorized; 23,427,582 shares issued and 23,367,866
shares outstanding at March 31, 1998 (unaudited)
and 23,427,582 shares issued and 22,947,233 shares
outstanding at December 31, 1997................... 1,171 1,171
Additional paid-in capital.......................... 53,561 56,504
Retained earnings................................... 89,166 82,897
Treasury stock...................................... (1,125) (9,047)
Foreign currency translation adjustment............. (152) (164)
-------- --------
Total stockholders' equity........................ 142,621 131,361
-------- --------
Total liabilities and stockholders' equity........ $244,501 $238,619
======== ========
</TABLE>
I-4
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
---------------
1998 1997
------- -------
<S> <C> <C>
Revenue:
Software and services:
Customer management........................................ $39,679 $37,779
Bill processing............................................ 32,313 28,398
------- -------
Total.................................................... 71,992 66,177
Equipment sales and services................................. 6,536 4,793
------- -------
Total revenue............................................ 78,528 70,970
------- -------
Cost of revenue:
Software and services:
Customer management........................................ 18,637 18,528
Bill processing............................................ 23,659 20,860
------- -------
Total.................................................... 42,296 39,388
Equipment sales and services................................. 4,281 2,798
------- -------
Total cost of revenue.................................... 46,577 42,186
------- -------
Gross profit................................................... 31,951 28,784
------- -------
Operating expenses:
Research and development..................................... 8,125 6,871
Selling, general and administrative.......................... 13,396 13,265
------- -------
Total operating expenses................................. 21,521 20,136
------- -------
Operating income............................................... 10,430 8,648
Interest expense, net.......................................... 153 169
------- -------
Income before income taxes..................................... 10,277 8,479
Income tax provision........................................... 4,008 3,426
------- -------
Net income..................................................... $ 6,269 $ 5,053
======= =======
Earnings per share:
Basic........................................................ $ 0.27 $ 0.22
Diluted...................................................... $ 0.26 $ 0.21
Weighted average common shares and equivalents:
Basic........................................................ 23,032 23,096
Diluted...................................................... 23,761 24,134
</TABLE>
I-5
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income................................................. $ 6,269 $ 5,053
Other comprehensive income:
Foreign currency translation adjustment.................. 12 (67)
--------- ---------
Comprehensive income....................................... $ 6,281 $ 4,986
========= =========
</TABLE>
I-6
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities................... $13,497 $ 7,527
------- -------
Cash flows from investing activities:
Capital expenditures, net................................... (5,079) (3,734)
Other....................................................... (1,600) --
------- -------
Net cash used in investing activities......................... (6,679) (3,734)
------- -------
Cash flows from financing activities:
Net paydown under revolving credit agreement................ (4,000) --
Payments on long-term debt.................................. (1,975) (1,454)
Proceeds from issuance of long-term debt.................... 7,427 235
Purchases of treasury stock net of issuances................ (1,554) --
------- -------
Net cash used in financing activities......................... (102) (1,219)
------- -------
Net increase in cash.......................................... 6,716 2,574
Cash at January 1............................................. 2,787 8,452
------- -------
Cash at March 31.............................................. $ 9,503 $11,026
======= =======
Supplemental Schedule of Noncash Financing Activities:
Contribution of Company shares to 401(k) Retirement Plan.... $ 6,533 $ --
======= =======
</TABLE>
I-7
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. LONG-TERM DEBT
The Company has a five-year unsecured revolving credit line, expiring
September 2001, with two banks in the amount of $50 million. Borrowings under
the agreement bear interest at the Company's choice of LIBOR (plus a margin
ranging from .55% to 1.25%), the bank's base rate or a quoted rate. Under the
borrowing agreement, the Company is required to maintain certain financial
ratios and meet a net worth test.
2. TREASURY STOCK
The Company, from time to time, at the authorization of the Board of
Directors, repurchases shares of the Company's common stock to be held as
treasury stock with reservation of such treasury stock for future issuance
under various employee stock purchase and incentive stock option plans and for
distributions to the Company's 401(k) Retirement Plan.
In March 1998, the Company contributed approximately 312,000 shares of
treasury stock to the Company's 401(k) Retirement Plan. The fair market value
on the date of contribution was $6,533,000.
3. EARNINGS PER SHARE
The Company has presented earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All
previously reported amounts have been restated to conform to SFAS 128. Under
SFAS 128, basic earnings per share are computed using the weighted average
number of outstanding registered shares. Diluted earnings per share are
computed using weighted average registered shares and common stock
equivalents, including the net shares issuable upon exercise of stock options
when dilutive.
I-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS
OF OPERATIONS, AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve risks
and uncertainties. The statements that are not historical facts or statements
of current status are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties including, but not limited to, the risks and uncertainties set
forth under the caption "Certain Factors That May Affect Future Results." The
Company's future results may differ significantly from the results and
forward-looking statements discussed in this Report.
Founded in 1969, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers worldwide, as well as
bill processing services to cable television, telecommunications, financial
services, utilities and other service industries. Software and bill processing
services are generally offered to North American cable television providers
under bundled service arrangements. Outside of North America, software is
generally sold exclusive of the bill processing. Most of the Company's revenue
is based on the number of subscribers or end-users of the Company's clients,
the number of billing statements mailed and/or the number of images produced
under contracts with terms ranging from three to seven years. Clients are
billed monthly, generally based on the number of end-users they serve. As a
result, a significant portion of the Company's revenue is recurring and
increases as the service provider's customer base grows. In addition, the
Company sells computer hardware and provides associated maintenance. Leasing
is provided as an alternative to equipment purchases for clients.
The Company sells its software and services to cable television and multi-
service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software primarily through strategic alliances with companies specializing in
system integration or computer hardware manufacturing that are capable of
providing local sales and support. Building and maintaining relationships with
its clients is an important part of the Company's strategy because selling
cycles can extend a year or longer. The Company has committed increased
resources to the diversification of its customer base, focusing primarily on
international, multi-service, telecommunications and other high-volume markets
because it believes these represent opportunities to grow at rates greater
than, and decrease its dependence upon, the U.S. cable television marketplace.
I-9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated condensed statements of operations and the percentage of revenue
represented by each line item (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
----------------------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management........................... $39,679 50.5% $37,779 53.2%
Bill processing............................... 32,313 41.2 28,398 40.0
------- ----- ------- -----
Total....................................... 71,992 91.7 66,177 93.2
Equipment sales and services.................... 6,536 8.3 4,793 6.8
------- ----- ------- -----
Total revenue............................... 78,528 100.0 70,970 100.0
------- ----- ------- -----
Cost of revenue:
Software and services:
Customer management........................... 18,637 23.7 18,528 26.1
Bill processing............................... 23,659 30.1 20,860 29.4
------- ----- ------- -----
Total....................................... 42,296 53.8 39,388 55.5
Equipment sales and services.................... 4,281 5.5 2,798 3.9
------- ----- ------- -----
Total cost of revenue....................... 46,577 59.3 42,186 59.4
------- ----- ------- -----
Gross profit...................................... 31,951 40.7 28,784 40.6
------- ----- ------- -----
Operating expenses:
Research and development........................ 8,125 10.3 6,871 9.7
Selling, general and administrative............. 13,396 17.1 13,265 18.7
------- ----- ------- -----
Total operating expenses.................... 21,521 27.4 20,136 28.4
------- ----- ------- -----
Operating income.................................. 10,430 13.3 8,648 12.2
Interest expense.................................. 153 .2 169 .3
------- ----- ------- -----
Income before income taxes........................ 10,277 13.1 8,479 11.9
Income tax provision.............................. 4,008 5.1 3,426 4.8
------- ----- ------- -----
Net income........................................ $ 6,269 8.0% $ 5,053 7.1%
======= ===== ======= =====
</TABLE>
The following table sets forth revenue and percentage of revenue by line
item exclusive of a discontinued customer, revenue of a discontinued customer
and total revenue (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
----------------------------
1998 1997
------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management........................... $29,444 37.5% $26,789 37.7%
Bill processing............................... 31,566 40.2 28,144 39.7
Equipment sales and services.................... 4,924 6.3 2,770 3.9
------- ----- ------- -----
Total....................................... 65,934 84.0 57,703 81.3
Discontinued customer........................... 12,594 16.0 13,267 18.7
------- ----- ------- -----
Total....................................... $78,528 100.0% $70,970 100.0%
======= ===== ======= =====
</TABLE>
I-10
<PAGE>
Revenue
Revenue is derived primarily from providing customer management software and
services to cable television and multi-service providers in more than 20
countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the Company sells computer hardware
and associated maintenance and leasing services to cable television service
providers in connection with licensing the Company's software and provides
design, printing and graphics services in connection with its bill processing
services. Most of the software and services revenue is based on the number of
end-users of the services of the Company's clients, the number of bills mailed
and/or the number of images produced under long-term contracts, which usually
have terms ranging from three to seven years. The Company generally recognizes
software and bill processing services revenue (collectively referred to as
"software and services revenue") as services are performed. Certain of the
Company's software licenses provide for fixed or minimum fees. Fixed fees and
the present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased by 11% to $78.5 million in the first quarter of 1998
from $71.0 million in the comparable quarter in 1997. The increase in the 1998
first quarter over the same period in 1997 was attributable to growth in
revenue from customer management software and services of $1.9 million or 5%,
growth in bill processing of $3.9 million or 14%, and an increase in equipment
sales and services of $1.7 million or 36%.
Telecommunications, Inc. ("TCI") represented approximately 16% of the
Company's revenue in the first quarter of 1998 and 19% in the same period in
1997. More than two years ago, TCI announced and began development of an in-
house system to replace the Company's customer management software. On August
11, 1997, TCI informed the Company that it had agreed to sell its partially
developed in-house system to a competitor and was going to enter into an
exclusive long-term contract for customer management software with that
competitor. Under the contract between TCI and the Company, which expires on
December 31, 1999, TCI may remove subscribers after giving ninety days' notice
without significant economic penalty. Although TCI has not provided the
Company with a definitive schedule for conversion of the TCI subscribers to
the competitor's software, the conversions have begun and it is believed that
TCI and the competitor wish to complete the transfer by the end of 1998.
Additionally, the Company believes that TCI's contract with the competitor
provides financial incentives to TCI for converting subscribers of certain TCI
affiliates, some of whom are currently clients of the Company, to the
competitor's software. Revenue from TCI has declined in absolute dollars from
$13.3 million in the first quarter 1997 to $12.6 million in the first quarter
1998 or 5%, primarily from a reduction in the number of subscribers serviced
by TCI and services purchased by TCI. The number of TCI subscribers no longer
on the Company's software declined by approximately 2.4 million or 22% as of
March 31, 1998, compared to December 31, 1997. The actual rate of decline in
the number of TCI subscribers served and revenue derived from TCI cannot be
definitively estimated on a quarter by quarter basis. However, the Company
believes the decline in revenue from TCI will increase throughout the year.
The Company intends to mitigate the impact of this by aggressively pursuing
other domestic and international opportunities and to allocate the Company's
resources to other existing or new customers. If these efforts are not fully
successful in mitigating the loss of TCI business, the Company believes that
it has sufficient financial resources and borrowing ability to meet its
obligations and fulfill its customer commitments during and after the
conversion period. To the extent the Company is not successful in generating
additional revenue to offset the expected decline in revenue from TCI, such
decline in revenue could have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
Customer management software and services revenue, exclusive of revenue from
TCI, increased by 10% to $29.4 million in the first quarter of 1998 from $26.8
million in the comparable 1997 quarter. Bill processing revenue as a stand-
alone service increased by 12% to $31.6 million in the first quarter of 1998
from $28.1 million in the comparable quarter of the prior year. Equipment
sales and services revenue increased to $4.9 million in the first quarter of
1998 from $2.8 in the first quarter of 1997.
I-11
<PAGE>
Growth in customer management software and services revenue for the first
quarter of 1998 compared to the same period in 1997, exclusive of revenue from
TCI, came primarily from increases in the number of subscribers of existing
and new clients in the U.S. and international markets, increases in prices
allowed by existing contracts, and migration of clients to higher-priced
services. Growth in bill processing revenue was derived from an increase in
the volume of statements and images produced because of the internal growth of
existing customers and the acquisition of new customers, primarily in
telecommunications and other high- volume markets. The increase in equipment
sales and services revenue was primarily the result of a large equipment sale
at the end of the first quarter of 1998 and increased leasing revenues related
to new leasing transactions which occurred in the latter part of 1997.
Three significant clients, including TCI, accounted for $30.0 million and
$29.5 million or 38% and 42% of total revenue in the first quarter of 1998 and
1997, respectively. See "Certain Factors That May Affect Future Results"
regarding these clients and other factors that may impact future revenue.
Cost of Revenue and Gross Profit
Cost of software and services revenue consists primarily of direct labor,
equipment-related expenses, cost of materials such as paper, and facilities
expense. Cost of equipment sales and services revenue consists primarily of
computer hardware purchased for resale or lease and third-party maintenance.
The Company's gross profit margin of approximately 41% in the first quarter
of 1998 was unchanged from the first quarter of 1997. The software and
services gross profit margin increased to 41% in the first quarter of 1998
from approximately 40% in the same period in 1997. The customer management
software and services gross profit margin increased to 53% in the first
quarter of 1998 from 51% in the first quarter of 1997. Bill processing
services gross profit margin of 27% in the first quarter of 1998 equaled the
1997 first quarter gross margin. The gross profit margin on equipment-related
revenue decreased to 35% in the first quarter of 1998 from 42%.
The gross margin increase in customer management software and services was
attributed to economies of scale associated with increased revenue. Gross
margins on equipment sales and services typically vary based on the mix of
equipment sales and services and underlying demand. The decline in the 1998
first quarter equipment sales and services gross margin in comparison to the
same period in the prior year was attributable to discounting on equipment
sales and increased depreciation expense on leased equipment.
Research and Development
Research and development costs relate primarily to ongoing product
development and consist of personnel costs, consulting, testing, supplies,
facilities and depreciation expenses. Once the product under development
reaches technological feasibility, the development expenditures are
capitalized and amortized.
Research and development expense was $8.1 million or 10% of revenue in the
first quarter of 1998 compared to $6.9 million, also 10% of revenue, for the
same period in 1997. The increased expenditures are attributable to the
Company's commitment to the development of new products and enhancements to
existing products.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance.
I-12
<PAGE>
The Company has identified, assessed and remedied some known "Year 2000"
date issues and is continuing to identify, assess and evaluate the full scope
of this issue as it relates to its software products, infrastructure-related
hardware and software, and third-party products. While identification and
assessment are an ongoing process, the Company believes, based on current
known information, that it can effectively mitigate any "Year 2000" date
issues, dependent upon cooperation from third parties. However, such
modification of software products, infrastructure-related hardware and
software and third-party products is subject to all the risks of development.
If the Company's efforts and/or third parties are not successful in the timely
mitigation of "Year 2000" issues, the impact on the Company will be
significant.
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted,
or that a failure to convert by another company will not have a material
adverse effect on the Company.
Selling, General and Administrative
Selling expenses consist of compensation for sales and marketing personnel
including commissions and related bonuses, travel, trade shows and promotional
expenses. General and administrative expenses consist of compensation for
administration, finance and general management personnel, as well as legal and
accounting fees.
Total selling, general and administrative expenses increased by 1% in the
first quarter of 1998 in comparison to the first quarter of 1997. Selling and
marketing expenditures increased by 4% in the first quarter of 1998 compared
to the first quarter of 1997. As a percentage of revenue, selling and
marketing expenditures decreased by less than 1% in 1998 compared to 1997.
General and administrative expenses for the first quarter decreased
approximately 2% in 1998 compared to 1997. As a percentage of revenue, general
and administrative expense in the first quarter of 1998 declined by
approximately 1% compared to the first quarter of 1997. The decline in
selling, general and administrative expense as a percentage of revenue to
approximately 17% in the first quarter of 1998 from approximately 19% in the
same period in 1997 was due to increased revenue coupled with cost containment
efforts.
Interest Expense
Interest expense consists of interest on borrowings under revolving credit
agreements, revenue bonds pertaining to certain of the Company's facilities
and notes and credit agreements related to the Company's leasing subsidiary.
Interest expense for the first quarter of 1998 was unchanged in comparison to
the first quarter of 1997.
Income Taxes
The Company's provision for income taxes represents estimated federal, state
and foreign income taxes. The income tax rate for the first quarter of 1998
was 39%, approximately one percentage point lower than the 1997 comparable
quarter. The rate decline is attributable to the mix of foreign and domestic
income and the application of tax reduction strategies.
Net Income
Net income increased by $1.2 million or 24% in the first quarter of 1998
compared to the same quarter in 1997. Diluted earnings per share for the
quarter were $0.26 per share in 1998 compared to $0.21 per share in 1997. This
represents a 24% increase. Diluted shares used in the calculation decreased by
approximately 2% in the first quarter of 1998 compared to the same period in
1997. The increase in net income for the first quarter of 1998 compared to
1997 is attributable to the factors cited above.
I-13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition and liquidity remained strong through the
first quarter of 1998. Total long-term debt, including the current portion,
was $10.8 million as of March 31, 1998 compared to $9.3 million at December
31, 1997. Of the debt outstanding at March 31, 1998, $10.1 million pertains to
the Company's leasing subsidiary and is collateralized, without recourse, by
rents receivable. As of March 31, 1998, the Company had an available $50
million line of credit. There were no borrowings outstanding at March 31,
1998. Total capital expenditures through the first quarter of 1998 were $5.1
million compared to $3.7 million in the same period in 1997. The increase is
primarily related to the enhancement and expansion of the Company's bill
processing capabilities. The Company, in 1998, has expended approximately $1.6
million, net of issuances, for the repurchase of stock. In addition, the
Company has issued approximately 312,000 shares of treasury stock to fund its
$6.5 million obligation to the 401(k) Retirement Plan.
The Company collects from its clients and remits to the U.S. Postal Service
a significant amount of postage. Substantially all contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect on
cash flow. As of March 31, 1998, accounts receivable were $95.0 million,
including $27.6 million in amounts due from clients for postage.
The Company continues to make significant investments in capital equipment,
facilities, and research and development as well as to expand into new
domestic and international markets. The Company believes that net cash from
operations and the Company's borrowing availability will be sufficient to
support operations through the next twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in
the global communications market as well as other high-volume service
industries, the Company's continuing ability to develop products that are
responsive to the evolving needs of its customers, increased competition,
changes in operating expenses, changes in government regulation of the
Company's customers and general economic factors in the U.S. as well as the
international marketplace.
Changing Communications Market and Development of Software and Services
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend,
in part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and
respond promptly to new client requirements and evolving industry standards.
The Company has expended considerable funds to develop products to serve the
changing communications market. If the communications market grows or
converges more slowly than anticipated or the Company's products and services
fail to achieve market acceptance, there could be a material adverse effect on
the financial condition and results of operations of the Company.
The Company's development projects are subject to all of the risks
associated with the development of new software and other products based on
innovative technologies. The failure of such development projects could have a
material adverse effect on the financial condition and results of operations
of the Company.
Dependence on the Cable Television Market
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. For the first
quarter of 1998 and 1997, more than 60% of the Company's revenue was derived
from sales to cable
I-14
<PAGE>
television service providers. Although the cable television industry outside
of North America is generally expanding, the number of providers of cable
television service in the U.S. has been declining, due to industry
consolidation, resulting in a reduction of the number of potential cable
television clients in the U.S. As the number of companies serving the
available subscriber base decreases, the loss of a single client could have a
greater adverse impact on the Company than in the past. Even if the number of
clients remains the same, a decrease in the number of subscribers served by
the Company's cable television clients would result in lower revenue for the
Company. Furthermore, a decrease in the number of cable subscribers or any
adverse development in the cable television market could have a material
adverse effect on the financial condition and results of operations of the
Company.
Concentration of Client Base
Aggregate revenue from the Company's ten largest clients accounted for
approximately 69% of total revenue for the three months ended March 31, 1998.
Loss of all or a significant part of the business of any of these clients or a
decrease in their respective customer bases would have a material adverse
effect on the financial condition and results of operations of the Company.
Three of the Company's clients, including TCI, represented approximately 38%
and 42% of total revenue in the first quarter of 1998 and 1997, respectively.
Variability of Quarterly Operating Results
The Company's quarterly and annual operating results may fluctuate from
quarter to quarter and year to year depending on various factors, including
the impact of significant start-up costs associated with initiating the
delivery of contracted services to new clients, the hiring of additional
staff, new product development and other expenses, introduction of new
products by competitors, pricing pressures, the evolving and unpredictable
nature of the markets in which the Company's products and services are sold
and general economic conditions.
Year 2000 Compliance
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted,
or that a failure to convert by another company will not have a material
adverse effect on the Company. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Year 2000 Compliance."
New Products, Rapid Technological Changes and Competition
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company believes its most significant competitors for customer management
software and services are independent providers of such software and services
and in-house systems.
A client that accounted for approximately 9% of total revenue in the first
quarter of 1998 orally advised the Company more than two years ago that it may
move to an alternate solution for its customer management software
requirements. Through the first quarter of 1998, no transfers of this
customer's business to an alternate solution have been made. The Company
believes its relations with this customer, as well as with its other
customers, are good.
In addition, competitive factors could influence or alter the Company's
overall revenue mix between customer management software, services, including
bill processing services, and equipment sales and leasing. Any of these events
could have a material adverse effect on the financial condition and results of
operations, including gross profit margins, of the Company.
I-15
<PAGE>
Electronic Bill Presentment
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based
statements and related materials. A number of companies, many with resources
greater than the Company, are developing and introducing electronic bill
presentment services that could reduce, if not eliminate, the need for paper
statements.
The Company has introduced products and has formed alliances with other
companies for the introduction, marketing and deployment of electronic bill
presentment and other electronic services. The maintenance of the Company's
paper statement expertise, successful development and marketing of electronic
services and rate of customer acceptance of such services are all subject to
the technological, competitive and market condition risks discussed in various
sections of "Certain Factors That May Affect Future Results."
Client Failure to Renew or Utilize Contracts
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
does not have the unilateral option to extend the terms of such contracts upon
their expiration. In addition, certain of the Company's contracts do not
require clients to make any minimum purchase. Others require minimum purchases
that are substantially below the current level of business under such
contracts, and all such contracts are cancelable by clients under certain
conditions. The failure of clients to renew contracts, a reduction in usage by
clients under any contracts or the cancellation of contracts could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations--Revenue."
International Business Activities
The Company's strategy to diversify its customer base includes the selling
of its products in a variety of international markets. To date, the Company's
primary customer management software has been installed in more than 20
countries. Generally, the Company operates in U.S. dollars, which reduces but
does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, less than 10% of the Company's customer management software and
services revenue comes from international sources, and the Company is
expanding its international presence, primarily through third party marketing
and distribution alliances. The Company's current and proposed international
business activities are subject to certain inherent risks, including, but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national
priorities of any given country and cultural differences. There can be no
assurance that such risks will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's
business, operating results and financial condition.
Dependence on Proprietary Technology
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures
to protect its proprietary technology. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. Although the
Company believes that its products and services do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or the
Company's clients.
The Company has been advised by a cable customer that a third party has
orally asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company. To
the best of the Company's knowledge, no legal proceedings with regard to this
matter have been instituted against the customer or the Company as of the date
of this Report. The Company believes that it has a substantial defense against
the third party's patent infringement claims, and the Company does not believe
that efforts by the third party to enforce the patents against the Company or
its clients are likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows. There can be no
assurance, however, that such claims, if brought, would not have a material
adverse effect on the Company.
I-16
<PAGE>
Management of Growth and Attraction and Retention of Key Personnel
Management of the Company's growth may place a considerable strain on the
Company's management, operations and systems. The Company's ability to execute
its business strategy will depend in part upon its ability to manage the
demands of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel.
The Company believes that its future success also depends on its ability to
attract and retain skilled technical, managerial and marketing personnel,
including, in particular, additional personnel in the areas of research and
development and technical support. Competition for qualified personnel is
intense. The Company has from time to time experienced difficulties in
recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
Government Regulation
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the world-wide communications industry. In addition,
the Company's clients are subject to certain regulations governing the privacy
and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect
on the financial condition and results of operations of the Company.
Volatility of Stock Price
Although the Company believes that it has the product offerings and
resources needed for continuing success, future revenue and margin trends
cannot be reliably predicted and may cause the Company to adjust its
operations. The Company's stock price, like that of other technology
companies, is subject to significant volatility. The announcement of new
products, services or technologies by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community and speculation in
the press or investment community are among the factors affecting the
Company's stock price. In addition, the stock price may be affected by general
market conditions and domestic and international macroeconomic factors
unrelated to the Company's performance. Because of the foregoing reasons,
recent trends should not be considered reliable indicators of future stock
prices or financial results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has legal proceedings incidental to its normal business
activities. In the opinion of the Company, the outcome of the proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES.
None.
I-17
<PAGE>
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The election of directors and ratification of independent accountants have
been submitted to a vote of security holders and are incorporated herein by
reference to the Registrant's Definitive Proxy Statement and Notice of Annual
Meeting of Stockholders dated April 17, 1998, for the annual meeting of
stockholders to be held May 20, 1998.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
I-18
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
USCS International, Inc.
(Registrant)
/s/ Douglas L. Shurtleff
By: _________________________________
Douglas L. Shurtleff
Senior Vice-President of Finance
and
Chief Financial Officer
(Principal Financial Officer)
Dated: May 8, 1998
I-19
<PAGE>
APPENDIX J
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from to
COMMISSION FILE NUMBER 0-28268
USCS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1727009
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
2969 PROSPECT PARK DRIVE,
RANCHO CORDOVA, CALIFORNIA 95670-6148
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (916) 636-4500
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JULY 31, 1998
----- ----------------------------
<S> <C>
Common Stock, $.05 par value 23,286,188 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements........................................ 3
Consolidated Condensed Balance Sheets June 30, 1998 (Unaudited) and
December 31, 1997.................................................. 4
Consolidated Condensed Statements of Operations (Unaudited) Three
months and six months ended June 30, 1998 and 1997................. 5
Consolidated Condensed Statements of Comprehensive Income
(Unaudited) Three months and six months ended June 30, 1998 and
1997............................................................... 6
Consolidated Condensed Statements of Cash Flows (Unaudited) Six
months ended June 30, 1998 and 1997................................ 7
Notes to Consolidated Condensed Financial Statements................ 8
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors That May Affect Future
Results............................................................ 9-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 19
Part II. Other Information
Item 1. Legal Proceedings........................................... 19
Item 2. Changes in Securities....................................... 19
Item 3. Defaults Upon Senior Securities............................. 19
Item 4. Submission of Matters to a Vote of Security Holders......... 19-20
Item 5. Other Information........................................... 20
Item 6. Exhibits and Reports on Form 8-K............................ 20
Signature........................................................... 21
</TABLE>
J-2
<PAGE>
USCS INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated condensed financial statements, except for the
balance sheet as of December 31, 1997, have been prepared by USCS
International, Inc. (the "Company") without audit by independent public
accountants, but in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results for each period shown. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report to Stockholders and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
the quarter and six months ended June 30, 1998 are not necessarily indicative
of the results to be expected for the entire year ending December 31, 1998.
J-3
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash................................................ $ 13,165 $ 2,787
Accounts receivable, net............................ 70,602 71,970
Postage receivable.................................. 24,470 25,684
Current portion of net investment in leases......... 4,930 5,892
Paper products and other inventory.................. 4,734 4,573
Other............................................... 8,821 9,853
-------- --------
Total current assets.............................. 126,722 120,759
Property and equipment, net........................... 100,394 101,631
Net investment in leases, net of current portion...... 5,413 4,686
Other................................................. 17,665 11,543
-------- --------
Total assets...................................... $250,194 $238,619
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses............... $ 55,601 $ 62,656
Current portion of long-term debt................... 5,622 3,865
Deferred revenue.................................... 6,101 4,529
-------- --------
Total current liabilities......................... 67,324 71,050
Long-term debt, net of current portion................ 3,454 5,453
Customer deposits..................................... 18,592 18,170
Other liabilities..................................... 12,435 12,585
-------- --------
Total liabilities................................. 101,805 107,258
-------- --------
Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares
authorized; no shares issued and outstanding....... -- --
Common Stock, $.05 par value, 40,000,000 shares
authorized; 23,427,582 shares issued and 23,330,099
shares outstanding at June 30, 1998 (unaudited) and
23,427,582 shares issued and 22,947,233 shares
outstanding at December 31, 1997................... 1,171 1,171
Additional paid-in capital.......................... 53,329 56,504
Retained earnings................................... 95,957 82,897
Treasury stock...................................... (1,895) (9,047)
Foreign currency translation adjustment............. (173) (164)
-------- --------
Total stockholders' equity........................ 148,389 131,361
-------- --------
Total liabilities and stockholders' equity........ $250,194 $238,619
======== ========
</TABLE>
J-4
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
--------------- -----------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management..................... $41,890 $37,655 $ 81,569 $ 75,434
Bill processing......................... 36,360 29,521 68,673 57,919
------- ------- -------- --------
Total................................. 78,250 67,176 150,242 133,353
Equipment sales and services.............. 7,284 5,522 13,820 10,315
------- ------- -------- --------
Total revenue......................... 85,534 72,698 164,062 143,668
------- ------- -------- --------
Cost of revenue:
Software and services:
Customer management..................... 19,943 17,383 38,580 35,911
Bill processing......................... 25,805 21,064 49,464 41,924
------- ------- -------- --------
Total................................. 45,748 38,447 88,044 77,835
Equipment sales and services.............. 4,893 2,728 9,174 5,526
------- ------- -------- --------
Total cost of revenue................. 50,641 41,175 97,218 83,361
------- ------- -------- --------
Gross profit................................ 34,893 31,523 66,844 60,307
------- ------- -------- --------
Operating expenses:
Research and development.................. 8,532 7,860 16,657 14,731
Selling, general and administrative....... 15,092 14,197 28,488 27,462
------- ------- -------- --------
Total operating expenses.............. 23,624 22,057 45,145 42,193
------- ------- -------- --------
Operating income............................ 11,269 9,466 21,699 18,114
Interest expense, net....................... 136 186 289 355
------- ------- -------- --------
Income before income taxes.................. 11,133 9,280 21,410 17,759
Income tax provision........................ 4,342 3,678 8,350 7,104
------- ------- -------- --------
Net income.................................. $ 6,791 $ 5,602 $ 13,060 $ 10,655
======= ======= ======== ========
Earnings per share:
Basic..................................... $ 0.29 $ 0.24 $ 0.56 $ 0.46
Diluted................................... $ 0.28 $ 0.23 $ 0.55 $ 0.44
Weighted average common shares and
equivalents:
Basic..................................... 23,356 23,152 23,195 23,124
Diluted................................... 24,099 24,285 23,930 24,209
</TABLE>
J-5
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
-------------- ----------------
1998 1997 1998 1997
------ ------ ------- -------
<S> <C> <C> <C> <C>
Net income..................................... $6,791 $5,602 $13,060 $10,655
Other comprehensive income:
Foreign currency translation adjustment...... (21) 48 (9) (19)
------ ------ ------- -------
Comprehensive income......................... $6,770 $5,650 $13,051 $10,636
====== ====== ======= =======
</TABLE>
J-6
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
----------------
1998 1997
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income.................................................. $13,060 $10,655
Depreciation and amortization............................... 13,496 11,558
Net change in operating assets and liabilities.............. 1,668 (5,239)
------- -------
Net cash provided by operating activities..................... 28,224 16,974
------- -------
Cash flows from investing activities:
Capital expenditures, net................................... (12,098) (11,990)
Other....................................................... (2,950) (3,020)
------- -------
Net cash used in investing activities......................... (15,048) (15,010)
------- -------
Cash flows from financing activities:
Net paydown under revolving credit agreement................ (4,000) --
Payments on long-term debt.................................. (3,669) (3,394)
Proceeds from issuance of long-term debt.................... 7,427 --
Proceeds from issuance of common stock...................... -- 1,619
Purchases of treasury stock net of issuances................ (2,556) --
------- -------
Net cash used in financing activities......................... (2,798) (1,775)
------- -------
Net increase in cash.......................................... 10,378 189
Cash at January 1............................................. 2,787 8,452
------- -------
Cash at June 30............................................... $13,165 $ 8,641
======= =======
Supplemental Schedule of Noncash Financing Activities:
Contribution of Company shares to 401(k).................... $ 6,533 $ --
======= =======
</TABLE>
J-7
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. LONG-TERM DEBT
The Company has a five-year unsecured revolving credit line, expiring
September 2001, with two banks in the amount of $50 million. Borrowings under
the agreement bear interest at the Company's choice of LIBOR (plus a margin
ranging from .55% to 1.25%), the bank's base rate or a quoted rate. Under the
borrowing agreement, the Company is required to maintain certain financial
ratios and meet a net worth test.
2. TREASURY STOCK
The Company, from time to time, at the authorization of the Board of
Directors, repurchases shares of the Company's common stock to be held as
treasury stock with reservation of such treasury stock for future issuance
under various employee stock purchase and incentive stock option plans and for
distributions to the Company's 401(k) Retirement Plan.
In March 1998, the Company contributed approximately 312,000 shares of
treasury stock to the Company's 401(k) Retirement Plan. The fair market value
on the date of contribution was $6,533,000.
3. EARNINGS PER SHARE
The Company has presented earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All
previously reported amounts have been restated to conform to SFAS 128. Under
SFAS 128, basic earnings per share are computed using the weighted average
number of outstanding registered shares. Diluted earnings per share are
computed using weighted average registered shares and common stock
equivalents, including the net shares issuable upon exercise of stock options
when dilutive.
J-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS
OF OPERATIONS, AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve risks
and uncertainties. The statements that are not historical facts or statements
of current status are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties including, but not limited to, the risks and uncertainties set
forth under the caption "Certain Factors That May Affect Future Results." The
Company's future results may differ significantly from the results and
forward-looking statements discussed in this Report.
Founded in 1969, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers worldwide, as well as
bill processing services to cable television, telecommunications, financial
services, utilities and other service industries. Software and bill processing
services are generally offered to North American cable television providers
under bundled service arrangements. Outside of North America, software is
generally sold exclusive of the bill processing. Most of the Company's revenue
is based on the number of subscribers or end-users of the Company's clients,
the number of billing statements mailed and/or the number of images produced
under contracts with terms ranging from three to seven years. Clients are
billed monthly, generally based on the number of end-users they serve. As a
result, a significant portion of the Company's revenue is recurring and
increases as the service provider's customer base grows. In addition, the
Company sells computer hardware and provides associated maintenance. Leasing
is provided as an alternative to equipment purchases for clients.
The Company sells its software and services to cable television and multi-
service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software primarily through strategic alliances with companies specializing in
system integration or computer hardware manufacturing that are capable of
providing local sales and support. Building and maintaining relationships with
its clients is an important part of the Company's strategy because selling
cycles can extend a year or longer. The Company has committed increased
resources to the diversification of its customer base, focusing primarily on
international, multi-service, telecommunications and other high-volume markets
because it believes these represent opportunities to grow at rates greater
than, and decrease its dependence upon, the U.S. cable television marketplace.
J-9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated condensed statements of operations and the percentage of revenue
represented by each line item (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management.... $41,890 49.0% $37,655 51.8% $ 81,569 49.7% $ 75,434 52.5%
Bill processing........ 36,360 42.5 29,521 40.6 68,673 41.9 57,919 40.3
------- ----- ------- ----- -------- ----- -------- -----
Total................ 78,250 91.5 67,176 92.4 150,242 91.6 133,353 92.8
Equipment sales and
services.............. 7,284 8.5 5,522 7.6 13,820 8.4 10,315 7.2
------- ----- ------- ----- -------- ----- -------- -----
Total revenue........ 85,534 100.0 72,698 100.0 164,062 100.0 143,668 100.0
------- ----- ------- ----- -------- ----- -------- -----
Cost of revenue:
Software and services:
Customer management.... 19,943 23.3 17,383 23.9 38,580 23.5 35,911 25.0
Bill processing........ 25,805 30.2 21,064 29.0 49,464 30.2 41,924 29.2
------- ----- ------- ----- -------- ----- -------- -----
Total................ 45,748 53.5 38,447 52.9 88,044 53.7 77,835 54.2
Equipment sales and
services.............. 4,893 5.7 2,728 3.7 9,174 5.6 5,526 3.8
------- ----- ------- ----- -------- ----- -------- -----
Total cost of
revenue............. 50,641 59.2 41,175 56.6 97,218 59.3 83,361 58.0
------- ----- ------- ----- -------- ----- -------- -----
Gross profit............ 34,893 40.8 31,523 43.4 66,844 40.7 60,307 42.0
------- ----- ------- ----- -------- ----- -------- -----
Operating expenses:
Research and
development........... 8,532 10.0 7,860 10.8 16,657 10.1 14,731 10.3
Selling, general and
administrative........ 15,092 17.6 14,197 19.5 28,488 17.4 27,462 19.1
------- ----- ------- ----- -------- ----- -------- -----
Total operating
expenses............ 23,624 27.6 22,057 30.3 45,145 27.5 42,193 29.4
------- ----- ------- ----- -------- ----- -------- -----
Operating income........ 11,269 13.2 9,466 13.1 21,699 13.2 18,114 12.6
Interest expense........ 136 .2 186 .3 289 .2 355 .2
------- ----- ------- ----- -------- ----- -------- -----
Income before income
taxes.................. 11,133 13.0 9,280 12.8 21,410 13.0 17,759 12.4
Income tax provision.... 4,342 5.1 3,678 5.1 8,350 5.0 7,104 5.0
------- ----- ------- ----- -------- ----- -------- -----
Net income.............. $ 6,791 7.9% $ 5,602 7.7% $ 13,060 8.0% $ 10,655 7.4%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
J-10
<PAGE>
The following table sets forth revenue and percentage of revenue by line
item exclusive of a discontinued customer, revenue of a discontinued customer
and total revenue (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management.. $32,372 37.8% $26,911 37.0% $ 61,816 37.7% $ 53,700 37.4%
Bill processing...... 34,906 40.8 28,957 39.9 66,472 40.5 57,101 39.7
Equipment sales and
services.............. 5,880 6.9 3,223 4.4 10,804 6.6 5,993 4.2
------- ----- ------- ----- -------- ----- -------- -----
Total.............. 73,158 85.5 59,091 81.3 139,092 84.8 116,794 81.3
Discontinued customer.. 12,376 14.5 13,607 18.7 24,970 15.2 26,874 18.7
------- ----- ------- ----- -------- ----- -------- -----
Total.............. $85,534 100.0% $72,698 100.0% $164,062 100.0% $143,668 100.0%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
J-11
<PAGE>
Revenue
Revenue is derived primarily from providing customer management software and
services to cable television and multi-service providers in more than 20
countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the Company sells computer hardware
and associated maintenance and leasing services to cable television service
providers in connection with licensing the Company's software and provides
design, printing and graphics services in connection with its bill processing
services. Most of the software and services revenue is based on the number of
end-users of the services of the Company's clients, the number of bills mailed
and/or the number of images produced under long-term contracts, which usually
have terms ranging from three to seven years. The Company generally recognizes
software and bill processing services revenue (collectively referred to as
"software and services revenue") as services are performed. Certain of the
Company's software licenses provide for fixed or minimum fees. Fixed fees and
the present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased by 18% to $85.5 million in the second quarter of
1998 from $72.7 million in the comparable quarter in 1997. The increase in the
1998 second quarter over the same period in 1997 was attributable to growth in
revenue from customer management software and services of $4.2 million or 11%,
growth in bill processing of $6.8 million or 23%, and an increase in equipment
sales and services of $1.8 million or 32%.
Total revenue increased by 14% to $164.1 million for the six months ended
June 30, 1998 from $143.7 million in the comparable period in 1997. The
increase in the first six months of 1998 over the same period in 1997 was
attributable to growth in revenue from customer management software and
services of $6.1 million or 8%, growth in bill processing of $10.8 million or
19%, and an increase in equipment sales and services of $3.5 million or 34%.
Telecommunications, Inc. ("TCI") represented approximately 15% of the
Company's revenue in the second quarter and six months ended June 30, 1998 and
19% in the same periods in 1997. Several years ago, TCI announced and began
development of an in-house system to replace the Company's customer management
software. On August 11, 1997, TCI informed the Company that it had agreed to
sell its partially developed in-house system to a competitor and was going to
enter into an exclusive long-term contract for customer management software
with that competitor. Under the contract between TCI and the Company, which
expires on December 31, 1999, TCI may remove subscribers after giving ninety
days' notice without significant economic penalty. Although TCI has not
provided the Company with a definitive schedule for conversion of the TCI
subscribers to the competitor's software, the conversions have begun and it is
believed that TCI and the competitor wish to complete the transfer by the end
of 1998. Additionally, the Company believes that TCI's contract with the
competitor provides financial incentives to TCI for converting subscribers of
certain TCI affiliates, some of whom are currently clients of the Company, to
the competitor's software. Revenue from TCI has declined in absolute dollars
from $13.6 million in the second quarter 1997 to $12.4 million in the second
quarter 1998 or 9% and from $26.9 million for the six months ended June 30,
1997 to $25.0 million in the same period in 1998. The decrease was primarily
from a reduction in the number of subscribers serviced by TCI and services
purchased by TCI. The number of total TCI subscribers on the Company's
software declined by approximately 3.7 million or 34% as of June 30, 1998,
compared to December 31, 1997. The actual rate of decline in the number of TCI
subscribers served and revenue derived from TCI cannot be definitively
estimated on a quarter by quarter basis. However, the Company believes the
decline in revenue from TCI will increase throughout the year. The Company is
mitigating the impact of this by aggressively pursuing other domestic and
international opportunities and allocating the Company's resources to other
existing or new customers. If these efforts are not fully successful in
mitigating the loss of TCI business, the Company believes that it has
sufficient financial resources and borrowing ability to meet its obligations
and fulfill its customer commitments during and after the conversion period.
To the extent the Company is not successful in generating additional revenue
to offset the expected decline in revenue from TCI, such decline in revenue
could have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
J-12
<PAGE>
Customer management software and services revenue, exclusive of revenue from
TCI, increased by 20% to $32.4 million in the second quarter of 1998 from
$26.9 million in the comparable 1997 quarter. Bill processing revenue as a
stand-alone service increased by 21% to $34.9 million in the second quarter of
1998 from $29.0 million in the comparable quarter of the prior year. Equipment
sales and services revenue increased to $5.9 million in the second quarter of
1998 from $3.2 in the second quarter of 1997.
Customer management software and services revenue, exclusive of revenue from
TCI, increased by 15% to $61.8 million for the six months ended June 30, 1998
from $53.7 million for the same period in 1997. Bill processing revenue
increased by 16% to $66.5 million for the six months ended June 30, 1998 from
$57.1 million for the same period in 1997. Equipment sales and services
revenue increased to $10.8 million for the six months ended June 30, 1998 from
$6.0 million for the same period in 1997.
Growth in customer management software and services revenue for the second
quarter and six months ending June 30, 1998 compared to the same periods in
1997, exclusive of revenue from TCI, came primarily from increases in the
number of subscribers of existing and new clients in the U.S. and
international markets, increases in prices allowed by existing contracts, and
migration of clients to higher-priced services. Growth in bill processing
revenue was derived from an increase in the volume of statements and images
produced because of the internal growth of existing customers and the
acquisition of new customers, primarily in telecommunications and other high-
volume markets. The increase in equipment sales and services revenue was
primarily the result of large equipment sales in the first and second quarters
of 1998 and increased leasing revenues related to new leasing transactions
which occurred in the latter part of 1997. Equipment sales volumes experienced
in prior quarters should not be considered indicative of future equipment
sales volumes.
Three significant clients, including TCI, accounted for $31.4 million and
$30.0 million or 37% and 41% of total revenue in the second quarter of 1998
and 1997, respectively, and $61.5 million and $59.7 million or 37% and 42% of
total revenue for the six months ended June 30, 1998 and 1997, respectively.
See "Certain Factors That May Affect Future Results" regarding these clients
and other factors that may impact future revenue.
Cost of Revenue and Gross Profit
Cost of software and services revenue consists primarily of direct labor,
equipment-related expenses, cost of materials such as paper, and facilities
expense. Cost of equipment sales and services revenue consists primarily of
computer hardware purchased for resale or lease and third-party maintenance.
The Company's gross profit margin of approximately 41% in the second quarter
of 1998 was lower than the second quarter 1997 gross margin of approximately
43%. The gross profit margin for the six months ending June 30, 1998 was 41%
compared to 42% for the same period in 1997. The software and services gross
profit margin slightly declined to approximately 42% in the second quarter of
1998 from approximately 43% for the same period in 1997. The software and
services gross profit margin for the six months ending June 30, 1998 was
approximately 41% compared to 42% for the same period in 1997. The customer
management software and services gross profit margin was 52% in the second
quarter of 1998 compared to 54% in the second quarter of 1997. The gross
profit margin for customer management software and services for the six months
ending June 30, 1998 was 53% compared to 52% for the same period in 1997. The
bill processing services gross profit margin of 29% in the second quarter of
1998 equaled the 1997 second quarter gross margin. The bill processing gross
profit margin of 28% for the first six months ending June 30, 1998 equaled the
gross profit margin for the same period in 1997. The gross profit margin on
equipment-related revenue decreased to 33% and 34% in the second quarter and
six months ending June 30, 1998 from 51% and 46% for the same periods in 1997,
respectively.
The gross profit margin decrease in customer management software and
services in the second quarter of 1998, as well as the relatively static gross
profit margin for the six months ended June 30, 1998, compared to the same
periods in 1997, was attributed to temporary inefficiencies associated with
transitioning new customers on to the Company's products and services while
transitioning TCI off. The decline in the software and services gross profit
margin, consisting of customer management and bill processing, was due to the
inefficiency cited above as well as a shift in revenue mix consisting of an
increased percentage of the gross profit contribution flowing from the lower
margin bill processing business. Gross margins on equipment sales and services
typically
J-13
<PAGE>
vary based on the mix of equipment sales and services and underlying demand.
The decline in the second quarter and six months ended June 30, 1998 equipment
sales and services gross profit margin, in comparison to the same period in
the prior year, was attributable to discounting on equipment sales and
increased depreciation expense on leased equipment.
Research and Development
Research and development costs relate primarily to ongoing product
development and consist of personnel costs, consulting, testing, supplies,
facilities and depreciation expenses. Once the product under development
reaches technological feasibility, the development expenditures are
capitalized and amortized.
Research and development expense was $8.5 million or 10% of revenue in the
second quarter of 1998 compared to $7.9 million, or 11% of revenue, for the
same period in 1997. For the six months ended June 30, 1998, research and
development expense was $16.7 million or 10% of revenue compared to $14.7
million, also approximately 10% of revenue, for the same period in 1997. The
increased expenditures are attributable to the Company's commitment to the
development of new products and enhancements to existing products.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, in less
than two years, computer systems and and/or software used by many companies
may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the
potential effects associated with such compliance.
The Company has identified, assessed and remedied some known "Year 2000"
date issues and is continuing to identify, assess and evaluate the full scope
of this issue as it relates to its software products, infrastructure-related
hardware and software, and third-party products. While identification and
assessment are an ongoing process, the Company believes, based on current
known information, that it can effectively mitigate any "Year 2000" date
issues, dependent upon cooperation from third parties. However, such
modification of software products, infrastructure-related hardware and
software and third-party products is subject to all the risks of development.
If the Company's efforts and/or third parties are not successful in the timely
mitigation of "Year 2000" issues, the impact on the Company will be
significant.
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted,
or that a failure to convert by another company will not have a material
adverse effect on the Company.
Selling, General and Administrative
Selling expenses consist of compensation for sales and marketing personnel
including commissions and related bonuses, travel, trade shows and promotional
expenses. General and administrative expenses consist of compensation for
administration, finance and general management personnel, as well as legal and
accounting fees.
Total selling, general and administrative expenses increased by
approximately 6% and 4% in the second quarter and six months ended June 30,
1998 in comparison to the same periods in 1997. Selling and marketing
expenditures increased by 8% in the second quarter of 1998 compared to the
second quarter of 1997. As a percentage of revenue, selling and marketing
expenditures decreased by less than 1% in the second quarter and first six
months of 1998 compared to the same periods in 1997. General and
administrative expenses for the second quarter and six months ended June 30,
1998 increased approximately 5% and 2% compared to the same periods in 1997.
As a percentage of revenue, general and administrative expense in the second
quarter and first six months of 1998 declined by approximately 1% compared to
the same periods in 1997. The decline in selling, general and administrative
expense as a percentage of revenue in the second quarter and six months ended
June 30, 1998 when compared to the same periods in 1997 was due to increased
revenue coupled with cost containment efforts.
J-14
<PAGE>
Interest Expense
Interest expense consists of interest on borrowings under revolving credit
agreements, revenue bonds pertaining to certain of the Company's facilities
and notes and credit agreements related to the Company's leasing subsidiary.
Interest expense for the three and six months ended June 30, 1998 was
unchanged in comparison to the same periods in 1997.
Income Taxes
The Company's provision for income taxes represents estimated federal, state
and foreign income taxes. The income tax rate for the three and six months
ended June 30, 1998 was 39%, approximately one percentage point lower than the
1997 comparable periods. The rate decline is attributable to the mix of
foreign and domestic income and the application of tax reduction strategies.
Net Income
Net income increased by $1.2 million or 21% and by $2.4 million or 23% in
the second quarter and six months ended June 30, 1998 compared to the same
periods in 1997, respectively. Diluted earnings per share for the quarter were
$0.28 per share in 1998 compared to $0.23 per share in 1997, and were $0.55
for the first six months of 1998 compared to $0.44 in 1997. This represents a
22% increase for the quarter and a 25% year-to-date increase over the same
periods in 1997. Diluted shares used in the calculation decreased by
approximately 1% in 1998 compared to the same periods in 1997. The increase in
net income for the second quarter and first six months of 1998 compared to
1997 is attributable to the factors cited above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition and liquidity remained strong through the
second quarter of 1998. Total long-term debt, including the current portion,
was $9.1 million as of June 30, 1998 compared to $9.3 million at December 31,
1997. Of the debt outstanding at June 30, 1998, $8.6 million pertains to the
Company's leasing subsidiary and is collateralized, without recourse, by rents
receivable. At June 30, 1998, the Company had an available $50 million line of
credit. There were no borrowings outstanding at June 30, 1998. Total capital
expenditures through the second quarter of 1998 were $12.1 million compared to
$12.0 million in the same period in 1997. The Company, in 1998, has expended
approximately $2.6 million, net of issuances, for the repurchase of stock. In
addition, the Company has issued approximately 312,000 shares of treasury
stock to fund its $6.5 million obligation to the 401(k) Retirement Plan.
The Company collects from its clients and remits to the U.S. Postal Service
a significant amount of postage. Substantially all contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect on
cash flow. As of June 30, 1998, accounts receivable were $95.1 million,
including $24.5 million in amounts due from clients for postage.
The Company continues to make significant investments in capital equipment,
facilities, and research and development as well as to expand into new
domestic and international markets. The Company believes that net cash from
operations and the Company's borrowing availability will be sufficient to
support operations through the next twelve months.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in
the global communications market as well as other high-volume service
industries, the Company's continuing ability to develop products that are
responsive to the evolving needs of its customers, increased competition,
changes in operating expenses, changes in government regulation of the
Company's customers and general economic factors in the U.S. as well as the
international marketplace.
J-15
<PAGE>
Changing Communications Market and Development of Software and Services
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend,
in part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and
respond promptly to new client requirements and evolving industry standards.
The Company has expended considerable funds to develop products to serve the
changing communications market. If the communications market grows or
converges more slowly than anticipated or the Company's products and services
fail to achieve market acceptance, there could be a material adverse effect on
the financial condition and results of operations of the Company.
The Company's development projects are subject to all of the risks
associated with the development of new software and other products based on
innovative technologies. The failure of such development projects could have a
material adverse effect on the financial condition and results of operations
of the Company.
Dependence on the Cable Television Market
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. For the three and
six months ended June 30, 1998, more than 55% of the Company's revenue was
derived from sales to cable television service providers. Although the cable
television industry outside of North America is generally expanding, the
number of providers of cable television service in the U.S. has been
declining, due to industry consolidation, resulting in a reduction of the
number of potential cable television clients in the U.S. As the number of
companies serving the available subscriber base decreases, the loss of a
single client could have a greater adverse impact on the Company than in the
past. Even if the number of clients remains the same, a decrease in the number
of subscribers served by the Company's cable television clients would result
in lower revenue for the Company. Furthermore, a decrease in the number of
cable subscribers or any adverse development in the cable television market
could have a material adverse effect on the financial condition and results of
operations of the Company.
Concentration of Client Base
Aggregate revenue from the Company's ten largest clients accounted for
approximately 65% of total revenue for the three and six months ended June 30,
1998. Loss of all or a significant part of the business of any of these
clients or a decrease in their respective customer bases would have a material
adverse effect on the financial condition and results of operations of the
Company. Three of the Company's clients, including TCI, represented
approximately 37% and 41% of total revenue in the second quarter of 1998 and
1997 and 37% and 42% of total revenue for the six months ended June 30, 1998
and 1997, respectively.
Variability of Quarterly Operating Results
The Company's quarterly and annual operating results may fluctuate from
quarter to quarter and year to year depending on various factors, including
the impact of significant start-up costs associated with initiating the
delivery of contracted services to new clients, the hiring of additional
staff, new product development and other expenses, introduction of new
products by competitors, pricing pressures, the effect of acquisitions, the
evolving and unpredictable nature of the markets in which the Company's
products and services are sold and general economic conditions.
Year 2000 Compliance
The cost of remediating the Company's "Year 2000" issues has not been
determined; however, management believes that the cost of this effort will not
have a material adverse effect on the Company's results of operations. There
can be no assurance that the software or systems of other companies, on which
certain of the Company's software and systems rely, will be timely converted,
or that a failure to convert by another company will not have a material
adverse effect on the Company. See "Management's Discussion And Analysis Of
Financial Condition And Results Of Operations--Year 2000 Compliance."
J-16
<PAGE>
New Products, Rapid Technological Changes and Competition
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company believes its most significant competitors for customer management
software and services are independent providers of such software and services
and in-house systems.
In addition, competitive factors could influence or alter the Company's
overall revenue mix between customer management software, services, including
bill processing services, and equipment sales and leasing. Any of these events
could have a material adverse effect on the financial condition and results of
operations, including gross profit margins, of the Company.
Electronic Bill Presentment
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based
statements and related materials. A number of companies, many with resources
greater than the Company, are developing and introducing electronic bill
presentment services that could reduce, if not eliminate, the need for paper
statements.
The Company has introduced products, begun customer applications and pilots,
and has formed alliances with other companies for the introduction, marketing
and deployment of electronic bill presentment and other electronic services.
The maintenance of the Company's paper statement expertise, successful
development and marketing of electronic services and rate of customer
acceptance of such services are all subject to the technological, competitive
and market condition risks discussed in various sections of "Certain Factors
That May Affect Future Results."
Client Failure to Renew or Utilize Contracts
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
does not have the unilateral option to extend the terms of such contracts upon
their expiration. In addition, certain of the Company's contracts do not
require clients to make any minimum purchase. Others require minimum purchases
that are substantially below the current level of business under such
contracts, and all such contracts are cancelable by clients under certain
conditions. The failure of clients to renew contracts, a reduction in usage by
clients under any contracts or the cancellation of contracts could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations--Revenue."
International Business Activities
The Company's strategy to diversify its customer base includes the selling
of its products in a variety of international markets. To date, the Company's
primary customer management software has been installed in more than 20
countries. Generally, the Company operates in U.S. dollars, which reduces but
does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, less than 10% of the Company's customer management software and
services revenue comes from international sources, and the Company is
expanding its international presence, primarily through third party marketing
and distribution alliances. The Company's current and proposed international
business activities are subject to certain inherent risks, including, but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national
priorities of any given country and cultural differences. There can be no
assurance that such risks will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's
business, operating results and financial condition.
J-17
<PAGE>
Dependence on Proprietary Technology
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures
to protect its proprietary technology. There can be no assurance that these
provisions will be adequate to protect its proprietary rights. Although the
Company believes that its products and services do not infringe upon the
proprietary rights of third parties, there can be no assurance that third
parties will not assert infringement claims against the Company or the
Company's clients.
The Company has been advised by a cable customer that a third party has
orally asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company. To
the best of the Company's knowledge, no legal proceedings with regard to this
matter have been instituted against the customer or the Company as of the date
of this Report. The Company believes that it has a substantial defense against
the third party's patent infringement claims, and the Company does not believe
that efforts by the third party to enforce the patents against the Company or
its clients are likely to have a material adverse effect on the Company's
financial position, results of operations or cash flows. There can be no
assurance, however, that such claims, if brought, would not have a material
adverse effect on the Company.
Management of Growth and Attraction and Retention of Key Personnel
Management of the Company's growth, which may occur both internally and
through acquisitions, may place a considerable strain on the Company's
management, operations and systems. The Company's ability to execute its
business strategy will depend in part upon its ability to manage the demands
of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel.
The Company believes that its future success also depends on its ability to
attract and retain skilled technical, managerial and marketing personnel,
including, in particular, additional personnel in the areas of research and
development and technical support. Competition for qualified personnel is
intense. The Company has from time to time experienced difficulties in
recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
Government Regulation
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the world-wide communications industry. In addition,
the Company's clients are subject to certain regulations governing the privacy
and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect
on the financial condition and results of operations of the Company.
Volatility of Stock Price
Although the Company believes that it has the product offerings and
resources needed for continuing success, future revenue and margin trends
cannot be reliably predicted and may cause the Company to adjust its
operations. The Company's stock price, like that of other technology
companies, is subject to significant volatility. The announcement of new
products, services or technologies by the Company or its competitors,
quarterly variations in the Company's results of operations, changes in
revenue or earnings estimates by the investment community and speculation in
the press or investment community are among the factors affecting the
Company's stock price. In addition, the stock price may be affected by general
market conditions and domestic and international macroeconomic factors
unrelated to the Company's performance. Because of the foregoing reasons,
recent trends should not be considered reliable indicators of future stock
prices or financial results.
J-18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has legal proceedings incidental to its normal business
activities. In the opinion of the Company, the outcome of the proceedings will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) The 1997 annual meeting (the "Annual Meeting") of stockholders of USCS
International, Inc. was held on May 20, 1998, and 19,367,217 (82.6%) shares
were present in person or by proxy.
(b) The following persons were elected as Class II directors at the Annual
Meeting:
Class II (term expiring in 2001)
----------------------
James L. Hesburgh
Thomas A. Page
Larry W. Wangberg
The following directors terms of office continued after the Annual Meeting.
Class I (term expiring in 2000)
----------------------
James C. Castle
John W. Clark
Charles D. Martin
Class III (term expiring in 1999)
----------------------
George L. Argyros, Sr.
Daniel R. Hesse
Michael F. McGrail
J-19
<PAGE>
(c) (i) Votes were cast or withheld in the election of Class II directors at
the Annual Meeting as follows:
<TABLE>
<CAPTION>
CLASS II DIRECTOR FOR WITHHELD AGAINST
----------------- ---------- -------- -------
<S> <C> <C> <C>
James L. Hesburgh............................. 19,079,263 287,954 0
Thomas A. Page................................ 19,100,224 266,993 0
Larry W. Wangberg............................. 18,386,958 980,259 0
</TABLE>
(ii) Votes were cast at the Annual Meeting with respect to ratification of
Price Waterhouse LLP as the Company's independent accountants for
1998:
For: 19,199,240
Against: 149,184
Abstain: 18,793
This matter received sufficient votes to pass.
(iii) During the meeting there were no broker non-votes.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit 10 Addendum to the Statement Production Services Agreement dated
as of August 20, 1993 between International Billing Services and
Ameritech Corporation.
Exhibit 10.1 Second Amendment to Amended, Consolidated and Restated
Credit Agreement dated as of September 30, 1996 among USCS
International, Inc. and NationsBank, N.A.
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
None
J-20
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
USCS International, Inc.
(Registrant)
Dated: August 7, 1998 /s/ Douglas L. Shurtleff
By: _________________________________
Douglas L. Shurtleff
Senior Vice-President of Finance
and
Chief Financial Officer
(Principal Financial Officer)
J-21
<PAGE>
APPENDIX K
333 West 11th Street
Kansas City, Missouri 64105
DST SYSTEMS, INC.
NOTICE AND PROXY STATEMENT
FOR
THE ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, MAY 12, 1998
YOUR VOTE IS IMPORTANT!
Please mark, date and sign the enclosed Proxy or Instruction Cardand promptly
return it in the enclosed envelope.
MAILING OF THIS NOTICE AND PROXY STATEMENT, AND THE ACCOMPANYING PROXY OR
INSTRUCTION CARD AND 1997 ANNUAL REPORT, COMMENCED ON OR ABOUT MARCH 31, 1998.
<PAGE>
DST SYSTEMS, INC.
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
PROXY STATEMENT
AND
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
MAY 12, 1998
You are hereby notified of and cordially invited to attend the Annual
Meeting of Stockholders of DST Systems, Inc., a Delaware corporation ("DST"),
to be held at the Muehlebach Tower, Truman-A Room, Kansas City Marriott
Downtown, 200 West 12th Street (12th Street and Wyandotte), Kansas City,
Missouri, at 10:30 a.m., Central Time, on Tuesday, May 12, 1998, to consider
and vote upon the following matters:
1. Election of two directors; and
2. Such other matters as may properly be brought before the Annual
Meeting or any adjournment thereof.
The Board of Directors has set the close of business on March 17, 1998 as
the record date for determining which stockholders are entitled to notice of
and to vote at this meeting or any adjournment thereof.
It is important that your shares be represented at the meeting. A Proxy Card
is enclosed for those of you who hold shares directly. If you are a
participant in The Employee Stock Ownership Plan and Trust Agreement of DST
Systems, Inc., an Instruction Card is enclosed to permit you to direct the
vote of shares allocated to you under that Plan. Please date the card, sign it
and promptly return it in the enclosed envelope, which requires no postage if
mailed in the United States. Alternatively, you may cast your votes
electronically as described on the enclosed card.
If you own shares registered in the name of a broker, you should receive a
card from that broker permitting you to direct the broker to vote those
shares.
Any stockholder or stockholder's representative who, because of a
disability, may need special assistance or accommodation to participate in the
Annual Meeting of Stockholders should contact DST's Corporate Secretary at the
above address, (816) 435-4636. To provide DST sufficient time to arrange for
reasonable assistance, please submit all such requests by May 1, 1998.
By Order of the Board of Directors,
/s/ Robert C. Canfield
Robert C. Canfield
Senior Vice President, General
Counsel
and Secretary
The date of this Notice is March 31, 1998.
<PAGE>
DST SYSTEMS, INC.
333 WEST 11TH STREET
KANSAS CITY, MISSOURI 64105
PROXY STATEMENT
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Voting..................................................................... 1
Principal Stockholders and Stockholdings of Management..................... 3
Proposal--Election of Two Directors........................................ 5
The Board of Directors..................................................... 6
Executive Compensation..................................................... 12
Other Matters.............................................................. 16
</TABLE>
<PAGE>
PROXY STATEMENT
This statement is being mailed on or about March 31, 1998, to all
stockholders of record at the close of business on March 17, 1998, the record
date ("Record Date") for the determination of stockholders entitled to vote at
the Annual Meeting of Stockholders of DST Systems, Inc. ("DST") to be held at
10:30 a.m. Central Time, on Tuesday, May 12, 1998, at the Muehlebach Tower,
Truman-A Room, Kansas City Marriott Downtown, 200 West 12th Street (12th
Street and Wyandotte), Kansas City, Missouri ("Annual Meeting"). This
statement is furnished in connection with the solicitation by the Board of
Directors of DST ("DST Board") of your proxy or instructions to vote on the
proposal to be considered at the Annual Meeting and is accompanied by both the
Annual Report to stockholders of DST for the year ended December 31, 1997,
containing certain financial information, and by a Proxy Card or an
Instruction Card.
VOTING
PROPOSAL. At the Annual Meeting, the DST Board intends to present the
election of two directors to the stockholders for their consideration and
vote. The DST Board knows of no other matters that will be presented or voted
on at the Annual Meeting. Stockholders do not have any dissenters' rights of
appraisal in connection with the election of two directors.
GENERAL VOTING RULES. Only the holders of record of DST's common stock, par
value $0.01 per share (the "DST Common Stock"), at the close of business on
the Record Date are entitled to notice of and to vote at the Annual Meeting.
The DST Common Stock is DST's only class of voting securities outstanding. On
the Record Date, DST had outstanding 48,936,953 shares of DST Common Stock.
The Amended and Restated By-laws of DST (the "By-laws") entitle each
stockholder to cast one vote for each share of DST Common Stock held by such
stockholder on the Record Date on all matters to be voted on at the Annual
Meeting other than the election of directors.
In order for any of the proposals to be approved at the Annual Meeting, a
quorum of DST stockholders must be present at the meeting, either in person or
through a proxy, regardless of whether such stockholders vote their shares.
The holders of a majority of the shares of DST Common Stock outstanding on the
Record Date constitute a quorum. With respect to any proposal other than the
election of directors, the DST stockholders present at the meeting must vote a
majority of their shares for the proposal.
Stockholders may vote cumulatively for directors. In other words, the By-
laws entitle each stockholder to cast a number of votes equal to the number of
shares of DST Common Stock held by such stockholder on the Record Date
multiplied by the number of directors to be elected, and the stockholder may
cast all such votes for a single nominee or distribute them between the
nominees as the stockholder chooses. The directors are elected by a plurality
of the shares voted by the stockholders. The plurality is determined by
reference to the number of votes for each director nominee, and where, as
here, there are two vacancies for director, the two nominees with the highest
number of affirmative votes are elected.
TABULATION OF VOTES. The DST Board has appointed three inspectors to certify
the votes. The percentage of shares that have been affirmatively voted for a
proposal other than the election of directors is determined by dividing the
affirmative votes by the total of the number of shares voted for the proposal,
the number of shares voted against the proposal, and the number of shares
abstained from voting on the proposal. A stockholder may abstain from voting
on any proposal other than the election of directors, and shares for which the
holders abstain from voting are not considered to be votes affirmatively cast.
In other words, abstaining on a proposal will have the effect of a vote
against a proposal. With regard to the election of directors, votes may be
cast in favor or withheld; votes that are withheld will be excluded entirely
from the vote and will have no effect.
K-1
<PAGE>
HOW STOCKHOLDERS VOTE. Stockholders may hold DST Common Stock in their own
names, through allocations to the stockholders' accounts under The Employee
Stock Ownership Plan and Trust Agreement of DST Systems, Inc. (the "DST ESOP"),
or through a broker, and may vote such stock as follows:
DST COMMON STOCK HELD IN STOCKHOLDER'S NAME. Stockholders who hold DST Common
Stock in their own names may only vote their shares of DST Common Stock if they
or their proxies are present at the Annual Meeting. Stockholders may appoint as
their proxy the Proxy Committee, which consists of officers of DST whose names
are listed on the Proxy Card. The Proxy Committee will vote all shares of DST
Common Stock for which it is the proxy as specified by the stockholders on the
Proxy Cards. A stockholder desiring to name as proxy someone other than the
Proxy Committee may do so by crossing out the names of the Proxy Committee
members on the Proxy Card and inserting the full name of such other person or
persons (but no more than two). In that case, the stockholder must sign the
Proxy Card and deliver it to the person named, and the person named must be
present and vote at the Annual Meeting.
If a properly executed and unrevoked Proxy Card solicited hereunder does not
specify how the shares of DST Common Stock represented thereby are to be voted,
the Proxy Committee intends to vote such shares for the election as directors
of the persons nominated by the DST Board ("Board Nominees") and in accordance
with the discretion of the Proxy Committee upon such other matters as may
properly come before the Annual Meeting. This Proxy Statement solicits, and the
Proxy Card grants, discretionary authority to the Proxy Committee to vote
cumulatively for directors by, for instance, casting all its votes for a single
Board Nominee, but the Proxy Committee does not intend to do so unless other
persons are properly nominated and such a vote appears necessary to assure that
a Board Nominee is elected.
A stockholder may revoke a Proxy Card with a later-dated, properly executed
Proxy Card or other writing delivered to the Corporate Secretary of DST at any
time before the Proxy Committee votes at the Annual Meeting. Attendance at the
Annual Meeting will not have the effect of revoking a properly executed Proxy
Card unless the stockholder delivers a written revocation to the Corporate
Secretary before the proxy votes.
DST COMMON STOCK ALLOCATED UNDER THE DST ESOP. Individuals for whom shares of
DST Common Stock are allocated in the DST ESOP may on the Instruction Card
instruct the DST ESOP trustee how to vote their allocated shares. The DST ESOP
trustee must also vote any shares of DST Common Stock not allocated to the
accounts of participants and the shares for which it received no instructions
in the same proportion as those shares for which it received instructions. The
DST ESOP trustee may vote shares allocated to the accounts of the DST ESOP
participants either in person or through a proxy. DST ESOP participants may not
vote the shares allocated to their accounts in person, and they may revoke
their instructions to the DST ESOP trustee only by contacting the trustee prior
to the time the trustee casts the DST ESOP vote, and by complying with the
trustee's procedures for revoking the instructions.
DST COMMON STOCK HELD THROUGH A BROKER. DST Common Stock is listed for
trading on the New York Stock Exchange ("NYSE") and on the Chicago Stock
Exchange ("CHX"). Each stock broker must solicit from its customers holding DST
Common Stock through the broker directions on how to vote the customers'
shares, and the broker must then vote such shares in accordance with such
directions. A broker's customers may revoke such directions by contacting their
broker and following the broker's revocation procedures.
Whether member brokers may vote the shares of their customers when they have
not received directions from their customers depends on the proposal and on the
rules and procedures of the NYSE and the CHX. DST anticipates that member
brokers will be entitled to vote the shares for which they have not received
directions on the election of directors, which is the only proposal described
herein.
When a broker has not received directions from customers on whether to vote
for a proposal, and the broker cannot or does not vote the shares it holds for
such customers, a "broker non-vote" has occurred. (Customer directed
abstentions are directions to the broker and therefore do not cause broker non-
votes.) Broker non-votes generally would not affect the determination of
whether the holders of the majority of shares of outstanding DST
K-2
<PAGE>
Common Stock are present at the Annual Meeting because typically some of the
shares held in the broker's name have been voted on at least some proposals,
and therefore, all of such shares held in the broker's name are considered
present at the Annual Meeting. A broker non-vote will have the same effect as a
vote against any proposal other than the election of directors, on which it
will have no effect.
PRINCIPAL STOCKHOLDERS AND STOCKHOLDINGS OF MANAGEMENT
The following table sets forth information as of the Record Date concerning
the beneficial ownership of DST Common Stock by: (i) beneficial owners of more
than 5% of the outstanding DST Common Stock which have publicly filed a report
acknowledging such ownership; (ii) the directors and certain executive officers
of DST; and (iii) all of DST's executive officers and directors as a group.
Beneficial ownership generally means either the sole or shared power to vote or
dispose of the shares. Except as otherwise noted, the holders have sole voting
and dispositive power. No officer or director of DST owns any equity securities
of any subsidiary of DST.
<TABLE>
<CAPTION>
SHARES OF PERCENT
NAME AND ADDRESS COMMON STOCK(1) OF CLASS(2)
- ---------------- --------------- -----------
<S> <C> <C>
Kansas City Southern Industries, Inc. ("KCSI")(3). 20,263,426(4) 41.4%
FMR Corp., Edward C. Johnson III,................. 4,225,290(6) 8.6%
Abigail P. Johnson, Fidelity
Management & Research Company ("Fidelity"),
Fidelity Management Trust Company ("Fidelity
Trust")(5)
UMB Financial Corporation ("UMBFC"),.............. 2,988,858(8) 6.1%
UMB Bank, N.A. ("UMB"), and
the DST ESOP
Massachusetts Financial........................... 2,492,396(10) 5.1%
Services Company(9)
A. Edward Allinson................................ 18,000(11) *
Director
Robert C. Canfield................................ 94,683(12) *
Senior Vice President,
General Counsel and Secretary
Michael G. Fitt................................... 16,000(11) *
Director
James P. Horan.................................... 102,877(13) *
Chief Information Officer
Thomas A. McCullough.............................. 247,022(14) *
Executive Vice President, Director
Thomas A. McDonnell............................... 508,433(15) 1.0%
President and Chief
Executive Officer, Director
William C. Nelson................................. 13,100(11) *
Director
Charles W. Schellhorn............................. 164,340(17) *
President, Output Technologies, Inc.(16)
M. Jeannine Strandjord............................ 14,000(11) *
Director
All Executive Officers and Directors as a Group 1,744,100(18) 3.6%
(17 Persons).....................................
</TABLE>
- --------
*Less than 1% of the outstanding DST Common Stock.
K-3
<PAGE>
(1) Under Rule 13d-3 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), share amounts shown for DST's officers and directors
include shares they may acquire upon the exercise of options which are
exercisable at the Record Date or will become exercisable within 60 days
of such date and shares allocated to the accounts of such persons under
the DST ESOP. The holders may disclaim beneficial ownership of any such
shares which are owned by or with family members, trusts or other
entities.
(2) The percentage is based on the number of shares outstanding as of the
Record Date.
(3) The address of KCSI is 114 West 11th Street, Kansas City, Missouri 64105.
(4) The number of shares is based upon information reported in a Form 4 dated
January 6, 1998.
(5) The address of FMR Corp., Fidelity and Fidelity Trust is 82 Devonshire
Street, Boston, Massachusetts 02109. Edward C. Johnson III is Chairman of
and Abigail P. Johnson is a director of FMR Corp. Fidelity and Fidelity
Trust are wholly owned subsidiaries of FMR Corp.
(6) The number of shares is based upon information in Amendment No. 1 to
Schedule 13G dated February 14, 1998 (the "FMR Schedule"). The FMR
Schedule states that Fidelity beneficially owns 3,724,200 shares and
Fidelity Trust beneficially owns 501,090 shares of DST Common Stock.
(7) The address for UMB, UMBFC, and the DST ESOP is 1010 Grand, Kansas City,
Missouri 64106.
(8) The number of shares is based on 3,188,858 shares of DST Common Stock held
as of December 31, 1997 reported in Amendment No. 2 to Schedule 13G, dated
February 13, 1998 (the "UMB Schedule"), jointly filed by UMB, UMBFC, and
the DST ESOP. Of the 3,188,858 shares of DST Common Stock beneficially
owned by UMB, UMB reported that it holds 3,187,568 shares as trustee of
the DST ESOP and 1,290 shares in other capacities. The number of shares of
DST Common Stock shown in the UMB Schedule has been reduced in the above
table by the number of shares of DST Common Stock the DST ESOP has sold
since December 31, 1997. Shares held by UMB as trustee of the DST ESOP
include shares allocated to the accounts of DST ESOP participants. UMB and
the DST ESOP disclaimed in the UMB Schedule beneficial ownership of the
shares allocated to participants' accounts. Voting and dispositive power
over such allocated shares are vested in the DST ESOP participants, who
have the right to direct the voting of all such allocated shares and the
tendering of such shares in response to offers to purchase. The DST ESOP
requires the trustee to vote any unallocated shares in the same proportion
as the allocated shares. UMBFC reported that it does not own of record any
DST Common Stock, that it participated in the filing of the UMB Schedule
solely as a result of its ownership of 100% of stock of UMB, and that it
is prohibited by law from directing the voting or disposition of the
shares and therefore disclaims beneficial ownership of the shares shown in
the UMB Schedule. The 3,188,858 shares reported in the UMB Schedule do not
include 86,759 shares held by UMB in custody accounts for which UMB does
not have voting or dispositive power.
(9) The address of Massachusetts Financial Services Company is 500 Boylston
Street, Boston, Massachusetts 02116.
(10) The number of shares is based upon information in Amendment No. 1 to
Schedule 13G dated February 12, 1998 ("MFS Schedule"). The MFS Schedule
states that the shares are also beneficially owned by certain non-
reporting entities as well as MFS.
(11) Includes 13,000 shares that may be acquired through option exercises.
(12) Includes 82,000 shares that may be acquired through option exercises and
5,934 shares allocated to his account in the DST ESOP.
(13) Includes 82,000 shares that may be acquired through option exercises and
13,374 shares allocated to his account in the DST ESOP.
(14) Includes 1,000 shares held by members of his immediate family, 220,000
shares that may be acquired through option exercises and 18,113 shares
allocated to his account in the DST ESOP.
(15) Includes 475,000 shares that may be acquired through option exercises and
18,933 shares allocated to his account in the DST ESOP.
(16) Output Technologies, Inc. is a wholly owned subsidiary of DST.
(17) Includes 140,000 shares that may be acquired through option exercises and
12,530 shares allocated to his account in the DST ESOP.
(18) Includes 1,506,250 shares that may be acquired through option exercises by
the Executive Officers and Directors and by the spouse of an Executive
Officer and 152,055 shares allocated to the DST ESOP accounts of Executive
Officers and the spouses of two Executive Officers.
K-4
<PAGE>
PROPOSAL--ELECTION OF TWO DIRECTORS
The By-laws classify the DST Board into three classes and stagger the terms
of each class to expire in different years. The term of office of one class of
directors expires each year in rotation so that at each annual meeting of
stockholders one class is up for election for a full three-year term. The terms
of the Board Nominees are expiring at this Annual Meeting. Directors elected at
the Annual Meeting will hold office for a three-year term expiring in 2001 or
until their successors are elected and qualified. DST expects that the other
directors will continue in office for the remainder of their terms.
The Board Nominees are A. Edward Allinson and Michael G. Fitt. They are
currently directors of DST, have indicated that they are willing and able to
continue serving as directors if elected and have consented to being named as
nominees in this Proxy Statement. If any of the Board Nominees should for any
reason become unavailable for election, the Proxy Committee will vote for such
other nominee as may be proposed by the annually appointed Nominating Committee
of the DST Board or, alternatively, the DST Board may reduce the number of
directors to be elected at the meeting.
A. EDWARD ALLINSON, age 63, served as a director of DST from 1977 to November
1990 and from September 1995 to present. He has been Executive Vice President
of State Street Bank and Trust Company ("State Street Bank") and an Executive
Vice President of State Street Corporation ("State Street"), the parent company
of State Street Bank, since March 1990. He is also a director of KCSI.
MICHAEL G. FITT, age 66, has served as a director of DST since September
1995. He was Chairman of Employers Reinsurance Corporation from 1980 through
1992, its President from 1979 through October 1991, its Chief Executive Officer
from 1980 through 1992, and is now retired. He is also a director of NAC RE
Corp. and of KCSI.
THE DST BOARD RECOMMENDS THAT YOU VOTE "FOR" THE
ELECTION OF THE BOARD NOMINEES
K-5
<PAGE>
THE BOARD OF DIRECTORS
INFORMATION ABOUT PRESENT DIRECTORS. In addition to the Board Nominees, the
following individuals are also on the DST Board, for a term ending on the date
of the annual meeting of stockholders in the year indicated.
DIRECTORS SERVING UNTIL THE ANNUAL MEETING OF STOCKHOLDERS IN 1999.
THOMAS A. MCDONNELL, age 52, has served as a director of DST since 1971; as
Chief Executive Officer of DST since October 1984; and as President of DST
since January 1973 (except for a 30-month period from October 1984 to April
1987). He served as Treasurer of DST from February 1973 to September 1995; and
as Vice Chairman of the Board from June 1984 to September 1995. He served as
Executive Vice President of KCSI from February 1987 until October 1995 and as
a director of KCSI from 1983 until October 1995. He is a director of BHA
Group, Inc., Cerner Corporation, Computer Sciences Corporation, Euronet
Services, Inc., and Informix Software, Inc.
M. JEANNINE STRANDJORD, age 52, has served as a director of DST since
January 1996. She has served as Senior Vice President and Treasurer for Sprint
Corporation ("Sprint") since January 1990, is responsible for Treasury
Operations for all Sprint subsidiaries and for Sprint's Pension and Savings
Trust Management, and is in charge of Risk Management and Loss Prevention and
of Real Estate and Facilities for Sprint. She also serves on the Finance
Committee for Sprint Spectrum L.P. She joined Sprint in 1985 as Vice President
of Finance and Distribution at AmericSource, Inc., a Sprint subsidiary. She is
also a director of six registered investment companies which are advised by
American Century Investments.
DIRECTORS SERVING UNTIL THE ANNUAL MEETING OF STOCKHOLDERS IN 2000.
THOMAS A. MCCULLOUGH, age 55, has been a director of DST since 1990. He has
served as Executive Vice President of DST since April 1987. His
responsibilities include full-service mutual fund processing, remote mutual
fund client servicing, information systems, portfolio accounting, securities
transfer and product sales and marketing.
WILLIAM C. NELSON, age 60, has been a director of DST since January 1996. He
is the President, Kansas City, of NationsBank, N.A. and Chairman of
NationsBank, N.A. (Mid-West), which was previously Boatmen's First National
Bank of Kansas City ("Boatmen's"). Mr. Nelson had served Boatmen's since
February 1990 as Chairman of the Board, since May 1989 as Chief Executive
Officer, and since June 1988 as President.
BOARD OF DIRECTORS' MEETINGS AND STANDING COMMITTEES.
MEETINGS. The DST Board met or took action by unanimous consent ten times in
1997, and all directors attended all meetings of the DST Board during 1997.
The DST Board has established two standing committees: the DST Audit Committee
and the DST Compensation Committee. During 1997, the DST Audit Committee held
two meetings and the DST Compensation Committee held seven meetings, and all
committee members attended all of the meetings of the committees on which they
served.
DST AUDIT COMMITTEE. The DST Audit Committee's primary responsibilities are
to oversee the internal and external audit functions of DST and to meet with
and consider suggestions from members of management and the internal audit
staff, as well as from DST's independent accountants, concerning the financial
operations of DST. The DST Audit Committee also reviews audited financial
statements of DST and considers and recommends the appointment of, and
approves the fee arrangement with, independent accountants for audit functions
and for advisory and other consulting services. Members of the DST Audit
Committee are Ms. Strandjord and Messrs. Fitt and Nelson. The DST Board
appoints the members of the DST Audit Committee to serve staggered three-year
terms.
DST COMPENSATION COMMITTEE. The DST Compensation Committee's
responsibilities are to make determinations with respect to salaries and
bonuses of and other compensation arrangements with DST's officers
K-6
<PAGE>
and to administer the DST Systems, Inc. Officers Incentive Plan (the "Officers
Incentive Plan") and the 1995 DST Systems, Inc. Stock Option and Performance
Award Plan (the "Stock Option Plan"). Members of the DST Compensation
Committee are Ms. Strandjord and Messrs. Fitt and Nelson. The members of the
DST Compensation Committee serve one-year terms. The DST Compensation
Committee's report on executive compensation is set forth herein under
"Executive Compensation."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. Thomas A.
McCullough, Director and Executive Vice President of DST, serves on the Board
of Directors and as a member of the Executive Committee of the Board of
Directors of Boston Financial Data Services, Inc. ("BFDS"), a joint venture
between State Street and DST. A. Edward Allinson, Chairman of the Board of
Directors of BFDS, serves as a director of DST. Although the BFDS Board of
Directors Executive Committee performs certain functions equivalent to those
of a compensation committee, it does not determine Mr. Allinson's annual
salary of $100,000 for serving as an officer of BFDS. BFDS uses DST's mutual
fund system and services as a remote service client of DST. Certain
subsidiaries of DST provide printing, mailing and other services to BFDS. For
1997, DST and subsidiaries had revenues of $70,062,670 from BFDS. At December
31, 1997, accounts receivable from BFDS totaled $6,169,672.
COMPENSATION OF DIRECTORS. Directors who do not receive compensation as
officers or employees of DST or any of its more than 50% owned affiliates (the
"Outside Directors") are each paid a fee of $4,000 for each meeting of the DST
Board that they attend, a fee of $2,000 for each committee meeting that they
attend, and a fee of $500 for any telephonic DST Board or committee meeting in
which they participate, plus reimbursement of reasonable travel expenses.
The Outside Directors may defer their compensation under the Directors'
Deferred Fee Plan, a non-qualified deferred compensation plan adopted
September 19, 1995. Under the plan, directors who receive fees from DST may
make an annual election to defer all or a part of any fees earned during the
next calendar year. Each participant's account will be credited with the
amount of fees deferred and adjusted annually by an interest factor equal to a
rate of return selected by the DST Board, or if the participant elects, by a
rate of return earned for the year from a hypothetical investment allocated by
the participant among certain mutual funds. The benefits become distributable
after termination of service as a director or in certain other circumstances
as approved by the DST Compensation Committee. Fees to some directors
previously deferred under an earlier plan, which terminated effective August
31, 1995, continue to be deferred and earn interest and shall be distributed
in accordance with such earlier plan.
The Outside Directors automatically participate in the Stock Option Plan.
Under the Stock Option Plan, when an Outside Director is first elected or
appointed to the DST Board, the Outside Director receives an option to
purchase 8,000 shares of DST Common Stock. On the date of each annual meeting
of DST's stockholders, each Outside Director receives an option to purchase
4,000 shares of DST Common Stock if such Outside Director will continue to
serve in such capacity immediately following such meeting. Except as otherwise
set forth in the Stock Option Plan, all options granted to an Outside Director
to purchase shares of DST Common Stock have an exercise price equal to the
fair market value of DST Common Stock on the date of the grant and become
exercisable as follows: 50% on the day preceding the date of the first annual
stockholders' meeting after the date of grant of the option; an additional 25%
on the day preceding the date of the second annual stockholders' meeting after
the date of grant of the option; and the remaining 25% on the day preceding
the third annual stockholders' meeting after the date of grant of the option.
The term of any options granted to an Outside Director may not extend more
than ten years from the date of grant. All such options shall immediately
become exercisable in the event of a change in control of DST (as defined in
the Stock Option Plan) subject to certain restrictions under federal
securities law.
K-7
<PAGE>
EXECUTIVE COMPENSATION
DST COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.* The DST
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph included herein shall not be incorporated by reference into
any filings under the Securities Act of 1933 or the Exchange Act, either as
amended, notwithstanding the incorporation by reference of the Proxy Statement
into any such filings.
COMPENSATION PRINCIPLES. The DST Compensation Committee based the 1997
compensation packages for DST executive officers on the principles that the
packages should (a) provide fair, reasonable and competitive base salaries,
(b) provide the opportunity to earn additional compensation if DST
stockholders experience increases in the value of DST Common Stock, and (c)
emphasize long-term stock ownership of DST Common Stock by executive officers.
OVERVIEW OF 1997 COMPENSATION. The compensation of DST executive officers
for 1997 consisted of base salary and of awards issued pursuant to the Stock
Option Plan. The Stock Option Plan allows the granting of stock options and
other forms of incentive compensation to DST officers and was approved by
stockholders in 1996. In 1997, stockholders approved additional types of
awards the DST Compensation Committee could grant under the Stock Option Plan,
including restricted stock. For 1997, the awards granted under the Stock
Option Plan were cash bonuses, restricted stock, and stock options. Because of
the last two types of awards, a substantial amount of the executive officers'
1997 compensation was at-risk and tied to DST's performance, furthering the
DST Compensation Committee's compensation principles. The executive officers
also participated in certain other benefits available generally to DST
officers and employees so that their base compensation packages were
competitive with compensation packages of other companies.
DETERMINATION OF 1997 COMPENSATION. To determine 1997 compensation, the DST
Compensation Committee utilized data from several surveys provided by
independent compensation consultants. The independent consultants provided a
survey of compensation information contained in the proxy statements of
fifteen companies determined for purposes of the survey to be peers of DST.
The survey group included all the companies in the peer group shown in the
Stock Performance Graph contained in this Proxy Statement (with the exception
of The Continuum Company, Inc., which was acquired August 1, 1996 by Computer
Sciences Corporation), and other companies the compensation consultants and
the DST Compensation Committee believed would have needs similar to DST for
executive talent. The independent consultants also provided surveys of the
compensation packages of technology companies, of entities with revenues
comparable to DST, and of entities with revenues comparable to DST
subsidiaries.
The DST Compensation Committee analyzed the surveys and considered the
recommendations of the independent compensation consultants to determine
target levels of base salary and of total cash compensation and the types of
awards to grant. The DST Compensation Committee focused on information in the
surveys about officers with positions and responsibilities similar to each DST
executive officer. When information from more than one survey applied to a DST
executive officer, the DST Compensation Committee considered information from
multiple surveys.
The DST Compensation Committee took the following actions with respect to
each component of the compensation packages:
BASE SALARIES. With the advice of independent compensation consultants, the
DST Compensation Committee set the target for each DST executive officer's
base salary to be in the 50th percentile of compensation levels shown in the
applicable survey. The DST Compensation Committee also examined the
responsibilities of
- --------
* The DST Compensation Committee Report on Executive Compensation and the
Stock Performance Graph included herein shall not be incorporated by
reference into any filings under the Securities Act of 1933 or the Exchange
Act, either as amended, notwithstanding the incorporation by reference of
the Proxy Statement into any such filings.
K-8
<PAGE>
individual executive officers in relation to the market and in relation to each
other and made adjustments where appropriate.
CASH BONUSES AND RESTRICTED STOCK. As incentive for DST executive officers to
meet DST's financial goals, the DST Compensation Committee adopted the Officers
Incentive Plan pursuant to the provisions and as an implementation of the Stock
Option Plan. Under the Officers Incentive Plan, the DST Compensation Committee
may award incentive compensation to an executive officer based on a percentage
of the officer's base salary. The percentage of salary awarded, if any, depends
on DST achieving certain annual or cumulative threshold, target or maximum
earnings per share goals ("EPS Goals") established by the DST Compensation
Committee prior to the beginning of the years in which the goals apply.
For 1997, the DST Compensation Committee established threshold, target and
maximum EPS Goals for DST and determined the percentage of each officer's
salary to be awarded at each level of EPS Goals met by DST. The range of
minimum percentages of base salary which could be awarded to officers other
than Mr. McDonnell for 1997 if EPS goals were met was from 25% to 50% and the
range of maximum percentages was 75% to 150%. In establishing the ranges, the
DST Compensation Committee set the target for each DST executive officer's
total cash compensation to be in the 75th percentile of the applicable survey
information, if DST met certain performance criteria.
Incentive compensation awarded under the Officers Incentive Plan if DST has
met at least its target EPS Goal consists of a combination of cash and
restricted DST Common Stock. If the threshold EPS Goal is met but not exceeded,
all of the incentive bonus is paid only in cash; for that portion of the bonus
attributable to performance above the threshold EPS Goal and up to the target
EPS Goal, 60% of the bonus is cash and 40% restricted stock; and for that
portion of the bonus attributable to performance above the target EPS Goal and
up to the maximum EPS Goal, 50% of the bonus is cash and 50% restricted stock.
The incentive award for 1997 consisted of a combination of cash and restricted
DST Common Stock.
Holders of restricted DST Common Stock have the right to vote such stock and
receive any dividends or other distributions with respect to such stock. If the
participant's employment by DST or its subsidiaries terminates (other than upon
retirement after age 60, disability, death or termination without cause) prior
to the last day of the third calendar year after the plan year for which the
incentive award was granted, the restricted DST Common Stock is forfeited. The
restricted DST Common Stock is not transferable during such period of
restriction except to family members or trusts for family members, and the
stock remains subject to the restrictions after such permitted transfers. In
the event of retirement after age 60, termination because of disability or
without cause, or a change in control, as defined in the Officers Incentive
Plan, the restrictions shall be deemed released.
STOCK OPTIONS. The DST Compensation Committee analyzed the application of
option pricing models and other valuation techniques to stock option data in
the surveys and considered the responsibility level of each officer receiving
an option award, the total number of options granted to each such officer at
the time of the initial public offering of DST Common Stock in 1995 (the
"IPO"), and the fact that, except for new officers, no options were granted in
1996. In February 1997, DST granted stock options to executive officers which
became exercisable one year from the date of grant.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER. DST and Mr. McDonnell are
parties to a three-year employment agreement (the "McDonnell Agreement") which
became effective January 1, 1996 and was approved by the DST Board. Under the
McDonnell Agreement, Mr. McDonnell's annual base salary is $400,000, and he
participates in DST's incentive compensation program for DST executive
officers.
The annual base salary set by the McDonnell Agreement is less than Mr.
McDonnell's base salary prior to the IPO and was determined prior to the IPO by
the KCSI Compensation and Organization Committee (the "KCSI Compensation
Committee"). The KCSI Compensation Committee had initially based Mr.
McDonnell's salary on surveys of independent compensation consultants of the
compensation packages of other U.S. based
K-9
<PAGE>
companies comparable in size to DST but then reduced it to align Mr.
McDonnell's compensation with that of other DST executive officers.
Under the Officers Incentive Plan, Mr. McDonnell's threshold, target and
maximum incentive awards for 1997 were set at 65%, 130% and 195% of his base
salary, respectively, if DST attained its threshold, target or maximum EPS
Goals. The DST Compensation Committee set such levels in recognition of Mr.
McDonnell's responsibilities and to provide incentives tied to DST's financial
performance.
The stock options awarded Mr. McDonnell in 1997 have the same terms as the
options awarded the other executive officers. The DST Compensation Committee
awarded Mr. McDonnell the number of options he received because of his level of
responsibility.
DEDUCTIBILITY OF COMPENSATION. Section 162(m) of the Internal Revenue Code
limits a public company's deduction for federal income tax purposes of
compensation expense in excess of $1 million paid to the executive officers
named in the company's summary compensation table. Performance-based
compensation which meets the requirements of Section 162(m) is excluded from
the compensation subject to the $1 million deduction. The DST Compensation
Committee believes DST has taken the steps required to exclude from calculation
of the $1 million compensation expense any performance-based awards granted
under the Stock Option Plan to the named executive officers.
THE DST COMPENSATION COMMITTEE
Michael G. Fitt
William C. Nelson
M. Jeannine Strandjord
K-10
<PAGE>
STOCK PERFORMANCE GRAPH.
The following graph shows the changes in value since the IPO of an assumed
investment of $100 in: (i) DST Common Stock; (ii) the stocks that comprise the
S&P 400 MidCap index(1); and (iii) the stocks that comprise a peer group of
companies(2). The table following the graph shows the dollar value of those
investments as of December 31, 1997. The value for the assumed investments
depicted on the graph and in the table has been calculated assuming that cash
dividends, if any, are reinvested at the end of each quarter in which they are
paid.
DST SYSTEMS, INC.
RELATIVE MARKET PERFORMANCE TOTAL RETURN
<TABLE>
<CAPTION>
NOVEMBER 1, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DST Total Return $100 $135.71 $149.40 $203.27
- --------------------------------------------------------------------------------
S&P 400 MidCap Index Total
Return $100 $104.11 $124.10 $164.13
- --------------------------------------------------------------------------------
Peer Group Total Return $100 $103.62 $117.74 $132.26
</TABLE>
(1)Standard and Poor's Corporation, an independent company, prepares the S&P
400 MidCap Index.
(2) This index is based upon a group of comparable companies in DST's industry
comprised of: Automatic Data Processing, Inc.; Bisys Group, Inc.; The
Continuum Company, Inc. (through August 1, 1996, the date it was acquired
by Computer Sciences Corporation); First Data Corporation; Fiserv, Inc.;
Policy Management Systems, Inc.; and Sunguard Data Systems, Inc.
K-11
<PAGE>
SUMMARY COMPENSATION TABLE.
The following table sets forth for the calendar years indicated the total
compensation paid to or for the account of the Chief Executive Officer of DST
and the four other DST executive officers receiving the highest totals of
salary and bonus in 1997 (collectively, the "Named Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
ANNUAL
COMPENSATION AWARDS
--------------- -----------------------
RESTRICTED NUMBER OF
STOCK SECURITIES ALL OTHER
SALARY BONUS AWARDS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) OPTIONS/SARS ($)2
--------------------------- ---- ------ ----- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. McDonnell 1997 400,000 546,000 234,000 75,000 4,746
President and Chief Executive 1996 399,996 480,000 0 0 16,761
Officer 1995 500,004 0 0 400,000 313,274
Thomas A. McCullough 1997 335,000 351,752 150,748 45,000 4,746
Executive Vice President 1996 300,000 300,000 0 0 16,761
1995 288,000 288,000 0 175,000 183,655
James P. Horan 1997 275,000 231,044 98,956 20,000 4,746
Chief Information Officer 1996 253,008 202,400 0 0 16,761
1995 243,000 194,400 0 62,000 128,109
Charles W. Schellhorn 1997 260,000 218,400 93,600 30,000 4,746
President, Output Technologies, Inc. 1996 249,996 200,000 0 0 16,761
1995 200,000 160,000 0 110,000 107,488
Robert C. Canfield 1997 252,000 211,712 90,688 20,000 4,746
Senior Vice President, General 1996 241,992 193,600 0 0 16,761
Counsel and Secretary 1995 233,000 186,400 0 62,000 120,381
</TABLE>
- --------
(1) The market price of DST Common Stock on February 26, 1998, the date of the
grant of the restricted stock to each of the Named Officers, was $52.00
per share; and the number of shares of restricted stock granted to each
Named Officer was determined by dividing the dollar amount in this column
by $52.00. Although the Named Officers did not hold any restricted stock
on December 31, 1997, the market price of DST Common Stock on that date
was $42.69 per share. The DST Compensation Committee Report on Executive
Compensation contained herein describes the restrictions on the stock.
(2) All other compensation for each of the Named Officers for 1997 is
comprised of: (i) contributions to his account for 1997 under the DST ESOP
of $1,885; and (ii) contributions to his account for 1997 under the DST
Systems, Inc. Profit Sharing Plan and Trust Agreement of $2,861.
LONG-TERM INCENTIVES.
The following table sets forth information about the options to acquire DST
Common Stock granted the Named Officers in 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT
NUMBER OF OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR(2) ($/SH)(1) DATE(1) PRESENT VALUE(3)
- ---- ------------ -------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Thomas A. McDonnell..... 75,000 8% $33.06 2/27/2007 $862,500
Thomas A. McCullough.... 45,000 5% $33.06 2/27/2007 $517,500
Charles W. Schellhorn... 30,000 3% $33.06 2/27/2007 $345,000
James P. Horan.......... 20,000 2% $33.06 2/27/2007 $230,000
Robert C. Canfield...... 20,000 2% $33.06 2/27/2007 $230,000
</TABLE>
K-12
<PAGE>
- --------
(1) The options became exercisable one year from the date of grant. All
options have a ten-year term but are subject to earlier termination upon
the occurrence of certain events, including termination of employment,
disability, retirement or death. The exercise price of each option is
equal to the average of the high and low price of DST Common Stock on the
NYSE on the date of the grant. Optionees may satisfy their tax withholding
obligations by authorizing DST to withhold shares of DST Common Stock
which would otherwise have been issuable on exercise or, subject to
certain restrictions, by delivering DST Common Stock to DST. In the event
of a change in control (as defined in the Stock Option Plan), the options
become immediately exercisable and, subject to certain securities laws
restrictions, the optionee may exercise certain limited rights related to
his options.
(2) Options for a total of 918,500 shares of DST Common Stock were granted to
employees in 1997.
(3) In accordance with Securities and Exchange Commission ("SEC") rules, the
Black-Scholes option pricing model was chosen to estimate the Grant Date
Present Value of the options set forth in this table. DST's use of this
model should not be construed as an endorsement of its accuracy at valuing
options. All stock option models require a prediction about the future
movement of the stock price. The following assumptions were made for
purposes of calculating Grant Date Present Value: options are exercised 5
years after the date of grant, volatility of 23.72% (calculated weekly
over the three preceding calendar years), dividend yield of 0% and risk
free rate of return rate of 6.38% (United States Government Zero Coupon
Bond on date of grant with a ten-year maturity). Given the limited trading
history of DST Common Stock, the volatility factor was determined by using
the average of the volatility of the stock of three of the peer companies
constituting the peer group referenced in the Stock Performance Graph
contained herein. No adjustments were made for non-transferability or risk
of forfeiture of the options. The real value of the options in this table
depends upon the actual performance of DST Common Stock during the
applicable period and upon the date they are exercised.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR
VALUES.
The following table shows that none of the Named Officers exercised options
during 1997 to purchase DST Common Stock and shows the number and value of
their exercisable and unexercisable options at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS/SARS AT FY- IN-THE-MONEY OPTIONS/SARS
SHARES END (#) AT FY-END ($)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE (#) REALIZED ($)* EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. McDonnell..... 0 0 280,000 195,000 6,081,600 3,330,900
Thomas A. McCullough.... 0 0 122,500 97,500 2,660,700 1,575,000
Charles W. Schellhorn... 0 0 77,000 63,000 1,672,440 1,006,560
James P. Horan.......... 0 0 43,400 38,600 942,648 597,192
Robert C. Canfield...... 0 0 43,400 38,600 942,648 597,192
</TABLE>
- --------
* Although neither Mr. McCullough, Mr. Schellhorn, nor Mr. Canfield realized
any value through the exercise of options to purchase DST Common Stock,
each realized value from the exercise of options to purchase KCSI stock he
had been awarded prior to the IPO by the KCSI Compensation Committee as a
result of his employment as a DST officer. The value realized by Mr.
McCullough was $224,063; the value realized by Mr. Schellhorn was $110,959,
and the value realized by Mr. Canfield was $466,840.
EMPLOYMENT AGREEMENTS. The McDonnell Agreement provides for Mr. McDonnell's
continued employment as President and Chief Executive Officer of DST at an
initial annual base salary of $400,000. The term of the McDonnell Agreement is
three years commencing January 1, 1996, with automatic renewal at the end of
the term and the right by either party during the renewal period to terminate
upon 30 days' written notice. The McDonnell Agreement provides for life
insurance coverage in the amount of $1,000,000 payable to the beneficiaries he
designates. The McDonnell Agreement provides for early termination, and in the
event DST
K-13
<PAGE>
terminates Mr. McDonnell's employment other than for cause, or does not renew
his employment, the McDonnell Agreement entitles him to severance pay equal to
24 months' base salary and benefits.
Agreements between DST and Messrs. McCullough, Horan, Schellhorn, and
Canfield, each dated April 1, 1992 and amended October 9, 1995 (the "Executive
Agreements"), provide for the continued employment of each such officer in his
respective executive officer position at his base salary in effect at the date
of execution of his respective agreement subject to adjustment by DST. Each of
the Executive Agreements may be terminated by the officer on at least 30 days'
notice to DST and by DST without notice and with or without cause. If DST
terminates any of the Employment Agreements without cause, the Executive
Agreements entitle the officer to severance pay equal to 12 months' base
salary and 12 months' reimbursement of costs of obtaining comparable life and
health insurance benefits unless another employer provides such benefits.
The McDonnell Agreement and the Executive Agreements (collectively, the
"Employment Agreements") provide that the officers are eligible to participate
in any DST incentive compensation plan and to receive other benefits DST
generally makes available to its executive officers. The Employment Agreements
also govern the officers' employment after a "change in control"* of DST. If a
change in control occurs during the term of any of the Employment Agreements,
the officer would be entitled to the following: (a) continuation of the
officer's employment, executive capacity, salary and benefits for a three-year
period at levels in effect on the "control change date"*; (b) with respect to
unfunded employer obligations under benefit plans, to a discounted cash
payment of amounts to which the officer is entitled; (c) if the officer's
employment is terminated after the control change date other than "for
cause"*, to payment of his base salary through termination plus a discounted
cash severance payment based on his salary for the remainder of the three-year
period and to continuation of benefits to the end of that period; (d) if the
officer resigns after a change in control upon "good reason"* and advance
written notice, to receive the same payments and benefits as if his employment
had been terminated other than for cause; (e) if amounts received on or after
the change in control date involve "Parachute Payments" under Section 4999 of
the Internal Revenue Code, to receive payments necessary to relieve the
officer of certain adverse federal income tax consequences; and (f) the
placement in trust of funds to secure the obligations to pay any legal expense
of the officer in connection with disputes arising with respect to the
agreement.
OTHER COMPENSATION PLANS AND ARRANGEMENTS. The Named Officers participate in
the following compensatory plans and arrangements, which are not generally
available to all DST employees:
THE STOCK OPTION PLAN. Stockholders approved the Stock Option Plan at the
1996 Annual Meeting of Stockholders and approved amendments to the plan at the
1997 Annual Meeting of Stockholders. The Stock Option Plan provides for the
automatic, periodic grant of stock options to Outside Directors and gives the
DST Compensation Committee the discretion to award incentives to selected DST
employees in the form of options, reload options, restricted stock, stock
appreciation rights, limited rights, performance shares, performance units
(including performance-based cash awards), dividend equivalents, DST Common
Stock, or any other right, interest or option relating to shares of DST Common
Stock granted pursuant to the Stock Option Plan.
In the event of a change in control of DST (as defined in the Stock Option
Plan), vesting of awards (including options) will be automatically accelerated
and all conditions on awards shall be deemed satisfactorily completed without
any action required by the DST Compensation Committee so that such award may
be exercised or realized in full on or before a date fixed by the DST
Compensation Committee, subject to certain restrictions under the federal
securities laws. The DST Compensation Committee may, in its discretion,
include such further provisions and limitations in any agreement documenting
such awards as it may deem equitable and in the best interests of DST.
THE DST SYSTEMS, INC. EXECUTIVE PLAN. The Executive Plan, a non-qualified
deferred compensation plan, terminated effective December 31, 1995. However,
account balances for each participant on such date remain subject to the terms
of the Executive Plan. Officers of DST selected by the KCSI Compensation
Committee prior
- --------
*The Employment Agreements define this term.
K-14
<PAGE>
to the IPO participated in the Executive Plan. Each of the Named Officers is a
participant. DST credited each participant's account with the value of
contributions DST would have made to the various qualified plans maintained by
DST without regard to statutory contribution limits and eligibility
requirements, less the amount actually contributed to such qualified plans on
the participant's behalf. The accounts, which became fully vested upon
termination of the Executive Plan, become distributable after termination of
employment or in certain instances as approved by the DST Compensation
Committee.
THE OFFICERS INCENTIVE PLAN. The Officers Incentive Plan became effective as
of January 1, 1997. Incentive awards issued under the Officers Incentive Plan
are subject to restrictions and limitations imposed under the terms of the
Stock Option Plan. All officers of DST participate in the Officers Incentive
Plan, and officers of more than 50% owned subsidiaries are eligible if
designated by the DST Compensation Committee. If for a given plan year, DST
achieves performance goals by meeting EPS Goals, each participant may receive
an award based on a percentage of his or her annual base salary.
Under the Officers Incentive Plan, the DST Compensation Committee has
established EPS Goals for threshold, target and maximum awards for 1997, 1998
and 1999. For plan years after 1999, the DST Compensation Committee may base
performance criteria on earnings per share in any manner appropriate for
carrying out the intent of the Officers Incentive Plan. For the years 1998 and
1999, the DST Compensation Committee has attributed separate weightings to the
annual EPS Goals and to the cumulative EPS Goals for the plan year, which the
DST Compensation Committee will use to calculate awards due to participants.
The DST Compensation Committee determines for each participant for each plan
year the percentages of his or her base salary which are the participant's
"threshold", "target" and "maximum" incentive award opportunity levels. No
participant will receive an incentive award if the actual DST earnings per
share do not at least meet either the threshold annual EPS Goal or the
threshold cumulative EPS Goal set for that year. The amount of incentive
awards will depend on whether actual earnings per share fall at or above the
threshold EPS Goal, at or above the target EPS Goal, or at or above the
maximum EPS Goal. For instance, if the actual earnings per share fall above
the target EPS Goal but below the maximum EPS Goal, the amount of a particular
participant's incentive award will be increased pro rata above the target
opportunity level. DST shall be deemed to have met the maximum EPS Goal for
any year in which a change of control (as defined in the Officers Incentive
Plan) occurs.
The Officers Incentive Plan provides that no participant may receive an
incentive award greater than 250% of such participant's base salary as of the
beginning of the plan year. Additionally, the aggregate value of all incentive
awards for a calendar year may not exceed 10% of DST's pre-tax income for that
year.
OFFICER TRUSTS. DST has established trusts that are intended to secure the
rights of its officers, directors, employees, and former employees under the
employment continuation commitments of certain employment agreements, the
Directors' Deferred Fee Plan, the Officers Incentive Plan, and the Executive
Plan. The function of each trust is to receive contributions by DST and, in
the event of a change in control of DST where DST fails to honor covered
obligations to a beneficiary, the trust shall distribute to the beneficiary
amounts sufficient to discharge DST's obligation to such beneficiary. The
trusts require DST to be solvent as a condition of making distributions. The
trusts are revocable until a change in control of DST (as defined in the
trusts) and terminate automatically if no such change in control occurs prior
to December 31, 1998, unless the trusts are extended prior to such date.
DST has established a trust to secure Mr. Horan's rights to deferred
compensation earned from 1989 to 1992. The trust holds the deferred
compensation and the earnings thereon, credited according to a formula in Mr.
Horan's employment agreement. Upon termination of Mr. Horan's employment, the
trustee will pay him the deferred compensation, including earnings, in
accordance with his employment agreement; provided, however, that DST must be
solvent as a condition to the trust making the distribution. To the extent
that the trust assets are not sufficient to pay all amounts due Mr. Horan, DST
is liable to pay any balance due. The trust cannot be revoked without Mr.
Horan's consent prior to the time all payments to him are made.
K-15
<PAGE>
OTHER MATTERS
GENERAL INFORMATION. Attendance at the Annual Meeting is limited to
stockholders of record on the Record Date or their properly appointed proxies,
beneficial owners of DST Common Stock having evidence of such ownership, and
guests of DST.
DST will bear the cost of the Annual Meeting, including the cost of mailing
the proxy materials. Proxies may also be solicited by telephone, telegraph or
in person by directors, officers and employees not specifically engaged or
compensated for that purpose. DST has retained D.F. King & Co., Inc. to assist
in the solicitation of proxies at a cost not expected to exceed $5,000 plus
expenses.
Brokers, dealers, banks, voting trustees, other custodians, and their
nominees, are asked to forward soliciting materials to the beneficial record
owners of shares, and, upon request, will be reimbursed by DST for their
reasonable expenses in completing the mailing of soliciting materials to such
beneficial owners.
DST'S INDEPENDENT ACCOUNTANTS. The Audit Committee recommended, and the DST
Board selected, the firm of Price Waterhouse LLP to serve as independent
accountants to examine the consolidated financial statements of DST for the
year 1998. Although the DST Board has selected Price Waterhouse for 1998, the
DST Board nonetheless may, in its discretion, retain another independent
accounting firm at any time during the year if it concludes that such change
would be in the best interest of DST and its stockholders.
Price Waterhouse LLP served as DST's independent accountants for 1997. As
such, Price Waterhouse LLP performed professional services in connection with
the examination of the consolidated financial statements of DST. Such services
included examination of the consolidated financial statements of DST and of
the financial statements of various subsidiaries, review of reports filed with
the SEC, and review of control procedures of the mutual fund processing system
of DST. In addition, Price Waterhouse LLP provided certain other accounting,
auditing and tax services to DST and certain of its subsidiaries during 1997.
Representatives of Price Waterhouse LLP will be present at the Annual
Meeting and will have the opportunity to make a statement if they desire and
to respond to appropriate questions.
STOCKHOLDER PROPOSALS. Stockholders may in the circumstances set forth below
submit proposals for consideration at a stockholders' meeting. A proposal may
either be specified in a notice of the meeting or otherwise properly brought
before the meeting. As of the date of this Proxy Statement, no such notices
have been received.
INCLUSION OF STOCKHOLDER PROPOSALS IN THE 1999 ANNUAL MEETING PROXY
STATEMENT. Applicable laws and rules of the SEC govern the contents and
timeliness of the notice to DST that must occur for inclusion of stockholder
proposals in the proxy statement. If a stockholder desires to have a proposal
included in DST's Proxy Statement for next year's annual meeting of
stockholders, the Corporate Secretary of DST must receive such proposal on or
before December 1, 1998, and the proposal must comply with the applicable SEC
laws and rules. DST may require any proposed nominee or stockholder proposing
a nominee to furnish such other information as DST may reasonably require to
properly complete any proxy or information statement used for the solicitation
of proxies in connection with the meeting at which stockholders are to elect
directors.
NOTICE TO DST OF NOMINATIONS FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS.
Otherwise to bring a proposal before an annual meeting, a stockholder must
comply with the provisions in the By-laws for giving notice of the proposal to
DST. For the notice to be timely (other than a proposal requested to be set
forth in the Proxy Statement, as noted above), the Corporate Secretary of DST
must receive it not less than 60 days nor more than 90 days prior to the
meeting at which the stockholders will consider the proposal; provided,
however, that in the event that the DST Board designates the meeting to be
held at a date other than the second Tuesday in May and gives notice of or
publicly discloses the date of the meeting less than 60 days prior to its
occurrence, the Corporate Secretary of DST must receive the notice not later
than the close of business on the 15th day following the date of the notice or
public disclosure of the meeting date, whichever first occurs.
K-16
<PAGE>
The required contents of the notice depend on whether the proposal pertains
to nominating a director or to other business. A stockholder's notice
pertaining to the nomination of a director shall set forth: (a) as to each
nominee whom the stockholder proposes to nominate for election or re-election
as a director, (i) the name, age, business address and residence address of
the nominee, (ii) the principal occupation or employment of the nominee, (iii)
the class and number of shares of capital stock of DST that are beneficially
owned by the nominee, and (iv) any other information concerning the nominee
that would be required, under the rules of the SEC, in a proxy statement
soliciting proxies for the election of such nominee; (b) as to the stockholder
giving the notice, (i) the name and address of the stockholder, and (ii) the
class and number of shares of capital stock of DST that are beneficially owned
by the stockholder and the name and address of record under which such stock
is held; and (c) the signed consent of the nominee to serve as a director if
elected.
A stockholder's notice concerning business other than nominating a director
shall set forth as to each matter the stockholder proposes to bring before the
meeting (a) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (b)
the name and address of the stockholder proposing such business, (c) the class
and number of shares of capital stock of DST that are beneficially owned by
the stockholder and the name and address of record under which such stock is
held, and (d) any material interest of the stockholder in such business. The
Chairman of the Annual Meeting has the power to determine whether the proposed
business is an appropriate subject for and was properly brought before the
meeting.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Exchange Act requires DST's directors and certain of its officers, and
each person, legal or natural, who owns more than 10% of DST Common Stock
(each, a "Reporting Person"), to file reports of such ownership with the SEC,
the NYSE, the CHX, and DST. Based solely on review of the copies of such
reports furnished to DST, and written representations relative to the filing
of certain forms, no Reporting Person was late in filing such reports for
fiscal year 1997 except as follows: (a) Peter R. O'Connell, Vice President,
became an executive officer of DST in May 1997 but did not file a Form 3 until
September 1997; (b) J. Philip Kirk, Vice President, purchased 5,000 shares of
DST Common Stock in April 1997 but did not report the purchase until he filed
a Form 5 in March 1998; and (c) Robert L. Tritt and John W. McBride, each a
Group Vice President, did not until the filing of Form 4's in March 1998
report stock option grants made under the Stock Option Plan in October 1995 to
their spouses, as DST employees, and Mr. McBride did not until such filing
report a February 1997 grant of options to his spouse.
By Order of the Board of Directors
/s/ Robert C. Canfield
Robert C. Canfield
Senior Vice President, General
Counsel
and Secretary
Kansas City, Missouri
March 31, 1998
K-17
<PAGE>
APPENDIX L
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 1-14036
DST SYSTEMS, INC.
(Exact name of Company as specified in its charger)
DELAWARE 43-1581814
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
333 WEST 11TH STREET,
KANSAS CITY, MISSOURI 64105
(Address of principal executive (Zip Code)
offices)
(816) 435-1000
(Company's telephone number, including area code)
NO CHANGES
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Company (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 Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Number of shares outstanding of the Company's common stock as of October 30,
1998:
Common Stock $.01 par value--49,006,082
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments M-3
Condensed Consolidated Balance Sheet--
December 31, 1997 and September 30, 1998 M-4
Condensed Consolidated Statement of Income--
Three and Nine Months Ended September 30, 1997 and 1998 M-5
Condensed Consolidated Statement of Cash Flows--
Nine Months Ended September 30, 1997 and 1998 M-6
Notes to Condensed Consolidated Financial Statements M-7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations M-10-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk M-16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings M-16
Item 2. Changes in Securities M-16
Item 3. Defaults Upon Senior Securities M-16
Item 4. Submission of Matters to a Vote of Security Holders M-16
Item 5. Other Information M-16
Item 6. Exhibits and Reports on Form 8-K M-18
SIGNATURES M-19
</TABLE>
The Company's service marks and trademarks include without limitation DST(TM),
Securities Transfer System(TM), TA2000(R), Portfolio Accounting System(TM),
Automated Work Distributor(TM), AWD(R), TRAC-2000(R), Fairway(TM), and
FAST2000(TM) which are referred to in this Report. AIM Family of Funds(R)
referred to in this Report is a trademark of AIM Management Group, Inc.
L-2
<PAGE>
DST SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 1998
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTRODUCTORY COMMENTS
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the United States Securities
and Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures herein are
adequate to enable a reasonable understanding of the information presented.
These Condensed Consolidated Financial Statements should be read in conjunction
with the audited financial statements and the notes thereto for the year ended
December 31, 1997. Additionally, the Condensed Consolidated Financial
Statements should be read in conjunction with Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations included in this
Form 10-Q.
The results of operations for the three and nine months ended September 30,
1998, are not necessarily indicative of the results to be expected for the full
year 1998.
L-3
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
ASSETS ------------ -------------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents......................... $ 15,833 $ 35,388
Accounts receivable............................... 170,699 177,884
Other assets...................................... 44,792 42,503
---------- ----------
231,324 255,775
Investments......................................... 820,577 936,259
Properties.......................................... 242,153 235,402
Intangibles and other assets........................ 61,350 52,710
---------- ----------
Total assets.................................... $1,355,404 $1,480,146
========== ==========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Debt due within one year.......................... $ 13,898 $ 10,584
Accounts payable.................................. 49,763 28,405
Accrued compensation and benefits................. 28,319 32,195
Deferred revenues and gains....................... 22,679 29,908
Other liabilities................................. 26,334 37,251
---------- ----------
140,993 138,343
Long-term debt...................................... 92,005 88,254
Deferred income taxes............................... 241,782 280,424
Other liabilities................................... 43,534 27,555
---------- ----------
518,314 534,576
---------- ----------
Minority interest................................... 1,380 845
---------- ----------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares
authorized, 50,000,000 shares issued............. 500 500
Additional paid-in capital........................ 408,610 409,351
Retained earnings................................. 261,589 316,243
Accumulated other comprehensive income............ 196,415 254,617
Treasury stock (956,942 and 997,596 shares,
respectively), at cost........................... (31,404) (35,986)
---------- ----------
Total stockholders' equity...................... 835,710 944,725
---------- ----------
Total liabilities and stockholders' equity...... $1,355,404 $1,480,146
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
L-4
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................... $159,863 $186,256 $473,941 $557,972
Costs and expenses..................... 118,811 139,932 349,148 411,573
Depreciation and amortization.......... 19,453 19,910 58,551 60,711
-------- -------- -------- --------
Income from operations................. 21,599 26,414 66,242 85,688
Interest expense....................... (1,960) (1,829) (6,006) (6,087)
Other income, net...................... 2,241 3,501 4,451 5,491
Equity in earnings (losses) of
unconsolidated affiliates, net of
income taxes.......................... (507) (1,162) 1,357 (1,529)
-------- -------- -------- --------
Income before income taxes and minority
interest.............................. 21,373 26,924 66,044 83,563
Income taxes........................... 7,097 8,495 22,463 29,153
-------- -------- -------- --------
Income before minority interest........ 14,276 18,429 43,581 54,410
Minority interests in income (losses).. 222 (102) 607 (244)
-------- -------- -------- --------
Net income............................. $ 14,054 $ 18,531 $ 42,974 $ 54,654
======== ======== ======== ========
Average common shares outstanding...... 49,236 48,994 49,378 48,988
Basic earnings per share............... $ 0.29 $ 0.38 $ 0.87 $ 1.12
Diluted shares outstanding............. 49,804 50,102 49,862 49,991
Diluted earnings per share............. $ 0.28 $ 0.37 $ 0.86 $ 1.09
</TABLE>
The accompanying notes are an integral part of these financial statements.
L-5
<PAGE>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income................................................. $ 42,974 $ 54,654
-------- --------
Depreciation and amortization............................ 58,551 60,711
Undistributed (earnings) losses of unconsolidated
affiliates.............................................. (1,357) 1,529
Gains on sale of investments............................. (1,464) (1,885)
Cash dividends received from unconsolidated affiliates... 8,363
Changes in accounts receivable........................... (3,323) (7,185)
Changes in other current assets.......................... (2,878) 1,974
Changes in accounts payable and accrued liabilities...... (13,996) 5,153
Other, net............................................... (859) 1,782
-------- --------
Total adjustments to net income............................ 34,674 70,442
-------- --------
Net...................................................... 77,648 125,096
-------- --------
CASH FLOWS--INVESTING ACTIVITIES:
Investments and advances to unconsolidated affiliates...... (15,368) (29,306)
Proceeds from sale of investments.......................... 12,359 2,669
Capital expenditures....................................... (41,134) (54,225)
Other, net................................................. (277) 656
-------- --------
Net...................................................... (44,420) (80,206)
-------- --------
CASH FLOWS--FINANCING ACTIVITIES:
Principal payments on long-term debt....................... (10,825) (8,148)
Net increase in credit facilities and notes payable........ 6,004 1,016
Common stock repurchased................................... (14,503) (10,009)
Other, net................................................. (6,387) (8,194)
-------- --------
Net...................................................... (25,711) (25,335)
-------- --------
Net increase in cash....................................... 7,517 19,555
Cash at beginning of period................................ 8,279 15,833
-------- --------
Cash at end of period...................................... $ 15,796 $ 35,388
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
L-6
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. SUMMARY OF ACCOUNTING POLICIES
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures herein are
adequate to enable a reasonable understanding of the information presented.
These Condensed Consolidated Financial Statements should be read in conjunction
with the audited financial statements and the notes thereto for the year ended
December 31, 1997. Additionally, the Condensed Consolidated Financial
Statements should be read in conjunction with Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations included in this
Form 10-Q.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal interim
closing procedures) necessary to present fairly the financial position of the
Company and its subsidiaries at December 31, 1997 and September 30, 1998, the
results of operations for the three and nine months ended September 30, 1997
and 1998, and cash flows for the nine months ended September 30, 1997 and 1998.
The results of operations for the three and nine months ended September 30,
1998, are not necessarily indicative of the results to be expected for the full
year 1998.
EARNINGS PER SHARE. The computation of basic and diluted earnings per share is
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
1997 1998 1997 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income..................................... $14,054 $18,531 $42,974 $54,654
======= ======= ======= =======
Average common shares outstanding.............. 49,236 48,994 49,378 48,988
Incremental shares from assumed
conversions of stock options.................. 568 1,108 484 1,003
------- ------- ------- -------
Dilutive potential common shares............... 49,804 50,102 49,862 49,991
======= ======= ======= =======
Basic earnings per share....................... $ 0.29 $ 0.38 $ 0.87 $ 1.12
Diluted earnings per share..................... $ 0.28 $ 0.37 $ 0.86 $ 1.09
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
COMPREHENSIVE INCOME. As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." The new statement requires that all changes in equity during a
period except those resulting from investments by and distributions to
owners be reported as "comprehensive income" in the financial statements.
Upon implementation, the Company included the net unrealized gain or loss
on available-for-sale securities and foreign currency translation
adjustments together with net income in the computation of comprehensive
income. For the three months ended September 30, 1998, comprehensive losses
were $83.3 million as compared to comprehensive income of $64.1 million for
the three months ended September 30, 1997. For the nine months ended
September 30, 1998, comprehensive income was $112.9 million as compared to
$123.6 million for the nine months ended September 30, 1997.
L-7
<PAGE>
SOFTWARE REVENUE RECOGNITION. As of January 1, 1998, the Company adopted
Statement of Position 97-2 ("SOP 97-2"), "Software Revenue Recognition"
which was effective for software licensing transactions entered into
beginning in 1998. Certain of the Company's products are licensed, but
revenues from licensed software products are not material to the Company as
a whole. Implementation of the SOP 97-2 did not have a material effect on
the three and nine months ended September 30, 1998 and the Company does not
expect SOP 97-2 to have a material effect on the future consolidated
results of operations of the Company.
SEGMENT INFORMATION. The Financial Accounting Standards Board issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" in June 1997. This statement requires that publicly traded
companies report certain information about their operating segments,
products and services, geographic areas in which they operate, and major
customers beginning with the 1998 annual report. The Company is currently
evaluating the effect that implementation of this new standard will have on
the information disclosed in its financial statements.
INTERNAL USE SOFTWARE. The Accounting Standards Executive Committee
recently issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The new
statement is effective for fiscal periods beginning after December 15, 1998
and requires that certain costs for the development of internal use
software be recorded as an asset. Accordingly, certain primary types of
development activities will be required to be capitalized, including coding
and software configuration costs, costs of testing and installing the
software, and when clearly distinguishable from maintenance, costs of
upgrades and enhancements. The Company currently expenses costs of
internally developed proprietary software as incurred. The Company believes
the effect of this SOP will result in the capitalization and amortization
of certain software development costs which were previously expensed. The
Company is currently evaluating the new standard and is unable to determine
the effects on the Company's results of operations at this time.
2. INVESTMENTS
The Company's investments consist of the following (ownership percentage as of
September 30, 1998):
<TABLE>
<CAPTION>
CARRYING VALUE
--------------------------
OWNERSHIP DECEMBER 31, SEPTEMBER 30,
PERCENTAGE 1997 1998
(in thousands) ---------- ------------ -------------
<S> <C> <C> <C>
AVAILABLE FOR SALE
SECURITIES:
Computer Sciences
Corporation............ 5.5% $360,400 $470,463
State Street
Corporation............ 3.7% 347,509 325,859
USCS International,
Inc.................... 4.7% 18,700 35,338
Euronet Services, Inc... 10.9% 9,136 5,261
Other................... 20,901 37,280
-------- --------
756,646 874,201
-------- --------
EQUITY INVESTEES:
Boston Financial Data
Services, Inc.......... 50.0% 32,262 37,807
European Financial Data
Services Limited....... 50.0% 6,196 5,483
Argus Health Systems,
Inc.................... 50.0% 10,649 4,402
Other................... 14,824 14,366
-------- --------
63,931 62,058
-------- --------
$820,577 $936,259
======== ========
</TABLE>
L-8
<PAGE>
Certain information related to the Company's available for sale securities is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
(in thousands) ------------ -------------
<S> <C> <C>
Cost................................................. $433,440 $455,535
Gross unrealized gains............................... 326,199 420,958
Gross unrealized losses.............................. (2,993) (2,292)
-------- --------
Market value......................................... $756,646 $874,201
======== ========
</TABLE>
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization is
as follows for the periods presented:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
(in thousands) ------- ------- ------- -------
<S> <C> <C> <C> <C>
Boston Financial Data Services, Inc......... $ 1,829 $ 1,919 $ 4,989 $ 5,546
Argus Health Systems, Inc................... 722 585 3,435 1,754
European Financial Data Services Limited.... (3,278) (2,744) (7,073) (7,532)
Other....................................... 220 (922) 6 (1,297)
------- ------- ------- -------
$ (507) $(1,162) $ 1,357 $(1,529)
======= ======= ======= =======
</TABLE>
3. USCS MERGER
On September 2, 1998, the Company and USCS International, Inc. ("USCS"), a
publicly traded company (NASDAQ: USCS), signed an agreement to merge USCS with
a wholly owned subsidiary of the Company. Under the terms of the agreement,
each USCS shareowner (other than the Company, USCS or their subsidiaries) will
receive 0.62 of a share of DST common stock for each share of USCS common
stock. The Board of Directors of each company has approved the transaction,
which is intended to be a tax free reorganization and accounted for as a
pooling of interests.
The transaction is subject to a number of conditions including approval by the
shareowners of both companies. The proposed merger has received notice of early
termination of the waiting period under the Hart-Scott-Rodino Act. The largest
shareowner of the company (Kansas City Southern Industries, Inc., which now
owns approximately 41% of the Company's common stock), and of USCS (George L.
Argyros, a USCS director who now owns approximately 33% of USCS) have each
agreed to vote for the merger. The merger is expected to be completed in the
fourth quarter of 1998. At the completion of the transaction, Mr. Argyros and
James C. Castle, Chairman and Chief Executive Officer of USCS, will be
appointed to the DST Board of Directors.
The Company and USCS expect to incur approximately $6.5 to $10.5 million for
investment banking and other transaction-related expenses as a result of the
merger. The Company and USCS will defer recognition of these costs until the
merger is completed. Management believes there are significant efficiencies,
economies of scale, and productivity enhancements that could result from the
integration of the Company and USCS. Such integration activities could result
in nonrecurring expenses and restructuring charges being incurred to achieve
the benefits. Such costs cannot be estimated at this time.
L-9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussions set forth in this Quarterly Report on Form 10-Q contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Quarterly Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by their use
of such verbs as expects, anticipates, believes or similar verbs or
conjugations of such verbs. If any of management's assumptions prove incorrect
or should unanticipated circumstances arise, the Company's actual results could
materially differ from those anticipated by such forward-looking statements.
The differences could be caused by a number of factors or combination of
factors including, but not limited to, those factors identified in the
Company's Current Report on Form 8-K/A dated August 4, 1998 ("Form 8-K/A"),
which is hereby incorporated by reference. The Form 8-K/A has been filed with
the United States Securities and Exchange Commission (the "SEC" or the
"Commission") in Washington, D.C. and can be obtained by contacting the SEC's
Public Reference Branch or in the SEC's EDGAR database accessible through the
SEC's web site on the World Wide Web at www.sec.gov. Readers are strongly
encouraged to consider the factors listed in the Form 8-K/A and any amendments
or modifications thereof when evaluating any forward-looking statements
concerning the Company. The Company does not currently intend to update any
forward-looking statements in this Quarterly Report to reflect future events or
developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction
with the Condensed Consolidated Financial Statements and Notes thereto included
in this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
INTRODUCTION
The Company provides sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance companies, banks
and other financial services organizations.
RECENT EVENTS
USCS MERGER
On September 2, 1998, the Company and USCS International, Inc. ("USCS"), a
publicly traded company (NASDAQ: USCS), signed an agreement to merge USCS with
a wholly owned subsidiary of the Company. Under the terms of the agreement,
each USCS shareowner (other than the Company, USCS or their subsidiaries) will
receive 0.62 of a share of DST common stock for each share of USCS common
stock. The Board of Directors of each company has approved the transaction,
which is intended to be a tax free reorganization and accounted for as a
pooling of interests.
The transaction is subject to a number of conditions including approval by the
shareowners of both companies. The proposed merger has received notice of early
termination of the waiting period under the Hart-Scott-Rodino Act. The largest
shareowner of the company (Kansas City Southern Industries, Inc., which now
owns approximately 41% of the Company's common stock), and of USCS (George L.
Argyros, a USCS director who now owns approximately 33% of USCS) have each
agreed to vote for the merger. The merger is expected to be completed in the
fourth quarter of 1998. At the completion of the transaction, Mr. Argyros and
James C. Castle, Chairman and Chief Executive Officer of USCS, will be
appointed to the DST Board of Directors.
This merger, which is expected to be accretive to DST's earnings per share in
1999, represents a significant expansion of DST's presence in the output
processing and customer management software and services industries. USCS,
through its CableData, Inc. subsidiary, is the largest provider of customer
management software to the cable television and convergence industries,
currently servicing approximately 40 million
L-10
<PAGE>
subscribers worldwide. DST, through its DBS Systems Corporation subsidiary,
provides subscriber management services to DirecTV. USCS' subsidiary,
International Billing Services, Inc., provides bill presentation services to a
variety of communications and other industries. DST's subsidiary, Output
Technologies, Inc., provides a variety of output related services to a
diversified group of industries, primarily in the financial services sector.
The combination of these businesses is expected to generate synergy savings
through combined economies of scale and coordinated production efficiencies.
Additional savings will be realized through the elimination of duplicate costs
associated with having two public companies.
The Company and USCS expect to incur approximately $6.5 to $10.5 million for
investment banking and other transaction-related expenses as a result of the
merger. The Company and USCS will defer recognition of these costs until the
merger is completed. Management believes there are significant efficiencies,
economies of scale, and productivity enhancements that could result from the
integration of the Company and USCS. Such integration activities could result
in nonrecurring expenses and restructuring charges being incurred to achieve
the benefits. Such costs cannot be estimated at this time.
EQUISERVE
On February 10, 1998, Boston EquiServe, LP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50%
owned joint venture of the Company and State Street Corporation) and BankBoston
Corporation, announced an agreement to combine with First Chicago Trust Company
of New York ("First Chicago") by issuance of a 50% partnership interest to
First Chicago in exchange for its shareowner services business. The transaction
would create the largest corporate securities transfer agent in the United
States, processing approximately 25 million accounts. The combination of the
two businesses, to be named EquiServe, LP ("EquiServe"), is awaiting approval
by the Federal Reserve Bank.
DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with
the merger, DST entered into a memorandum of understanding with Boston
EquiServe and First Chicago to complete development of Fairway for the
exclusive use by EquiServe to process all of its accounts. The Company has also
agreed with EquiServe to provide data processing services for EquiServe to use
Fairway. The terms and conditions of this memorandum of understanding will be
set forth in a definitive agreement, the completion of which is a condition to
the closing of the merger agreement between Boston EquiServe and First Chicago.
Upon acceptance of defined components of Fairway, DST will contribute Fairway
and its non-EquiServe securities transfer processing business (approximately 2
million accounts) to EquiServe for a direct ownership interest in EquiServe.
DST will also continue to hold an indirect ownership interest in EquiServe
through BFDS.
RESULTS OF OPERATIONS
THIRD QUARTER AND YEAR TO DATE 1997 VERSUS THIRD QUARTER AND YEAR TO DATE 1998
For the quarter ended September 30, 1998, DST's consolidated net income was
$18.5 million, or $0.38 basic and $0.37 diluted earnings per share, as compared
to $14.1 million, or $0.29 basic and $0.28 diluted earnings per share, for the
quarter ended September 30, 1997.
For the nine months ended September 30, 1998, DST's consolidated net income was
$54.7 million, or $1.12 basic and $1.09 diluted earnings per share, as compared
to $43.0 million, or $0.87 basic and $0.86 diluted earnings per share, for the
nine months ended September 30, 1997.
REVENUES
Consolidated revenues for the three and nine months ended September 30, 1998
were $186.3 million and $558.0 million, respectively, which represent increases
of 16.5% and 17.7%, respectively, over the comparable 1997 periods.
L-11
<PAGE>
U.S. revenues for the three and nine months ended September 30, 1998 were
$152.3 million and $462.1 million, respectively, which represent increases of
13.5% and 14.1%, respectively, over the comparable 1997 periods. This revenue
increase resulted from growth in mutual fund shareowner processing, output
services, automated work distributor (AWD) fees and satellite television
subscriber management fees. U.S. mutual fund processing revenues for the three
and nine months ended September 30, 1998 have increased approximately 14.2% and
15.2%, respectively, over the prior year as shareowner accounts serviced
increased to 48.9 million at September 30, 1998, an increase of 8.7% from 45.0
million at December 31, 1997 and 13.5% from 43.1 million at September 30, 1997.
Increased Individual Retirement Account ("IRA") activity continued to
contribute to account growth. For the quarter ended September 30, 1998, new IRA
accounts totaled approximately 500,000 accounts, with approximately 27% of the
new accounts consisting of new Roth or Educational IRA accounts. U.S. mutual
fund output processing revenues for the three and nine months ended September
30, 1998 increased 15.9% and 13.7%, respectively, primarily related to the
18.2% and 18.9% increase in total pages printed for the three and nine months
ended September 30, 1998, respectively. U.S. AWD workstations licensed
increased 23.4% over year-end 1997 levels. Satellite television subscriber
management revenues have increased 10% over the prior year quarter due to an
increased number of subscribers and continuing systems development activities.
Additionally, the Company received a one-time $2.6 million contract termination
fee from a portfolio accounting client during the first quarter 1998.
The Company expects approximately 1.6 million mutual fund accounts from a new
client to be converted onto its system during the fourth quarter of 1998. As
expected and earlier reported, Prudential Financial Management Services
internalized the processing for approximately 1,100,000 mutual fund shareowner
accounts primarily during the first quarter of 1998. Also, approximately
650,000 accounts of GT Global Funds were converted off of the Company's system
during the quarter as a result of GT Global's acquisition by the parent company
of the AIM Family of Funds. The Company also expects that approximately 850,000
accounts from a remote client whose accounts were derived from a broker-dealer
will be converted to the broker-dealer's system in the fourth quarter of 1998.
International revenues for the three and nine months ended September 30, 1998
were $34.0 million and $95.8 million, respectively, which represent increases
of 32.2% and 39.0%, respectively, over the comparable 1997 periods. The
increase in international revenues was attributable to higher investment
accounting software and services revenues, increased Canadian mutual fund
processing revenues and higher AWD software and services revenues. The planned
introduction of the European Monetary Unit, which is expected to be effective
beginning January 1, 1999, contributed to increased demand for the Company's
international investment management products and services.
COSTS AND EXPENSES
Consolidated costs and expenses for the three and nine months ended September
30, 1998 increased 17.8% and 17.9%, respectively, over the comparable 1997
periods to $139.9 million and $411.6 million, respectively, primarily as a
result of increases in personnel costs to support business growth and increases
in development costs for DST's new securities transfer system (Fairway). In
addition, the renegotiation of certain third party software agreements,
effective March 31, 1998, resulted in certain amounts being recorded as costs
and expenses instead of depreciation expense. U.S. costs and expenses for the
three and nine months ended September 30, 1998 increased 17.6% and 17.0%,
respectively. International costs and expenses for the three and nine months
ended September 30, 1998 increased 18.4% and 22.0%, respectively.
The Company continues to experience increases in compensation necessary to hire
and retain computer programmers and other systems professionals. While these
cost increases have not materially affected the Company's overall cost
structure to date, the Company believes that the costs associated with computer
programmers and other systems professionals may continue to increase at rates
above general inflation at least through 2000.
L-12
<PAGE>
DEPRECIATION AND AMORTIZATION
Consolidated depreciation and amortization for the three months ended September
30, 1998 increased 2.3% to $19.9 million. Consolidated depreciation and
amortization for the nine months ended September 30, 1998 increased 3.7% to
$60.7 million. The increase in depreciation for the nine months ended September
30, 1998 is primarily attributable to a one-time write-off of intangible assets
totaling $3.2 million in the first quarter 1998, primarily associated with the
$2.6 million contract termination fee referred to above, partially offset by a
decrease in depreciation attributable to the renegotiation of certain third
party software agreements noted above.
INTEREST EXPENSE
Interest expense for the three months ended September 30, 1998 decreased 6.7%
over the prior year due to lower average debt balances. On a year to date
basis, interest expense for 1998 has increased 1.3% over the prior year.
OTHER INCOME
Other income increased $1.3 million and $1.0 million for the three and nine
months ended September 30, 1998, respectively, primarily as a result of gains
on sales of investment securities.
EQUITY IN EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES
Equity in losses of unconsolidated affiliates totaled $1.2 million for the
quarter ended September 30, 1998 as compared to $0.5 million for the quarter
ended September 30, 1997. Year-to-date, equity in losses of unconsolidated
affiliates totaled $1.5 million in 1998 as compared to equity in income of $1.4
million in 1997. The Company's share of losses recorded at European Financial
Data Services Limited ("EFDS") of $2.7 million during the third quarter 1998
was reduced from losses of $3.3 million for the respective 1997 quarter, but
reflected increased losses as compared to the quarter ended June 30, 1998 as a
result of increased costs associated with FAST2000 development and conversion
activity. Year-to-date, losses recorded from EFDS totaled $7.5 million in 1998
as compared to $7.1 million in 1997 due to continuing development costs of
FAST2000, which costs are being expensed as incurred and costs of conversions
of new and existing client accounts to the new system. Lower earnings were
recorded by Argus Health Systems due to the contract termination of a large
client in late 1997. Higher operating earnings were recorded at Boston
Financial Data Services, Inc. from increased levels of mutual fund activity.
INCOME TAXES
DST's effective income tax rate was 31.6% for the three months ended September
30, 1998, as compared to 33.2% for the three months ended September 30, 1997,
primarily caused by the recognition of benefits associated with new Missouri
income apportionment rules designed to attract and retain mutual fund service
companies. DST's effective income tax rate was 34.9% for the nine months ended
September 30, 1998, as compared to 34.0% for the nine months ended September
30, 1997, primarily caused by changes in the components of taxable income and
the effect of certain tax benefits recognized in 1997 relating to certain
international operations. The increase in the effective tax rate for the nine
months ended September 30, 1998 was partially offset by the Missouri
apportionment rules previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash available from operating activities, borrowings from
banks and financing from third-party vendors and others to fund operating,
investing and financing activities.
Cash flows from operating activities totaled $125.1 million for the nine months
ended September 30, 1998. Operating cash flows were affected by an $8.0 million
dividend from Argus Health Systems.
L-13
<PAGE>
Cash flows used in investing activities totaled $80.2 million for the nine
months ended September 30, 1998. The Company has expended $54.2 million year-
to-date for capital additions. Investments and advances to unconsolidated
affiliates totaled $29.3 million, primarily for funding the development of
FAST2000 at EFDS and for investments in available for sale securities.
Cash flows used in financing activities totaled $25.3 million for the nine
months ended September 30, 1998. During the first quarter 1998, the Company
repurchased 200,000 shares of common stock for $10.0 million, completing its
1.2 million share repurchase program. Financing activities also include $10.8
million in payments relating to accrued settlements of prior years' sales and
use tax matters.
The Company maintains a $50 million bank line of credit facility to finance
short-term working capital requirements available through May 1999, of which
total borrowings were $27.2 million as of September 30, 1998. Additionally, the
Company maintains a five-year revolving credit facility of $125 million with a
syndicate of U.S. and international banks. Total borrowings of $30.0 million
were outstanding on this facility at September 30, 1998.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's credit facilities, will be sufficient to meet the Company's operating
and debt service requirements and other current liabilities for at least the
next twelve months. Further, the Company believes that its longer-term
liquidity and capital requirements will be met through cash flows from
operations and existing bank credit facilities, as well as the Company's $125
million revolving credit facility described above.
OTHER
UNREALIZED GAINS ON SECURITIES. The Company holds, among other investments,
approximately 8.6 million shares of Computer Sciences Corporation common stock
and approximately 6.0 million shares of State Street Corporation common stock.
At December 31, 1997 and September 30, 1998, the market value of the Company's
investments in available-for-sale securities reflected aggregate unrealized
gains (net of deferred taxes) of $197.0 million and $255.1 million,
respectively, which are included in Accumulated Other Comprehensive Income on
the Condensed Consolidated Balance Sheet. Included in the computation of
comprehensive income in accordance with Statement on Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" are the $51.6 million net
unrealized gain and $102.2 million net unrealized loss for the third quarter
1997 and 1998 respectively. For the nine months ended September 30, 1997 and
1998, net unrealized gains of $83.0 million and $58.1 million, respectively
were included.
SOFTWARE USAGE AGREEMENT. On March 31, 1998, the Company entered into a
software usage and maintenance agreement for certain computer software to be
utilized at the Winchester Data Center. The new software agreement replaces an
existing agreement with the same vendor, extending the term from 2000 until
2003 and provides for an increase in software usage capacity. Under the
previous agreement, the Company capitalized the total fixed costs to be
incurred under the agreement and recorded a corresponding liability.
Capitalized costs under the previous agreement were depreciated over the period
of the contract while variable payments for incremental usage were recorded as
costs and expenses when incurred. Based on the terms of the new agreement,
annual payments will be recorded as costs and expenses over the period which
they benefit. As a result of replacing the previous agreement, approximately
$9.0 million of computer software previously capitalized by the Company and
related short-term and long-term liabilities were removed from the Company's
balance sheet on March 31, 1998. Although the new agreement will result in
certain future costs being recorded as costs and expenses instead of
depreciation expense, the Company does not believe that the new agreement will
have a material adverse affect on the Company's operating expenses.
SEGMENT INFORMATION. The Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. This statement requires that publicly traded companies report
certain information about their operating segments, products and services,
geographic areas in which they operate, and major customers beginning with the
1998 annual report. The Company is
L-14
<PAGE>
currently evaluating the effect that implementation of this new standard will
have on the information disclosed in its financial statements.
INTERNAL USE SOFTWARE. The Accounting Standards Executive Committee recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The new statement is
effective for fiscal periods beginning after December 15, 1998 and requires
that certain costs for the development of internal use software be recorded as
an asset. Accordingly, certain primary types of development activities will be
required to be capitalized, including coding and software configuration costs,
costs of testing and installing the software, and when clearly distinguishable
from maintenance, costs of upgrades and enhancements. The Company currently
expenses costs of internally developed proprietary software as incurred. The
Company believes the effect of this SOP will result in the capitalization and
amortization of certain software development costs which were previously
expensed. The Company is currently evaluating the new standard and is unable to
determine the effects on the Company's results of operations at this time.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The Financial Accounting
Standards Board recently issued Financial Accounting Standard No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new
statement is effective for fiscal quarters of fiscal years beginning after June
15, 1999 and requires that a company recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. The Company has historically not used derivative
instruments and believes that implementation of this new standard will not have
a material impact on the Company's results of operations.
SEASONALITY. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March 31 due
primarily to processing year-end transactions and printing and mailing of year
end statements and tax forms during January. The Company has historically added
operating equipment in the last half of the year in preparation for processing
year-end transactions which has the effect of increasing costs for the second
half of the year. Software license revenues and operating results are dependent
upon the timing, size, and terms of the license.
YEAR 2000. Many computer programs use only two digits to identify a year in a
date field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000. These Year 2000
related issues are of particular importance to the Company. The Company depends
upon its computer and other systems and the computer and other systems of
third-parties to conduct and manage the Company's business. Additionally, the
Company's products and services are dependent upon using accurate dates in
order to function properly. These Year 2000-related issues may also adversely
affect the operations and financial performance of one or more of the Company's
customers or suppliers. As a result, the failure of the Company's computer and
other systems, products or services, the computer systems and other systems
upon which the Company depends, or of the Company's customers or suppliers to
be Year 2000 ready could have a material adverse effect on the Company's
results of operations, financial position and cash flows.
The Company has completed its review and evaluation of its mission critical
products, services and internal systems and is maintaining its schedule to
achieve material Year 2000 readiness in such products, services and systems
which are material by December 31, 1998. The Company anticipates internal
readiness for all of its other material systems by June 30, 1999. The Company
will continue testing its systems with clients and other third parties for Year
2000 related issues as needed throughout 1999, subject to the cooperation of
such third parties.
As part of resolving its Year 2000 issues, the Company is developing
contingency plans. The Company has had for several years formal contingency
plans for its Winchester Data Center in the event of a natural disaster or a
processing failure such as those that could be caused by Year 2000 issues. The
Company expects to formalize contingency plans for its other material business
units, which would incorporate Year 2000 related contingencies, by March 31,
1999. The costs to address the Year 2000 related issues to date have not been
material, and the Company does not anticipate such costs to become material in
the future.
L-15
<PAGE>
Although the Company is not aware of any material operational or financial Year
2000-related issues not being addressed, the Company cannot ensure that its
computer systems, products, services or other systems or the computers and
other systems of others upon which the Company depends will be Year 2000 ready
on schedule, that the costs of its Year 2000 program will not become material
or that the Company's alternative plans will be adequate. The Company is
currently unable to anticipate accurately the magnitude, if any, of the Year
2000-related issues arising from the Company's customers or suppliers. If any
such risks (either with respect to the Company or its customers or suppliers)
materialize, the Company could experience material adverse consequences to its
business.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is from time to time a party to litigation arising in the ordinary
course of its business. Currently, there are no legal proceedings that
management believes would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
A. The following table presents the sources of the Company's revenues:
<TABLE>
<CAPTION>
SOURCES OF REVENUE
NINE MONTHS ENDED SEPTEMBER 30,
1997 1998
--------------- ---------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. revenues
Mutual fund and Investment management
Data processing services................ $211,420 44.6% $243,490 43.6%
Output processing....................... 63,919 13.5% 72,663 13.0%
-------- ------ -------- ------
275,339 58.1% 316,153 56.6%
Other output processing................... 72,666 15.3% 81,247 14.6%
Other..................................... 56,977 12.0% 64,729 11.6%
-------- ------ -------- ------
Total U.S. revenues......................... 404,982 85.4% 462,129 82.8%
International revenues...................... 68,959 14.6% 95,843 17.2%
-------- ------ -------- ------
Total revenues.............................. $473,941 100.0% $557,972 100.0%
======== ====== ======== ======
</TABLE>
L-16
<PAGE>
B. The following table identifies geographic operating results:
<TABLE>
<CAPTION>
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1997 1998
GEOGRAPHIC INFORMATION -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
U.S. revenues.......................... $134,157 $152,270 $404,982 $462,129
U.S. income from operations............ 20,854 22,057 66,824 74,619
International revenues................. 25,706 33,986 68,959 95,843
International income (losses) from
operations............................ 745 4,357 (582) 11,069
</TABLE>
C. The following table summarizes certain key operating and financial data for
the periods indicated:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
INVESTMENT MARKET VALUES (IN THOUSANDS) (1)
Computer Sciences Corporation................... $360,400 $470,463
State Street Corporation........................ 347,509 325,859
Euronet Services, Inc........................... $ 9,136 $ 5,261
OTHER OPERATING DATA
Mutual fund shareowner accounts processed
(millions)
U.S........................................... 45.0 48.9
Canada........................................ 0.9 1.5
United Kingdom................................ 1.0 1.5
TRAC-2000 mutual fund accounts (millions) (2)... 1.9 2.4
TRAC-2000 participants (thousands).............. 696 836
Portfolio Accounting System portfolios.......... 1,925 1,956
Automated Work Distributor workstations......... 35,100 42,000
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30,
1997 1998
------- -------
<S> <C> <C>
Output Technologies pages printed (millions)................. 1,067.0 1,277.9
Argus pharmaceutical claims processed (millions)............. 109.8 98.2
</TABLE>
- --------
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2) Included in TA2000 mutual fund shareowner accounts processed.
The SEC recently amended its proxy rules to require a registrant, such as the
Company, to disclose the date after which stockholder proposals that are not
included in the Company's proxy statement are considered "untimely" for proxy
solicitation purposes. Under the Company's By-laws, in order for such a
stockholder proposal to be timely and otherwise validly brought before the
Company's 1999 Annual Meeting of Stockholders, a stockholder must notify the
Company's Corporate Secretary no earlier than February 11, 1999 and no later
than March 13, 1999. The calculation of this notice period and By-law
requirements for the contents of such notice are set forth in the Company's
1998 Proxy Statement, which can be obtained by contacting the SEC's Public
Reference Branch or in the SEC's EDGAR database accessible through the SEC's
web site on the World Wide Web at www.sec.gov.
L-17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
10.6.2 Second Amendment to the Employee Stock Ownership Plan and Trust
Agreement of DST Systems, Inc.
10.6.3 Third Amendment to the Employee Stock Ownership Plan and Trust
Agreement of DST Systems, Inc.
10.7.2 Second Amendment to the 1996 Profit Sharing Plan
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
July 23, 1998, reporting the announcement of financial results for the
quarter ended June 30, 1998.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K/A-2
dated August 4, 1998 amending and restating its Form 8-K dated March 15,
1996 (amended and restated April 13, 1998) setting forth certain cautionary
statements identifying important factors that either individually or in
combination with other factors could cause the Company's actual operating
results to differ materially from those projected in forward-looking
statements, whether oral or written, concerning the Company and made by, or
on behalf of, the Company.
The Company filed under Item 5 of Form 8-K, the Company's News Release
dated September 2, 1998 concerning the announcement of the merger of USCS
International, Inc. with a wholly-owned subsidiary of the Registrant.
L-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, and in the capacities indicated on
November 16, 1998.
DST Systems, Inc.
/s/ Kenneth V. Hager
- -------------------------------------
Kenneth V. Hager
Vice President and Chief Financial
Officer
(Principal Financial Officer)
L-19
<PAGE>
APPENDIX M
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-28268
USCS INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1727009
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION)
2969 PROSPECT PARK DRIVE,
RANCHO CORDOVA, CALIFORNIA 95670-6148
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (916) 636-4500
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT OCTOBER 31, 1998
----- -------------------------------
<S> <C>
Common Stock, $.05 par value 23,371,385 shares
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
USCS INTERNATIONAL, INC.
REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements........................................ L-3
Consolidated Condensed Balance Sheets September 30, 1998 (Unaudited)
and December 31, 1997.............................................. L-4
Consolidated Condensed Statements of Operations (Unaudited) Three
months and nine months ended September 30, 1998 and 1997........... L-5
Consolidated Condensed Statements of Comprehensive Income
(Unaudited) Three months and nine months ended September 30, 1998
and 1997........................................................... L-6
Consolidated Condensed Statements of Cash Flows (Unaudited) Nine
months ended September 30, 1998 and 1997........................... L-7
Notes to Consolidated Condensed Financial Statements................ L-8
Item 2. Management's Discussion and Analysis of Financial Condition,
Results of Operations, and Certain Factors That May Affect Future
Results............................................................ L-9-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. L-20
Part II. Other Information
Item 1. Legal Proceedings........................................... L-20
Item 2. Changes in Securities....................................... L-20
Item 3. Defaults Upon Senior Securities............................. L-20
Item 4. Submission of Matters to a Vote of Security Holders......... L-20
Item 5. Other Information........................................... L-20
Item 6. Exhibits and Reports on Form 8-K............................ L-20
Signature........................................................... L-21
</TABLE>
M-2
<PAGE>
USCS INTERNATIONAL, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated condensed financial statements, except for the
balance sheet as of December 31, 1997, have been prepared by USCS
International, Inc. (the "Company") without audit by independent public
accountants, but in accordance with the rules and regulations of the
Securities and Exchange Commission ("SEC") and, in the opinion of the Company,
include all adjustments (consisting only of normal recurring adjustments)
necessary for a fair statement of results for each period shown. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. These financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report to Stockholders and the Company's Annual Report on
Form 10-K for the year ended December 31, 1997. The results of operations for
the quarter and nine months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the entire year ending December
31, 1998.
M-3
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
------ ------------- ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash.............................................. $ 16,630 $ 2,787
Accounts receivable, net.......................... 67,867 71,970
Postage receivable................................ 28,230 25,684
Current portion of net investment in leases....... 4,789 5,892
Paper products and other inventory................ 6,957 4,573
Other............................................. 10,160 9,853
-------- --------
Total current assets............................ 134,633 120,759
Property and equipment, net......................... 105,321 101,631
Net investment in leases, net of current portion.... 4,591 4,686
Other............................................... 28,234 11,543
-------- --------
Total assets.................................... $272,779 $238,619
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable and accrued expenses............. $ 69,850 $ 62,656
Current portion of long-term debt................. 4,594 3,865
Deferred revenue.................................. 7,473 4,529
-------- --------
Total current liabilities....................... 81,917 71,050
Long-term debt, net of current portion.............. 2,451 5,453
Customer deposits and advances...................... 29,116 18,170
Other liabilities................................... 10,333 12,585
-------- --------
Total liabilities............................... 123,817 107,258
-------- --------
Stockholders' Equity:
Preferred Stock, $.05 par value, 10,000,000 shares
authorized; no shares issued and outstanding..... -- --
Common Stock, $.05 par value, 40,000,000 shares
authorized; 23,427,582 shares issued and
23,354,483 shares outstanding at September 30,
1998 (unaudited) and 23,427,582 shares issued and
22,947,233 shares outstanding at December 31,
1997............................................. 1,171 1,171
Additional paid-in capital........................ 52,893 56,504
Retained earnings................................. 96,015 82,897
Treasury stock.................................... (1,463) (9,047)
Foreign currency translation adjustment........... 346 (164)
-------- --------
Total stockholders' equity...................... 148,962 131,361
-------- --------
Total liabilities and stockholders' equity...... $272,779 $238,619
======== ========
</TABLE>
M-4
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED SPETEMBER NINE MONTHS ENDED
30, SEPTEMBER 30,
---------------- -----------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management.................... $40,287 $39,646 $121,856 $115,080
Bill processing........................ 37,114 28,998 105,787 86,917
------- ------- -------- --------
Total................................ 77,401 68,644 227,643 201,997
Equipment sales and services............. 5,102 4,479 18,922 14,794
------- ------- -------- --------
Total revenue........................ 82,503 73,123 246,565 216,791
------- ------- -------- --------
Cost of revenue:
Software and services:
Customer management.................... 20,219 17,759 58,799 53,670
Bill processing........................ 25,599 20,923 75,063 62,847
------- ------- -------- --------
Total................................ 45,818 38,682 133,862 116,517
Equipment sales and services............. 2,974 2,536 12,148 8,062
------- ------- -------- --------
Total cost of revenue................ 48,792 41,218 146,010 124,579
------- ------- -------- --------
Gross profit............................... 33,711 31,905 100,555 92,212
------- ------- -------- --------
Operating expenses:
Research and development................. 8,719 7,323 25,376 22,054
Selling, general and administrative...... 14,385 14,799 42,873 42,261
Non-recurring charges.................... 7,100 -- 7,100 --
------- ------- -------- --------
Total operating expenses............. 30,204 22,122 75,349 64,315
------- ------- -------- --------
Operating income........................... 3,507 9,783 25,206 27,897
Interest (income) expense, net............. (39) 109 250 464
------- ------- -------- --------
Income before income taxes................. 3,546 9,674 24,956 27,433
Income tax provision....................... 3,488 3,883 11,838 10,987
------- ------- -------- --------
Net income................................. $ 58 $ 5,791 $ 13,118 $ 16,446
======= ======= ======== ========
Earnings per share:
Basic.................................... $ -- $ 0.25 $ 0.56 $ 0.71
Diluted.................................. $ -- $ 0.24 $ 0.54 $ 0.68
Weighted average common shares and
equivalents:
Basic.................................... 23,305 23,291 23,232 23,180
Diluted.................................. 24,325 24,438 24,084 24,293
</TABLE>
M-5
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED NINE MONTHS
SEPTEMBER ENDED SEPTEMBER
30, 30,
----------- ---------------
1998 1997 1998 1997
---- ------ ------- -------
<S> <C> <C> <C> <C>
Net income........................................ $ 58 $5,791 $13,118 $16,446
Other comprehensive income:
Foreign currency translation adjustment......... 519 (16) 510 (35)
---- ------ ------- -------
Comprehensive income............................ $577 $5,775 $13,628 $16,411
==== ====== ======= =======
</TABLE>
M-6
<PAGE>
USCS INTERNATIONAL, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 13,118 $ 16,446
Depreciation and amortization............................. 21,015 18,882
Net change in operating assets and liabilities............ 17,746 (3,764)
Non-recurring charges..................................... 7,100 --
-------- --------
Net cash provided by operating activities................... 58,979 31,564
-------- --------
Cash flows from investing activities:
Capital expenditures, net................................. (23,361) (23,988)
Purchase of subsidiary.................................... (13,951) (2,046)
Other..................................................... (2,950) --
-------- --------
Net cash used in investing activities....................... (40,262) (26,034)
-------- --------
Cash flows from financing activities:
Net paydown under revolving credit agreement.............. (4,000) --
Payments on long-term debt................................ (5,741) (4,348)
Proceeds from issuance of long-term debt.................. 7,427 --
Proceeds from issuance of common stock.................... -- 2,338
Purchases of treasury stock net of issuances.............. (2,560) (3,157)
-------- --------
Net cash used in financing activities....................... (4,874) (5,167)
-------- --------
Net increase in cash........................................ 13,843 363
Cash at January 1........................................... 2,787 8,452
-------- --------
Cash at September 30........................................ $ 16,630 $ 8,815
======== ========
Supplemental Schedule of Noncash Financing Activities:
Contribution of Company shares to 401(k).................. $ 6,533 $ --
======== ========
</TABLE>
M-7
<PAGE>
USCS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. LONG-TERM DEBT
The Company has a five-year unsecured revolving credit line, expiring
September 2001, with two banks in the amount of $50 million. Borrowings under
the agreement bear interest at the Company's choice of LIBOR (plus a margin
ranging from .55% to 1.25%), the bank's base rate or a quoted rate. Under the
borrowing agreement, the Company is required to maintain certain financial
ratios and meet a net worth test.
2. TREASURY STOCK
The Company, from time to time, at the authorization of the Board of
Directors, repurchases shares of the Company's common stock to be held as
treasury stock with reservation of such treasury stock for future issuance
under various employee stock purchase and incentive stock option plans and for
distributions to the Company's 401(k) Retirement Plan.
In March 1998, the Company contributed approximately 312,000 shares of
treasury stock to the Company's 401(k) Retirement Plan. The fair market value
on the date of contribution was $6,533,000.
3. EARNINGS PER SHARE
The Company has presented earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). All
previously reported amounts have been restated to conform to SFAS 128. Under
SFAS 128, basic earnings per share are computed using the weighted average
number of outstanding registered shares. Diluted earnings per share are
computed using weighted average registered shares and common stock
equivalents, including the net shares issuable upon exercise of stock options
when dilutive.
4. BUSINESS ACQUISITION
In August of 1998, the Company purchased 100% of the stock of Custima
International Holdings, plc ("Custima") for cash. The business acquired
provides billing and customer care software for the utilities industry. The
cost of the acquisition was approximately $ 15,400,000. The acquisition is
being accounted for as a purchase, and accordingly, the financial statements
include the results of operations from the date of acquisition. The purchase
includes existing technology, in-process research and development, trademarks
and in-place workforce with an aggregate value of approximately $15,200,000.
Based on an independent appraisal, $6,000,000 was attributed to in-process
research and development and, in accordance with applicable accounting
principles, was charged to expense. Also, a reorganization charge for
redundant facilities and workforce of $1,100,000 was taken in connection with
the Company's purchase and consolidation of Custima. Intangible assets are
being amortized on a straight-line basis over periods ranging from 5 to 20
years. The results of operations for periods prior to the acquisition were
immaterial.
5. PROPOSED MERGER
On September 2, 1998, the Company announced a proposed merger with DST
Systems, Inc. ("DST"). DST provides sophisticated information processing and
computer software services and products, primarily to mutual funds, insurance
companies, banks and other financial services organizations. The Board of
Directors of each Company has approved the merger. Under the terms of the
merger agreement, upon the closing, each share of the Company's common stock
will be converted into the right to receive .62 shares of DST common stock.
The merger is intended to be a tax-free reorganization and accounted for as a
pooling of interests. The proposed merger is subject to approval by the
shareholders of both companies and is intended to be completed before the end
of the year.
M-8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS
OF OPERATIONS, AND CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report contains forward-looking statements that involve risks
and uncertainties. The statements that are not historical facts or statements
of current status are forward-looking statements as defined in the Private
Securities Litigation Reform Act of 1995 and are subject to risks and
uncertainties including, but not limited to, the risks and uncertainties set
forth under the caption "Certain Factors That May Affect Future Results." The
Company's future results may differ significantly from the results and
forward-looking statements discussed in this Report.
Founded in 1969, the Company is a leading global provider of customer
management software and services to the communications and other service
industries. The Company's revenues are derived primarily from providing
software to cable television and multi-service providers worldwide, as well as
bill processing services to cable television, telecommunications, financial
services, utilities and other service industries. Software and bill processing
services are generally offered to North American cable television providers
under bundled service arrangements. Outside of North America, software is
generally licensed to customers exclusive of the bill processing. Most of the
Company's revenue is based on the number of subscribers or end-users of the
Company's clients, the number of billing statements mailed and/or the number
of images produced under contracts with terms ranging from three to seven
years. Clients are billed monthly, generally based on the number of end-users
they serve. As a result, a significant portion of the Company's revenue is
recurring and increases as the service provider's customer base grows. In
addition, the Company sells computer hardware and provides associated
maintenance. Leasing is provided as an alternative to equipment purchases for
clients. The Company, since the acquisition of Custima, also provides customer
care and billing software for the utilities industry. See note 4 to the
financial statements.
The Company sells its software and services to cable television and multi-
service providers in North America and the U.K. primarily through a direct
sales force. Outside of North America and the U.K., the Company markets its
software primarily through strategic alliances with companies specializing in
system integration or computer hardware manufacturing that are capable of
providing local sales and support. Building and maintaining relationships with
its clients is an important part of the Company's strategy because selling
cycles can extend a year or longer. The Company has committed increased
resources to the diversification of its customer base, focusing primarily on
international, multi-service, telecommunications, utilities and other high-
volume markets because it believes these represent opportunities to grow at
rates greater than, and decrease its dependence upon, the U.S. cable
television marketplace.
On September 2, 1998, the Company announced a proposed merger with DST
Systems, Inc. ("DST"). See note 5 to the financial statements. The merger is
intended to strengthen the operating, financial and competitive aspects of the
combined company through combined economies of scale, coordinated production
efficiencies and the elimination of duplicate costs. The Company believes that
the combined company will have a significant presence in terms of market share
in the mutual fund shareowner processing, subscriber management services and
output processing industries.
M-9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the Company's
consolidated condensed statements of operations and the percentage of revenue
represented by each line item (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER
SEPTEMBER 30, 30,
----------------------------- ------------------------------
1998 1997 1998 1997
-------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Software and services:
Customer management.. $40,287 48.8% $39,646 54.2% $121,856 49.4% $115,080 53.1%
Bill processing...... 37,114 45.0 28,998 39.7 105,787 42.9 86,917 40.1
------- ----- ------- ----- -------- ----- -------- -----
Total.............. 77,401 93.8 68,644 93.9 227,643 92.3 201,997 93.2
Equipment sales and
services.............. 5,102 6.2 4,479 6.1 18,922 7.7 14,794 6.8
------- ----- ------- ----- -------- ----- -------- -----
Total revenue...... 82,503 100.0 73,123 100.0 246,565 100.0 216,791 100.0
------- ----- ------- ----- -------- ----- -------- -----
Cost of revenue:
Software and services:
Customer management.. 20,219 24.5 17,759 24.3 58,799 23.9 53,670 24.8
Bill processing...... 25,599 31.0 20,923 28.6 75,063 30.4 62,847 29.0
------- ----- ------- ----- -------- ----- -------- -----
Total.............. 45,818 55.5 38,682 52.9 133,862 54.3 116,517 53.8
Equipment sales and
services.............. 2,974 3.6 2,536 3.5 12,148 4.9 8,062 3.7
------- ----- ------- ----- -------- ----- -------- -----
Total cost of
revenue........... 48,792 59.1 41,218 56.4 146,010 59.2 124,579 57.5
------- ----- ------- ----- -------- ----- -------- -----
Gross profit............ 33,711 40.9 31,905 43.6 100,555 40.8 92,212 42.5
------- ----- ------- ----- -------- ----- -------- -----
Operating expenses:
Research and
development........... 8,719 10.6 7,323 10.0 25,376 10.3 22,054 10.2
Selling, general and
administrative........ 14,385 17.4 14,799 20.3 42,873 17.4 42,261 19.4
Non-recurring charges.. 7,100 8.6 -- -- 7,100 2.9 -- --
------- ----- ------- ----- -------- ----- -------- -----
Total operating
expenses.......... 30,204 36.6 22,122 30.3 75,349 30.6 64,315 29.6
------- ----- ------- ----- -------- ----- -------- -----
Operating income........ 3,507 4.3 9,783 13.3 25,206 10.2 27,897 12.9
Interest (income)
expense................ (39) -- 109 .1 250 .1 464 .2
------- ----- ------- ----- -------- ----- -------- -----
Income before income
taxes.................. 3,546 4.3 9,674 13.2 24,956 10.1 27,433 12.7
Income tax provision.... 3,488 4.2 3,883 5.3 11,838 4.8 10,987 5.1
------- ----- ------- ----- -------- ----- -------- -----
Net income.............. $ 58 0.1% $ 5,791 7.9% $ 13,118 5.3% $ 16,446 7.6%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
The following table sets forth revenue and percentage of revenue by line
item exclusive of a discontinued customer, revenue of a discontinued customer
and total revenue (dollars in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS ENDED SEPTEMBER
ENDED SEPTEMBER 30, 30,
---------------------------- ------------------------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Software and services:
Customer management.... $32,875 39.9% $29,256 40.0% $ 94,691 38.4% $ 82,956 38.3%
Bill processing........ 35,959 43.6 28,768 39.4 102,431 41.6 85,869 39.6
Equipment sales and
services............... 3,810 4.6 2,637 3.6 14,614 5.9 8,630 4.0
------- ----- ------- ----- -------- ----- -------- -----
Total................ 72,644 88.1 60,661 83.0 211,736 85.9 177,455 81.9
Discontinued customer... 9,859 11.9 12,462 17.0 34,829 14.1 39,336 18.1
------- ----- ------- ----- -------- ----- -------- -----
Total................ $82,503 100.0% $73,123 100.0% $246,565 100.0% $216,791 100.0%
======= ===== ======= ===== ======== ===== ======== =====
</TABLE>
Revenue
Revenue is derived primarily from providing customer management software and
services to cable television and multi-service providers in more than 20
countries and from providing bill processing services primarily to
telecommunications companies in the U.S. Software and bill processing services
to cable television and multi-service providers are provided generally under
bundled service arrangements. In addition, the
M-10
<PAGE>
Company sells computer hardware and associated maintenance and leasing
services to cable television service providers in connection with licensing
the Company's software and provides design, printing and graphics services in
connection with its bill processing services. Most of the software and
services revenue is based on the number of end-users of the services of the
Company's clients, the number of bills mailed and/or the number of images
produced under long-term contracts, which usually have terms ranging from
three to seven years. The Company generally recognizes software and bill
processing services revenue (collectively referred to as "software and
services revenue") as services are performed. Certain of the Company's
software licenses provide for fixed or minimum fees. Fixed fees and the
present value of minimum fees under software licenses are recognized as
revenue upon installation. Such amounts have not been material. Most contracts
include provisions for inflation-based adjustments, including changes in paper
costs.
Total revenue increased 13% to $82.5 million in the third quarter of 1998
from $73.1 million in the comparable quarter in 1997. The increase in the 1998
third quarter over the same period in 1997 was attributable to growth in
revenue from customer management software and services of $.6 million or 2%,
growth in bill processing of $8.1 million or 28%, and an increase in equipment
sales and services of $.6 million or 14%.
Total revenue increased by 14% to $246.6 million for the nine months ended
September 30, 1998 from $216.8 million in the comparable period in 1997. The
increase in the first nine months of 1998 over the same period in 1997 was
attributable to growth in revenue from customer management software and
services of $6.8 million or 6%, growth in bill processing of $18.9 million or
22%, and an increase in equipment sales and services of $4.1 million or 28%.
Tele-Communications, Inc. ("TCI") represented approximately 12% and 14% of
the Company's total revenue in the third quarter and nine months ended
September 30, 1998, respectively, and 17% and 18% in the same periods in 1997.
TCI represented approximately 18% and 22% of the Company's customer management
software and services revenue in the third quarter and nine months ended
September 30, 1998, respectively, and 26% and 28% in the same periods in 1997.
More than two years ago, TCI announced and began development of an in-house
system to replace the Company's customer management software. On August 11,
1997, TCI informed the Company that it had agreed to sell its partially
developed in-house system to a competitor of the Company and was going to
enter into an exclusive long-term contract for customer management software
with that competitor. Under the contract between TCI and the Company, which
expires on December 31, 1999, TCI may remove subscribers after giving ninety
days' notice, without significant economic penalty. Although TCI has not
provided the Company with a definitive schedule for conversion of the TCI
subscribers to the competitor's software, the conversions have begun, and it
is believed that TCI and the competitor wish to complete the transfer by the
end of 1998. Additionally, the Company believes that TCI's contract with the
competitor provides financial incentives to TCI for converting subscribers of
certain TCI affiliates, some of whom are currently clients of the Company, to
the competitor's software. Revenue from TCI has declined in absolute dollars
from $12.5 million in the third quarter 1997 to $9.9 million in the third
quarter 1998 or 21% and from $39.3 million for the nine months ended September
30, 1997 to $34.8 million in the same period in 1998 or 11%. The decrease was
primarily from a reduction in the number of subscribers serviced by TCI and
services purchased by TCI. The total number of TCI subscribers on the
Company's software declined by approximately 5.6 million or 51% as of
September 30, 1998 compared to December 31, 1997. The actual rate of decline
in the number of TCI subscribers served and revenue derived from TCI cannot be
definitively estimated on a quarter by quarter basis. However, the Company
believes the decline in revenue from TCI will increase throughout the year.
The Company intends to mitigate the impact of this by aggressively pursuing
other domestic and international opportunities and allocating the Company's
resources to other existing or new customers.
If these efforts are not fully successful in mitigating the loss of TCI
business, the Company believes that it has sufficient financial resources and
borrowing ability to meet its obligations and fulfill its customer commitments
during and after the conversion period. To the extent the Company is not
successful in generating additional revenue to offset the expected decline in
revenue from TCI, such decline in revenue could have a material adverse effect
on the Company's consolidated financial position, results of operations or
cash flows.
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Customer management software and services revenue, exclusive of revenue from
TCI, increased 12% to $32.9 million in the third quarter of 1998 from $29.3
million in the comparable 1997 quarter. Bill processing revenue as a stand-
alone service increased 25% to $36.0 million in the third quarter of 1998 from
$28.8 million in the comparable quarter of the prior year. Equipment sales and
services revenue increased to $3.8 million in the third quarter of 1998 from
$2.6 in the third quarter of 1997.
Customer management software and services revenue, exclusive of revenue from
TCI, increased by 14% to $94.7 million for the nine months ended September 30,
1998 from $83.0 million for the same period in 1997. Bill processing revenue
increased by 19% to $102.4 million for the nine months ended September 30,
1998 from $85.9 million for the same period in 1997. Equipment sales and
services revenue increased to $14.6 million for the nine months ended
September 30, 1998 from $8.6 million for the same period in 1997.
Growth in customer management software and services revenue for the third
quarter and nine months ending September 30, 1998 compared to the same periods
in 1997, exclusive of revenue from TCI, came primarily from increases in the
number of subscribers of existing and new clients in the U.S. and
international markets, increases in prices allowed by existing contracts, and
migration of clients to higher-priced services. Growth in bill processing
revenue was derived from an increase in the volume of statements and images
produced because of the internal growth of existing customers and the
acquisition of new customers, primarily in telecommunications and other high-
volume markets. The increase in equipment sales and services revenue was
primarily the result of large equipment sales in the first and second quarters
of 1998 and increased leasing revenues related to new leasing transactions
which occurred in the latter part of 1997. Equipment sales volumes experienced
in prior quarters should not be considered indicative of future equipment
sales volumes.
Three significant clients, including TCI, accounted for $27.3 million and
$28.3 million or 33% and 39% of total revenue in the third quarter of 1998 and
1997, respectively, and $88.8 million and $87.8 million or 36% and 41% of
total revenue for the nine months ended September 30, 1998 and 1997,
respectively. See "--Certain Factors That May Affect Future Results" regarding
these clients and other factors that may impact future revenue.
Cost of Revenue and Gross Profit
Cost of software and services revenue consists primarily of direct labor,
equipment-related expenses, cost of materials such as paper, and facilities
expense. Cost of equipment sales and services revenue consists primarily of
computer hardware purchased for resale or lease and third-party maintenance.
The Company's gross profit margin of approximately 41% in the third quarter
of 1998 was lower than the third quarter 1997 gross margin of approximately
44%. The gross profit margin for the nine months ending September 30, 1998 was
41% compared to 43% for the same period in 1997. The software and services
gross profit margin declined to approximately 41% in the third quarter of 1998
from approximately 44% for the same period in 1997. The software and services
gross profit margin for the nine months ending September 30, 1998 was
approximately 41% compared to 42% for the same period in 1997. The customer
management software and services gross profit margin was 50% in the third
quarter of 1998 compared to 55% in the third quarter of 1997. The gross profit
margin for customer management software and services for the nine months
ending September 30, 1998 was 52% compared to 53% for the same period in 1997.
The bill processing services gross profit margin was 31% in the third quarter
of 1998 compared to 28% in 1997. The bill processing gross profit margin was
29% for the first nine months ending September 30, 1998 compared to 28% for
the same period in 1997. The gross profit margin on equipment-related revenue
decreased to 42% and 36% in the third quarter and nine months ending September
30, 1998 from 43% and 46% for the same periods in 1997, respectively.
The gross profit margin decrease in customer management software and
services in the third quarter of 1998 and nine months ended September 30,
1998, compared to the same periods in 1997, is attributable to inefficiencies
associated with transitioning new customers on to the Company's products and
services while transitioning TCI off, and, to a lesser degree, the
consolidation of Custima's operations. The increase in the bill
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processing gross margin for the third quarter and nine months ended September
30, 1998 was attributed to increased revenues while realizing processing
efficiencies and economies of scale. The decline in the software and services
gross profit margin, consisting of customer management and bill processing,
was due to the inefficiencies cited above as well as a shift in revenue mix
consisting of an increased percentage of the gross profit contribution flowing
from the lower margin bill processing business. Gross margins on equipment
sales and services typically vary based on the mix of equipment sales and
services and underlying demand. The decline in the gross profit margin for
equipment sales and services in the third quarter and nine months ended
September 30, 1998, in comparison to the same periods in the prior year, is
attributable to discounting on equipment sales and increased depreciation
expense on leased equipment.
Research and Development
Research and development costs relate primarily to ongoing product
development and consist of personnel costs, consulting, testing, supplies,
facilities and depreciation expenses. Once the product under development
reaches technological feasibility, the development expenditures are
capitalized and amortized.
Research and development expense was $8.7 million, or 11% of revenue, in the
third quarter of 1998 compared to $7.3 million, or 10% of revenue, for the
same period in 1997. For the nine months ended September 30, 1998, research
and development expense was $25.4 million, or 10% of revenue, compared to
$22.1 million, also approximately 10% of revenue, for the same period in 1997.
The increased expenditures are attributable to the Company's commitment to the
development of new products and enhancements to existing products.
Year 2000 Compliance
Many computer programs use only two digits to identify a year in a date
field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results or fail by or at the Year 2000. Because the Company
licenses software and provides services relating to such software and
otherwise makes extensive use of date-sensitive computer programs, the Company
may have exposure to Year 2000 issues.
The Company has completed a review of its IT systems, such as internal
computer systems, financial and payroll systems and software development
systems, and its non-IT systems, such as HVAC, security and elevators, to
identify systems that could be affected by the "Year 2000 Issue." The Company
has developed an enterprise-wide implementation plan to resolve any Year 2000
issues in its internal systems. With modifications to existing systems, which
are expected to be completed by September 30, 1999, the Company believes the
Year 2000 Issue will not pose significant operational problems for its
computer systems. The Company is in the process of quantifying internal staff
costs as well as consulting and other expenses related to enhancements
necessary to prepare the systems for the Year 2000. The Company currently
believes that such costs will not be material; however, there can be no
assurance of this.
The Company has also completed an assessment of third-party Year 2000
dependencies, has determined risk levels associated with those dependencies
and is in the process of developing contingency plans, which are expected to
be completed by December 31, 1998, relative to those dependencies. The Company
believes that it will not experience any Year 2000 problems from most of its
key vendors and suppliers; however, the Company is unable to determine whether
certain suppliers, principally utility providers, will be Year 2000 compliant
in time. The Company is developing contingency plans in the event that a key
vendor or supplier causes or could potentially cause any Year 2000 problems,
but there can be no assurance that an acceptable contingency plan can be
developed for certain suppliers, such as utilities, or that any such plan
would successfully protect the Company from any Year 2000 exposure. There can
also be no assurance that a vendor or supplier that appears to be Year 2000
compliant will not experience problems that could adversely affect the
Company. The Company is specifically dependent upon uninterrupted service from
utilities providers. In the event that service is disrupted as a result of a
utility provider not being Year 2000 ready, the Company's results of
operations could be materially adversely affected.
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The Company believes that its current products do not require further
modification for the Year 2000 Issue and does not anticipate any material
exposures related to the Year 2000 Issue for its products and services. The
Company expects that the current installed base of its customer management
software will be fully replaced with Year 2000-ready software by June 30,
1999, through both the customers' regular upgrade program and the customers'
maintenance contracts. In certain cases, the Company will be required under
the applicable maintenance contract to provide Year 2000-compliant software
free of charge. The Company believes that the cost of such upgrades will be
immaterial. The Company has since 1995 been implementing an on-going program
of upgrading or replacing its bill processing computer systems. A part of such
program includes providing Year 2000 capability. The cost of including Year
2000 compliance as part of the upgrade program is immaterial. The program is
expected to be completed by September 30, 1999.
Factors that could impact the Company's ability to make the necessary
modifications and deploy those modifications across the current computer
systems include, but are not limited to, the availability and cost of trained
personnel and the ability of such personnel to complete the current
remediation plan on schedule. However, if such remediation is not completed on
a timely basis or is more costly to implement than currently anticipated, the
Company's business, financial condition or results of operations could be
materially adversely affected. Further, the Company cannot anticipate the
degree to which it may be the subject of claims or complaints regarding the
Year 2000 Issue.
Selling, General and Administrative
Selling expenses consist of compensation for sales and marketing personnel
including commissions and related bonuses, travel, trade shows and promotional
expenses. General and administrative expenses consist of compensation for
administration, finance and general management personnel, as well as legal and
accounting fees.
Total selling, general and administrative expenses did not significantly
vary in the third quarter and nine months ended September 30, 1998 in
comparison to the same periods in 1997. Selling and marketing expenditures
decreased by 2% in the third quarter of 1998 compared to the third quarter of
1997. As a percentage of revenue, selling and marketing expenditures decreased
by approximately 1% in the third quarter and first nine months of 1998
compared to the same periods in 1997. General and administrative expenses for
the third quarter decreased by approximately 4% and decreased by less than 1%
in the nine months ended September 30, 1998 compared to the same periods in
1997. As a percentage of revenue, general and administrative expense in the
third quarter declined by approximately 2 percentage points compared to the
same period in 1997 and by approximately 1 percentage point for the first nine
months of 1998 compared to the same period in 1997. The decline in selling,
general and administrative expense as a percentage of revenue in the third
quarter and nine months ended September 30, 1998, when compared to the same
periods in 1997, was due to increased revenue coupled with cost containment
efforts.
Acquisition of Business and Non-Recurring Charges
In August of 1998, the Company purchased for cash 100% of the stock of
Custima International Holdings, plc (Custima). Based in the United Kingdom,
Custima provides customer management and billing software to the utilities
industry and supports electric, gas, water and waste utilities on an
international basis. The acquisition of Custima is expected to facilitate the
Company's efforts to expand and diversify its product offerings into the
utilities industry both domestically and internationally.
The aggregate cost of the acquisition was approximately $15.4 million. The
acquisition is being accounted for as a purchase, and accordingly, the
financial statements include the results of operations from the date of
acquisition. The purchase includes existing technology, in-process research
and development, trademarks and in-place workforce of approximately $15.2
million.
The Company incurred $7.1 million in non-recurring charges pertaining to the
acquisition of Custima. The non-recurring charges consist of an in-process
research and development write-off of $6.0 million and a
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<PAGE>
reorganization charge for redundant facilities and workforce of $1.1 million.
See note 4 to the financial statements.
Interest Rate
Interest expense consists of interest on borrowings under revolving credit
agreements, revenue bonds pertaining to certain of the Company's facilities
and notes and credit agreements related to the Company's leasing subsidiary.
Interest expense for the three and nine months ended September 30, 1998 did
not materially change in comparison to the same periods in 1997.
Income Taxes
The Company's provision for income taxes represents estimated federal, state
and foreign income taxes. The income tax rate was 36% and 38% for the quarter
and nine months ended September 30, 1998, respectively, after adjustment for
the non-deductible in-process research and development charge of $6.0 million
and non-deductible amortization of goodwill related to the Custima
acquisition. The cumulative tax rate adjustment from 39% for the first six
months of 1998 to 38% for the nine-month period ending September 30, 1998 was
effected in the third quarter of 1998. This was approximately two percentage
points lower than the 1997 comparable periods. The rate decline is
attributable to the mix of foreign and domestic income and the application of
tax reduction strategies.
Net Income
Adjusted information is provided to facilitate comparisons to prior periods.
Net income, as adjusted to exclude the effects of the non-recurring charges
of $7.1 million and Custima's operating loss of $.7 million, would have been
$7.3 million for the third quarter of 1998, an increase of approximately 26%
over the same period in 1997. For the first nine months of 1998, net income
would have been $20.4 million or 24% higher than the same period in 1997.
Diluted earnings per share would have been $.30 and $.85 for the third quarter
and nine months ending September 30, 1998 compared to $.24 and $.68 in the
same periods in 1997, respectively.
Net income as reported decreased by $5.7 million or 99% and by $3.3 million
or 20% in the third quarter and nine months ended September 30, 1998 compared
to the same periods in 1997, respectively. The decline in net income was
primarily the result of the $7.1 million in non-recurring charges explained
above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity position remained strong through the third quarter
of 1998. Total long-term debt, including the current portion, was $7.0 million
as of September 30, 1998 compared to $9.3 million at December 31, 1997. The
debt outstanding at September 30, 1998 pertains to the Company's leasing
subsidiary and is collateralized, without recourse, by rents receivable. At
September 30, 1998, the Company had an available $50 million line of credit.
There were no borrowings outstanding at September 30, 1998. Total capital
expenditures through the third quarter of 1998 were $23.4 million compared to
$24.0 million in the same period in 1997. The Company, in 1998, has expended
approximately $2.6 million, net of issuances, for the repurchase of stock. In
addition, the Company has contributed approximately 312,000 shares of treasury
stock to fund its $6.5 million obligation to the 401(k) Retirement Plan.
The Company collects from its clients and remits to the U.S. Postal Service
a significant amount of postage. Substantially all contracts allow the Company
to pre-bill and/or require deposits from its clients to mitigate the effect on
cash flow.
The Company continues to make significant investments in capital equipment,
facilities, and research and development as well as to expand into new
domestic and international markets. The Company believes that net cash from
operations and the Company's borrowing availability will be sufficient to
support operations through the next twelve months.
M-15
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, changes in the global
communications market, concentration in the cable television market, the
Company's ability to retain existing customers and attract new customers in
the global communications market as well as utilities and other high-volume
service industries, the Company's continuing ability to develop products that
are responsive to the evolving needs of its customers, increased competition,
changes in operating expenses, changes in government regulation of the
Company's customers and general economic factors in the U.S. as well as the
international marketplace.
Changing Communications Market and Development of Software and Services
The communications market is characterized by rapid technological
developments, changes in client requirements, evolving industry standards and
frequent new product introductions. The Company's future success will depend,
in part, upon its ability to enhance its existing applications, develop and
introduce new products that take advantage of technological advances and
respond promptly to new client requirements and evolving industry standards.
The Company has expended considerable funds to develop products to serve the
changing communications market. If the communications market grows or
converges more slowly than anticipated or the Company's products and services
fail to achieve market acceptance, there could be a material adverse effect on
the financial condition and results of operations of the Company.
The Company's development projects are subject to all of the risks
associated with the development of new software and other products based on
innovative technologies. The failure of such development projects could have a
material adverse effect on the financial condition and results of operations
of the Company.
Dependence on the Cable Television Market
Although the Company's current strategy is to address the needs of the
global communications market and other high volume service providers, the
Company is highly dependent on the cable television market. For the three and
nine months ended September 30, 1998, more than 55% of the Company's revenue
was derived from sales to cable television service providers. Although the
cable television industry outside of North America is generally expanding, the
number of providers of cable television service in the U.S. has been
declining, due to industry consolidation, resulting in a reduction of the
number of potential cable television clients in the U.S. As the number of
companies serving the available subscriber base decreases, the loss of a
single client could have a greater adverse impact on the Company than in the
past. Even if the number of clients remains the same, a decrease in the number
of subscribers served by the Company's cable television clients would result
in lower revenue for the Company. Furthermore, a decrease in the number of
cable subscribers or any adverse development in the cable television market
could have a material adverse effect on the financial condition and results of
operations of the Company.
Concentration of Client Base
Aggregate revenue from the Company's ten largest clients accounted for
approximately 65% of total revenue for the three and nine months ended
September 30, 1998. Loss of all or a significant part of the business of any
of these clients or a decrease in their respective customer bases would have a
material adverse effect on the financial condition and results of operations
of the Company. Three of the Company's clients, including TCI, represented
approximately 33% and 39% of total revenue in the third quarter of 1998 and
1997 and 36% and 41% of total revenue for the nine months ended September 30,
1998 and 1997, respectively.
TCI represented approximately 12% and 14% of the Company's revenue in the
third quarter and nine months ended September 30, 1998, respectively, and 17%
and 18% in the same periods in 1997.
The Company's largest bill processing client, Ameritech Corporation,
accounted for 12% of total revenue in both the third quarter and nine months
ended September 30, 1998 and for 13% and 14% of total revenue in
M-16
<PAGE>
the third quarter and nine months ended September 30, 1997, respectively.
Ameritech became a client early in 1994 and has contracts with the Company
expiring in 2000 and 2001. Another bill processing client, Cincinnati Bell
Information Systems, Inc. ("CBIS"), a client since 1990, accounted for 9% and
10% of total revenue in the third quarter and nine months ended September 30,
1998, respectively, and 9% of total revenue in both the third quarter and nine
months ended September 30, 1997. Early in 1997, the Company entered into a new
contract with CBIS expiring in 2002.
Potential Loss of Revenue
In addition to the loss of revenue from TCI as discussed in "Management's
Discussion And Analysis Of Financial Condition And Results Of Operations--
Revenue," another customer that accounted for approximately 6% of the
Company's total revenue in both the third quarter and nine months ended
September 30, 1998 and 5% in the same periods in 1997, and for approximately
10% of the Company's customer management software and services revenue in both
the third quarter and nine months ended September 30, 1998 and 8% in the same
periods in 1997, has orally advised the Company that it may move to an
alternative solution for its customer management software requirements. The
customer has informed the Company that it expects that a competitor of the
Company may have this alternative available for pilot testing in mid-1999 and,
if that test is successful, the customer would begin migrating its subscribers
to this alternative in the first or second quarter of 2000. The migration
would extend over twelve months or longer. Under the contract between the
customer and the Company, which expires in July 2003, the customer may remove
subscribers after giving ninety days' notice, without significant economic
penalty.
Variability of Quarterly Operating Results
The Company's quarterly and annual operating results may fluctuate from
quarter to quarter and year to year depending on various factors, including
the impact of significant start-up costs associated with initiating the
delivery of contracted services to new clients, the hiring of additional
staff, new product development and other expenses, introduction of new
products by competitors, pricing pressures, the effect of acquisitions, the
evolving and unpredictable nature of the markets in which the Company's
products and services are sold and general economic conditions. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Acquisition of Business and Non-recurring Charges."
Year 2000 Compliance
The Company has completed "Year 2000" related reviews of its internal
computer systems such as financial, payroll and software development systems
as well as its production systems and products. The Company has also completed
Year 2000 assessments of external third-party software and services
dependencies that might have an impact on the operations of the Company. The
Company has developed an enterprise-wide implementation plan to resolve any
Year 2000 problems, and with current and future modifications of existing
systems, believes Year 2000-related issues will not pose significant
operational problems for its computer systems. Also, the Company believes it
will not experience any Year 2000 problems related to most of its external
third-party software and services dependencies. The Company, while still in
the process of determining costs related to Year 2000 preparation, does not
believe that such costs will be material. However, there can be no assurance
that the Company will not experience some type of computer hardware, software
or operational problem that is related to the Year 2000 Issue, and there can
be no assurance that such a problem will not have a material adverse impact on
the operations or financial position of the Company or the Company's
customers. Although costs related to Year 2000 preparedness are still being
quantified, there also can be no assurance that these costs will not have an
adverse material impact to the Company and its results of operations. See
"Management's Discussion And Analysis Of Financial Condition And Results Of
Operations--Year 2000 Compliance."
New Products, Rapid Technological Changes and Competition
The market for the Company's products and services is highly competitive,
and competition is increasing as additional market opportunities arise. The
Company believes its most significant competitors for customer
M-17
<PAGE>
management software and services are independent providers of such software
and services and in-house systems.
Through the acquisition of Custima, the Company is entering into a new
market that is currently undergoing significant and rapid changes. There can
be no assurance that the Company will be successful in this new market. See
note 4 to the financial statements.
In addition, competitive factors could influence or alter the Company's
overall revenue mix between customer management software, services, including
bill processing services, and equipment sales and leasing. Any of these
factors could have a material adverse effect on the financial condition and
results of operations, including gross profit margins, of the Company.
Electronic Bill Presentment
The Company's bill processing business is dependent on its ability to
design, handle, print and distribute via first class mail paper-based
statements and related materials. A number of companies, many with resources
greater than the Company, are developing and introducing electronic bill
presentment services that could reduce, if not eliminate, the need for paper
statements.
The Company has introduced products, begun customer applications and pilots,
and has formed alliances with other companies for the introduction, marketing
and deployment of electronic bill presentment and other electronic services.
The maintenance of the Company's paper statement expertise, successful
development and marketing of electronic services and rate of customer
acceptance of such services are all subject to the technological, competitive
and market condition risks discussed in various sections of this report.
Client Failure to Renew or Utilize Contracts
Substantially all of the Company's revenue is derived from the sale of
services or products under long-term contracts with its clients. The Company
does not have the unilateral option to extend the terms of such contracts upon
their expiration. In addition, certain of the Company's contracts do not
require clients to make any minimum purchase. Others require minimum purchases
that are substantially below the current level of business under such
contracts, and all such contracts are cancelable by clients under certain
conditions. The failure of clients to renew contracts, a reduction in usage by
clients under any contracts or the cancellation of contracts could have a
material adverse effect on the Company's financial condition and results of
operations. See "Management's Discussion And Analysis Of Financial Condition
And Results Of Operations--Revenue."
International Business Activities
The Company's strategy to diversify its customer base includes the selling
of its products in a variety of international markets. To date, the Company's
primary customer management software has been installed in more than 20
countries. Generally, the Company operates in U.S. dollars, which reduces but
does not eliminate exposure to the adverse impact of currency fluctuations.
Currently, less than 10% of the Company's customer management software and
services revenue comes from international sources, and the Company is
expanding its international presence, primarily through third-party marketing
and distribution alliances. The Company's current and proposed international
business activities are subject to certain inherent risks, including, but not
limited to, specific country, regional or global economic conditions, exchange
rate fluctuation and its impact on liquidity, changes in the national
priorities of any given country and cultural differences. There can be no
assurance that such risks will not have a material adverse effect on the
Company's future international sales and, consequently, the Company's
business, operating results and financial condition.
Dependence on Proprietary Technology
The Company relies on a combination of patent, trade secret and copyright
laws, nondisclosure agreements, and other contractual and technical measures
to protect its proprietary technology. There can be no assurance
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<PAGE>
that these provisions will be adequate to protect its proprietary rights.
There can be no assurance that third parties will not assert infringement
claims against the Company or the Company's clients.
The Company has been advised by a cable customer that a third party has
orally asserted that patents held by the third party may be infringed by the
customer's use of interactive computer telephony systems, and that, should it
become necessary, the customer would seek indemnification from the Company. To
the best of the Company's knowledge, no legal proceedings with regard to this
matter have been instituted against the customer or the Company as of the date
of this Report. There can be no assurance, however, that such claims, if
brought, would not have a material adverse effect on the Company.
Management of Growth and Attraction and Retention of Key Personnel
Management of the Company's growth, which may occur both internally and
through acquisitions, may place a considerable strain on the Company's
management, operations and systems. The Company's ability to execute its
business strategy will depend in part upon its ability to manage the demands
of a growing business. Any failure of the Company's management team to
effectively manage growth could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company's future success depends in large part on the continued service
of its key management, sales, product development and operational personnel.
The Company believes that its future success also depends on its ability to
attract and retain skilled technical, managerial and marketing personnel,
including, in particular, additional personnel in the areas of research and
development and technical support. Competition for qualified personnel is
intense. The Company has from time to time experienced difficulties in
recruiting qualified skilled technical personnel. Failure by the Company to
attract and retain the personnel it requires could have a material adverse
effect on the financial condition and results of operations of the Company.
Government Regulation
The Company's existing and potential clients are subject to extensive
regulation, and certain of the Company's revenue opportunities may depend on
continued deregulation in the world-wide communications industry. In addition,
the Company's clients are subject to certain regulations governing the privacy
and use of the customer information that is collected and managed by the
Company's products and services. Regulatory changes that adversely affect the
Company's existing and potential clients could have a material adverse effect
on the financial condition and results of operations of the Company.
Volatility of Stock Price and Proposed Merger with DST Systems, Inc.
Although the Company believes that it has the product offerings and
resources needed for continuing success, future revenue and margin trends
cannot be reliably predicted and may cause the Company to adjust its
operations. The Company's stock price, like that of other technology
companies, is subject to significant volatility. The announcement of new
products, services or technologies by the Company or its competitors, proposed
mergers or acquisitions, quarterly variations in the Company's results of
operations, changes in revenue or earnings estimates by the investment
community and speculation in the press or investment community are among the
factors affecting the Company's stock price. In addition, the stock price may
be affected by general market conditions and domestic and international
macroeconomic factors unrelated to the Company's performance. Because of the
foregoing reasons, recent trends should not be considered reliable indicators
of future stock prices or financial results.
Certain risks are inherent in the proposed merger with DST Systems, Inc.
(DST) including, but not limited to, failure of the proposed merger to occur,
or of the combined company to realize certain efficiencies and economies of
scale, as well as an adverse reaction by the investment community or the
combined company's customers. Furthermore, the Company's pre-merger stock
price is significantly influenced by the stock price of DST. Any fluctuations
in the stock price of DST may have an effect on the stock price of the Company
prior to
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<PAGE>
the merger. Failure of the proposed merger to occur could have an adverse
effect on the Company's stock price as well as the Company's future operating
results due to the write-off of pre-merger costs incurred and possible market
stigma.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
The Company does not have any material pending legal proceedings other than
ordinary routine litigation incidental to its normal business activities.
ITEM 2. CHANGES IN SECURITIES:
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES:
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) EXHIBITS.
Exhibit 11--Computation of Per Share Earnings
Exhibit 27--Financial Data Schedule
(b) REPORTS ON FORM 8-K:
The Registrant filed the following reports Form 8-K:
Registrant's Press Release, dated as of September 2, 1998, announcing
an agreement to merge USCS International, Inc. with a wholly owned
subsidiary of DST Systems, Inc.
Registrant's Press Release, dated as of August 13, 1998, announcing
the acquisition of Custima International Holdings, plc, by CableData
International, Ltd., a wholly owned subsidiary of USCS International,
Inc.
M-20
<PAGE>
USCS INTERNATIONAL, INC.
SIGNATURE
PURSUANT TO THE REQUIREMENTS 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.
USCS International, Inc.
(Registrant)
/s/ Douglas L. Shurtleff
By: _________________________________
Douglas L. Shurtleff
Senior Vice-President of Finance
and
Chief Financial Officer
(Principal Financial Officer)
Dated: November 13, 1998
M-21
<PAGE>
EXHIBIT 11
USCS INTERNATIONAL, INC.
COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding during the period................. 23,305 23,291 23,232 23,180
Common stock equivalents considered to be
outstanding for the periods presented......... 1,020 1,147 852 1,113
------- ------- ------- -------
24,325 24,438 24,084 24,293
Net income..................................... $ 58 $ 5,791 $13,118 $16,446
Earnings per share
Basic........................................ $ -- $ 0.25 $ 0.56 $ 0.71
Diluted...................................... $ -- $ 0.24 $ 0.54 $ 0.68
</TABLE>
M-22
<PAGE>
COMMON COMMON
DST SYSTEMS, INC.
Special Meeting of Stockholders-December 21, 1998
Solicited on Behalf of the DST Board of Directors
The DST Board recommends that you have your votes cast FOR each of the proposals
listed on this card. Each has been proposed by the DST Board and none is related
to or conditioned on the approval of any other proposal which may come before
the meeting.
You authorize the Proxy Committee to vote in its discretion upon such other
business as may properly come before the Special Meeting. You may revoke this
proxy in the manner described in the Joint Proxy Statement-Prospectus dated
November 25, 1998, receipt of which you hereby acknowledge.
If you do not specify how you authorize the Proxy Committee to vote on a
proposal, you authorize it to vote FOR the proposal.
PLEASE PROMPTLY DATE AND SIGN ON THE REVERSE AND RETURN IN THE ENCLOSED ENVELOPE
OR AUTHORIZE YOUR PROXY BY TELEPHONE AT (800) 435-2911 OR ELECTRONICALLY AT
http://www.eproxy.com/dst.
IF YOUR ADDRESS HAS CHANGED, PLEASE NOTE THE NEW ADDRESS BELOW.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[X] IF MARKING BOXES,
FOLLOW THIS EXAMPLE
The DST Board recommends that you have
your votes cast FOR these proposals
To vote in accordance with the DST Board of
Directors' recommendations please sign and
date below; you need not mark any boxes.
- ---------------------------
DST SYSTEMS, INC.
- --------------------------- 1. Approval of Merger, For Against Abstain
including Issuance
The DST Board of Directors of DST Common Stock [_] [_] [_]
has appointed Messrs. Thomas pursuant to the
A. McDonnell, Robert C. Merger Agreement
Canfield and Kenneth V. Hager between DST and USCS For Against Abstain
to act as the Proxy Committee, International, Inc.
each with the power to appoint 2. Amendment of DST Stock [_] [_] [_]
his substitute. By signing Option and Performance
this card, you are authorizing Award Plan to increase
such Proxy Committee to the number of shares
represent and to vote at the of DST Common Stock
Special Meeting of Stockholders available for awards
to be held on December 21, thereunder.
1998, or any adjournment
thereof, in the manner you
specify on this card, all the
shares of common stock of DST
Systems, Inc. you held of
record on November 6, 1998.
Mark box at right if you plan [_]
to attend the Special Meeting
of Stockholders.
Mark box at right if an address [_]
Please be sure to sign exactly change has been noted on the
as your name appears above Date reverse of this card.
and date this Proxy Card.
All joint owners must sign. Officers of
corporate stockholders, executors,
Stockholder sign here administrators, trustees, guardians and
attorneys-in-fact must indicate the
Co-owner sign here capacity in which they are signing.
DETACH CARD DETACH CARD
DST SYSTEMS, INC.
Dear Stockholder:
Important matters set forth in the enclosed Joint Proxy Statement-Prospectus
require your immediate attention and approval.
DST strongly encourages you to exercise your right to authorize your proxy to
vote your shares. Your proxy counts.
Please sign the Proxy Card, detach it, and promptly return it in the enclosed
postage paid envelope. Alternatively, you may authorize your proxy by telephone
at (800) 435-2911 or electronically at http://www.eproxy.com/dst. If you choose
to do so, you will need the 14 digit identification across the top of the Proxy
Card.
Thank you in advance for your prompt attention.
Sincerely,
DST Systems, Inc.
<PAGE>
ESOP ESOP
DST SYSTEMS, INC.
Special Meeting of Stockholders -- December 21, 1998
CONFIDENTIAL VOTING INSTRUCTIONS TO UMB BANK, N.A. AS TRUSTEE UNDER THE
EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST AGREEMENT OF DST SYSTEMS, INC.
The Trustee of The Employee Stock Ownership Plan and Trust Agreement of DST
Systems, Inc. ("ESOP") seeks your instruction on how to vote your shares on the
proposals listed on the reverse side of this Instruction Card. Each has been
proposed by the DST Board, and none is related to or conditioned on the approval
of any other proposal which may come before the meeting. The DST Board
recommends that you have your votes cast FOR each proposal.
By signing this Instruction Card, you direct that the voting rights pertaining
to shares of common stock of DST Systems, Inc. held by the Trustee and allocated
to your ESOP account shall be exercised as specified herein by you at the
Special Meeting of Stockholders to be held on December 21, 1998, or any
adjournment thereof, and in the Trustee's discretion on all other matters
properly brought before the Special Meeting of Stockholders. You may revoke your
instruction in the manner described in the Joint Proxy Statement-Prospectus
dated November 25, 1998, receipt of which you hereby acknowledge.
If you specify no choice or fail to return this Instruction Card, the Trustee
will vote shares allocated to your ESOP account in the same proportion as the
shares held by the ESOP for which the Trustee receives voting instructions.
- --------------------------------------------------------------------------------
PLEASE PROMPTLY DATE AND SIGN ON THE REVERSE AND RETURN IN THE ENCLOSED ENVELOPE
OR MAKE YOUR INSTRUCTIONS BY TELEPHONE AT (800) 435-2911 OR ELECTRONICALLY AT
http://www.eproxy.com/dst.
- --------------------------------------------------------------------------------
IF YOUR ADDRESS HAS CHANGED, PLEASE NOTE THE NEW ADDRESS BELOW.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[X] IF MARKING BOXES,
FOLLOW THIS EXAMPLE
- -------------------------
DST SYSTEMS, INC.
- -------------------------
1. Approval of Merger, including For Against Abstain
Issuance of DST Common
Stock pursuant to the Merger [_] [_] [_]
Agreement between DST and
USCS International, Inc.
RECORD DATE SHARES:
2. Amendment of DST Stock Option For Against Abstain
and Performance Award Plan to
increase the number of shares [_] [_] [_]
of DST Common Stock
available for awards thereunder.
The DST Board of Directors recommends
that you have your votes cast FOR these proposals.
Mark box at right if you plan to attend the [_]
Special Meeting of Stockholders
Mark box at right if an address change has been [_]
noted on the reverse of this card.
| Please be sure to sign exactly as your name appears above | Date
and date this Instruction Card.
By signing, you acknowledge that you have read the
-- reverse of this Instruction Card.
Participant sign here
DETACH CARD DETACH CARD
DST SYSTEMS, INC.
Dear ESOP Participant:
Important matters set forth in the enclosed Joint Proxy Statement-
Prospectus require your immediate attention and approval.
DST strongly encourages you to exercise your right to instruct the Trustee
under The Employee Stock Ownership Plan and Trust Agreement of DST Systems,
Inc. ("ESOP") how to vote the shares allocated to your ESOP account. Your
instruction counts.
Please mark the boxes on this Instruction Card to indicate how the Trustee
shall vote your shares. Then sign the Instruction Card, detach it, and
promptly return it. PLEASE USE THE ENCLOSED POSTAGE PAID ENVELOPE AND DO
NOT RETURN THIS CARD TO THE COMPANY AS YOUR VOTE IS CONFIDENTIAL.
Alternatively, you may make your instructions by telephone at (800) 435-
2911 or electronically at http://www.eproxy.com/dst. If you choose to do
so, you will need the 14 digit identification across the top of the
Instruction Card.
Thank you in advance for your prompt attention.
Sincerely,
DST Systems, Inc.
<PAGE>
COMMON COMMON
USCS INTERNATIONAL, INC.
Special Meeting of Stockholders--December 21, 1998
Solicited on Behalf of the USCS Board of Directors
The USCS Board recommends that you have your votes cast FOR the proposal listed
on this card. The proposal has been proposed by the USCS Board and is not
related to or conditioned on the approval of any other proposal which may come
before the meeting.
You authorize James C. Castle, James E. Laramy, Terry Kaufman and Lisa A.
Mondori to vote in their discretion upon such other business as may properly
come before the Special Meeting. You may revoke this proxy in the manner
described in the Joint Proxy Statement-Prospectus dated November 25, 1998,
receipt of which you hereby acknowledge.
This proxy when properly signed will be voted in the manner directed herein by
the undersigned stockholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1.
- --------------------------------------------------------------------------------
PLEASE DATE AND SIGN ON THE REVERSE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.
- --------------------------------------------------------------------------------
<PAGE>
[X] IF MARKING BOXES,
FOLLOW THIS EXAMPLE
To vote in accordance with
the USCS Board of Directors'
recommendation please sign
and date below; you need
not mark any boxes.
- ----------------------------
USCS INTERNATIONAL, INC.
- ---------------------------- 1. Approve and Adopt For Against Abstain
the Merger Agreement
The undersigned hereby between DST Systems, [_] [_] [_]
appoints James C. Castle, Inc. and USCS
James E. Laramy, Terry International, Inc.
Kaufman and Lisa A. Mondori and the consummation
and each of them, as proxies of the Merger.
to vote shares which the
undersigned is entitled
to vote at the Special
Meeting of Stockholders
of USCS to be held at the
offices of USCS, 2969
Prospect Park Drive,
Rancho Cardova, California,
on December 21, 1998, at
9:00 a.m. and any The USCS Board recommends that
adjournments thereof. you have your votes cast FOR this proposal.
Mark box at right if you plan to [_]
attend the Special Meeting of
Stockholders.
All joint owners must sign. Officers of
corporate stockholders, executors,
Stockholder sign here administrators, trustees, guardians and
attorneys-in-fact must indicate the capacity
Co-owner sign here in which they are signing.
DETACH CARD DETACH CARD
USCS INTERNATIONAL, INC.
Dear Stockholder:
Important matters set forth in the enclosed Joint Proxy Statement-Prospectus
require your immediate attention and approval.
USCS strongly encourages you to exercise your right to authorize your proxy to
vote your shares. Your proxy counts.
Please sign the Proxy Card, detach it, and promptly return it in the enclosed
postage paid envelope.
Thank you in advance for your prompt attention.
Sincerely,
USCS International, Inc.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides,
generally, that a corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (except actions by or in the
right of the corporation) by reason of the fact that such person is or was a
director, officer, employee or agent of the corporation against all expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interest of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his or her conduct was unlawful. A corporation may similarly indemnify
such person for expenses actually and reasonably incurred by such person in
connection with the defense or settlement of any action or suit by or in the
right of the corporation, provided such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the corporation, and, in the case of claims, issues and matters
as to which such person shall have been adjudged liable to the corporation,
provided that a court shall have determined, upon application, that, despite
the adjudication of liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
Section 102(b)(7) of the DGCL provides, generally, that the certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such
provision may not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under section 174
of Title 8 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. No such provision may eliminate or limit
the liability of a director for any act or omission occurring prior to the
date when such provision becomes effective.
The DST Certificate of Incorporation provides that the directors and
officers of DST, or persons who are or were serving at the request of DST as
directors or officers of other corporations, shall be indemnified to the
maximum extent permitted by law against expenses incurred by such individuals
in defending a civil or criminal action, suit or proceeding brought against
such officers and directors in their capacities as such. Such expenses shall
be paid by DST in advance of the final disposition of such action, suit or
proceeding. As to directors and officers, the DST Certificate of Incorporation
requires receipt by DST of an undertaking by or on behalf of the director or
officer to repay such amount if it is ultimately determined that the director
or officer is not entitled to be indemnified by DST as authorized by the DGCL.
The foregoing right of indemnification and advancement of expenses is not
exclusive of any other rights of indemnification and advancement of expenses
to which any such individual may be entitled by by-law, agreement, vote of
stockholders or disinterested directors or otherwise.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
2 Agreement and Plan of Merger, dated September 2, 1998 by and among DST
Systems, Inc., DST Acquisitions, Inc. and USCS International, Inc.
3.1 DST's Delaware Certificate of Incorporation, as restated, which is
attached as Exhibit 3.1 to DST's Registration Statement on Form S-1 dated
September 1, 1995 (Commission File No. 33-96526) (the "IPO Registration
Statement")
3.2 Amended and Restated By-Laws of DST Systems, Inc., which are attached as
Exhibit 3.2 to DST's IPO Registration Statement is hereby incorporated by
reference as Exhibit 3.2
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
4.1 Form of USCS International, Inc. Stockholder Agreement
4.2 Form of DST Systems, Inc. Stockholder Agreement between DST Systems, Inc.
and Kansas City Southern Industries, Inc. ("KCSI")
4.2.1 Letter Agreement amending DST Systems, Inc. Stockholder Agreement between
DST and KCSI, dated October 29, 1998
4.3 Form of Registration Rights Agreement
4.4 Form of USCS International, Inc. Affiliate Agreement
4.5 Form of DST Systems, Inc. Affiliate Agreement
4.6 The Registration Rights Agreement dated October 24, 1995, between DST and
KCSI, which is attached as Exhibit 4.1 to the IPO Registration Statement,
is hereby incorporated by reference as Exhibit 4.6
4.7 The Certificate of Designations dated October 16, 1995, establishing the
Series A Preferred Stock of DST, which is attached as Exhibit 4.3 to the
IPO Registration Statement, is hereby incorporated by reference as Exhibit
4.7
4.8 The Summary of the preferred stock purchase rights set forth in Form 8-A
dated November 15, 1995 (Commission file No. 1-14036), and the related
Rights Agreement dated as of October 6, 1995, between DST and State Street
Bank and Trust Company, as rights agent, which is attached as Exhibit 4.4
to the IPO Registration Statement, are hereby incorporated by reference as
Exhibit 4.8
4.9 The Registration Rights Agreement dated October 31, 1995, between DST and
UMB Bank, N.A. as trustee of The Employee Stock Ownership Plan of DST
Systems, Inc. ("UMB") which is attached as Exhibit 4.4 to DST's Annual
Report for the year ended December 31, 1995 (Commission file No. 1-14036),
is hereby incorporated by reference as Exhibit 4.9
4.10 The Stock Exchange Agreement dated October 26, 1995, between KCSI and UMB,
which is attached as Exhibit 4.6 to the IPO Registration Statement, is
hereby incorporated by reference as Exhibit 4.10
4.11 The description of DST's common stock, par value $0.01 per share, set
forth under the headings "Description of Capital Stock" and "Dividend
Policy" in the IPO Registration Statement of the common stock on Form 8-A
declared effective October 31, 1995 (Commission file No. 1-14036), is
hereby incorporated by reference as Exhibit 4.11
4.12 Paragraphs fourth, fifth, sixth, seventh, tenth, eleventh, and twelfth of
Exhibit 3.1 are hereby incorporated by reference as Exhibit 4.12
4.13 Article I, Sections 1, 2, 3 and 11 of Article II, Article V, Article VIII,
Article IX of Exhibit 3.2 are hereby incorporated by reference as Exhibit
4.13
5.1 Opinion of Sonnenschein Nath & Rosenthal, counsel to DST, regarding
legality
8.1 Opinion of Sonnenschein Nath & Rosenthal, regarding tax matters
8.2 Opinion of Graham & James LLP, regarding tax matters
10.1 Form of Registration Rights Agreement--See Exhibit 4.3
10.2 Certificate of Incorporation of DST Acquisitions, Inc.
10.3 By-Laws of DST Acquisitions, Inc.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.4 The Registration Rights Agreement dated October 24, 1995, between DST and
KCSI, which is incorporated by reference as Exhibit 4.1 to DST's Annual
Report on Form 10-K for the year ended December 31, 1997 (Commission file
No. 1-14036), is also hereby incorporated by reference as Exhibit 10.4
10.5 DST's Executive Plan effective as of October 31, 1995, attached as Exhibit
10.2 to DST's Annual Report on Form 10-K for the year ended December 31,
1995 (Commission file No. 1-14036), is hereby incorporated by reference as
Exhibit 10.5
10.6 DST's 1995 Stock Option and Performance Award Plan, effective September 1,
1995, which is attached as Exhibit 10.3 to the IPO Registration Statement
is hereby incorporated by reference as Exhibit 10.6
10.6.1 The First Amendment to the 1995 Stock Option and Performance Award Plan
approved May 13, 1997, is attached as Exhibit 10.3.1 to DST's Annual
Report on Form 10-K for the year ended December 31, 1997 (Commission file
No. 1-14036), is hereby incorporated by reference as Exhibit 10.6.1
10.7 The Tax Disaffiliation Agreement between DST and KCSI dated October 23,
1995, which is attached as Exhibit 10.10 to the IPO Registration
Statement, is hereby incorporated by reference as Exhibit 10.7
10.8 The Stock Purchase, Sale of Assets, Assignment and Assumption Agreement
dated August 30, 1995, among DST, DST Realty, Inc., Tolmak, Inc. Mulberry
Western Company and KCSI, which is attached as Exhibit 10.5 to the IPO
Registration Statement, is hereby incorporated by reference as Exhibit
10.8
10.9 The Employee Stock Ownership Plan and Trust Agreement of DST Systems, Inc.
dated January 1, 1998 attached as Exhibit 10.6 to DST's Annual Report on
Form 10-K for the year ended December 31, 1997 (Commission file No. 1-
14036), is hereby incorporated by reference as Exhibit 10.9
10.9.1 The First Amendment, dated July 9, 1998, to the Employee Stock Ownership
Plan and Trust Agreement, attached as Exhibit 10.6.1 to DST's Quarterly
Report on Form 10-Q for the quarterly period ending June 30, 1998
(Commission file No. 1-14036), is hereby incorporated by reference as
Exhibit 10.9.1
10.9.2 The Second Amendment, dated August 17, 1998, to the Employee Stock
Ownership Plan and Trust Agreement
10.9.3 The Third Amendment, dated October 1, 1998, to the Employee Stock
Ownership Plan and Trust Agreement
10.10 The 1996 Restatement of DST's Profit Sharing Plan and Trust Agreement
dated December 31, 1996 (the "1996 Profit Sharing Plan"), is attached as
Exhibit 10.7 to DST's Annual Report on Form 10-K for the year ended
December 31, 1997 (Commission file
No. 1-14036), is hereby incorporated by reference as Exhibit 10.10
10.10.1 The First Amendment, dated February 27, 1998, to the 1996 Profit Sharing
Plan is attached as Exhibit 10.7.1 to DST's Annual Report on Form 10-K for
the year ended December 31, 1997 (Commission file No. 1-14036), is hereby
incorporated by reference as Exhibit 10.10.1
10.10.2 The Second Amendment, dated October 1, 1998, to the 1996 Profit Sharing
Plan
10.11 The Employment Agreement among DST, KCSI and Thomas A. McDonnell, Amended
and Restated as of March 18, 1993 and October 9, 1995, which is attached
as Exhibit 10.8 to the IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.11
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.11.1 The Employment Agreement between DST and Thomas A. McDonnell dated October
9, 1995, which is attached as Exhibit 10.8.1 to the IPO Registration
Statement, is hereby incorporated by reference as Exhibit 10.11.1
10.12 The Employment Agreement between DST, KCSI and Thomas A. McCullough dated
April 1, 1992, as amended October 9, 1995, which is attached as Exhibit
10.9 to the IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.12
10.13 The Employment Agreement between DST, KCSI and James P. Horan dated April
1, 1992, as amended October 9, 1995, which is attached as Exhibit 10.10 to
the IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.13
10.14 The Employment Agreement between DST, KCSI and Robert C. Canfield, dated
April 1, 1992, as amended October 9, 1995, which is attached as Exhibit
10.11 to the IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.14
10.15 The Employment Agreement between DST, KCSI and Charles W. Schellhorn,
dated April 1, 1992, as amended October 9, 1995, which is attached as
Exhibit 10.12 to DST's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission file No. 1-14036), is hereby incorporated by
reference as Exhibit 10.15
10.16 DST's 1994 Restatement of its 401(k) Plan and Trust Agreement dated
September 12, 1994 (the "1994 401(k) Plan"), which is attached as Exhibit
10.13 to the IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.16
10.16.1 The First Amendment dated June 1, 1995, to DST's 1994 401(k) Plan, which
is attached as Exhibit 10.13.1 to the IPO Registration Statement, is
hereby incorporated by reference as Exhibit 10.16.1
10.16.2 The Second Amendment dated October 31, 1995, to DST's 1994 401(k) Plan is
attached as Exhibit 10.13.2 to DST's Annual Report on Form 10-K for the
year ended December 31, 1995 (Commission file No. 1-14036), is hereby
incorporated by reference as Exhibit 10.16.2
10.16.3 The Third Amendment dated March 21, 1996, to DST's 1994 401(k) Plan is
attached as Exhibit 10.13.3 to DST's Annual Report on Form 10-K for the
year ended December 31, 1997 (Commission file No. 1-14036), is hereby
incorporated by reference as Exhibit 10.16.3
10.16.4 The Fourth Amendment dated February 9, 1998, to DST's 401(k) Plan is
attached as Exhibit 10.13.4 to DST's Annual Report on Form 10-K for the
year ended December 31, 1997 (Commission file No. 1-14036), is hereby
incorporated by reference as Exhibit 10.16.4
10.17 The Agreement between State Street Boston Financial Corporation and Data-
Sys-Tance dated June 1, 1974 (the "State Street Agreement"), which is
attached as Exhibit 10.14 to the IPO Registration Statement, is hereby
incorporated by reference as Exhibit 10.17
10.17.1 The Amendment to the State Street Agreement between DST and State Street,
dated October 1, 1987, which is attached as Exhibit 10.14.1 to DST IPO
Registration Statement, is hereby incorporated by reference as Exhibit
10.17.1
10.18 The Data Processing Services Agreement between DST and The Continuum
Company, Inc. dated October 1, 1993, which is attached as Exhibit 10.15 to
the IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.18
10.19 The Agreement among DST, Financial Holding Corporation, KCSI and Argus
Health Systems, Inc. dated June 30, 1989, which is attached as Exhibit
10.16 to the IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.19
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
10.19.1 The Stock Transfer Restriction and Option Agreement between DST, Argus
Health Systems, Inc. and Financial Holding Corporation dated June 30,
1989, which is attached as Exhibit 10.16.1 to the IPO Registration
Statement, is hereby incorporated by reference as Exhibit 10.19.1
10.20 The Five-Year Competitive Advance and Revolving Credit Facility Agreement
among DST, the lenders named therein, The Chase Manhattan Bank, N.A. as
Documentation, Syndication, and Administrative Agent dated December 30,
1996, which is attached as Exhibit 10.17 to DST's Annual Report on Form
10-K for the year ended December 31, 1996 (Commission file No. 1-14036),
is hereby incorporated by reference as Exhibit 10.20
10.21 The Master Lease Agreement between DST and Irkan Corp. dated December 30,
1987 for property at 1004 Baltimore in Kansas City, Missouri which is
attached as Exhibit 10.18 to the IPO Registration Statement, is hereby
incorporated by reference as Exhibit 10.21
10.21.1 The Master Lease Agreement between DST and Irkan Corp. dated December 30,
1987, for property at 127 West Tenth Street in Kansas City, Missouri which
is attached as Exhibit 10.18.1 to the IPO Registration Statement, is
hereby incorporated by reference as Exhibit 10.21.1
10.21.2 The Lease Agreement dated February 24, 1988, between DST and Broadway
Square Partners for property at 1055 Broadway in Kansas City, Missouri,
which is attached as Exhibit 10.18.2 to DST's Registration Statement, is
hereby incorporated by reference as Exhibit 10.21.2
10.22 DST's Directors' Deferred Fee Plan effective September 1, 1995, which is
attached as Exhibit 10.19 to the IPO Registration Statement, is hereby
incorporated by reference as Exhibit 10.22
10.23 The Trust Agreement between DST as settlor and United Missouri Bank of
Kansas City, N.A. as Trustee dated December 31, 1987, which is attached as
Exhibit 10.20 to the IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.23
10.23.1 Trust Agreement by and between DST as settlor and United Missouri Bank of
Kansas City, N.A., Trustee dated June 30, 1989, for the benefit of James
Horan, which is attached as Exhibit 10.20.1 to the IPO Registration
Statement, is hereby incorporated by reference as Exhibit 10.23.1
10.24 DST Systems, Inc. Master Trust agreement dated December 31, 1997 which is
attached as Exhibit 10.21 to DST's Annual Report on Form 10-K for the year
ended December 31, 1997 (Commission file No. 1-14036), is hereby
incorporated by reference as Exhibit 10.24
13.1 DST's Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file No. 1-14036), is hereby incorporated by reference as
Exhibit 13.1
13.2 DST's Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 (Commission file No. 1-14036), is hereby incorporated by reference as
Exhibit 13.2
13.3 USCS' Annual Report on Form 10-K for the year ended December 31, 1997
(Commission file No. 0-28268), is hereby incorporated by reference as
Exhibit 13.3
13.4 USCS' Quarterly Report on Form 10-Q for the quarter ended September 30,
1998 (Commission file No. 0-28268), is hereby incorporated by reference as
Exhibit 13.4
21 Schedule of subsidiaries of DST Systems, Inc.
23.1 Consent of Sonnenschein Nath & Rosenthal (included in Exhibit 5.1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<S> <C>
23.2 Consent of Sonnenschein Nath & Rosenthal (included in Exhibit 8.1)
23.3 Consent of Graham & James LLP (included in Exhibit 8.2)
23.4 Consent of PricewaterhouseCoopers LLP, independent accountants
23.5 Consent of Merrill Lynch, Pierce, Fenner & Smith, financial advisor
24 Power of Attorney (included on signature page)
</TABLE>
ITEM 22. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof;
(2) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
(3) That every prospectus: (i) that is filed pursuant to paragraph (2)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof;
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request;
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the
registrant in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer, or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the questions whether such indemnification
by it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT
ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN CITY OF KANSAS CITY, STATE OF MISSOURI ON NOVEMBER 20, 1998.
DST Systems, Inc.
/s/ Robert C. Canfield
By: _________________________________
Robert C. Canfield
Senior Vice President, General
Counsel and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT ON FORM S-4 HAS BEEN SIGNED BY
THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<S> <C> <C>
/s/ Thomas A. McDonnell * President, Chief Executive November 20, 1998
____________________________________ Officer (Principal
Thomas A. McDonnell Executive Officer) and
Director
/s/ Kenneth V. Hager * Vice President and Chief November 20, 1998
____________________________________ Financial Officer and
Kenneth V. Hager Treasurer (Principal
Financial Officer)
/s/ John J. Faucett * Controller (Principal November 20, 1998
____________________________________ Accounting Officer)
John J. Faucett
/s/ A. Edward Allinson * Director November 20, 1998
____________________________________
A. Edward Allinson
/s/ Michael G. Fitt * Director November 20, 1998
____________________________________
Michael G. Fitt
/s/ Thomas A. McCullough * Director November 20, 1998
____________________________________
Thomas A. McCullough
/s/ William C. Nelson * Director November 20, 1998
____________________________________
William C. Nelson
/s/ M. Jeannine Strandjord * Director November 20, 1998
____________________________________
M. Jeannine Strandjord
</TABLE>
/s/ Robert C. Canfield
*By: _____________________
Attorney-in-fact
II-7
<PAGE>
EXHIBIT 2
AGREEMENT AND PLAN OF MERGER
DATED
SEPTEMBER 2, 1998
AMONG
DST SYSTEMS, INC.,
DST ACQUISITIONS, INC.
AND
USCS INTERNATIONAL, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I
The Merger and Related Matters
Section 1.1 The Merger........................................................ 2
Section 1.2 Effective Time of the Merger...................................... 3
ARTICLE II
Conversion of Capital Stock
Section 2.1 Conversion of Stock............................................... 3
Section 2.2 Exchange of Certificates.......................................... 4
Section 2.3 Dividends and Other Distributions................................. 5
Section 2.4 No Fractional Shares.............................................. 6
Section 2.5 No Liability...................................................... 6
Section 2.6 Lost Certificates................................................. 6
Section 2.7 Treatment of Stock Options, Etc................................... 7
Section 2.8 Closing of USCS' Transfer Books................................... 7
Section 2.9 Closing........................................................... 7
Section 2.10 No Repurchase Rights.............................................. 7
ARTICLE III
- -----------
Representations and Warranties of USCS
Section 3.1 Organization and Qualification.................................... 8
Section 3.2 Capitalization.................................................... 8
Section 3.3 Subsidiaries...................................................... 9
Section 3.4 Authority Relative to this Agreement 9
Section 3.5 No Breach; Required Consents...................................... 10
Section 3.6 Consents and Approvals............................................ 10
Section 3.7 Reports and Financial Statements.................................. 10
Section 3.8 Compliance with Law; Litigation................................... 11
Section 3.9 Title to Assets................................................... 12
Section 3.10 Employee Matters.................................................. 12
Section 3.11 ERISA............................................................. 12
Section 3.12 Approval.......................................................... 14
Section 3.13 Financial Advisor/Investment Banker............................... 14
Section 3.14 Taxes............................................................. 15
Section 3.15 Environmental Laws................................................ 15
Section 3.16 Transactions with Affiliates...................................... 15
Section 3.17 Material Contracts................................................ 15
Section 3.18 Intellectual Property............................................. 16
Section 3.19 Year 2000 Compliance.............................................. 17
</TABLE>
<PAGE>
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ARTICLE IV
Representations and Warranties of DST and Acquisition Sub
Section 4.1 Organization and Qualification......................................................................... 18
Section 4.2 Capitalization......................................................................................... 18
Section 4.3 Authority Relative to this Agreement................................................................... 18
Section 4.4 No Breach; Required Consents........................................................................... 19
Section 4.5 Consents and Approvals................................................................................. 19
Section 4.6 Reports and Financial Statements....................................................................... 19
Section 4.7 Litigation............................................................................................. 20
Section 4.8 No Broker.............................................................................................. 20
Section 4.9 Approval............................................................................................... 21
ARTICLE V
Conduct of Business Pending the Merger
Section 5.1 Conduct of Business of USCS............................................................................ 21
Section 5.2 Conduct of Business of DST............................................................................. 24
ARTICLE VI
Additional Agreements
Section 6.1 Access and Information................................................................................. 25
Section 6.2 SEC Filings............................................................................................ 25
Section 6.3 Meetings of Stockholders............................................................................... 28
Section 6.4 Compliance with the Securities Act..................................................................... 29
Section 6.5 Other Actions.......................................................................................... 29
Section 6.6 Confidentiality and Public Announcements............................................................... 29
Section 6.7 Notification........................................................................................... 30
Section 6.8 HSR Act Filings........................................................................................ 30
Section 6.9 USCS Director and Officer Indemnification.............................................................. 30
Section 6.10 Termination of USCS Rights Agreement................................................................... 31
Section 6.11 Actions Under Stockholder Agreement.................................................................... 31
Section 6.12 Consents/Waivers....................................................................................... 31
Section 6.13 USCS Deferred Compensation Plans....................................................................... 31
ARTICLE VII
Conditions Precedent
Section 7.1 Conditions to Each Party's Obligation to Effect the Merger............................................. 31
Section 7.2 Conditions to Obligation of USCS to Effect the Merger.................................................. 32
Section 7.3 Conditions to Obligations of DST and Acquisition Sub to Effect the Merger.............................. 33
</TABLE>
<PAGE>
<TABLE>
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<S> <C>
ARTICLE VIII
Termination, Amendment and Waiver
Section 8.1 Termination..................................................................................... 34
Section 8.2 Remedies........................................................................................ 35
Section 8.3 Amendment....................................................................................... 35
Section 8.4 Waiver.......................................................................................... 36
ARTICLE IX
Definitions; General Provisions
Section 9.1 Definitions..................................................................................... 36
Section 9.2 Other Definitions............................................................................... 38
Section 9.3 Use of Terms.................................................................................... 40
Section 9.4 Non-Survival of Representations, Warranties and Agreements..................................... 40
Section 9.5 Notices......................................................................................... 40
Section 9.6 Fees and Expenses............................................................................... 41
Section 9.7 Specific Performance............................................................................ 41
Section 9.8 Entire Agreement; Miscellaneous................................................................. 41
Section 9.9 Governing Law and Venue; Waiver of Jury Trial................................................... 42
</TABLE>
EXHIBITS
EXHIBIT DESCRIPTION
A USCS Disclosure Schedule
6.4 Form of USCS Affiliate Agreement
7.2(e)(i) Form of DST Affiliate Agreement
E-1 Form of USCS Stockholder Agreement
E-2 Form of DST Stockholder Agreement
7.2(e)(ii) Legal Opinion of Sonnenschein Nath & Rosenthal
7.2(e)(iv) Registration Rights Agreement
7.3(c)(iii) Legal Opinion of Graham & James LLP
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated September 2,
1998 and is entered into by and among DST Systems, Inc., a Delaware corporation
("DST"), DST Acquisitions, Inc., a Delaware corporation and a wholly-owned
subsidiary of DST ("Acquisition Sub") and USCS International, Inc., a Delaware
corporation ("USCS").
RECITALS
A. DST and USCS desire to enter into a transaction in which Acquisition
Sub will merge with and into USCS (the "Merger"). At the effective time of the
Merger, the outstanding shares of the capital stock of USCS shall be converted
into the right to receive shares of common stock of DST (except as provided
herein). As a result, DST will become the holder of all the outstanding shares
of capital stock of USCS and the holders of shares of capital stock of USCS
outstanding immediately prior to the Merger will become holders of shares of
common stock of DST.
B. The Boards of Directors of DST, USCS and Acquisition Sub each have
determined that the transactions described herein are in the best interests of
their respective corporations and stockholders.
C. It is intended that, for federal income tax purposes, the Merger shall
qualify as a reorganization under the provisions of Section 368(a) of the Code.
D. It is intended that for financial accounting purposes, the Merger
shall be accounted for as a "pooling-of-interests" under generally accepted
accounting principles.
E. Parties owning more than 35% of the outstanding shares of (i) USCS
Common Stock (the "USCS Major Stockholders") and of (ii) DST Common Stock (the
"DST Major Stockholder") are contemporaneously with the execution and delivery
of this Agreement executing and delivering the respective Stockholder Agreements
attached hereto as Exhibits E-1 and E-2.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement, the
parties to this Agreement agree as follows:
ARTICLE I
The Merger and Related Matters
Section 1.1 The Merger. Subject to the terms and conditions of this
Agreement and applicable provisions of the Delaware General Corporation Law
("DGCL"), at the Effective Time: (i) Acquisition Sub will be merged with and
into USCS; (ii) the separate existence of Acquisition Sub will cease and USCS
will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and (iii) the name of the Surviving Corporation will be USCS
1
<PAGE>
from and after the Effective Time, and without any further action on the part of
any Person, the Merger will have all the effects provided by applicable Legal
Requirements, including Sections 251 and 259 of the DGCL, the effects described
in Section 2.1 with respect to the capital stock of Acquisition Sub and USCS
and, subject to applicable Legal Requirements, the following additional effects
as of the Effective Time:
(A) CERTIFICATE OF INCORPORATION. The certificate of incorporation of
Acquisition Sub (the "Certificate of Incorporation"), will become the
certificate of incorporation of the Surviving Corporation, and such Certificate
of Incorporation may thereafter be amended and/or restated as provided therein
and by the DGCL.
(B) BYLAWS. The bylaws of Acquisition Sub, as in effect immediately prior
to the Effective Time, will become the bylaws of the Surviving Corporation, and
such bylaws may thereafter be amended or repealed in accordance with their terms
and the Certificate of Incorporation and as provided by the DGCL.
(C) DIRECTORS. The directors of Acquisition Sub immediately prior to the
Effective Time will become the directors of the Surviving Corporation, each to
hold office in accordance with the Certificate of Incorporation and bylaws of
the Surviving Corporation and the DGCL and until the earlier of such director's
resignation or removal or such director's successor is duly elected and
qualified, as the case may be.
(D) OFFICERS. The officers of USCS immediately prior to the Effective Time
will become the officers of the Surviving Corporation, each to hold office in
accordance with the Certificate of Incorporation and bylaws of the Surviving
Corporation and the DGCL and until the earlier of such officer's resignation or
removal or such officer's successor is duly appointed and qualified, as the case
may be.
(E) PROPERTIES AND LIABILITIES. All the properties, rights, privileges,
powers and franchises of USCS and Acquisition Sub will vest in the Surviving
Corporation, and all debts, liabilities, agreements and duties of USCS and
Acquisition Sub will become the debts, liabilities, agreements and duties of the
Surviving Corporation.
(F) NEW DST DIRECTORS. George Argyros and James Castle, Directors of USCS,
will become members of the Board of Directors of DST, in the classes with terms
expiring, respectively, in 2001 and 2000, to hold office in accordance with the
certificate of incorporation and bylaws of DST and the DGCL and until the
earlier of their resignation or removal or their successors are duly elected and
qualified.
SECTION 1.2 EFFECTIVE TIME OF THE MERGER. Subject to the terms and
conditions of this Agreement, on the Closing Date the parties will prepare, sign
and acknowledge, in accordance with the DGCL, a certificate of merger (the
"Certificate of Merger") and deliver the Certificate of Merger to the Secretary
of State of the State of Delaware (the "Secretary") for filing pursuant to the
DGCL. The Merger will become effective upon the filing of the Certificate of
Merger with the Secretary. As used in this Agreement, the "Effective Time" means
the time at which the Certificate of Merger is filed with the Secretary.
2
<PAGE>
ARTICLE II
CONVERSION OF CAPITAL STOCK
SECTION 2.1 CONVERSION OF STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of DST, Acquisition Sub, USCS or the
holders of any of the following securities:
(a) Each share of USCS Common Stock outstanding immediately prior to the
Effective Time (except shares subject to Section 2.1(b)), shall be converted
into the right to receive, and there shall be paid and issued as provided in
this Agreement in exchange for such share, .62 shares of DST Common Stock (the
"Exchange Ratio"), plus cash in lieu of any fractional share as provided in
Section 2.4.
(b) Each share of capital stock of USCS (the "USCS Stock") issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by USCS or any Subsidiary of USCS, or by DST or any Subsidiary of
DST, if any, will be canceled and retired, and no DST Common Stock or other
consideration will be delivered in exchange therefor.
(c) The shares of common stock, par value $.01 per share, of Acquisition
Sub issued and outstanding immediately prior to the Effective Time will be
converted into and will thereafter evidence and become one thousand (1,000)
shares of validly issued, fully paid, and nonassessable common stock, par value
$.01 per share, of the Surviving Corporation.
(d) In the event DST changes the number of shares of DST Common Stock
issued and outstanding after the date of this Agreement and prior to the
Effective Time as a result of a stock split, stock dividend, or similar
recapitalization with respect to DST Common Stock and the record date therefor
(in the case of a stock dividend) or the effective date thereof (in the case of
a stock split or similar recapitalization for which a record date is not
established) is after the date of this Agreement and prior to the Effective
Time, the Exchange Ratio will be appropriately adjusted to reflect such stock
split, stock dividend or similar recapitalization. The issuance of shares of
DST Common Stock upon exercise of options, warrants or other rights to purchase
such stock shall not be deemed an event requiring any adjustment pursuant to
this Section 2.1(d).
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(A) EXCHANGE AGENT. As of the Effective Time, DST shall enter into an
agreement with a bank or trust company selected by DST and reasonably acceptable
to USCS to act as exchange agent (the "Exchange Agent") in connection with the
surrender of certificates that, prior to the Effective Time, evidenced
outstanding shares of USCS Common Stock ("USCS Stock Certificates"). On or
prior to the Closing Date, DST will deposit with the Exchange Agent for exchange
in accordance with this Section 2.2 certificates evidencing the shares of DST
Common Stock to be issued in the Merger ("DST Certificates"), which shares of
DST Common Stock will be deemed to be issued at the Effective Time. At and
following the Effective Time, DST will deliver to the Exchange Agent such cash
as may be required from time to time to make payments of cash in lieu of
fractional shares of DST Common Stock in accordance with Section 2.4.
3
<PAGE>
(B) EXCHANGE. As soon as practicable after the Effective Time, DST will
cause the Exchange Agent to mail to each Person who was a holder of record of
USCS Common Stock at the Effective Time: (i) a letter of transmittal (which will
specify that delivery will be effective, and risk of loss and title to any USCS
Stock Certificates will pass, only upon delivery of USCS Stock Certificates to
the Exchange Agent and will be in such form and will have such other provisions
that are specified by DST and reasonably acceptable to USCS); and (ii)
instructions for use in effecting the surrender of USCS Stock Certificates in
exchange for DST Certificates (together with any dividend or distribution with
respect thereto made after the Effective Time and any cash to be paid in lieu of
fractional shares of DST Common Stock pursuant to Section 2.4). Upon surrender
of a USCS Stock Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by DST, together with such letter of
transmittal, duly executed, and such other documents as may be required by the
Exchange Agent or such other agent, the holder of such USCS Stock Certificate
will be entitled to receive in exchange therefor DST Certificates representing
the number of whole shares of DST Common Stock that such holder has the right to
receive pursuant to this Agreement (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash to be paid in
lieu of fractional shares of DST Common Stock pursuant to Section 2.4) and each
USCS Stock Certificate so surrendered will be canceled. In the event of a
transfer of ownership of USCS Common Stock that is not registered in the
transfer records of USCS, DST Certificates representing the proper number of
shares of DST Common Stock may be issued to a Person other than the Person in
whose name the surrendered USCS Stock Certificate is registered if the USCS
Stock Certificate representing such USCS Common Stock is presented to the
Exchange Agent accompanied by all documents required to evidence and effect such
transfer and by evidence reasonably satisfactory to DST that any applicable
stock transfer tax has been paid. DST will not directly or indirectly pay or
reimburse any Person for any transfer taxes. If any DST Certificates are to be
delivered to a Person other than the Person in whose name USCS Stock
Certificates surrendered in exchange therefor are registered, it will be a
condition to the delivery of such DST Certificates that USCS Stock Certificates
so surrendered are properly endorsed or accompanied by appropriate stock powers
and otherwise in proper form for transfer, that such transfer otherwise is
proper and that the Person requesting such transfer pay to the Exchange Agent
any transfer or other taxes payable by reason of the foregoing or establishes to
the satisfaction of the Exchange Agent that such taxes have been paid or are not
required to be paid.
(C) CERTIFICATES NOT EXCHANGED. After the Effective Time, each outstanding
USCS Stock Certificate will, until surrendered for exchange in accordance with
this Section 2.2, be deemed for all purposes to evidence ownership of the number
of whole shares of DST Common Stock into which the shares of USCS Common Stock
(which, prior to the Effective Time, were represented thereby) are converted in
accordance with Section 2.1, together with the right to receive any dividend or
distribution with respect thereto made after the Effective Time, subject to
Section 2.3, and any cash to be paid in lieu of fractional shares of DST Common
Stock pursuant to Section 2.4.
(D) EXPENSES. Except as otherwise expressly provided in this Agreement,
DST will pay all charges and expenses, including those of the Exchange Agent, in
connection with the exchange of shares of DST Common Stock for shares of USCS
Common Stock, except any charges or expenses that are otherwise solely the
liability of one or more holders of USCS
4
<PAGE>
Common Stock. Any DST Certificates deposited with the Exchange Agent that remain
unclaimed by the former stockholders of USCS after six months following the
Effective Time will be delivered to DST upon its demand, and any former
stockholders of USCS who have not then complied with the instructions for
exchanging their USCS Stock Certificates will thereafter look only to DST for
exchange of USCS Stock Certificates and for any dividend or distribution with
respect thereto made after the Effective Time and any cash to be paid in lieu of
fractional shares of DST Common Stock pursuant to Section 2.4.
SECTION 2.3 DIVIDENDS AND OTHER DISTRIBUTIONS. No dividends or other
distributions declared or made after the Effective Time with respect to shares
of DST Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered USCS Stock Certificate with respect to the
shares of DST Common Stock issuable upon surrender thereof until the holder of
such USCS Stock Certificate surrenders such USCS Stock Certificate in accordance
with Section 2.2. Subject to the effect of applicable Legal Requirements,
following surrender of any such USCS Stock Certificate, DST will pay or cause to
be paid, without interest, to the record holder of DST Certificates issued in
exchange therefor, (a) at the time of such surrender, the amount of cash in lieu
of fractional shares of DST Common Stock to which such holder is entitled
pursuant to Section 2.4 and the amount, if any, of dividends or other
distributions by DST with a record date after the Effective Time theretofore
paid with respect to such whole shares of DST Common Stock and (b) at the
appropriate payment date, the amount of dividends or other distributions (if
any) by DST with a record date after the Effective Time but prior to surrender
of such USCS Stock Certificate and a payment date subsequent to such surrender
payable with respect to such whole shares of DST Common Stock.
SECTION 2.4 NO FRACTIONAL SHARES.
(A) CASH PAYMENT IN LIEU OF FRACTIONAL SHARES. No certificates or scrip
representing fractional shares of DST Common Stock will be issued upon the
surrender of USCS Stock Certificates pursuant to Section 2.2. No such
fractional interest will entitle the owner thereof to any rights as a security
holder of DST. In lieu of any such fractional shares of DST Common Stock, each
holder of USCS Common Stock entitled to receive shares of DST Common Stock in
the Merger, upon surrender of such Person's USCS Stock Certificates for exchange
pursuant to Section 2.2, will be entitled to receive an amount in cash (without
interest), rounded up to the nearest cent, determined by multiplying the
fractional share interest in DST Common Stock to which such holder would
otherwise be entitled (after taking into account all shares of USCS Common Stock
held of record by such holder immediately prior to the Effective Time) by the
Market Price of one share of DST Common Stock at the Effective Time.
(B) DEPOSIT WITH EXCHANGE AGENT. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of shares of
USCS Common Stock in lieu of any fractional shares of DST Common Stock, DST will
promptly deposit with the Exchange Agent cash in the required amounts and the
Exchange Agent will mail such amounts without interest to such holders; provided
however, that no such amount will be paid to any holder with respect to any USCS
Stock Certificate prior to the surrender by such holder of such USCS Stock
Certificate.
5
<PAGE>
SECTION 2.5 NO LIABILITY. None of DST, Acquisition Sub, USCS, the
Surviving Corporation or the Exchange Agent will be liable to any holder of
shares of USCS Common Stock for any shares of DST Common Stock, dividends or
distributions with respect thereto or cash payable in lieu of fractional shares
of DST Common Stock delivered to a state abandoned property administrator or
other public official pursuant to any applicable abandoned property, escheat or
similar law.
SECTION 2.6 LOST CERTIFICATES. If any USCS Stock Certificate is lost,
stolen or destroyed, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed USCS Stock Certificate the shares of DST Common Stock (and
any dividend or distribution with respect thereto made after the Effective Time
and any cash payable in lieu of fractional shares of DST Common Stock pursuant
to Section 2.4) deliverable in respect thereof as determined in accordance with
the terms of this Agreement, subject to the condition that the Person to whom
the DST Common Stock (and any dividend or distribution with respect thereto made
after the Effective Time and any cash payable in lieu of fractional shares
pursuant to Section 2.4) is to be issued shall have (a) delivered to DST an
affidavit claiming such USCS Stock Certificate to be lost, stolen, or destroyed
and (b) if required by DST, give DST an indemnity agreement and bond
satisfactory to DST against any claim that may be made against DST with respect
to USCS Stock Certificate alleged to have been lost, stolen or destroyed.
SECTION 2.7 TREATMENT OF STOCK OPTIONS, ETC. At the Effective Time, each
outstanding stock option, warrant or other right to acquire shares of USCS
Common Stock, identified in Section 3.2(b) of the USCS Disclosure Schedule
("USCS Options"), whether or not exercisable, as of the Effective Time will be
converted into and become rights with respect to DST Common Stock, and DST shall
assume each USCS Option, in accordance with the terms and conditions of the
stock option, warrant or other agreement by which it is evidenced (including,
without limitation, continuing the qualification as incentive stock options of
any options that qualify as such under Section 422 of the Code), except that
from and after the Effective Time, (i) each USCS Option assumed by DST may be
exercised solely for shares of DST Common Stock, (ii) the number of shares of
DST Common Stock subject to such USCS Option will be equal to the number of
shares of USCS Common Stock subject to such USCS Option immediately prior to the
Effective Time multiplied by the Exchange Ratio, rounded down to the nearest
whole share, and (iii) the per share exercise price under each such USCS Option
will be adjusted by dividing the per share exercise price under each such USCS
Option by the Exchange Ratio and rounding up to the nearest cent.
Notwithstanding the provisions of clause (ii) of the preceding sentence, DST
will not be obligated to issue any fraction of a share of DST Common Stock upon
exercise of USCS Options.
SECTION 2.8 CLOSING OF USCS' TRANSFER BOOKS. At the Effective Time, the
stock transfer books of USCS will be closed and no transfer of shares of USCS
Common Stock will be made thereafter. In the event that, after the Effective
Time, USCS Stock Certificates are presented to the Surviving Corporation, they
will be canceled and exchanged for DST Certificates (and, if required, cash) as
provided in Section 2.2(b) and Section 2.4.
SECTION 2.9 CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place (i) at the offices of Sonnenschein
Nath & Rosenthal, 4520 Main Street, Suite 1100, Kansas City, Missouri, at 10:00
a.m. local time on the date that is the first
6
<PAGE>
Business Day after the day on which the last of the conditions set forth in
Article VII (excluding delivery of opinions and certificates) is fulfilled or
waived or (ii) at such other place and time as DST and USCS agree in writing.
The date on which the Closing occurs is referred to in this Agreement as the
"Closing Date."
SECTION 2.10 NO REPURCHASE RIGHTS. The holders of DST Common Stock
received pursuant to the Merger or issuable pursuant to USCS Options shall have
no right to require DST or its Affiliates to repurchase any such shares of DST
Common Stock.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF USCS
USCS REPRESENTS AND WARRANTS TO DST AS FOLLOWS:
SECTION 3.1 ORGANIZATION AND QUALIFICATION. USCS is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has all requisite corporate power and authority to carry on its
business as it is now being conducted. USCS is duly qualified as a foreign
corporation to do business, and is in good standing, in each jurisdiction where
the character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary, except where the failure to be so
qualified will not, individually or in the aggregate, have a Material Adverse
Effect upon it. Set forth in Section 3.1 of the USCS Disclosure Schedule
(Exhibit A hereto) is a list of all jurisdictions in which USCS and its
Subsidiaries, Cabledata, Inc. and International Billing Services, Inc. are each
qualified as a foreign corporation.
SECTION 3.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of USCS
consisted of: (i) 40,000,000 shares of USCS Common Stock, of which 23,296,188
shares were issued and outstanding as of August 31, 1998; (ii) 10,000,000 shares
of preferred stock, $.05 par value per share, none of which are issued and
outstanding; and (iii) 2,532,280 shares of USCS Common Stock issuable as of
September 2, 1998 with respect to all outstanding options to acquire shares of
USCS Common Stock.
(b) Set forth in Section 3.2(b) of the USCS Disclosure Schedule is a
schedule of all options, warrants, calls, subscriptions or other rights,
agreements or commitments of any kind (including preemptive rights), to which
USCS or any of its Subsidiaries is a party, relating to the issued or unissued
capital stock or other securities of USCS. Such schedule sets forth for all
such options, warrants, calls, subscriptions or other rights, agreements or
commitments that are outstanding (i) the names of the holders, (ii)
identification of the plan under which each such USCS Option was issued, (iii)
the number of shares of USCS Common Stock issuable pursuant thereto, (iv) the
exercise or conversion price, (v) the date of grant and date of expiration, and
(vi) as to options, which options are "incentive stock options" as defined in
Section 422(b) of the Code. All such options, warrants, calls, subscriptions,
rights, agreements and commitments have been validly issued in accordance with
the provisions of applicable plans or agreements and Legal Requirements.
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(c) All issued and outstanding shares of USCS Stock have been duly
authorized and validly issued and are fully paid and nonassessable, are not
subject to, and have not been issued in violation of, any preemptive rights, and
have not been issued in violation of any federal or state securities laws or any
other Legal Requirement and all corporate and other action on behalf of USCS and
the USCS Option Holders to permit assumption of the USCS Options contemplated in
Section 2.7 has been taken.
(d) Except as set forth in Section 3.2(d) of the USCS Disclosure Schedule,
since June 20, 1996 USCS has not reacquired any of its Common Stock or other
equity securities and all securities identified in such schedule were reacquired
in compliance with applicable Legal Requirements solely for use in connection
with Employee Benefit Plans and not in a manner that would prevent the Merger
from being accounted for as a "pooling-of-interest."
SECTION 3.3 SUBSIDIARIES. Set forth in Section 3.3 of the USCS Disclosure
Schedule is a schedule listing all the Equity Affiliates of USCS including the
percentage and nature of USCS' ownership of each Subsidiary and Equity Affiliate
of USCS. Each of USCS' Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation and has the corporate power to carry on its business
as it is now being conducted or currently proposed to be conducted. Each of
USCS' Subsidiaries is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities makes such
qualification necessary except where the failure to be so qualified will not
have a Material Adverse Effect on USCS. All the outstanding shares of capital
stock of each of USCS' Subsidiaries are validly issued, fully paid and
nonassessable. Except as set forth in Section 3.3 of the USCS Disclosure
Schedule, the shares of capital stock or other ownership interests in each of
USCS' Subsidiaries or Equity Affiliates that are owned by USCS or by a
Subsidiary of USCS are owned free and clear of any Liens, are not subject to and
have not been issued in violation of any preemptive rights and have not been
issued in violation of any federal or state securities laws or any other Legal
Requirement. Except as set forth in Section 3.3 of the USCS Disclosure
Schedule, there are not, as of the date hereof, and at the Effective Time there
will not be, any outstanding options, warrants, calls or other rights,
agreements or commitments of any character, to which USCS or any of its
Subsidiaries is a party, relating to the issued or unissued capital stock, other
securities or other ownership interests in any of the Subsidiaries or Equity
Affiliates of USCS.
SECTION 3.4 AUTHORITY RELATIVE TO THIS AGREEMENT. USCS has all requisite
corporate power and authority to execute and deliver this Agreement and, subject
to approval of this Agreement by the holders of USCS Stock, to consummate the
transactions contemplated by this Agreement. The execution and delivery of this
Agreement and the consummation of the transactions contemplated by this
Agreement have been duly authorized by USCS' Board of Directors. Except for the
approval of the holders of USCS Stock, no other corporate proceedings on the
part of USCS are necessary to authorize this Agreement and the transactions
contemplated by this Agreement. The Board of Directors of USCS has received the
opinion of Merrill Lynch & Co. as financial advisor to USCS dated as of the date
of this Agreement satisfactory to USCS and its Board of Directors to the effect
that, as of the date of this Agreement, the Exchange Ratio is fair to USCS'
stockholders from a financial point of view. This Agreement constitutes a valid
and binding obligation of USCS enforceable in accordance
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with its terms except (i) as enforcement may be limited by bankruptcy,
insolvency or other similar Legal Requirements affecting the enforcement of
creditors' rights generally, (ii) as the availability of indemnification and
other remedies may be limited by federal and state securities laws and (iii) for
limitations imposed by general principles of equity.
SECTION 3.5 NO BREACH; REQUIRED CONSENTS. The execution and delivery of
this Agreement by USCS does not, and the consummation of the transactions
contemplated by this Agreement by USCS will not: (a) subject to the approval of
holders of USCS Stock, violate or conflict with the certificate of incorporation
or bylaws of USCS; (b) except as set forth in Section 3.5 of the USCS Disclosure
Schedule, constitute a breach or default (or an event that with notice or lapse
of time or both would become a breach or default) or give rise to any Lien,
third-party right of termination, cancellation, modification or acceleration
under any agreement or undertaking to which USCS is a party or by which it is
bound, except where such breach, default, Lien, third-party right of
termination, cancellation, modification, or acceleration would not have a
Material Adverse Effect on USCS; or (c) subject to obtaining the consents,
approvals or authorizations and making the filings or registrations described in
Section 3.6, constitute a violation of any Legal Requirement.
SECTION 3.6 CONSENTS AND APPROVALS. Except as set forth in Section 3.6 of
the USCS Disclosure Schedule, neither the execution and delivery of this
Agreement by USCS nor the consummation of the transactions contemplated by this
Agreement by USCS will require USCS to make any filing or registration with, or
obtain any authorization, consent or approval of, any Governmental Entity or any
other Person, except those required in connection, or in compliance, with the
provisions of (i) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), (ii) the Securities Act, (iii) the Exchange Act and
(iv) the corporation, securities or blue sky laws or regulations, or similar
Legal Requirements, of the various states of the United States.
SECTION 3.7 REPORTS AND FINANCIAL STATEMENTS.
(A) SEC REPORTS. USCS has filed all required forms, reports and documents
required to be filed with the SEC since June 20, 1996 (collectively, the "USCS
SEC Reports"). As of their respective dates or effective dates and except as
the same may have been corrected, updated or superseded by means of a subsequent
filing with the SEC prior to the date of this Agreement, none of USCS SEC
Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading insofar as
such statements relate to or affect USCS or its Subsidiaries. USCS has delivered
or made available to DST, in the form filed with the SEC, all USCS SEC Reports.
(B) FINANCIAL STATEMENTS. The audited consolidated financial statements of
USCS contained in USCS SEC Reports comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with GAAP applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and present fairly USCS' consolidated financial
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condition and the results of its operations as of the relevant dates thereof and
for the periods covered thereby. The unaudited consolidated interim financial
statements of USCS contained in USCS SEC Reports comply in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, were prepared on a basis consistent
with prior interim periods (except as required by applicable changes in GAAP or
in SEC accounting policies) and include all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of USCS'
consolidated financial condition and results of operations for such periods.
(C) ABSENCE OF CERTAIN CHANGES. Except as set forth in Section 3.7(c) of
the USCS Disclosure Schedule, since the date of the most recent consolidated
balance sheet of USCS included in USCS' Quarterly Report on Form 10-Q filed with
the SEC for the quarter ended June 30, 1998 (the "Most Recent USCS Balance
Sheet"), there has not been any: (i) transaction, commitment, dispute or other
event or condition (financial or otherwise) of any character (whether or not in
the ordinary course of business) that, individually or in the aggregate, has
had, or would have, a Material Adverse Effect on USCS; (ii) any declaration,
setting aside or payment of any dividend or other distribution (whether in cash,
stock or property) with respect to the capital stock of USCS; or (iii) entry
into any commitment or transaction material to USCS and its Subsidiaries taken
as a whole (including any borrowing or sale of assets) except in the ordinary
course of business consistent with past practice.
(D) ABSENCE OF UNDISCLOSED LIABILITIES. USCS does not have any
indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent USCS
Balance Sheet except (i) liabilities, obligations and contingencies that were
incurred after the date of the Most Recent USCS Balance Sheet in the ordinary
course of business and which would not in the aggregate have a Material Adverse
Effect on USCS or its Subsidiaries and (ii) other liabilities, obligations and
contingencies that would not, in the aggregate, have a Material Adverse Effect
on USCS.
SECTION 3.8 COMPLIANCE WITH LAW; LITIGATION.
(a) Except as set forth in Section 3.8 of the USCS Disclosure Schedule,
USCS and its Subsidiaries hold all permits, licenses, franchises, variances,
exemptions, concessions, leases, instruments, orders and approvals (the "USCS
Permits") of all Governmental Entities required to be held under applicable
Legal Requirements and will not lose any USCS Permit as a result of the Merger,
except such USCS Permits the failure of which to hold, individually or in the
aggregate, does not have and, to the Knowledge of USCS, in the future is not
likely to have, a Material Adverse Effect on USCS. USCS and its Subsidiaries
are in compliance with the terms of USCS Permits, except for such failures to
comply that, individually or in the aggregate, would not have a Material Adverse
Effect on USCS. The businesses of USCS and its Subsidiaries are not being
conducted in violation of any Legal Requirement, except for such violations
which, individually or in the aggregate, would not have a Material Adverse
Effect on USCS. No investigation or review by any Governmental Entity with
respect to USCS or any of its Subsidiaries is pending, or, to the Knowledge of
USCS, threatened, nor has any Governmental Entity indicated to USCS in writing
an intention to conduct the same.
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(b) Set forth in Section 3.8(b) of the USCS Disclosure Schedule is a
schedule listing every suit, action or proceeding pending or, to the Knowledge
of USCS, threatened against or affecting USCS or any of its Subsidiaries and
every judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against USCS or any of its Subsidiaries and none of the
suits, actions, proceedings, judgments, decrees, injunctions, rules or orders
listed in that Schedule has had or is likely to have a Material Adverse Effect
on USCS.
(c) Neither USCS nor any of its Subsidiaries is subject to Section 2115 of
the California Corporation Code.
SECTION 3.9 TITLE TO ASSETS. USCS and its Subsidiaries have valid title
to all material assets reflected on the Most Recent USCS Balance Sheet, free and
clear of any Lien except: (a) landlord's Liens and Liens for property taxes not
delinquent; (b) Liens that were created in the ordinary course of business and
do not materially detract from the value of such assets or materially impair the
use thereof in the operation of USCS' business; (c) leased interests in property
owned by others; and leased interests in property leased to others; and (d)
zoning, building or similar restrictions, easements, rights-of-way, reservations
of rights, conditions, or other restrictions or encumbrances relating to or
affecting real property that do not, individually or in the aggregate,
materially interfere with the use of such real property in the operation of
USCS' business.
SECTION 3.10 EMPLOYEE MATTERS. Except as set forth in Section 3.10 of the
USCS Disclosure Schedule, USCS and its Subsidiaries are in compliance with all
applicable Legal Requirements relating to the employment of employees, including
any obligations relating to employment standards legislation, pay equity,
occupational health and safety, labor relations and human rights legislation
except for such failures to comply as do not have, and to USCS' Knowledge are
not likely to have, a Material Adverse Effect on USCS. None of the employees of
USCS or its Subsidiaries are represented by any labor union and there is to the
knowledge of USCS no organizing effort underway currently to form any such
union.
SECTION 3.11 ERISA.
(a) Set forth in Section 3.11(a) of the USCS Disclosure Schedule is a
schedule listing all "employee benefit plans," as defined in ERISA, and all
other material employee benefit arrangements, programs or payroll practices,
including severance pay, sick leave, vacation pay, salary continuation for
disability, deferred compensation, retirement income, bonus, stock purchase or
option, hospitalization, medical insurance, life insurance, tuition
reimbursement, employee assistance and employee discounts, that USCS or any of
its ERISA Affiliates maintains or has or may have an obligation to make
contributions to (the "USCS Benefit Plans").
(b) Neither USCS nor any of its ERISA Affiliates is or has been a
participating employer in any multiemployer plan within the meaning of Section
3(37) of ERISA. Neither USCS nor any of its ERISA Affiliates has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on USCS. To the
Knowledge of USCS, neither USCS nor any of its ERISA Affiliates reasonably
expects to incur any liability
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due to a withdrawal from or termination or reorganization of a multiemployer
plan, except any such liability that would not have a Material Adverse Effect on
USCS.
(c) Except as set forth in Section 3.11(c) of the USCS Disclosure Schedule,
each USCS Benefit Plan that is intended to qualify under Section 401 of the
Code, and a form of trust that is similar in all material respects to the trust
maintained pursuant thereto, have been determined to be exempt from federal
income taxation under Section 501 of the Code by the Internal Revenue Service,
and to the Knowledge of USCS, nothing has occurred with respect to any such plan
since such determination that is likely to result in the loss of such exemption
or the imposition of any material liability, penalty or tax under ERISA or the
Code.
(d) Each USCS Benefit Plan has at all times been maintained and operated in
all material respects, by its terms and in operation, in accordance with all
applicable Legal Requirements.
(e) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under USCS Benefit
Plans or pursuant to applicable Legal Requirements (without regard to any
waivers granted under Section 412 of the Code) to any funds or trusts
established thereunder or in connection therewith have been made by the due date
thereof (including any valid extension or grace period) and no accumulated
funding deficiency exists with respect to any of USCS Benefit Plans subject to
Section 412 of the Code.
(f) Except as set forth in Section 3.11(f) of the USCS Disclosure Schedule,
to the Knowledge of USCS, there have been no violations of ERISA or the Code
with respect to the filing of applicable reports, documents and notices
regarding USCS Benefit Plans with the Secretary of Labor, the Pension Benefit
Guaranty Corporation, and the Secretary of the Treasury or the furnishing of
such reports, documents and notices to the participants or beneficiaries of USCS
Benefit Plans, except such violations that, individually or in the aggregate,
would not have a Material Adverse Effect on USCS.
(g) There are no pending actions, claims or lawsuits that have been
asserted or instituted against USCS Benefit Plans, the assets of any of the
trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of USCS Benefit Plans, with respect to the operation of
such plans (other than routine benefit claims), nor does USCS have Knowledge of
facts that reasonably could be expected to form the basis for any such action,
claim or lawsuit.
(h) Neither USCS nor any of its ERISA Affiliates maintain, or has in the
past maintained, a defined benefit pension plan which is or was subject to Title
IV of ERISA.
(i) The current value of vested accrued benefits under each USCS Benefit
Plan which is subject to Title IV of ERISA does not exceed the current value of
all of the assets of such Plan allocable to such vested accrued benefits. For
purposes of the representations in the preceding sentence, the terms "current
value" and "accrued benefit" have the meanings specified in Section 3 of ERISA.
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(j) There are no accrued liabilities under any USCS Benefit Plan which are
not provided for on the books or financial statements of USCS or its ERISA
Affiliates, or which have not been fully provided for by contributions to such
Plans.
SECTION 3.12 APPROVAL.
(a) The Board of Directors of USCS at a meeting duly called and held: (i)
determined that the Merger is advisable and fair and in the best interests of
USCS and its stockholders; (ii) approved the Merger and this Agreement and the
transactions contemplated by this Agreement in accordance with the provisions of
Section 251 of the DGCL; (iii) recommended the approval of this Agreement and
the Merger by the holders of USCS Stock and directed that the Merger be
submitted for consideration by USCS' stockholders at the Meeting; and (iv)
adopted a resolution having the effect of causing the Merger not to be subject
to Section 203 of the DGCL or to the USCS Rights Plan.
(b) The vote of a majority of the outstanding shares of USCS Stock is the
vote required for the adoption and approval of this Agreement, the Merger and
the other transactions contemplated by this Agreement.
SECTION 3.13 FINANCIAL ADVISOR/INVESTMENT BANKER. Except for amounts
payable to Merrill Lynch & Co., pursuant to the letter agreement dated July 21,
1998, no broker, finder or investment banker is entitled to any brokerage,
finder's or other fee or commission in connection with the Merger or the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of USCS or its Subsidiaries. There has been delivered to DST a true
and complete copy of the agreement pursuant to which Merrill Lynch & Co. has
been retained to act as financial advisor to USCS in connection with the Merger.
SECTION 3.14 TAXES. USCS and each of its Subsidiaries have timely filed
all Tax returns required to be filed by any of them and have timely paid or have
established an adequate reserve for the payment of all Taxes owed in respect of
the periods covered by such returns. The information contained in such Tax
returns is complete and accurate in all material respects. Neither USCS nor any
Subsidiary of USCS is delinquent in the payment of any Tax or other amount owed
to any Governmental Entity. Except as set forth in Section 3.14 of the USCS
Disclosure Schedule, there are no claims or investigations pending or, to USCS'
Knowledge, threatened against USCS or any of its Subsidiaries for past Taxes,
except claims and investigations that would not have a Material Adverse Effect
on USCS and adequate provision for which has been made on the Most Recent
Balance Sheet. None of USCS or its Subsidiaries has waived or extended any
applicable statute of limitations relating to the assessment of any Taxes that
would be payable by USCS or such Subsidiary.
SECTION 3.15 ENVIRONMENTAL LAWS.
(a) Each of USCS and its Subsidiaries is in compliance in all respects with
all Environmental Laws, except where the failure to so comply would not have a
Material Adverse Effect on USCS; and
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(b) No orders, directions or notices have been received by USCS or its
Subsidiaries during the past five years pursuant to any Environmental Law and no
Governmental Entity has submitted to any of USCS and its Subsidiaries any
request for information pursuant to any Environmental Law, except as set forth
in Section 3.15(b) of the USCS Disclosure Schedule.
SECTION 3.16 TRANSACTIONS WITH AFFILIATES. Except as disclosed in USCS
SEC Reports, or as set forth in Section 3.16 of the USCS Disclosure Schedule,
there is no lease, sublease, indebtedness, contract, agreement, commitment,
understanding or other arrangement of any kind entered into by USCS with any
officer, director or stockholder of USCS or any "affiliate" or "associate" of
any of them (as those terms are defined in the Exchange Act) or of USCS, except,
in each case, for compensation paid to directors and officers consistent with
previously established policies, reimbursements of ordinary and necessary
expenses incurred in connection with their employment and amounts paid or
benefits granted pursuant to USCS Benefit Plans.
SECTION 3.17 MATERIAL CONTRACTS. Set forth in Section 3.17 of the USCS
Disclosure Schedule is a schedule of each contract or agreement to which USCS or
any of its Subsidiaries is a party which involves more than $2.5 Million in
expenses per year or more than $3.0 Million in revenues per year. Each of USCS
and its Subsidiaries are in compliance with each contract or agreement listed in
Section 3.17 of the USCS Disclosure Schedule, and each such contract or
agreement is in full force and effect, without default by USCS or any such
Subsidiary and, to the Knowledge of USCS, without any breach or default by any
other party thereto, except where such breach or default would not result in a
Material Adverse Effect. Except as set forth in Section 3.17 of the USCS
Disclosure Schedule, no written notice has been received by USCS or any such
Subsidiary or, to USCS' Knowledge, threatened regarding termination, suspension
or material alteration or amendment of any such contract or agreement. Each
such contract or agreement is a valid and binding obligation of USCS or its
Subsidiary, as the case may be, in accordance with its terms, except (i) as
enforcement may be limited by bankruptcy, insolvency or other similar Legal
Requirements affecting the enforcement of creditors' rights generally, (ii) as
the availability of indemnification and other remedies may be limited by federal
and state securities laws and (iii) for limitations imposed by general
principles of equity. Also set forth in Section 3.17 of the USCS Disclosure
Schedule is a list of the companies who have indicated an intention to convert
cable subscribers to USCS' software and systems within the next 18 months and
the approximate number of such intended subscribers.
SECTION 3.18 INTELLECTUAL PROPERTY. Set forth in Section 3.18 of the USCS
Disclosure Schedule is a schedule listing all material Intellectual Property
which is owned by, registered in the name of, licensed to, or used in the
business of, USCS or its Subsidiaries, except for "shrink-wrapped end-user
licenses." USCS has a policy of obtaining a license for all computer software
and to USCS' Knowledge this policy is enforced except for non-material
violations. The Intellectual Property identified in Section 3.18 of the USCS
Disclosure Schedule is sufficient to conduct USCS' business as currently
operated by USCS. Except as described in Section 3.18 of the USCS Disclosure
Schedule, (a) to USCS' Knowledge, there is no restriction affecting the use of
any of the Intellectual Property, except for restrictions on the use of
Intellectual Property licensed to USCS as set forth in the applicable license
agreement and except for such restrictions that do not have a Material Adverse
Effect, (b) no license with a term of more than ten years, or which authorizes a
sub-license of any license, has been granted by USCS or its Subsidiaries to any
third party with respect thereto, and (c) to USCS' Knowledge, no third party has
any
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right, title or interest in, or claims to, the Intellectual Property, except for
rights granted to USCS pursuant to licenses. Each item of Intellectual Property
owned by, or licensed to, USCS or its Subsidiaries, is valid and enforceable,
and to USCS' Knowledge and except as set forth in Section 3.17 of the USCS
Disclosure Schedule, (a) is not being, and has not been, challenged or
infringed, (b) is not, and has not been, involved in any pending or threatened
administrative or judicial proceeding, and (c) has not conflicted, and does not
conflict, with any rights or alleged rights of any Person. To USCS' Knowledge
and except as set forth in Section 3.17 of the USCS Disclosure Schedule, none of
USCS' products or operations, or any products or operation of any of its
Subsidiaries, involves any infringement of any proprietary or contractual right
of any Person. None of the items of Intellectual Property owned by, or licensed
to, USCS or its Subsidiaries, are subject to any liens or limitations on use by
USCS or its Subsidiaries, or to USCS' Knowledge, by any party granting rights to
the Intellectual Property to USCS or its Subsidiaries. To USCS' Knowledge and
except as set forth in Section 3.17 of the USCS Disclosure Schedule, no event
has occurred that has resulted in a default or violation, or which constitutes
or may constitute a default or violation, by USCS or its Subsidiaries with
respect to any of the Intellectual Property or with respect to any agreement
relating directly to, or affecting USCS' ownership rights in, the Intellectual
Property.
SECTION 3.19 YEAR 2000 COMPLIANCE. USCS believes, and it has no
information to the contrary, that it has taken and is taking all reasonable
steps to assure that all of its proprietary hardware and proprietary computer
software that is licensed to others or used by USCS to provide services to its
clients or used otherwise in its business ("USCS Products") will be year 2000
compliant in accordance with Schedule 3.19. As used in this Agreement "year
2000 compliant" shall mean that the USCS Products will perform in accordance
with its specifications and the agreements under which they are provided to
USCS' clients or licensed or used to provide services to USCS' clients
regardless of the year of the date data encountered by such products, provided,
that such date data falls within the period ending in the year 2060; provided,
further, that (i) all date data received for use by the USCS Products are
accurate and in formats defined by the USCS Products from time to time, and (ii)
all date data generated by the USCS Products are accepted in formats defined by
the USCS Products from time to time. Notwithstanding the foregoing, USCS makes
no representation or warranty respecting user defined fields that contain dates,
or as to the functionality of the USCS Products in circumstances where data
received from any third party system are invalid, incorrect or otherwise
corrupt. Notwithstanding the foregoing, USCS further represents and warrants
that it is not currently in violation of any year 2000 warranty in any contract
to which it is a party and that it is taking all reasonable steps under its year
2000 compliance program to avoid any future violation of any such warranty.
Section 3.19 of the USCS Disclosure Schedule lists all contracts in which USCS
has made a specific year 2000 warranty. USCS further represents and warrants
that (i) it has made adequate provision for the costs of its year 2000
compliance program in its current year budget and in all financial projections
for 1998, 1999 and 2000 which have been provided to DST and (ii) it has taken
the appropriate steps in connection with achieving year 2000 compliance of the
USCS Products including but not limited to:
(a) It has identified all hardware, systems and applications that must be
modified except where the absence of Year 2000 compliance for any such
hardware, systems or applications would not have a Material Adverse
Effect;
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(b) It has evaluated alternatives (modification, replacement or
discontinuance); and
(c) It has established plans and programs which include timely milestones
and appropriate testing to ensure that such hardware, systems and
applications identified in subparagraph (a) above shall be year 2000
compliant by June 30, 1999.
USCS further represents and warrants that its year 2000 compliance program
includes (i) projects to ensure that third parties are year 2000 compliant
respecting software, equipment and services provided to USCS; (ii) selection of
alternative vendors on a timely basis; and (iii) interoperability testing with
clients and other third parties.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DST AND ACQUISITION SUB
DST and Acquisition Sub represent and warrant to USCS as follows:
SECTION 4.1 ORGANIZATION AND QUALIFICATION. Each of DST and Acquisition
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, and has all requisite corporate power and
authority to carry on its business as it is now being conducted. Each of DST
and Acquisition Sub is duly qualified as a foreign corporation to do business,
and is in good standing, in each jurisdiction where the character of its
properties owned or held under lease or the nature of its activities make such
qualification necessary, except where the failure to be so qualified will not,
individually or in the aggregate, have a Material Adverse Effect on it.
SECTION 4.2 CAPITALIZATION.
(a) As of the date of this Agreement, the authorized capital stock of DST
consisted of: (i) 125,000,000 shares of DST Common Stock, of which 48,997,772
were issued and outstanding as of August 31, 1998; (ii) 10,000,000 shares of
preferred stock, par value $.01 per share, of which no shares are issued and
outstanding; and (iii) 3,658,090 shares of DST Common Stock issuable as of
August 31, 1998 with respect to all outstanding options to acquire shares of DST
Common Stock.
(b) All shares of DST Common Stock to be issued in connection with the
Merger, when issued in accordance with this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable, and, assuming the information
provided to DST by USCS is accurate and complete, will be issued in material
compliance with all federal and state securities laws and any other Legal
Requirements.
(c) As of the date of this Agreement, the authorized capital stock of
Acquisition Sub consisted of 1,000 shares of Common Stock. Acquisition Sub is a
direct, wholly owned subsidiary of DST. DST will own all of the issued and
outstanding stock of (i) Acquisition Sub immediately prior to the Effective Time
and (ii) Surviving Corporation immediately after the Effective Time.
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SECTION 4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. DST has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated by this Agreement. The execution and
delivery of this Agreement and the consummation of the transactions contemplated
by this Agreement by DST have been duly authorized by the Board of Directors of
DST, and no other corporate proceedings on the part of DST (other than the
approval of DST stockholders as contemplated by this Agreement) are necessary to
authorize this Agreement and the transactions contemplated by this Agreement.
This Agreement constitutes a valid and binding obligation of DST enforceable
against it in accordance with its terms, except (i) as enforcement may be
limited by bankruptcy, insolvency or other similar Legal Requirements affecting
the enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
SECTION 4.4 NO BREACH; REQUIRED CONSENTS. The execution and delivery of
this Agreement by DST does not, and the consummation of the transactions
contemplated by this Agreement by DST and Acquisition Sub will not: (a) subject
to approval of holders of DST Common Stock, violate or conflict with the
certificate of incorporation or bylaws of DST or Acquisition Sub; (b) constitute
a breach or default (or an event that with notice or lapse of time or both would
become a breach or default) or give rise to any Lien, third-party right of
termination, cancellation, modification or acceleration under any agreement or
undertaking to which DST or Acquisition Sub is a party or by which any of them
is bound, except where such breach, default, Lien, third-party right of
termination, cancellation, modification or acceleration would not have a
Material Adverse Effect on DST or Acquisition Sub; or (c) subject to obtaining
the approvals and making the filings described in Section 4.5, constitute a
violation of any applicable Legal Requirement.
SECTION 4.5 CONSENTS AND APPROVALS. Neither the execution and delivery of
this Agreement by DST nor the consummation of the transactions contemplated by
this Agreement by DST and Acquisition Sub will require DST or Acquisition Sub to
make any filing or registration with, or obtain any authorization, consent or
approval of, any Governmental Entity, except those required in connection, or in
compliance, with the provisions of (i) the HSR Act, (ii) the Securities Act of
1933, as amended (the "Securities Act"), (iii) the Securities Exchange Act of
1934, as amended (the "Exchange Act") and (iv) the corporation, securities or
blue sky laws or regulations, or similar Legal Requirements, of various states
of the United States.
SECTION 4.6 REPORTS AND FINANCIAL STATEMENTS.
(A) SEC REPORTS. DST has filed all required forms, reports and documents
required to be filed with the SEC since December 31, 1995 (collectively, the
"DST SEC Reports"). As of their respective dates or effective dates and except
as the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of the
DST SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by reference therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading insofar as
such statements relate to or affect DST or its Subsidiaries.
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(B) FINANCIAL STATEMENTS. The audited consolidated financial statements of
DST contained in the DST SEC Reports comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with GAAP applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and present fairly DST's consolidated financial condition and
the results of its operations as of the relevant dates thereof and for the
periods covered thereby. The unaudited consolidated interim financial
statements of DST contained in the DST SEC Reports comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared on a basis
consistent with prior interim periods (except as required by applicable changes
in GAAP or in SEC accounting policies) and include all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of DST's
consolidated financial condition and results of operations for such periods.
(C) ABSENCE OF CERTAIN CHANGES. Since the date of the most recent
consolidated balance sheet of DST included in DST's Quarterly Report on Form 10-
Q filed with the SEC for the quarter ended June 30, 1998 (the "Most Recent DST
Balance Sheet"), there has not been any: (i) transaction, commitment, dispute
or other event or condition (financial or otherwise) of any character (whether
or not in the ordinary course of business) that, individually or in the
aggregate, has had, or would have, a Material Adverse Effect on DST; (ii) any
declaration, setting aside or payment of any dividend or other distribution
(whether in cash, stock or property) with respect to the capital stock of DST;
or (iii) entry into any commitment or transaction material to DST and its
Subsidiaries taken as a whole (including any borrowing or sale of assets) except
in the ordinary course of business consistent with past practice.
(D) ABSENCE OF UNDISCLOSED LIABILITIES. DST does not have any
indebtedness, liability or obligation required by GAAP to be reflected on a
balance sheet that is not reflected or reserved against in the Most Recent DST
Balance Sheet except (i) liabilities, obligations and contingencies that were
incurred after the date of the Most Recent DST Balance Sheet in the ordinary
course of business and which would not, in the aggregate, have a Material
Adverse Effect and (ii) other liabilities, obligations and contingencies that
would not, in the aggregate, have a Material Adverse Effect on DST.
SECTION 4.7 LITIGATION. Except as set forth in Section 4.7 of the DST
Disclosure Schedule, there is no suit, action or proceeding pending, or to the
knowledge of DST, threatened against or affecting DST or any of its Subsidiaries
or any judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against DST or any of its Subsidiaries that has had or is
likely to have a Material Adverse Effect on DST.
SECTION 4.8 NO BROKER. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of DST or Acquisition Sub.
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SECTION 4.9 APPROVAL.
(a) The Board of Directors of DST and Acquisition Sub at meetings duly
called and held, respectively: (i) determined that the Merger is advisable and
fair and in the best interests of DST and its stockholders and Acquisition Sub
and its stockholder; (ii) approved the Merger and this Agreement and the
transactions contemplated by this Agreement; and (iii) recommended the approval
of this Agreement and the Merger by the holders of DST Common Stock and by DST
as the sole stockholder of Acquisition Sub and directed that the Merger be
submitted for consideration by DST's stockholders at the Meeting.
(b) The majority vote of the total votes cast at the Meeting with respect
to this Agreement and the Merger is the minimum vote required for the adoption
and approval of this Agreement, the Merger and the other transactions
contemplated by this Agreement.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 5.1 CONDUCT OF BUSINESS OF USCS. Prior to the Effective Time,
except as contemplated, permitted or required by this Agreement:
(a) Except as set forth in Section 5.1 of the USCS Disclosure Schedule,
USCS will conduct, and will cause each of its Subsidiaries to conduct, its
business in the ordinary course in accordance with past practice, and will use,
and will cause each of its Subsidiaries to use, its reasonable best efforts to
preserve intact its present business organization and to preserve relationships
with customers, suppliers and others having business dealings with them.
(b) USCS will not, and will not permit any of its Subsidiaries to: (i)
amend or propose to amend the certificate of incorporation or bylaws of USCS or
any of its Subsidiaries; (ii) split, combine or reclassify the outstanding
capital stock of, or issue or authorize or propose the issuance of any other
securities in respect of, in lieu of or in substitution for shares of capital
stock of, or other ownership interests in, USCS or any of its Subsidiaries;
(iii) or declare, set aside or pay any dividend, distribution, or similar
payment to any stockholder, director or officer of USCS or any of its
Subsidiaries; (iv) directly or indirectly redeem, purchase or otherwise acquire
or agree to redeem, purchase or otherwise acquire any shares of capital stock
of, or other ownership interests in, USCS or any of its Subsidiaries; or (v)
agree to do any of the foregoing.
(c) USCS will not, and will not permit any of its Subsidiaries to: (i)
encumber, issue, deliver or sell or agree to issue, deliver or sell any shares
of capital stock of, or other equity interests (including any option, warrant or
other similar right to acquire any equity interest) in USCS or any of its
Subsidiaries, except for shares issued upon exercise of options outstanding at
the date of this Agreement which are exercised in accordance with the terms of
such options); (ii) acquire, lease or dispose of any assets other than in the
ordinary course of business consistent with past practice; (iii) create, assume
or incur any indebtedness except in the ordinary course of business consistent
with past practice; (iv) encumber any of its assets other than in connection
with equipment leases incurred in the ordinary course of business consistent
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with past practice; (v) enter into any other material transaction; (vi) make any
payment with respect to any indebtedness of USCS or its Subsidiaries except such
payments that are scheduled to come due prior to the Effective Time; (vii)
acquire by merging or consolidating with, or by acquiring assets of, or by
purchasing an ownership interest in, or by any other method, any business or any
other Person, except pursuant to agreements identified in Section 5.1(c) of the
USCS Disclosure Schedule; or (viii) agree to do any of the foregoing.
(d) Except as required to comply with applicable Legal Requirements or
existing USCS Benefit Plans, USCS will not, and will not permit any of its
Subsidiaries to: (i) adopt, terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other USCS Benefit Plan, agreement, trust,
fund or other arrangement for the benefit or welfare of any director, officer or
current or former employee; (ii) increase in any manner the compensation or
benefits of any director, officer or employee (except normal increases in the
ordinary course of business consistent with past practice); (iii) grant any
award or option under any bonus, incentive, performance or other compensation
plan or arrangement or USCS Benefit Plan (except as set forth in Section 5.1(d)
to the USCS Disclosure Schedule); (iv) take any action to fund or in any other
way secure the payment of compensation or benefits (including any option,
warrant or other similar right to acquire any equity interest) under any
employee plan, agreement, contract or arrangement or USCS Benefit Plan (except
in the ordinary course of business consistent with past practice); or (v) agree
to do any of the foregoing.
(e) USCS will not take or agree to take, and will cause its Subsidiaries
not to take or agree to take, any action that would: (i) make any representation
or warranty of USCS set forth in this Agreement untrue or incorrect so as to
cause the conditions set forth in Article VII of this Agreement not to be
fulfilled as of the Effective Time; or (ii) result in any breach of this
Agreement or cause any of the other conditions of this Agreement not to be
satisfied as of the Effective Time.
(f) USCS will not, and will not permit any of its Subsidiaries to enter
into any transaction with any officer, stockholder, director, consultant or
employee of USCS or any Subsidiary thereof or any person or entity that is an
"affiliate" or "associate" of any of the foregoing, as those terms are defined
in Rule 12b-2 under the Exchange Act, whether or not such transaction would be
in the ordinary course of business.
(g) USCS will take no action that reasonably could be expected to adversely
affect the qualification of the Merger for pooling-of-interests accounting
treatment under GAAP.
(h) USCS and its Subsidiaries will (i) not take any action to initiate,
solicit or encourage, directly or indirectly, any inquiries or the making or
implementation of any proposal or offer (including, without limitation, any
proposal or offer to its stockholders) with respect to a merger, acquisition,
consolidation or similar transaction involving, or any purchase of all or any
significant portion of the assets or any equity securities of, USCS or any of
its Subsidiaries (any such proposal or offer being hereinafter referred to as an
"Acquisition Proposal"), or engage in any negotiations concerning, or provide
any confidential information or data to, or have any discussions with, any
person or other entity or group, as defined in Section 13(d)(3) of the Exchange
Act, relating to an Acquisition Proposal, or otherwise facilitate any effort or
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attempt to make or implement an Acquisition Proposal; (ii) immediately cease and
cause to be terminated any existing activities, discussions or negotiations with
any parties previously conducted with respect to any of the foregoing and take
the necessary steps to inform the individuals or entities referred to above of
the obligations undertaken in this Section 5.1(h); and (iii) notify DST
immediately if any such inquiries or proposals are received by, any such
information is requested from or any such negotiations or discussions are sought
to be initiated or continued with, USCS or any of its Subsidiaries. Nothing
contained in this Section 5.1(h) will prohibit the Board of Directors of USCS
from (1) furnishing information to, or entering into discussions or negotiations
with, any person or other entity or group that makes an Acquisition Proposal or
recommending to its stockholders that they accept such Acquisition Proposal, if
(A) the Board of Directors of USCS reasonably determines in good faith, after
consultation with outside legal counsel, that such action is compelled by its
fiduciary duties to stockholders imposed by law, (B) prior to furnishing such
information to, or entering into discussions or negotiations with, such person
or entity, USCS provides written notice to DST to the effect that it is
furnishing information to, or entering into discussions or negotiations with,
such person or entity, and (C) subject to any confidentiality agreement with
such other party (which USCS determines in good faith, after consultation with
outside counsel, is required to be executed in order for the Board of Directors
to act in accordance with its fiduciary duties to stockholders imposed by law),
USCS keeps DST informed of the status (not the terms) of any such discussions or
negotiations; and (2) to the extent applicable, complying with Rule 14e-2
promulgated under the Exchange Act with regard to an Acquisition Proposal.
Nothing in this Section 5.1(h) shall (x) permit any party to terminate this
Agreement (except as specifically provided in Section 8.1(d)), (y) permit any
party to enter into any agreement with respect to an Acquisition Proposal during
the term of this Agreement (it being agreed that during the term of this
Agreement, no party shall enter into any agreement with any person that provides
for, or in any way facilitates, an Acquisition Proposal (other than a
confidentiality agreement in customary form)), or (z) breach any obligation of
any party under this Agreement.
(i) The Board of Directors of USCS will recommend to the stockholders of
USCS the approval of the Merger, unless the Board of Directors reasonably
determines in good faith in connection with an Acquisition Proposal, after
consultation with outside counsel, that such action would be inconsistent with
its fiduciary duties to stockholders as required by law and, if such
determination is made, will give written notice to DST of such determination
within two Business Days of the making of such determination. Upon the issuance
of such written notice to DST, and upon the written election of DST, USCS will
negotiate in good faith with DST for a period of two Business Days regarding
such adjustments in the terms of the Merger as would enable the Board of
Directors of USCS, consistent with its fiduciary duties to the stockholders, to
proceed to recommend the Merger to the stockholders of USCS as contemplated in
this Agreement, provided, that there shall be no obligation, express or implied,
on the part of DST to agree to any terms or conditions which may be different
from those set forth in this Agreement.
(j) Upon the request of DST, USCS will prepare and deliver to DST, within
thirty days after such request, such financial statements (including audited
financial statements) as may be required by DST to meet its financial reporting
obligations (including requirements under applicable securities laws).
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(k) USCS shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code.
SECTION 5.2 CONDUCT OF BUSINESS OF DST. Prior to the Effective Time,
except as contemplated, permitted or required by this Agreement:
(a) DST will conduct, and will cause each of its Subsidiaries to conduct,
its business in the ordinary course in accordance with past practice, and will
use, and will cause each of its Subsidiaries to use, its reasonable best efforts
to preserve intact its present business organization and to preserve
relationships with customers, suppliers and others having business dealings with
them.
(b) DST will not take or agree to take, and will cause its Subsidiaries
not to take or agree to take, any action that would (i) make any representation
or warranty of DST set forth in this Agreement untrue or incorrect so as to
cause the condition set forth in Article VII of this Agreement not to be
fulfilled as of the Effective Time or (ii) result in any breach of this
Agreement or cause any of the other conditions of this Agreement not to be
satisfied as of the Effective Time.
(c) The Board of Directors of DST will recommend to the stockholders of
DST the approval of the Merger.
(d) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger for pooling-of-interests
accounting treatment under GAAP.
(e) DST shall take no action that reasonably could be expected to
adversely affect the qualification of the Merger as a reorganization under
Section 368(a) of the Code.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.1 ACCESS AND INFORMATION. USCS and its Subsidiaries will afford
to DST and to DST's accountants, counsel and other representatives full and
reasonable access during normal business hours (and at such other times as the
parties may mutually agree) throughout the period prior to the Effective Time to
all of USCS' and its Subsidiaries properties, books, contracts, commitments,
records and personnel, subject to the confidentiality requirements set forth in
Section 6.6.
SECTION 6.2 SEC FILINGS.
(a) USCS and DST will prepare jointly, and as soon as reasonably
practicable after the date of this Agreement, file with the SEC a joint proxy
statement/registration statement (the "Preliminary Joint Proxy
Statement/Prospectus") comprising preliminary proxy materials of USCS and DST
under the Exchange Act with respect to the Merger and a Registration Statement
on Form S-4 and preliminary prospectus of DST under the Securities Act with
respect to the DST Common Stock to be issued in the Merger, and will thereafter
use their respective
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reasonable best efforts to respond to any comments of the SEC with respect
thereto and to cause a definitive joint proxy statement/registration statement
(including all supplements and amendments thereto, the "Joint Proxy
Statement/Prospectus") and proxy to be mailed to USCS' and DST's stockholders as
promptly as practicable.
(b) As soon as reasonably practicable after the date hereof, USCS and DST
will prepare and file any other filings relating to the Merger and the other
transactions contemplated hereby that are required to be filed by each under the
Exchange Act, including, without limitation, the filing or amending of a Form S-
8 Registration Statement promptly after the Effective Time to cover the DST
Common Stock issuable upon exercise of the USCS Options assumed by DST, and
other applicable Legal Requirements (collectively "Other Filings"), and will use
their reasonable best efforts to respond to any comments of the SEC or any other
appropriate government official with respect thereto.
(c) USCS, on the one hand, and DST, on the other, will cooperate with each
other and provide all information necessary to prepare the Preliminary Joint
Proxy Statement/Prospectus, the Joint Proxy Statement/Prospectus and the Other
Filings (collectively "SEC Filings") and will provide promptly to the other
party any information that such party may obtain that could necessitate amending
any such document.
(d) Each of USCS and DST will notify the other promptly of the receipt of
any comments from the SEC or its staff or any other government official and of
any requests by the SEC or its staff or any other government official for
amendments or supplements to any of the SEC Filings or for additional
information and will supply the other with copies of all correspondence between
USCS or any of its representatives or DST or any of its representatives, as the
case may be, on the one hand, and the SEC or its staff or any other government
official, on the other hand, with respect thereto. If at any time prior to the
Effective Time, any event occurs that should be set forth in an amendment of, or
a supplement to, any of the SEC Filings, USCS and DST promptly will prepare and
file such amendment or supplement and will distribute such amendment or
supplement as required by applicable Legal Requirements, including, in the case
of an amendment or supplement to the Joint Proxy Statement/Prospectus, mailing
such supplement or amendment to USCS' stockholders.
(e) DST covenants that the SEC Filings (other than any information
provided by USCS for inclusion in the SEC Filings) (i) will comply in all
material respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they are made, not
misleading.
(f) USCS covenants that the SEC Filings (other than any information
provided by DST for inclusion in the SEC Filings) (i) will comply in all
material respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
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(g) DST will be responsible for all reasonable expenses incurred in
complying with this Section 6.2, including all registration, qualification and
filing fees, printing expenses, fees and disbursements of counsel (other than
counsel to USCS) and applicable blue-sky fees and expenses.
(h) (i) Each of DST and Acquisition Sub will indemnify, defend, and hold
harmless USCS, its officers, directors, employees and agents and each other
Person, if any, who controls any of the foregoing within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act, against any losses,
claims, damages or liabilities (collectively, "Losses"), joint or several, to
which any of the foregoing may become subject under the Securities Act or the
Exchange Act or otherwise, insofar as such Losses (or actions in respect
thereof) arise out of or are based upon (A) an untrue statement or alleged
untrue statement of a material fact contained in any SEC Filing, or (B) the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, provided that such
misstatement or omission was based on or omitted from information provided by
DST in writing for inclusion in the SEC Filings or was made in reliance upon and
in conformity with such information. DST promptly will reimburse USCS and each
such officer, director, employee, agent and controlling Person for any legal or
any other expenses reasonably incurred by any of them in connection with
investigating or defending any such Losses (or action in respect thereof).
(ii) If this Agreement is terminated prior to the consummation of
the Merger, USCS will indemnify, defend and hold harmless each of DST and
Acquisition Sub and their officers, employees and agents and directors and each
other Person, if any, who controls any of the foregoing within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, against any
Losses, joint or several, to which any of the foregoing may become subject under
the Securities Act or the Exchange Act or otherwise, insofar as such Losses (or
actions in respect thereof) arise out of or are based upon (A) an untrue
statement or alleged untrue statement of a material fact contained in any USCS
SEC Filing or (B) the omission or alleged omission to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, provided
that the misstatement or omission was based on or omitted from information
provided by USCS in writing for use in the SEC Filings or was made in reliance
upon and in conformity with such information. USCS promptly will reimburse DST
and Acquisition Sub and each such officer, director, employee, agent and
controlling Person for any legal or any other expenses reasonably incurred by
any of them in connection with investigating or defending any such Losses (or
action in respect thereof).
(iii) For purposes of this Section 6.2, (A) "Indemnifying Party"
means the Person having an obligation hereunder to indemnify any other Person
pursuant to this Section 6.2, (B) "Indemnified Party" means the Person having
the right to be indemnified pursuant to this Section 6.2 and (C) any information
concerning USCS that is included in any SEC Filing that is provided to USCS or
its counsel for review within a reasonable period before filing or use thereof
and to which USCS has not provided written notice of objection to DST will be
deemed to have been provided by USCS for inclusion in such SEC Filing. Whenever
any claim for indemnification arises under this Section 6.2, the Indemnified
Party will promptly notify the Indemnifying Party in writing of such claim and,
when known, the facts constituting the basis
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for such claim (in reasonable detail). Failure by the Indemnified Party so to
notify the Indemnifying Party will not relieve the Indemnifying Party of any
liability hereunder except to the extent that such failure materially prejudices
the Indemnifying Party.
(iv) After such notice, if the Indemnifying Party undertakes to
defend any such claim, then the Indemnifying Party will be entitled, if it so
elects, to take control of the defense and investigation with respect to such
claim and to employ and engage attorneys of its own choice to handle and defend
such claim, at the Indemnifying Party's cost, risk and expense, upon notice to
the Indemnified Party of such election, which notice acknowledges the
Indemnifying Party's obligation to provide indemnification hereunder. The
Indemnifying Party will not settle any third-party claim that is the subject of
indemnification without the written consent of the Indemnified Party, which
consent will not be unreasonably withheld; provided however, that the
Indemnifying Party may settle a claim without the Indemnified Party's consent if
the settlement (A) makes no admission or acknowledgment of liability or
culpability with respect to the Indemnified Party, (B) includes a complete
release of the Indemnified Party and (C) does not require the Indemnified Party
to make any payment or forego or take any action. The Indemnified Party will
cooperate in all reasonable respects with the Indemnifying Party and its
attorneys in the investigation, trial and defense of any lawsuit or action with
respect to such claim and any appeal arising therefrom (including the filing in
the Indemnified Party's name of appropriate cross claims and counterclaims) and
the Indemnifying Party will reimburse the Indemnified Party for all reasonable
direct out-of-pocket expenses incurred by the Indemnified Party in connection
with such cooperation. The Indemnified Party may, at its own expense,
participate in any investigation, trial and defense of such lawsuit or action
controlled by the Indemnifying Party and any appeal arising therefrom. If, after
receipt of a claim notice pursuant to Section 6.2(h)(iii), the Indemnifying
Party does not undertake to defend any such claim, the Indemnified Party may,
but will have no obligation to, contest any lawsuit or action with respect to
such claim and the Indemnifying Party will be bound by the result obtained with
respect thereto by the Indemnified Party (including the settlement thereof
without the consent of the Indemnifying Party). If there are one or more
defenses available to the Indemnified Party that conflict with, or are
additional to, those available to the Indemnifying Party, the Indemnified Party
will have the right, at the expense of the Indemnifying Party, to participate in
the defense of the lawsuit or action; provided however, that the Indemnified
Party may not settle such lawsuit or action without the consent of the
Indemnifying Party, which consent will not be unreasonably withheld.
(v) If the indemnification provided for in this Section 6.2(h) is
for any reason unavailable to the Indemnified Party in respect of any Losses (or
action in respect thereof) then the Indemnifying Party will, in lieu of
indemnifying the Indemnified Party, contribute to the amount paid or payable by
the Indemnified Party as a result of such Losses (or action in respect thereof),
in such proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and the Indemnified Party on the other with
respect to the statement or omission that resulted in such Losses (or action in
respect thereof) as well as any other relevant equitable considerations.
Relative fault with respect to an untrue or alleged untrue statement or omission
of a material fact will be determined by reference to whether the untrue or
alleged untrue statement or omission of a material fact related to information
supplied by the Indemnifying Party on the one hand or the Indemnified Party on
the other, the intent of the parties and their relative Knowledge, access to
information and opportunity to correct or prevent
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such statement or omission. The amount paid or payable by the Indemnified Party
as a result of the Losses (or action in respect thereof) referred to above will
be deemed to include any legal or other expenses reasonably incurred by the
Indemnified Party in connection with investigating, trying or defending any such
action or claim. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) will be entitled to contribution
from any Person who was not guilty of such fraudulent misrepresentation.
SECTION 6.3 MEETINGS OF STOCKHOLDERS. Each of USCS and DST will take all
action necessary, in accordance with the DGCL, the rules and regulations of the
NYSE, the Chicago Stock Exchange, the NASDAQ Stock Market and the NASD and the
certificate of incorporation and bylaws of USCS or DST, as applicable, to duly
call, give notice of, convene and hold a meeting of its stockholders as promptly
as practicable, to consider and vote upon the adoption and approval of this
Agreement (as a plan of merger under Section 251 of the DGCL), the Merger and
the other transactions contemplated by this Agreement (each, individually, the
"Meeting"), to the extent such approval is required by the DGCL, the NYSE, the
Chicago Stock Exchange, the NASDAQ Stock Market, the NASD or the certificate of
incorporation of USCS or DST, as applicable. Each of USCS and DST will use its
best efforts to hold such meetings at the same date and time.
SECTION 6.4 COMPLIANCE WITH THE SECURITIES ACT. Prior to the Closing
Date, USCS will cause to be delivered to DST a letter from USCS, identifying all
Persons who are, in its opinion, as of the date of this Agreement, "affiliates"
of USCS as that term is used in paragraphs (c) and (d) of Rule 145 under the
Securities Act and a written agreement from each such Person substantially in
the form of Exhibit 6.4. DST may cause the DST Certificates evidencing shares
of DST Common Stock issued to such Persons to bear a legend referring to the
applicability of paragraphs (c) and (d) of Rule 145 under the Securities Act.
SECTION 6.5 OTHER ACTIONS. Without limiting the termination and other
rights of the parties under this Agreement (and subject to the parties' rights
to take certain actions pursuant to Section 5.1(h) and Section 5.1(i) consistent
with the fiduciary duties of their respective Boards of Directors) each of the
parties to this Agreement will use its commercially reasonable best efforts to
take, or cause to be taken, all appropriate action, and to do, or cause to be
done, all things necessary, proper or advisable under applicable Legal
Requirements to consummate and make effective the transactions contemplated by
this Agreement in the most expeditious manner practicable, including the
satisfaction of all conditions to the Merger.
SECTION 6.6 CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS. Each party to this
Agreement agrees that it will treat this Agreement and all negotiations and
communications between them relating to this Agreement, the Merger or otherwise,
and all information disclosed to a party by the other party, as confidential.
No party to this Agreement will make any public announcements or otherwise
communicate with any news media with respect to this Agreement or any of the
transactions contemplated by this Agreement without prior approval of the other
party, which approval will not unreasonably be withheld or delayed, as to the
timing and contents of any such announcement as may be reasonable under the
circumstances; provided however, that nothing contained herein will prevent any
party from promptly making all filings with Governmental Entities that may, in
its reasonable judgment, be required or advisable in connection with the
execution and delivery of this Agreement or the consummation of the
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transactions contemplated by this Agreement, or from making any disclosures
required by Legal Requirements, so long as such party gives timely notice to the
other parties of the anticipated disclosure and cooperates with the other party
in designing reasonable procedural and other safeguards to preserve, to the
maximum extent possible, the confidentiality of all information furnished by the
other party pursuant to this Agreement. Except as expressly set forth above, all
of the terms and conditions of the Mutual Non-Disclosure Agreement by and
between DST and USCS, dated April 20, 1998, shall remain in full force and
effect until the Effective Time, but not any of the amendments thereto, each of
which is hereby superseded and replaced by this Section 6.6.
SECTION 6.7 NOTIFICATION. In the event of, or after obtaining Knowledge
of the occurrence or threatened occurrence of, any fact or circumstance that
would cause or constitute a breach or violation of any of its representations,
warranties, covenants or other agreements set forth herein, each party to this
Agreement promptly will give notice thereof to the other party and will use its
best efforts to prevent or remedy such breach.
SECTION 6.8 HSR ACT FILINGS. DST and USCS each will make or cause to be
made, and will use their reasonable best efforts to cause each of their
respective stockholders to make (if required under the HSR Act), an appropriate
filing of a Notification and Report Form pursuant to the HSR Act no later than
15 Business Days after the date of this Agreement. Each such filing will
request early termination of the waiting period imposed by the HSR Act. USCS
and DST each will use its reasonable best efforts to respond or cause a response
to be made as promptly as reasonably practicable to any inquiries received from
the Federal Trade Commission (the "FTC") and the Antitrust Division of the
Department of Justice (the "Antitrust Division") for additional information or
documentation and to respond as promptly as reasonably practicable to all
inquiries and requests received from any other Governmental Entity in connection
with antitrust matters; provided however, that nothing contained herein will be
deemed to preclude either USCS or DST from negotiating reasonably with any
Governmental Entity regarding the scope and content of any such requested
information or documentation. USCS and DST each will use their respective
reasonable best efforts to overcome any objections that may be raised by the
FTC, the Antitrust Division or any other Governmental Entity having jurisdiction
over antitrust matters. Notwithstanding the foregoing, neither DST nor USCS
will be required to make any significant change in the operations or activities
of the business (or any material assets employed therein) of DST or any of its
Affiliates, or of USCS or any of its Affiliates, as the case may be, if DST or
USCS, as the case may be, determines in good faith that such change would be
materially adverse to the operations or activities of the business (or any
material assets employed therein) of DST or any of its Affiliates or USCS or any
of its Affiliates, as the case may be.
SECTION 6.9 USCS DIRECTOR AND OFFICER INDEMNIFICATION.
(a) From and after the Effective Time, DST will, and will cause the
Surviving Corporation to, fulfill and honor in all respects the obligations of
USCS pursuant to (i) each indemnification agreement identified in Section 6.9 of
the USCS Disclosure Schedule in effect on the date hereof between USCS and any
person who was a director or officer of USCS and (ii) the indemnification
provisions set forth in USCS' Certificate of Incorporation or Bylaws as each is
in effect on the date hereof. (The persons to be indemnified pursuant to the
provisions
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<PAGE>
of this Section 6.9(a) are referred to as the "USCS Indemnified Parties.") For a
period of one year following the Effective Time, the indemnification and
exculpation of liability provisions set forth in USCS' Certificate of
Incorporation and Bylaws as in effect on the date hereof shall not be eliminated
or changed in any manner that would adversely affect the rights thereunder of
the USCS Indemnified Parties.
(b) This Section 6.9 shall survive consummation of the Merger at the
Effective Time and is intended to be for the benefit of, and enforceable by,
USCS, DST, the Surviving Corporation, each of the USCS Indemnified Parties and
their heirs and representatives, and shall be binding upon all successors and
assigns of DST and the Surviving Corporation.
SECTION 6.10 TERMINATION OF USCS RIGHTS AGREEMENT. Prior to the Effective
Time, USCS shall take all necessary action to terminate the USCS Rights Plan
without issuing any securities or making any cash payment.
SECTION 6.11 ACTIONS UNDER STOCKHOLDER AGREEMENT. DST shall promptly
provide the notices and take all such other actions required of it under the
Stockholder Agreement attached as Exhibit E-2 hereto.
SECTION 6.12 CONSENTS/WAIVERS. With respect to each agreement identified
in Section 3.5 of the USCS Disclosure Schedule with any customer of USCS or its
Subsidiaries which would permit the customer to declare a breach or default or
to terminate such agreement because of the execution or delivery of this
Agreement or the consummation of the transactions contemplated by this
Agreement, (a "Change of Control Agreement") DST and USCS agree to take the
actions set forth in Schedule 6.12.
SECTION 6.13 USCS DEFERRED COMPENSATION PLANS. DST shall guarantee the
obligations of the Surviving Corporation with respect to the USCS Deferred
Salary Plan and the USCS Deferred Bonus Plan (as described in Section 3.11 of
the USCS Disclosure Schedule) for those participants under such plans who agree
to waive application of the change in control provisions under such plans to the
transactions contemplated by this Agreement.
ARTICLE VII
CONDITIONS PRECEDENT
SECTION 7.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER.
The respective obligations of each party to effect the Merger will be subject to
the fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement, the Merger and the transactions contemplated by this
Agreement shall have been duly approved, to the extent required by applicable
law or rule by (i) the holders of the outstanding USCS Stock entitled to vote
and (ii) the holders of the outstanding DST Common Stock entitled to vote.
(b) The waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been earlier terminated.
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(c) The Registration Statement on Form S-4 that includes the Joint Proxy
Statement/Prospectus shall have become effective in accordance with the
provisions of the Securities Act and any necessary state securities law
approvals shall have been obtained and no stop orders with respect thereto shall
have been issued by the SEC and remain in effect.
(d) No Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any Legal Requirement that remains in effect and has the
effect of making the transactions contemplated by this Agreement illegal or
otherwise prohibiting the transactions contemplated by this Agreement, or that
questions the validity or the legality of the transactions contemplated by this
Agreement and that could reasonably be expected to materially and adversely
affect the value of the business of USCS, it being agreed that each party will
use its reasonable best efforts to have any such injunction lifted. All
material consents of Governmental Entities required to be obtained with respect
to the Merger and the other transactions contemplated by this Agreement shall
have been obtained.
(e) As of the Effective Time, the shares of DST Common Stock issued in
connection with the Merger will be approved for listing on the NYSE and the
Chicago Stock Exchange, subject to satisfaction of applicable NYSE and Chicago
Stock Exchange requirements upon official notice of issuance.
(f) DST and USCS shall have each received the written opinion of its
respective counsel, Sonnenschein Nath & Rosenthal and Graham & James LLP, or
other evidence, in form and substance reasonably satisfactory to it, to the
effect that the Merger will constitute a reorganization within the meaning of
Section 368 of the Code. In rendering such opinions, such counsel may rely upon
representations of the parties contained herein and in certificates of officers
of DST, USCS and others.
(g) DST and USCS shall have each received letters from
PricewaterhouseCoopers LLP ("PWC") dated as of the Closing Date confirming that
the Merger may be accounted for as a pooling of interests in accordance with
GAAP, Accounting Principles Board Opinion No. 16 and all published rules,
regulations and interpretations of the SEC.
(h) The Spin-off referred to in Exhibit E-2 hereto shall not have occurred
within thirty (30) days prior to the Effective Time.
SECTION 7.2 CONDITIONS TO OBLIGATION OF USCS TO EFFECT THE MERGER. The
obligation of USCS to effect the Merger will be subject to the fulfillment at or
prior to the Effective Time of the additional following conditions:
(a) The representations and warranties of DST contained in this Agreement
shall be true and correct in all material respects as of the Effective Time,
with the same force and effect as if made as of the Effective Time, except (i)
for changes contemplated by this Agreement, (ii) for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), and (iii) in all such cases, for such
breaches or inaccuracies of such representations and warranties as do not have a
Material Adverse Effect on DST, and USCS shall have received a certificate of
DST to such effect signed by the Chief Executive Officer of DST. For purposes
of determining whether there has been
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a failure to satisfy the condition set forth in this Section 7.2(a), there shall
not be considered any change in the stock price of capital stock of DST after
the date of this Agreement.
(b) DST shall have performed or complied in all material respects with all
material agreements and covenants required by this Agreement to be performed or
complied with by it prior to the Effective Time, and USCS shall have received a
certificate of DST to such effect signed by the Chief Executive Officer and by
the Chief Financial Officer of DST.
(c) George Argyros and James Castle shall have been appointed to the Board
of Directors of DST effective as of the Effective Time.
(d) The opinion of Merrill Lynch & Co. referenced in Section 3.4 shall not
have been withdrawn (unless withdrawn at the request or direction of USCS).
(e) USCS shall have received the following documents: (i) Affiliate
Agreements in the form of Exhibit 7.2(e)(i) hereto executed by each Person who
may be reasonably deemed an "affiliate" of DST (except for the DST Major
Stockholder, whose agreement is set forth in Exhibit E-2); (ii) an Agreement in
the form of Exhibit E-2 hereto executed by the DST Major Stockholder; (iii) the
legal opinion of Sonnenschein Nath & Rosenthal dated as of the Closing Date in
the form of Exhibit 7.2(e)(ii) hereto; and (iv) the Registration Rights
Agreement in the form of Exhibit 7.2(e)(iv) hereto executed by DST.
SECTION 7.3 CONDITIONS TO OBLIGATIONS OF DST AND ACQUISITION SUB TO EFFECT
THE MERGER. The obligations of DST and Acquisition Sub to effect the Merger
will be subject to the fulfillment at or prior to the Effective Time of the
additional following conditions:
(a) The representations and warranties of USCS contained in this Agreement
shall be true and correct in all material respects as of the Effective Time,
with the same force and effect as if made as of the Effective Time, except (i)
for changes contemplated by this Agreement, (ii) for those representations and
warranties which address matters only as of a particular date (which shall
remain true and correct as of such date), and (iii) in all such cases, for such
breaches or inaccuracies of such representations and warranties as do not have a
Material Adverse Effect on USCS, and DST shall have received a certificate of
USCS to such effect signed by the Chief Executive Officer and by the Chief
Financial Officer of USCS.
(b) USCS shall have performed or complied in all material respects with all
material agreements and covenants required by this Agreement to be performed or
complied with by it on or prior to the Effective Time, and DST shall have
received a certificate of USCS to such effect signed by the Chief Executive
Officer and by the Chief Financial Officer of USCS.
(c) DST shall have received the following documents: (i) Affiliate
Agreements in the form of Exhibit 6.4 hereto executed by each Person who may be
reasonably deemed an "affiliate" of USCS; (ii) Agreements in the form of Exhibit
E-1 executed by the USCS Major Stockholders; (iii) the legal opinion of Graham &
James LLP dated as of the Closing date, in the form of Exhibit 7.3(c)(iii); and
(iv) comfort letters from PWC with respect to USCS dated no more than two
business days before the date on which the Joint Proxy Statement/Prospectus
becomes effective, in scope and substance equivalent to letters customarily
delivered by
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independent public accountants in such circumstances and reasonably acceptable
in form and substance to DST.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
SECTION 8.1 TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
stockholders of USCS or DST:
(a) by mutual written consent of the Board of Directors of DST and the
Board of Directors of USCS;
(b) by either DST or USCS (i) if at the Meeting of its stockholders
(including any postponement or adjournment thereof), the Merger is not approved
and adopted by the affirmative vote required by law, or (ii) after the later of
January 31, 1999 or, if the Spin-off occurs in January, 1999, that day which is
thirty days after the Spin-off, or (iii) if the letter of its independent
accounts referred to in Section 7.1(g) is withdrawn;
(c) by DST, if it receives notice from USCS of the determination of the
Board of Directors of USCS as provided in Section 5.1(i) or by USCS, if a period
of two Business Days has elapsed since receipt by DST of such notice and no
election to negotiate has been received from DST or if the two Business Day
negotiation period set forth in Section 5.1(i) has expired without an agreement
being reached;
(d) by DST, if any Person (other than DST or any of its Affiliates) shall
have acquired before the Effective Time or the termination of this Agreement
fifty percent (50%) or more of the outstanding USCS Stock, unless such Person
shall have delivered to DST within two Business Days of such acquisition
definitive written confirmation to the effect that such Person will vote in
favor of the Merger at the Meeting and take no action to prevent or delay the
Merger.
SECTION 8.2 REMEDIES.
(a) In the event of the termination of this Agreement or breach of any
provision of this Agreement by either DST or USCS, DST and USCS shall be
entitled to all remedies available at law. Notwithstanding anything to the
contrary in this Agreement, in the event of a breach of any provision of this
Agreement prior to the termination of this Agreement, the non-breaching party
shall be entitled to all available equitable remedies.
(b) Subject to Section 8.2(c), if (i) (w) DST receives notice from USCS of
the determination of the Board of Directors of USCS as provided in Section
5.1(i), (x) the Board of Directors of USCS fails to recommend to the
stockholders of USCS the approval of the Merger or withdraws such
recommendation, or (y) the Merger is not consummated as a result of the failure
of USCS to obtain stockholder approval as provided in Section 7.1(a)(i), if such
failure or withdrawal is not the result of the failure of DST to satisfy the
conditions set forth in Section 7.2(a) or Section 7.2(b) and within twelve
months after such failure USCS enters into
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a merger, acquisition, consolidation or similar transaction involving, or any
purchase of all or any significant portion of the assets or any equity
securities of, USCS or any of its Subsidiaries with any person other than DST or
a Subsidiary of DST, or (ii) any Person (other than DST and any of its
Affiliates) shall have acquired before the Effective Time or the termination of
this Agreement 50 percent or more of the outstanding USCS Stock and such Person
fails to timely deliver the written confirmation to DST as provided in Section
8.1(d), or (iii) USCS shall have terminated this Agreement pursuant to Section
8.1(c), USCS will promptly pay to DST by wire transfer, in immediately available
funds, the Termination Fee.
(c) Notwithstanding anything to the contrary herein, no party shall have
any liability under the Agreement, including Section 8.2(a) or Section 8.2(b),
in the event the Agreement is terminated or terminable as a consequence of the
nonfulfillment of any of the conditions set forth in Section 7.1(b), Section
7.1(c), Section 7.1(d), Section 7.1(e) or Section 7.1(g), unless such
nonfulfillment is caused by that party's material breach of any of its covenants
or obligations under this Agreement.
SECTION 8.3 AMENDMENT. This Agreement may be amended by DST and USCS by
or pursuant to action taken by their respective Boards of Directors at any time
before or after approval of this Agreement by the stockholders of USCS and DST
and prior to the Effective Time, but, after either such approval, no amendment
will be made that changes the Exchange Ratio or in any other way materially
adversely affects the rights of such stockholders, without the further approval
of such stockholders. This Agreement may not be amended except by an instrument
in writing signed on behalf of DST and USCS.
SECTION 8.4 WAIVER. At any time prior to the Effective Time, subject to
Section 8.3, DST and USCS, by or pursuant to action taken by their respective
Boards of Directors, may (i) extend the time for performance of any of the
obligations or other acts of the other party to this Agreement, (ii) waive any
inaccuracies in the representations and warranties set forth in this Agreement
or in any documents delivered pursuant to this Agreement and (iii) waive
compliance with any of the agreements or conditions set forth in this Agreement.
Any agreement on the part of a party to this Agreement to any such extension or
waiver will be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE IX
DEFINITIONS; GENERAL PROVISIONS
SECTION 9.1 DEFINITIONS. As used in this Agreement, the following terms
with initial capital letters will have the meanings set forth below:
"Affiliate" means, as to any Person, any other Person which, directly or
indirectly, controls, is under common control with, or is controlled by, such
Person. As used in this definition, "control" (as well as "controlling,"
"controlled by" and "under common control with") means possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a Person (whether through the ownership of voting securities, by
contract or otherwise).
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"Business Day" means any day on which commercial banks are open for
business in Kansas City, Missouri.
"Code" means the Internal Revenue Code of 1986, as amended.
"DST Common Stock" means the shares of common stock, par value $.01 per
share, of DST.
"Environmental Law" means any applicable Legal Requirement relating to the
protection of human health, protection, preservation or restoration of the
environment (including, air, water vapor, surface water, ground water, drinking
water supply, surface land, subsurface land, plant and animal life or any other
natural resource).
"Equity Affiliate" means, as to any Person, any other Person in which such
Person or any of its Subsidiaries holds a five percent or greater equity
interest.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"ERISA Affiliate" means, as to any Person, any trade or business (whether
or not incorporated) that is treated as a single employer with such Person under
Section 414(b), (c), (m) or (o) of the Code.
"Executive Officer" means, as to DST, any Person identified in its most
recent Annual Report to Shareholders as an executive officer and, as to USCS,
any Person identified in its most recent Annual Report to Shareholders as
management.
"GAAP" means generally accepted accounting principles as in effect from
time to time in the United States of America.
"USCS Common Stock" means the shares of common stock, par value $.05 per
share, of USCS.
"USCS Disclosure Schedule" means the Schedule designated as such and
attached to this Agreement as Exhibit A and incorporated herein.
"USCS Rights Plan" means the Stockholder Rights Plan, as amended, between
USCS and ChaseMellon Shareholder Services, LLC.
"USCS Stock Plans" means the following USCS Stock Option Plans: 1988 Stock
Option Plan; 1996 Stock Option Plan; 1996 Directors' Stock Option Plan; 1993
Stock Option Plan; and 1990 Stock Option Plan.
"Intellectual Property" means copyrights, patents, trademarks, service
marks, service names, trade names, applications therefor, technology rights and
licenses, computer software (including any source or object codes therefor or
documentation relating thereto), trade secrets, franchises, know-how,
inventions, and other intellectual property rights, either registered, issued,
applied for or common law.
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"Knowledge" means the present actual knowledge of a Person that is a human
being and, in the case of a Person that is not a human being, the present actual
knowledge of any Executive Officer (or any human being having duties comparable
to those of an Executive Officer) of such Person.
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted, adopted
or applied by any Governmental Entity, including judicial decisions applying
common law or interpreting any other Legal Requirement or any agreement entered
into with a Governmental Entity in resolution of a dispute or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim, option,
right to acquire, restriction on transfer, voting restriction or encumbrance of
any nature.
"Market Price" means (i) with respect to DST Common Stock, the closing
quotation from the New York Stock Exchange Composite Transactions as reported in
THE WALL STREET JOURNAL, and (ii) with respect to USCS Common Stock, the closing
quotation from the NASDAQ National Market Issues as reported in THE WALL STREET
JOURNAL.
"Material Adverse Effect" means a material adverse effect on the business,
properties, assets, known or reasonably foreseeable prospects, financial
condition, liabilities or operations of a Person and its Subsidiaries, taken as
a whole, or on the ability of such Person to perform its obligations under this
Agreement.
"NASD" means the National Association of Securities Dealers, Inc.
"NASDAQ" means the over-the-counter market of the NASD.
"NYSE" means the New York Stock Exchange.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, Governmental Entity or other entity.
"SEC" means the United States Securities and Exchange Commission.
"Spin-off" means the spin-off of FAM by the DST Major Stockholder referred
to in Exhibit E-2 and the date of such Spin-off shall mean the date the shares
of FAM are distributed to the stockholders of the DST Major Stockholder.
"Subsidiary" means, with respect to any Person, any other Person more than
50% of whose outstanding voting securities or partnership or other equity
interests, as the case may be, are directly or indirectly owned by such Person.
"Tax" means all federal, state, local and foreign income, profits,
estimated, franchise, gross receipts, payroll, sales, employment, use, property,
withholding, excise and other taxes,
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duties and assessments of any nature whatsoever together with all interest,
penalties and additions imposed with respect to such amounts.
"Termination Fee" means cash in the amount of $25,000,000.
SECTION 9.2 OTHER DEFINITIONS. The following terms are defined in the
Sections indicated:
<TABLE>
<CAPTION>
================================================================================
TERM SECTION
---- -------
<S> <C>
Acquisition Proposal 5.1 (h)
Acquisition Sub Preamble
Agreement Preamble
Antitrust Division 6.8
Certificate of Incorporation 1.1(a)
Certificate of Merger 1.2
Closing 2.9
Closing Date 2.9
USCS Preamble
USCS Benefit Plans 3.11(a)
USCS Options 2.7
USCS Permits 3.8(a)
USCS SEC Reports 3.7(a)
USCS Stock 2.1(b)
USCS Stock Certificates 2.2(a)
DGCL 1.1
Effective Time 1.2
Exchange Act 3.6
Exchange Agent 2.2(a)
Exchange Ratio 2.1(a)
FTC 6.8
Governmental Entity 3.8(a)
HSR Act 3.6
================================================================================
</TABLE>
35
<PAGE>
<TABLE>
================================================================================
<S> <C>
DST Preamble
DST Certificates 2.2(a)
DST SEC Reports 4.6(a)
Indemnified Party 6.2(h)(iii)
Indemnifying Party 6.2(h)(iii)
Joint Proxy Statement/Prospectus 6.2(a)
Losses 6.2(h)(i)
Meeting 6.3
Merger Recital A
Most Recent USCS Balance Sheet 3.7(c)
Most Recent DST Balance Sheet 4.6(c)
Other Filings 6.2(b)
Preliminary Joint Proxy Statement/Prospectus 6.2(a)
Secretary 1.2
SEC Filings 6.2(c)
Securities Act 3.6
Surviving Corporation 1.1
Tax 9.1
================================================================================
</TABLE>
SECTION 9.3 USE OF TERMS. Terms used with initial capital letters will
have the meanings specified, applicable to both singular and plural forms, for
all purposes of this Agreement. All pronouns (and any variations) will be
deemed to refer to the masculine, feminine or neuter, as the identity of the
Person may require. The singular or plural includes the other, as the context
requires or permits. The word "include" (and any variation) is used in an
illustrative sense rather than a limiting sense. The word "day" means a
calendar day. All accounting terms not otherwise defined in this Agreement will
have the meanings ascribed to them under GAAP.
SECTION 9.4 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
No representations and warranties contained in this Agreement will survive
beyond the Closing Date. This Section 9.4 will not limit any covenant or
agreement of the parties to this Agreement that by its terms requires
performance after the Closing Date.
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SECTION 9.5 NOTICES. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex or
other standard form of telecommunications, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to USCS: USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, CA 95670
Attn: Chief Executive Officer
With a copy to: Gilles S. Attia, Esq.
Graham & James LLP
400 Capitol Mall, 24th Floor
Sacramento, CA 95814
If to DST: DST Systems, Inc.
333 West 11th Street, 5th Floor
Kansas City, MO 64105
Attn: President
With a copy to: John F. Marvin, Esq.
Sonnenschein Nath & Rosenthal
4520 Main Street, Suite 1100
Kansas City, MO 64111
or to such other addresses as any party may have furnished to the other parties
in writing in accordance with this Section 9.5.
SECTION 9.6 FEES AND EXPENSES. Except as otherwise expressly provided in
this Agreement, whether or not the Merger is consummated, all costs and expenses
incurred in connection with this Agreement and the transactions contemplated by
this Agreement will be paid by the party incurring such expenses.
SECTION 9.7 SPECIFIC PERFORMANCE. The parties to this Agreement agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that, in accordance with
Section 8.2(a), the parties will be entitled to enforce specifically the terms
and provisions of this Agreement in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity, and no party will raise any defense to the
institution of such equitable relief other than with respect to the factual
allegations concerning the claims for which relief is sought.
SECTION 9.8 ENTIRE AGREEMENT; MISCELLANEOUS. This Agreement will be of no
force or effect until executed and delivered by all of the parties to this
Agreement. This Agreement (including the documents and instruments referred to
in this Agreement) when executed and delivered, constitutes the entire agreement
and supersedes all other prior agreements and
37
<PAGE>
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter of this Agreement except for the Mutual Non-
Disclosure Agreement dated as of April 20, 1998 but not the amendments thereto.
All parties have participated in the preparation of this Agreement and the
interpretive principle of construing a document against the drafter shall have
no application to this Agreement. This Agreement may be executed in two or more
counterparts which together will constitute a single agreement. This Agreement
may be delivered by facsimile. Any certificate delivered pursuant to this
Agreement will be made without personal liability on the part of the officer or
employee of the Person giving such certificate.
SECTION 9.9 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL.
(a) This Agreement shall be deemed to be made under, and in all respects
shall be interpreted, construed and governed by and in accordance with, the law
of the State of Delaware. The parties hereby irrevocably submit to the
exclusive jurisdiction of the courts of the State of Delaware and the Federal
courts of the United States of America located in the State of Delaware solely
in respect of the interpretation and enforcement of the provisions of this
Agreement and of the documents referred to in this Agreement, and in respect of
the transactions contemplated hereby, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that it is not subject thereto or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any such document may not be enforced in or by such courts, and the
parties hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a Delaware State or Federal
court. The parties hereby consent to and grant any such court jurisdiction over
the person of such parties and over the subject matter of such dispute and agree
that mailing of process or other papers in connection with any such action or
proceeding in the manner provided in Section 9.5 or in such other manner as may
be permitted by law shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.9.
38
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunder duly authorized all as of the date first
written above.
DST SYSTEMS, INC.
By: /s/ Thomas A. McDonnell
-----------------------------------
Name: Thomas A. McDonnell
Title: President and Chief
Executive Officer
DST ACQUISITIONS, INC.
By: /s/ Thomas A. McDonnell
-----------------------------------
Name: Thomas A. McDonnell
Title: President
USCS INTERNATIONAL, INC.
By: /s/ James C. Castle
------------------------------------
Name: James C. Castle
Title: Chief Executive Officer
1
<PAGE>
EXHIBIT 4.1
EXHIBIT E-1 TO AGREEMENT AND PLAN OF MERGER
FORM OF USCS INTERNATIONAL, INC. STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated as of September _____, 1998 (this "Agreement")
by the undersigned stockholder ("Stockholder") of USCS International, Inc., a
Delaware corporation ("USCS"), for the benefit of DST Systems, Inc., a Delaware
corporation ("DST").
WHEREAS, DST, DST Acquisitions, Inc., a Delaware corporation and a wholly-
owned subsidiary of DST ("Sub"), and USCS are entering into an Agreement and
Plan of Merger, dated as of September _____, 1998 (the "Merger Agreement"),
whereby, upon the terms and subject to the conditions set forth in the Merger
Agreement, each issued and outstanding share of the Common Stock, par value $.05
per share, of USCS ("USCS Common Stock") not owned directly or indirectly by DST
or USCS, will be converted into shares of Common Stock, par value $.01 per
share, of DST ("DST Common Stock");
WHEREAS, Stockholder owns or beneficially owns _______________ shares of
USCS Common Stock (such shares of USCS Common Stock, together with any other
shares of capital stock of USCS acquired by such Stockholder after the date
hereof and during the term of this Agreement, being collectively referred to
herein as the "Subject Shares"); and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, DST has required that Stockholder agree, and in order to induce DST
to enter into the Merger Agreement the Stockholder has agreed, to enter into
this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, Stockholder agrees as follows:
1. CAPITALIZED TERMS. Capitalized terms used in this Agreement that are
not defined herein shall have such meanings as set forth in the Merger
Agreement.
2. COVENANTS OF STOCKHOLDER. Until the termination of this Agreement in
accordance with Section 5 hereof, Stockholder agrees that:
(a) at the Stockholders Meeting (or at any adjournment thereof) or in
any other circumstances upon which a vote, consent or other approval with
respect to the Merger or the Merger Agreement is sought, the Stockholder shall
vote (or cause to be voted) the Subject Shares in favor of the Merger, the
adoption of the Merger Agreement and the approval of the terms thereof; and
(b) If, at any time which is more than 30 days prior to the Closing
Date, Stockholder sells or otherwise transfers, in one or a series of
transactions, more than 2.3 million shares of the Subject Shares to a single
purchaser or transferee, Stockholder shall, as a condition to such transfer or
sale, require such purchaser or transferee to execute an "Affiliate's Agreement"
in the same form as other affiliates of USCS have signed as required by the
Merger Agreement.
<PAGE>
Stockholder makes the covenants and agreements contained in this Agreement
solely in Stockholder's capacity as a stockholder of USCS and nothing contained
in this Agreement shall limit the ability of Stockholder, to the extent
Stockholder is a director of USCS, to discharge Stockholder's fiduciary duties
as a director of USCS under applicable law.
3. THE SUBJECT SHARES. The Stockholder represents and warrants to DST
that (i) the Stockholder is the record and/or beneficial owner of, and has good
and marketable title to, the Subject Shares, (ii) the Stockholder does not own,
of record or beneficially, any shares of capital stock of USCS other than the
Subject Shares and (iii) the Stockholder has the sole right to vote, and the
sole power of disposition with respect to, the Subject Shares, and none of the
Subject Shares is subject to any voting trust, proxy or other agreement,
arrangement or restriction with respect to the voting or disposition of such
Subject Shares, except as imposed by federal and state securities law and as
contemplated by this Agreement.
4. AFFILIATES LETTER. Stockholder agrees to execute and deliver on a
timely basis an Affiliate Letter in the form of Exhibit 6.4 to the Merger
Agreement, when and if requested by DST.
5. TERMINATION. The obligations of the Stockholder hereunder shall
terminate upon the earlier of the termination of the Merger Agreement pursuant
to its terms or the Effective Time.
6. SUCCESSORS, ASSIGNS AND TRANSFEREES BOUND. Any successor, assignee or
transferee of Stockholder (including a successor, assignee or transferee as a
result of the death of the Stockholder, such as an executor or heir) shall be
bound by the terms hereof, and the Stockholder shall take any and all actions
necessary to obtain the written confirmation from such successor, assignee or
transferee that it is bound by the terms hereof.
7. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement in any jurisdiction shall not affect the validity or
enforceability of any other provision of this Agreement in such jurisdiction, or
the validity or enforceability of any provision of this Agreement in any other
jurisdiction.
8. AMENDMENT. This Agreement constitutes the entire agreement between
the Stockholder and DST and supercedes all other prior agreements and
understandings, both written or oral, with respect to the subject matter of this
Agreement. This Agreement may be amended only by means of a written instrument
executed and delivered by both the Stockholder and DST.
9. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
10. COUNTERPARTS. For the convenience of the parties, this Agreement may
be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
<PAGE>
Name:__________________________
<PAGE>
EXHIBIT 4.2
FORM OF DST SYSTEMS, INC. STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated September 2, 1998 (this "Agreement") by Kansas
City Southern Industries, Inc., a Delaware corporation ("KCSI") and DST Systems,
Inc., a Delaware corporation ("DST").
WHEREAS, DST, DST Acquisitions, Inc., a Delaware corporation ("DST
Acquisitions") and a wholly-owned subsidiary of DST, and USCS International,
Inc., a Delaware corporation ("USCS") are entering into an Agreement and Plan of
Merger, dated as of September 2, 1998 (the "Merger Agreement"), whereby, upon
the terms and subject to the conditions set forth in the Merger Agreement, each
issued and outstanding share of the Common Stock, par value $.05 per share, of
USCS ("USCS Common Stock") not owned directly or indirectly by DST or USCS, will
be converted into shares of Common Stock, par value $.01 per share, of DST ("DST
Common Stock");
WHEREAS, KCSI currently owns 20,263,426 shares of DST Common Stock (such
shares of DST Common Stock, together with any other shares of capital stock of
DST acquired by KCSI after the date hereof and during the term of this
Agreement, being collectively referred to herein as the "Subject Shares"); and
WHEREAS, as a condition to the willingness to enter into the Merger
Agreement, USCS has required that DST obtain this Agreement from KCSI, and at
the request of DST and in consideration of DST and USCS entering into the Merger
Agreement, and in reliance on the facts that DST has conducted a due diligence
investigation of USCS and that DST is satisfied with such investigation, KCSI
has agreed to enter into this Agreement; and
WHEREAS, KCSI intends to transfer the Subject Shares to its wholly-owned
subsidiary, FAM Holdings, Inc. ("FAM"), and KCSI contemplates spinning off FAM
by distributing shares of FAM stock to KCSI shareholders (the "Spin-off") and
DST and KCSI do not want the Spin-off to adversely affect the contemplated
accounting treatment of the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements set forth herein, the parties agree as follows:
1. DEFINITIONS. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the following meanings:
(a) "Closing Date" shall mean the day on which the Merger takes place.
(b) "Merger" shall mean the merger of DST Acquisitions into USCS
pursuant to the terms and conditions of the Merger Agreement.
<PAGE>
2. COVENANTS OF KCSI. Until the termination of this Agreement in
accordance with Section 6 hereof, KCSI agrees that:
(a) at the stockholders meeting of DST (or at any adjournment thereof)
or in any other circumstances upon which a stockholder vote, consent or
other approval of the Merger or the Merger Agreement is sought, KCSI shall
vote (or cause to be voted) all of the Subject Shares it then owns in favor
of the Merger, the adoption of the Merger Agreement and the approval of the
terms thereof;
(b) If, at any time which is more than 30 days prior to the Closing
Date, KCSI sells or otherwise transfers, in one or a series of
transactions, more than 4.5 million shares of the Subject Shares to a
single purchaser or transferee, KCSI shall, as a condition to such transfer
or sale, require such purchaser or transferee to execute an "Affiliate's
Agreement" in the same form as other affiliates of DST have signed as
required by the Merger Agreement.
3. THE SUBJECT SHARES. KCSI represents and warrants to DST that (i) KCSI
is the record and beneficial owner of, and has good and marketable title to, the
Subject Shares, (ii) KCSI does not own, of record or beneficially, any shares of
capital stock of DST other than the Subject Shares and (iii) KCSI has the sole
right to vote, and the sole power of disposition with respect to, the Subject
Shares, and none of the Subject Shares is subject to any voting trust, proxy or
other agreement, arrangement or restriction with respect to the voting or
disposition of such Subject Shares, except as imposed by federal and state
securities laws and except as contemplated by this Agreement.
4. DISPOSITION OF SUBJECT SHARES AND SPIN-OFF.
(a) During the period beginning on the date that KCSI receives written
notice from DST that the Closing Date is reasonably expected to occur 30
days from the date of such notice, KCSI will not sell, transfer or
otherwise dispose of, or reduce any risk relative to (collectively
"Restricted Actions"), the Subject Shares which it then owns until after
the earlier of (i) such time as results covering at least 30 days of post-
Closing Date operations of DST (including the combined operations of USCS)
have been published by DST in any public filing or announcement which
includes such results of operations or (ii) 60 days from the Closing Date.
Restricted Actions shall include, but are not limited to, the setting of a
record date for the Spin-off that is within the period described in the
preceding sentence or consummating the Spin-off.
(b) Notwithstanding the provisions of Section 4(a) above, KCSI may
consummate the Spin-off prior to the Closing Date, and if KCSI does
consummate the Spin-off prior to the Closing Date, DST agrees that the
Closing Date shall not occur until at least 30 days following consummation
of the Spin-off.
<PAGE>
Section 4(a) shall continue to apply to any actions of KCSI described in
Section 4(a) other than the Spin-off. However, if the Closing Date has not
occurred, and KCSI has not consummated the Spin-off, by November 20, 1998,
and if DST has notified KCSI in writing on or within two days prior to
November 20, 1998 that DST reasonably expects the Closing to occur by
December 31, 1998, KCSI will not consummate the Spin-off during the period
of November 20, 1998 through January 1, 1999, KCSI shall continue to be
subject to the requirements of Section 4(a) above, and DST will use its
reasonable best efforts to cause the Closing Date to occur as soon after
November 20, 1998 as reasonably possible. Notwithstanding the immediately
preceding sentence, if KCSI has set a record date prior to November 20,
1998, it may consummate the Spin-off during the period from November 20 to
November 30, 1998 provided the Closing has not occurred during such period
and prior to the Spin-off. If neither the Closing Date nor the Spin-off
occur during the period from November 20, 1998 through December 31, 1998,
KCSI shall continue to be subject to the requirements of Section 4(a) after
December 31, 1998 for the term of this Agreement.
(c) For purposes of this Agreement, the Spin-off shall be deemed to
"occur" or to have been "consummated" on the date which the shares of FAM
are distributed to the KCSI shareholders.
5. Notwithstanding any other provision of this Agreement to the contrary,
KCSI may prior to the Spin-off at any time sell or transfer any part or all of
the Subject Shares to FAM and/or any other direct or indirect wholly owned
subsidiary of KCSI, subject to FAM's written agreement to assume and to be bound
by this Agreement.
6. TERMINATION. The obligations of KCSI and DST hereunder shall
terminate upon the earlier of (a) the termination of the Merger Agreement
pursuant to its terms, or (b) 60 days following the Closing Date, or (c) March
15, 1999.
7. SUCCESSORS AND ASSIGNS BOUND. Any successor or assignee of KCSI shall
be bound by the terms hereof, and KCSI shall take any and all actions necessary
to obtain the written confirmation from such successor or assignee that it is
bound by the terms hereof.
8. DST represents and warrants to KCSI as follows:
(a) The exchange ratio under the Merger Agreement is 0.62 shares of
DST Common Stock for each share of USCS Common Stock;
(b) Not more than 15,518,000 shares of DST Common Stock will be issued
pursuant to the Merger Agreement in exchange for USCS Common Stock (which
number assumes that all outstanding options on USCS Stock were exercised
prior to the Closing Date), and not more than 1,600,000 shares of DST
<PAGE>
Common Stock will be substituted for USCS Common Stock under USCS option
agreements; and
(c) The principal stockholder of USCS (owning approximate 33% of USCS
Common Stock) will execute an agreement making (x) a commitment
substantially the same as KCSI's commitments in Section 2 hereof and (y)
agreeing to restrict transactions involving USCS Common Stock substantially
similar to KCSI's commitments in Section 4(a) hereof.
9. If KCSI determines that it desires for its Board of Directors, within
the period described in the first sentence of Section 4(a) hereof (the
"Restricted Period") to declare the dividend to effectuate the Spin-off, it will
notify DST at least 10 days in advance of such declaration. If, prior to such
declaration DST provides KCSI, from counsel reasonably acceptable to KCSI, an
opinion that states that there is a reasonable likelihood that such declaration
within the Restricted Period would prevent accounting for the Merger as a
pooling, KCSI agrees that it will not make such declaration within the
Restricted Period.
10. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement in any jurisdiction shall not affect the validity or
enforceability of any other provision of this Agreement in such jurisdiction, or
the validity or enforceability of any provision of this Agreement in any other
jurisdiction.
11. AMENDMENT. This Agreement may be amended only by means of a written
instrument executed and delivered by both KCSI and DST.
12. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Delaware, regardless of the laws that
might otherwise govern under applicable principles of conflicts of law thereof.
13. COUNTERPARTS. For the convenience of the parties, this Agreement may
be executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunder duly authorized all as of the date first
written above.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By______________________________________
Name:
Title
DST SYSTEMS, INC.
<PAGE>
By_____________________________________
Name:
Title
<PAGE>
EXHIBIT 4.2.1
October 29, 1998
Kansas City Southern Industries, Inc.
114 West 11th Street
Kansas City, MO 64105
Attn: Danny R. Carpenter
Re: Stockholder Agreement dated September 2, 1998
Gentlemen:
This letter confirms our understanding regarding a modification in the
Stockholder Agreement dated September 2, 1998 between Kansas City Southern
Industries, Inc. ("KCSI") and DST Systems, Inc. ("DST"). Capitalized terms used
in this letter shall have the meanings set forth in the Agreement.
DST and KCSI have agreed that, if the Closing Date of the Merger occurs
after December 1, 1998 and on or before December 31, 1998, the period referred
to in Section 4(a) of the Agreement will extend at least through February 15,
1999, notwithstanding any other provision of the Agreement to the contrary.
If this letter accurately sets forth our understanding, please sign a copy
as indicated below and return a signed copy to me.
Sincerely,
/s/ Robert C. Canfield
----------------------------
Robert C. Canfield
Senior Vice President
and General Counsel
Confirmed and Agreed
Kansas City Southern Industries, Inc.
By /s/ Landon Rowland
-------------------------------
Date: 10/30/98
---------------------------
<PAGE>
EXHIBIT 4.3
EXHIBIT 7.2(E)(IV)
TO THE AGREEMENT AND PLAN OF MERGER
FORM OF REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated
_______________, _________ and is entered into by and among DST Systems, Inc., a
Delaware corporation ("DST"), USCS International, Inc., a Delaware corporation
("USCS"), and each of the stockholders of USCS listed on Exhibit A hereto (the
"Affiliate Stockholders," and each an "Affiliate Stockholder").
RECITALS
A. DST, DST Acquisitions, Inc., a Delaware corporation and wholly owned
subsidiary of DST ("Acquisition Sub"), and USCS have entered into that certain
Agreement and Plan of Merger, dated September 2, 1998 (the "Merger Agreement"),
pursuant to which Acquisition Sub will merge with and into USCS (the "Merger").
B. At the effective time of the Merger, the outstanding shares of capital
stock of USCS will be converted into shares of common stock of DST ("DST Common
Stock").
C. The Affiliate Stockholders may be deemed affiliates of USCS within the
meaning of Rule 145 ("Rule 145") promulgated under the Securities Act of 1933,
as amended (the "Securities Act"), although nothing contained herein shall be
construed as an admission of such status.
D. Each Affiliate Stockholder, if such stockholder were considered an
affiliate under Rule 145, would be subject to certain resale restrictions under
Rule 145(d), and, if applicable, Rule 144 ("Rule 144") promulgated under the
Securities Act, with respect to shares of DST Common Stock received by the
Affiliate Stockholder in the Merger.
E. As a material inducement for USCS to enter into the Merger Agreement
and consummate the Merger, DST is willing to grant each Affiliate Stockholder
the registration rights set forth in this Agreement
F. USCS' obligation to consummate the Merger and the transactions
contemplated by the Merger Agreement is subject to the condition, among others,
that DST shall have executed and delivered this Agreement.
NOW, THEREFORE, in connection with the Merger Agreement, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
-1-
<PAGE>
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. The following defined terms, when used in this
-----------
Agreement, shall have the respective meanings set forth below (such definitions
to be equally applicable to both singular and plural forms of the terms
defined):
"Affiliate" shall mean any person directly or indirectly controlling,
---------
controlled by or under common control with such other Person.
"Business Day" means a day other than Saturday, Sunday or any day on
------------
which banks located in Kansas City, Missouri are authorized or obligated to
close.
"Commission" means the Securities and Exchange Commission.
----------
"DST Common Stock" has the meaning ascribed to it in the recitals
----------------
hereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission issued thereunder.
"Form S-3" means the registration statement form designated "Form S-3"
--------
under the rules and regulations promulgated by the Commission under the
Securities Act (or any successor form to Form S-3 regardless of its
designation).
"Form S-3 Registration" has the meaning ascribed to it in Section
---------------------
2.1(a).
"KCSI" means Kansas City Southern Industries, Inc.
----
"Merger" has the meaning ascribed to it in the recitals to this
------
Agreement.
"Person" means any human being or any partnership, limited liability
------
company, corporation, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental entity or other entity.
"Risk Sharing Period" means the period of time during which each
-------------------
Affiliate Stockholder has agreed not to sell, transfer or otherwise dispose of,
or reduce any risk relative to, the shares of DST Common Stock received by the
Affiliate Stockholder in the Merger, pursuant to the terms and conditions of the
USCS Affiliate Agreement attached as an exhibit to the Merger Agreement and
executed and delivered by each Affiliate Stockholder prior to the effective time
of the Merger. The Risk Sharing Period will terminate on the date results
covering at least 30 days of operations of DST (including the combined
operations of USCS) have been published by DST in the form of a quarterly
earnings report, or an annual report on Form 10-K, if such 30-day period
includes the end of DST's fiscal year, an effective registration
-2-
<PAGE>
statement filed with the Commission, a report to the Commission on Form 10-K,
10-Q, or 8-K, or any other public filing or announcement which includes such
results of operations.
"Registration Expenses" means all out-of-pocket expenses incident to
---------------------
DST's performance of or compliance with this Agreement, including without
limitation the expenses and fees for listing securities on one or more
securities exchanges, all registration and filing fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities, printing expenses, messenger and delivery expenses, and fees and
disbursements of counsel and all independent certified public accountants and
other persons retained by DST in connection with registration of the Registrable
Securities.
"Registrable Securities" means, at any time, a block of shares of DST
----------------------
Common Stock issued to an Affiliate Stockholder pursuant to the Merger (or other
shares of DST Common Stock issued in respect thereof by way of stock split,
dividend or otherwise), which such Affiliate Stockholder cannot sell or transfer
in a single transaction without registration under the Securities Act as a
result of the resale restrictions contained in Rule 145 and/or the volume
restrictions in Rule 144(e), as such rules are applicable to the Affiliate
Stockholder at the time the request for a Form S-3 Registration has been
delivered to DST in accordance with Section 2.1(a).
"Rule 144" has the meaning ascribed to it in the recitals to this
--------
Agreement.
"Rule 145" has the meaning ascribed to it in the recitals to this
--------
Agreement.
"Securities Act" has the meaning ascribed to it in the recitals of
--------------
this Agreement.
ARTICLE 2
FORM S-3 REGISTRATIONS
2.1 DEMAND REGISTRATION.
-------------------
(a) Subject to the terms of this Agreement, in the event that DST
shall receive written notice from any Affiliate Stockholder at any time
following the Risk Sharing Period, requesting that DST effect a Registration on
Form S-3 (a "Form S-3 Registration") with respect to Registrable Securities then
held by such Affiliate Stockholder, which notice shall specify the intended
method of disposition thereof, DST shall (i) promptly give written notice of the
proposed registration to all other Affiliate Stockholders, and (ii) use
reasonable efforts to effect a Form S-3 Registration of the Registrable
Securities specified in such request, together with any other Registrable
Securities held by Affiliate Stockholders joining in such request as are
specified in a written request delivered to DST within five (5) Business Days
after receipt by such Affiliate Stockholders of written notice from DST of the
proposed Form S-3 Registration, to the extent necessary to permit the
disposition (in accordance with the intended method thereof); provided, however,
that DST shall not be required to effect such a Form S-3 Registration more
-3-
<PAGE>
than twice, nor more than once in any twelve (12) month period under this
Section 2.1(a), and, provided further, that:
(x) DST shall not be obligated to file a registration statement
relating to a Form S-3 Registration request under this Article 2: (A)
within a period of six months after the effective date of any other
registration statement filed pursuant to this Section 2.1(a), or in
connection with an acquisition by DST of another company (or the financing
thereof) and (B) unless the aggregate fair market value of the Registrable
Securities which DST has been so requested to register by the Affiliate
Stockholders constitutes, as of the date of DST's receipt of the last of
such timely requests, at least $15 million (based on the closing price of
the DST Common Stock on such date);
(y) with respect to any registration statement filed, or to be
filed, pursuant to this Section 2.1(a), if DST shall furnish to the
Affiliate Stockholders a certified resolution of the Board of Directors of
DST (the "Board") stating that in the Board's good faith judgment it would
(because of the existence of, or in anticipation of, any acquisition or
financing activity, or the unavailability for reasons beyond DST's control
of any required financial statements, or any other event or condition of
similar significance to DST) be significantly disadvantageous (a
"Disadvantageous Condition") to DST or its shareholders for such a
registration statement to be maintained effective, or to be filed and
become effective, and setting forth the general reasons for such judgment,
DST shall be entitled to cause the Affiliate Stockholders to discontinue
the use of such registration statement or, in the event no registration
statement has yet been filed, shall be entitled not to file any such
registration statement, until such Disadvantageous Condition no longer
exists (notice of which DST shall promptly deliver to the Affiliate
Stockholders) and upon receipt of any such notice of a Disadvantageous
Condition each Affiliate Stockholder will forthwith discontinue use of the
prospectus contained in such registration statement and, if so directed by
DST, will deliver to DST all copies, other than permanent file copies then
in such Affiliate Stockholder's possession, of the prospectus then covering
such Registrable Securities current at the time of receipt of such notice,
and, in the event no registration statement has yet been filed, all drafts
of the prospectus covering such Registrable Securities; provided, however,
that the duration of any single Disadvantageous Condition shall not exceed
90 days and DST may not utilize the right set forth in this Section
2.1(a)(y) more than once in any twelve-month period; and
(z) Notwithstanding anything contained herein to the contrary, upon
receipt of written notice from DST of a proposed registration as set forth
in this Section 2.1(a), any Affiliate Stockholder (other than the Affiliate
Stockholder initially making the registration request without revoking it)
that does not request (or that subsequently revokes its request) that
Registrable Securities held by such Affiliate Stockholder be included in
such proposed registration shall have no right to make a registration
request under Section 2.1(a) during the twelve-month period following the
effectiveness of such proposed registration.
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(b) A registration requested by the Affiliate Stockholders pursuant to
Section 2.1(a) shall not be deemed to have been effected (and, therefore, not
requested for purposes of Section 2.1(a)), (i) unless the registration statement
filed in connection therewith has been declared effective by the Commission, or
(ii) if after it has been declared effective by the Commission such registration
is interfered with by any stop order, injunction or other order or requirement
of the Commission or other governmental agency or court solely due to the
actions or omissions to act of DST and, as a result thereof, less than ninety
percent (90%) of the Registrable Securities requested to be registered can be
completely distributed in accordance with the plan of distribution set forth in
the related registration statement. Any registration may, at any time prior to
its effectiveness, be withdrawn by the holders of 51% or more of the Registrable
Securities for which registration was requested and, provided that the Affiliate
Stockholders pay the Registration Expenses in accordance with Section 2.1(h)
hereof, shall not count as a demand registration under Section 2.1(a) hereof.
(c) If an Affiliate Stockholder intends to distribute the Registrable
Securities covered by his request by means of an underwriting, he shall so
advise DST as part of his request made pursuant to Section 2.1(a) and DST shall
include such information in the written notice referred to in Section 2.1(a).
In such event, the right of any Affiliate Stockholder to include its Registrable
Securities in such registration shall be conditioned upon such Affiliate
Stockholder's participation in such underwriting and the inclusion of such
Affiliate Stockholder's Registrable Securities in the underwriting (unless
otherwise mutually agreed by a majority in interest of the Affiliate
Stockholders and by the underwriter to the extent provided herein).
(d) All Affiliate Stockholders proposing to distribute their
securities through such underwriting (together with DST as provided in Section
4.1(h)), shall enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such underwriting
by a majority in interest of the Affiliate Stockholders participating in the
offering and reasonably acceptable to DST. Notwithstanding any other provisions
of this Article 2, if the underwriter advises the Affiliate Stockholders that
marketing factors require a limitation of the number of shares to be
underwritten, the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
participating Affiliate Stockholders pro rata based on the number of shares
requested to be included in the registration by all participating Affiliate
Stockholders. No Registrable Securities excluded from the underwriting by reason
of the underwriters' marketing limitation shall be included in such
registration. If any Affiliate Stockholder disapproves of the terms of the
underwriting, such Person may elect to withdraw therefrom by written notice to
DST, the underwriter and, unless otherwise provided, the participating Affiliate
Stockholders. The securities so withdrawn shall also be withdrawn from such
registration.
(e) DST shall have the right to cause the registration of additional
securities for the account of any Person (including DST) in any registration of
Registrable Securities under this Article 2; provided, however, that if the
underwriter advises the Affiliate Stockholders participating in such
registration that marketing or other factors require a limitation of the number
of shares to be underwritten, the Registrable Securities to be included in such
registration on behalf of the Affiliate Stockholders shall have priority,
without proration as
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between the Affiliate Stockholders and any other Person (including DST), and any
such additional securities to be registered shall be limited to that amount
which the underwriter advises would not have an adverse effect on the
underwritten offering.
(f) It shall be a condition precedent to the obligations of DST under
this Agreement that each Affiliate Stockholder that participates in any Form S-3
registration under Section 2.1(a) furnish to DST such information regarding such
Affiliate Stockholder as DST may reasonably request.
(g) Any Affiliate Stockholder which requests or elects to participate
in a Form S-3 Registration may, at any time prior to the effective date of the
registration statement relating to such Form S-3 Registration, revoke such
request by providing written notice to DST; provided, however, that any
Affiliate Stockholder making such revocation shall be subject to the
prohibitions set forth in Section 2.1(a)(z) above.
(h) The Affiliate Stockholders shall pay all Registration Expenses, on
a pro rata basis, based on the number of shares of Registrable Securities
requested to be included in the registration by all participating Affiliate
Stockholders, provided that the Affiliate Stockholders shall not be obligated to
pay the incremental expenses (i.e., those expenses over and above the expenses
that would have been incurred without inclusion of additional securities
pursuant to Section 2.1(e)) of inclusion by DST of additional securities
pursuant to Section 2.1(e) of this Agreement in a registration pursuant to this
Article 2.
ARTICLE 3
PIGGY-BACK REGISTRATION
3.1 PIGGY-BACK REGISTRATION RIGHTS. If, at any time during the term of
------------------------------
this Agreement DST proposes to register (including for this purpose a
registration effected by DST for stockholders other than the Affiliate
Stockholders) any of its common equity securities under the Securities Act in
connection with the public offering of such securities solely for cash (other
than a registration form relating to: (a) a registration of a stock option,
stock purchase or compensation or incentive plan or of stock issued or issuable
pursuant to any such plan, or a dividend investment plan; (b) a registration of
securities proposed to be issued in exchange for securities or assets of or in
connection with a merger or consolidation with, another corporation; or (c) a
registration of securities proposed to be issued in exchange for other
securities of DST), DST shall each such time, promptly give each Affiliate
Stockholder written notice of such registration together with a list of the
jurisdictions in which DST intends to attempt to qualify such securities under
applicable state securities laws. Upon the written request of any Affiliate
Stockholder given within ten (10) days after written notice from DST (which
request shall specify the number of Registrable Securities intended to be
disposed of and the intended method of disposition thereof), DST shall effect,
in the manner set forth in Article 5, in connection with such registration, the
registration under the Securities Act of all of the Registrable Securities which
DST has been so requested to register, to the extent required to permit the
disposition (in accordance with the intended methods thereof) of the Registrable
Securities so requested to be
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registered, provided that if at any time after giving written notice of its
intention to register any securities and prior to the effective date of such
registration, DST shall determine for any reason not to register or delay
registration of such securities, DST may, at its election, given written notice
of such determination to the Affiliate Stockholders and, thereupon, (A) in the
case of a determination not to register, DST shall be relieved of its obligation
to register any Registrable Securities in connection with such registration and
(B) in the case of a determination to delay such registration, DST shall be
permitted to delay registration of any Registrable Securities requested to be
included in such registration for the same period as the delay in registering
such other securities.
3.2 UNDERWRITING REQUIREMENTS. The rights of any Affiliate Stockholder to
-------------------------
"piggy-back" in an underwritten public offering of DST's securities shall be
conditioned upon such Affiliate Stockholder's participation in such underwriting
and the inclusion of such Affiliate Stockholder's Registrable Securities in the
underwriting to the extent provided herein. All Affiliate Stockholders proposing
to distribute their Registrable Securities through such underwriting shall
(together with DST and any other stockholders distributing their securities
through such underwriting) enter into an underwriting agreement in customary
form with the underwriter or underwriters selected for underwriting by DST.
Notwithstanding any other provision of Article 3, if the underwriter determines
that marketing factors require a limitation of the number of shares to be
underwritten, shares to be included in any such registration shall be based on
the following priorities:
(i) In the case of an underwritten public offering for the account
of DST, the number of shares to be included shall be allocated, first, to DST;
second, to KCSI; third to the Affiliate Stockholders on a pro rata basis based
on the number of shares requested by the Affiliate Stockholders to be included
therein; and fourth to any other stockholder of DST on a pro rata basis based on
the number of shares requested to be included therein;
(ii) In the case of an underwritten public offering for the account
of KCSI, the number of shares to be included shall be allocated, first, to KCSI;
second, to the Affiliate Stockholders; and third, to any other stockholders of
DST on a pro rata basis based on the number of shares requested to be included
therein by such stockholders; and
(iii) In the case of an underwritten public offering for the account
of any other stockholder of DST, the number of shares to be included shall be
allocated pro rata among the stockholders of DST, including KCSI and the
Affiliate Stockholders, based on the number of shares requested to be included
therein.
If any Affiliate Stockholder disapproves of the terms of any such
underwriting, it may elect to withdraw therefrom by written notice to DST and
the underwriters. Any Registrable Securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
3.3 EXPENSES. With respect to an offering in which Registrable Securities
--------
are requested to be included pursuant to Article 3 hereof, the participating
Affiliate Stockholders
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shall pay the incremental Registration Expenses (i.e., those expenses over and
above the expenses that would have been incurred without inclusion of the
Registrable Securities of the Affiliate Stockholders) of including the
Registrable Securities of the Affiliate Stockholders in such offering, on a pro
rata basis, based on the number of shares of Registrable Securities requested to
be included in the registration by all participating Affiliate Stockholders.
ARTICLE 4
REGISTRATION PROCEDURES
4.1 REGISTRATION PROCEDURES. Whenever the Affiliate Stockholders have
-----------------------
requested that any Registrable Securities be registered in accordance with the
terms of this Agreement, DST shall use reasonable efforts to effect the
registration of such Registrable Securities in accordance with the intended
method of disposition thereof and pursuant thereto DST shall as expeditiously as
possible:
(a) promptly prepare and file with the Commission a registration
statement (on Form S-3 with respect to registrations pursuant to Section 2.1(a))
with respect to such Registrable Securities and use reasonable efforts to cause
such registration statement to become effective, PROVIDED that as promptly as
practicable before filing a registration statement or prospectus or any
amendments or supplements thereto, DST shall (i) furnish copies of all such
documents proposed to be filed to one counsel selected by the Affiliate
Stockholders, and in each case DST shall not file such documents to which any
such counsel shall have reasonably objected on the grounds that such document
does not comply in all material respects with the requirements of the Securities
Act, (ii) notify each Affiliate Stockholder holding Registrable Securities
covered by such registration statement of (x) any request by the Commission to
amend such registration statement or amend or supplement any prospectus or (y)
any stop order issued or threatened by the Commission, and (iii) take all
reasonable actions required to prevent the entry of such stop order or to remove
it if entered;
(b) (i) prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement effective at
all times during the period commencing on the effective date of such
registration statement and ending twelve months thereafter or, if earlier, on
the first date as of which all Registrable Securities covered by such
registration statement are sold in accordance with the intended plan of
distribution set forth in such registration statement and (ii) comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition set forth in such
registration statement;
(c) furnish without additional charge, to each underwriter and each
Affiliate Stockholder selling Registrable Securities covered by such
registration statement, such number of conformed copies of such registration
statement, each amendment and supplement thereto, of the prospectus included in
such registration (including each preliminary prospectus and, in each case,
including all exhibits thereto and documents incorporated by reference therein)
and
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<PAGE>
such other documents as such underwriter or Affiliate Stockholder may reasonably
request in order to facilitate the disposition of the Registrable Securities as
part of the underwriting or being sold by such Affiliate Stockholder;
(d) use its best efforts to register or qualify the Registrable
Securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as any Affiliate Stockholder shall
reasonably request, to keep such registration or qualification in effect for so
long as such registration statement remains in effect and to do any and all
other acts and things which may be reasonably necessary or advisable (in light
of the intended plan of distribution) to enable such Affiliate Stockholder to
consummate the disposition in such jurisdictions of any such Registrable
Securities owned by such Affiliate Stockholder; PROVIDED, HOWEVER, that DST
shall not be required to (i) qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
clause (d), (ii) subject itself to taxation in any such jurisdiction or (iii)
consent to general service of process in any such jurisdiction;
(e) notify each seller of Registrable Securities covered by such
registration statement, at a time when a prospectus relating to such Registrable
Securities is required to be delivered under the Securities Act, of the
occurrence of any event known to DST as a result of which the prospectus
included in such registration statement, as then in effect, contains an untrue
statement of a material fact or omits to state any fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made; and, at the request of any
Affiliate Stockholder selling Registrable Securities covered by such
registration statement, DST shall prepare and furnish such seller a reasonable
number of copies of a supplement to or an amendment of such prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Registrable
Securities, such prospectus shall not (with respect to information not furnished
by or on behalf of the Affiliate Stockholders) include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in the light of the
circumstances under which they were made;
(f) subject to other provisions hereof, use all reasonable efforts to
cause the Registrable Securities covered by such registration statement to be
registered with or approved by such governmental agencies or authorities or
self-regulatory organizations as may be necessary to enable the Affiliate
Stockholders to consummate the intended disposition of such Registrable
Securities under the registration statement;
(g) promptly notify the Affiliate Stockholder selling Registrable
Securities covered by such registration statement of the issuance of any stop
order by the Commission or the issuance by any state securities commission or
other regulatory authority of any order suspending the qualification or
exemption from qualification of any of the Registrable Securities under state
securities or "blue sky" laws, and use all reasonable efforts to obtain the
lifting at the earliest possible time of any stop order suspending the
effectiveness of such registration statement or of any order preventing or
suspending the use of any preliminary prospectus included therein;
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<PAGE>
(h) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with terms and
provisions, including indemnity provisions and requirements to provide a "cold
comfort" letter from DST's accountants, reasonably satisfactory to the managing
underwriter of such offering. Each Affiliate Stockholder participating in such
underwriting shall also enter into and perform its obligations under such an
agreement; and
(i) during the period when the prospectus is required to be delivered
under the Securities Act, promptly file all documents required to be filed with
the Commission pursuant to Sections 12(a), 13(c), 14 or 15(d) of the Exchange
Act.
ARTICLE 5
INDEMNIFICATION
5.1 INDEMNIFICATION
---------------
(a) In the case of each offering of Registrable Securities made
pursuant to this Agreement, DST agrees to indemnify and hold harmless the
Affiliate Stockholders, and their officers and directors, each underwriter of
Registrable Securities so offered and each Person, if any, who controls any of
the foregoing persons within the meaning of the Securities Act (each an
"Affiliate Indemnified Party" and, collectively, the "Affiliate Indemnified
Parties"), from and against any and all claims, liabilities, losses, damages,
expenses and judgments, joint or several, to which they or any of them may
become subject, under the Securities Act or otherwise, including any amount paid
in settlement of any litigation commenced or threatened, and shall promptly
reimburse them, as and when incurred, for any reasonable legal or other expenses
incurred by them in connection with investigating any claims and defending any
actions, insofar as such losses, claims, damages, liabilities or actions shall
arise out of, or shall be based upon, any untrue statement or alleged untrue
statement of a material fact contained in the registration statement (or in any
preliminary or final prospectus included therein) or any amendment thereof or
supplement thereto, or in any document incorporated by reference therein, or any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that DST shall not be liable to any Affiliate Indemnified
Party in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement, or any omission or alleged omission, if such statement
or omission shall have been made in reliance upon and in conformity with
information relating to an Affiliate Stockholder furnished to DST in writing by
or on behalf of an Affiliate Stockholder specifically for use in the preparation
of the registration statement (or in any preliminary or final prospectus
included therein) or any amendment thereof or supplement thereto. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of an Affiliate Stockholder and shall survive the transfer of such
securities. The foregoing indemnity agreement is in addition to any liability
which DST may otherwise have to the Affiliate Indemnified Parties; provided,
further, that this indemnity does not apply to any loss, liability, claim,
damage or expense arising out of or based upon any untrue statement or alleged
untrue statement or
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omission or alleged omission in any preliminary prospectus if a copy of a
prospectus was not sent or given to such Person asserting such loss, claim,
damage, liability or action at or prior to the written confirmation of the sale
of the Registrable Securities as required by the Securities Act and such untrue
statement or omission had been corrected in such prospectus.
(b) In the case of each offering made pursuant to this Agreement, the
Affiliate Stockholders, by exercising their registration rights hereunder, agree
to indemnify and hold harmless DST, its officers and directors, each underwriter
of Registrable Securities, and each Person, if any, who controls any of the
foregoing within the meaning of the Securities Act (each a "DST Indemnified
Party" and, collectively, the "DST Indemnified Parties"), from and against any
and all claims, liabilities, losses, damages, expenses and judgments, joint or
several, to which they or any of them may become subject, under the Securities
Act or otherwise, including any amount paid in settlement of any litigation
commenced or threatened, and shall promptly reimburse them, as and when
incurred, for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions shall arise out of, or shall be based
upon, any untrue statement or alleged untrue statement of a material fact
contained in the registration statement (or in any preliminary or final
prospectus included therein) or any amendment thereof or supplement thereto, or
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
in each case only to the extent that such untrue statement of a material fact is
contained in, or such material fact is omitted from, information relating to an
Affiliate Stockholder furnished in writing to DST by or on behalf of an
Affiliate Stockholder specifically for use in the preparation of such
registration statement (or in any preliminary or final prospectus included
therein) or any amendment thereof or supplement thereto. The foregoing
indemnity is in addition to any liability which the Affiliate Stockholders may
otherwise have to DST Indemnified Parties; provided, however, that, as to any
underwriter or any Person controlling any underwriter, this indemnity does not
apply to any loss, liability, claim, damage or expense arising out of or based
upon any untrue statement or alleged untrue statement or omission or alleged
omission in any preliminary prospectus if a copy of a prospectus was not sent or
given by or on behalf of any underwriter to such Person asserting such loss,
claim, damage, liability or action at or prior to the written confirmation of
the sale of the Registrable Securities as required by the Securities Act and
such untrue statement or omission had been corrected in such prospectus.
5.2 INDEMNIFICATION PROCEDURE. Within 10 days after receipt by an
-------------------------
indemnified party hereunder of written notice of the commencement of any action
or proceeding involving a claim referred to in Section 5.1, such indemnified
party will, if a claim in respect thereof is to be made against an indemnifying
party, give written notice to the latter of the commencement of such action;
PROVIDED, HOWEVER, that the failure of any indemnified party to give notice as
provided herein shall not relieve the indemnifying party of its obligations
under Section 5.1 except to the extent that the indemnifying party is actually
prejudiced by such failure to give notice. In any case any such action or
proceeding is brought against any indemnified party, the indemnifying party will
be entitled to participate in and to assume the defense thereof, jointly with
any other indemnifying party similarly notified, to the extent that it may wish,
with counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party
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to such indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party for any legal
fees and expenses subsequently incurred by the latter in connection with the
defense thereof, unless in such indemnified party's reasonable judgment an
actual or potential conflict of interest between such indemnified and
indemnifying parties may exist in respect of such claim, in which case the
indemnifying party shall not be liable for the fees and expenses of (i) in the
case of a claim referred to in Section 5.1(a), more than one counsel (in
addition to any local counsel) for all indemnified parties selected by the
Affiliate Stockholders holding a majority (by number of shares) of the
Registrable Securities held by such indemnified parties, or (ii) in the case of
a claim referred to in Section 5.1(b), more than one counsel (in addition to any
local counsel) for DST, in each case in connection with any one action or
separate but similar or related actions or proceedings. The indemnifying party
will not, without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action, suit, investigation or proceeding in respect of which
indemnification may be sought hereunder (whether or not such indemnified party
or any Person who controls such indemnified party is a party to such claim,
action, suit, investigation or proceeding). Whether or not the defense of any
claim or action is assumed by the indemnifying party, such indemnifying party
will not be subject to any liability for any settlement made without its
consent, which consent will not be unreasonably withheld. Notwithstanding
anything to the contrary set forth herein, and without limiting any of the
rights set forth above, in any event any indemnified party will have the right
to retain, at its own expense, counsel with respect to the defense of a claim.
5.3 CONTRIBUTION. If the indemnification provided for in Section 5.1 is
------------
unavailable to hold harmless any indemnified party under such Section, then each
indemnifying party shall contribute to the amount paid or payable by such
indemnified party as a result of the losses, claims, damages, liabilities and
expenses referred to in Section 5.1 in such proportion as is appropriate to
reflect the relative fault of such indemnifying party, on the one hand, and such
indemnified party, on the other hand, in connection with statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations, including the relative benefits
received by each party from the offering of the securities covered by the
relevant registration statement, the parties' relative knowledge and access to
information concerning the matter with respect to which the relevant claim was
asserted and the parties' relative opportunities to correct and prevent any
relevant statement or omission. Without limiting the generality of the
foregoing, the parties' relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the indemnifying party or the indemnified party and the
parties' relative intent, knowledge, access to relevant information and
opportunity to correct or prevent any such untrue statements or omission. In
the event of an offering of Registrable Securities pursuant to an effective
registration statement under this Agreement which is the subject of any loss,
claim, damage, liability or expense, no participating Affiliate Stockholder
would be required to contribute in excess of the amount of the net proceeds
received by such Affiliate Stockholder in connection with the sale of
Registrable Securities in such offering. The parties hereto agree that it would
not be just and equitable if contributions pursuant to this Section 5.3 were to
be determined by pro rata or per capita allocation or by any other method of
allocation which does
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not take account of the equitable considerations referred to in the first and
second sentences of this Section 5.3. The amount paid by an indemnified party as
a result of the losses,claims,damages, labilities or expenses referred to in the
first sentence of this Section 5.3 shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending the relevant action or proceeding and shall be
limited as provided in Section 5.2 if the indemnifying party has assumed the
defense of the relevant action or proceeding in accordance with the provisions
of Section 5.2. Promptly after receipt by an indemnified party under this
Section 5.3 of notice of the commencement of any action or proceeding against
such party in respect of which a claim for contribution may be made against an
indemnifying party under this Section 5.3, such indemnified party shall notify
the indemnifying party in writing of the commencement thereof if the notice
specified in Section 5.2 has not been given with respect to such action or
proceeding; PROVIDED, HOWEVER, that the omission to so notify the indemnifying
party shall not relieve the indemnifying party from any liability which it may
otherwise have to any indemnified party under this Section 5.3, except to the
extent that the indemnifying party is actually prejudiced by such failure to
give notice. No Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of fraudulent misrepresentation.
5.4 PERIODIC PAYMENTS. The indemnification required by this Article 5
-----------------
shall be made by periodic payments of the amount thereof during the course of
the relevant investigation or defense, as and when bills are received or
expenses, loss, damage or liability is incurred.
ARTICLE 6
MISCELLANEOUS
6.1 NO INCONSISTENT AGREEMENTS. DST and each of the Affiliate
--------------------------
Stockholders represents and warrants that it is not currently a party to, and
covenants that it will not hereafter enter into, any agreement which is
inconsistent with, or would otherwise restrict the performance by it of, its
obligations hereunder. DST also represents and warrants that no conflict exists
between this Agreement and any other registration rights provided by it to
others existing as of the date hereof.
6.2 FORM S-3 ELIGIBILITY. DST hereby represents to each Affiliate
--------------------
Stockholder that it is currently eligible to use a registration statement on
Form S-3 and it will use reasonable efforts to remain eligible to qualify for
the use of a registration statement on Form S-3.
6.3 SPECIFIC PERFORMANCE. In the event of a breach by any party to this
--------------------
Agreement of its obligations under this Agreement, any party injured by such
breach, in addition to being entitled to exercise all rights granted by law,
including recovery of damages, will be entitled to specific performance of its
rights under this Agreement. The parties agree that the provisions of this
Agreement shall be specifically enforceable, it being agreed by the parties that
the remedy at law, including monetary damages, for breach of any such provision
will be inadequate
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compensation for any loss and that any defense in any action for specific
performance that a remedy at law would be adequate is waived.
6.4 ACTIONS TAKEN; AMENDMENTS AND WAIVERS. Except as otherwise provided
-------------------------------------
herein, no modification, amendment or waiver of any provision of this Agreement
will be effective against DST or any Affiliate Stockholder, unless such
modification, amendment or waiver is approved in writing by DST, and a majority
in interest of the Affiliate Stockholders (based on the number of shares then
owned by the Affiliate Stockholders). The failure of any party hereto to
enforce any of the provisions of this Agreement will in no way be construed as a
waiver of such provisions and will not affect the right of such party thereafter
to enforce each and every provision of this Agreement in accordance with its
terms.
6.5 NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to cause DST, or
----------------------------------------
its successors or assigns to register Registrable Securities pursuant to this
Agreement are reserved solely for the use and benefit of the Affiliate
Stockholders and may not be assigned or transferred by him to any other person,
provided, however, that an Affiliate Stockholder may assign or transfer his
rights hereunder to an entity or trust controlled by the Affiliate Stockholder,
if such assignee or transferee agrees in writing to be bound by the terms of
this Agreement.
6.6 DELAY OF REGISTRATION. No Affiliate Stockholder shall have any right
---------------------
to obtain or seek an injunction restraining or otherwise delaying any such
registration as the result of any controversy that might arise with respect to
the interpretation or implementation of this Agreement.
6.7 REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view of making
---------------------------------------------
available to the Affiliate Stockholders the benefits of Rule 144 promulgated
under the Securities Act and any other rule or regulation of the Commission that
may at any time permit an Affiliate Stockholder to sell securities of DST to the
public without registration or pursuant to a registration on Form S-3, DST
agrees to:
(a) use reasonable efforts to make and keep public information
available, as those terms are understood and defined in Commission Rule 144 at
all times;
(b) use reasonable efforts to file with the Commission in a timely
manner all reports and other documents required of DST under the Securities Act
and the Exchange Act; and
(c) furnish to any Affiliate Stockholder so long as the Affiliate
Stockholder owns any Registrable Securities, forthwith upon request: (i) a
written statement by DST that it has complied with the reporting requirements of
Rule 144, the Securities Act and the Exchange Act or that it qualifies as a
Registrant where securities may be resold pursuant to Form S-3 (at any time
after it so qualifies); (ii) a copy of the most recent annual or quarterly
report of DST and all other reports and documents filed by DST with the
Commission; and (iii) such other non-confidential information as may be
reasonably requested in availing any Affiliate
-14-
<PAGE>
Stockholder of any rule or regulation of the Commission which permits the
selling of any such securities without registration.
6.8 NOTICES. (a) All notices, requests and other communications
-------
hereunder must be in writing and will be deemed to have been duly given only if
delivered personally against written receipt or by facsimile transmission
against facsimile confirmation or mailed (by registered or certified mail,
postage prepaid, return receipt requested) or delivered by reputable overnight
courier, fee prepaid, to the parties at the following addresses or facsimile
numbers:
If to DST, to:
DST Systems, Inc.
333 West 11th Street, 5th Floor
Kansas City, Missouri 64105
Attn: President
Facsimile: (816) 435-8630
with a copy to:
Sonnenschein Nath & Rosenthal
4520 Main Street, Suite 1100
Kansas City, MO 64111
Attn: John F. Marvin, Esq.
Facsimile: (816) 531-7545
If to an Affiliate Stockholder, as specified in (b):
with a copy to (in the case of notice to George
Argyros as an Affiliate Stockholder):
O'Melveny & Myers
610 Newport Center Drive, 17th Floor
Newport Beach, California 92660
Attention: J. Jay Herron, Esq.
Facsimile: (949) 823-6994
(b) All such notices, requests and other communications will (w) if
delivered personally to the address as provided in this Section 6.8 or, with
respect to the Affiliate Stockholders, the addresses specified under their
signatures hereto, be deemed given upon delivery, (x) if delivered by facsimile
transmission to the facsimile number as provided in this Section or, with
respect to the Affiliate Stockholders, the facsimile number specified under
their signatures hereto, be deemed given upon receipt by the sender of
confirmation of such transmission, and (y) if delivered by mail in the manner
described above to the address as provided in this Section 6.8 upon the earlier
of the third business day following mailing or upon receipt and (z) if delivered
by overnight courier to the address as provided in this Section 6.8,
-15-
<PAGE>
be deemed given on the earlier of the first Business Day following the date sent
by such overnight courier or upon receipt (in each case regardless of whether
such notice, request or other communication is received by any other Person to
whom a copy of such notice is to be delivered pursuant to this Section 6.8). Any
party hereto may from time to time change its address or other information for
the purpose of notices to such party by giving notice specifying such change to
the other parties hereto in accordance with Section 6.8(a).
6.9 HEADINGS, CERTAIN CONVENTIONS. The headings of the various Articles
-----------------------------
and Sections of this Agreement are for convenience of reference only and shall
not define, limit or otherwise affect any of the terms or provisions hereof.
Unless the context otherwise expressly requires,all references herein to
Articles, Sections and Exhibits are to Articles and Section of, and Exhibits to,
this Agreement. the words "herein," "hereunder" and "hereof" and words of
similar import refer to this Agreement as a whole and not to any particular
Section or provision. The words "include", "includes" and "including" shall be
deemed to be followed by the phrase "without limitation".
6.10 INVALID PROVISIONS. If any provision of this Agreement is held to be
------------------
illegal, invalid or unenforceable under any present or future law, and if the
rights or obligations of any party hereto under this Agreement will not be
materially and adversely affected thereby, (a) such provisions will be fully
severable, (b) this Agreement will be construed and enforced as if such illegal,
invalid or unenforceable provision had never comprised a part hereof, (c) the
remaining provisions of this Agreement will remain in full force and effect and
will not be affected by the illegal, invalid or unenforceable provision or by
its severance herefrom and (d) in lieu of such illegal, invalid or unenforceable
provision, there will be added automatically as a part of this Agreement a
legal, valid and enforceable provisions as similar in terms to such illegal,
invalid or unenforceable provision as may be possible.
6.11 GOVERNING LAW. This Agreement shall be governed by and construed in
-------------
accordance with the domestic laws of the State of Delaware applicable to a
contract executed and performed in such State and without giving effect to any
choice or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other that the State of Delaware.
6.12 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
6.13 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and
----------------
agreements between the parties with respect to the subject matter hereof and
contains the sole and entire agreement among the parties hereto with respect to
the subject matter hereof.
6.14 FIVE-YEAR TERM. This Agreement shall terminate and be of no further
--------------
force and effect, except with respect to Article 5, on that date which shall be
five years after the date hereof.
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
DST USCS
____________________________ ________________________________
Signature Signature
____________________________ ________________________________
Print Name and Title Print Name and Title
-17-
<PAGE>
Affiliate Stockholder
______________________________
Signature
______________________________
Print Name
______________________________
Address
______________________________
______________________________
Facsimile Number
-18-
<PAGE>
EXHIBIT 4.4
EXHIBIT 6.4
TO AGREEMENT AND
PLAN OF MERGER
FORM OF USCS INTERNATIONAL, INC. AFFILIATE AGREEMENT
Gentlemen:
The undersigned is a holder of shares of Common Stock, par value $0.05 per
share ("Common Stock"), of USCS International, Inc., a Delaware corporation
("USCS"), and will be entitled to receive in connection with the merger (the
"Merger") of a wholly-owned Delaware subsidiary of DST Systems, Inc., a Delaware
corporation ("DST"), with and into USCS, shares of Common Stock, par value $0.01
per share, of DST (the "Securities").
The undersigned acknowledges that the undersigned may be deemed an
"affiliate" of USCS within the meaning of Rule 145 ("Rule 145") promulgated
under the Securities Act of 1933, as amended (the "Act"), and/or as such term is
used in and for purposes of Accounting Series Releases 130 and 135, as amended,
of the Securities and Exchange Commission (the "Commission"), although nothing
contained herein shall be construed as an admission of such status.
If in fact the undersigned were an affiliate of USCS under the Act, the
undersigned's ability to sell, assign or transfer any Securities received by the
undersigned in exchange for any shares of USCS pursuant to the Merger may be
restricted unless such transaction is registered under the Act or an exemption
from such registration is available. The undersigned understands that such
exemptions are limited and the undersigned has obtained advice of counsel as to
the nature and conditions of such exemptions, including instruction with respect
to the applicability to the sale of such Securities of Rules 144 and 145(d)
promulgated under the Act.
The undersigned hereby represents to and covenants to DST that the
undersigned will not sell, assign or transfer any Securities received by the
undersigned in exchange for shares of Common Stock pursuant to the Merger except
(i) pursuant to an effective registration statement under the Act, (ii) by a
transaction in conformity with the volume and other limitations of Rule 145 or
Rule 144 under the Act ("Rule 144"), to the extent applicable, or any other
applicable rules promulgated by the Commission or (iii) in a transaction which,
in the opinion of independent counsel reasonably satisfactory to DST, or as
described in a "no-action" or interpretative letter from the Staff of the
Commission, is not required to be registered under the Act.
In the event of a sale of Securities pursuant to Rule 145, or, if
applicable, Rule 144, the undersigned will supply DST with evidence of
compliance with such Rule, in the form of customary seller's and broker's Rule
145 or, if applicable, Rule 144, representation letters or as DST may otherwise
reasonably request. The undersigned understands that DST may instruct its
transfer agent to withhold the transfer of any Securities disposed of by the
undersigned in a manner inconsistent with this letter.
<PAGE>
The undersigned acknowledges and agrees that appropriate legends will be
placed on certificates representing Securities received by the undersigned in
the Merger or held by a transferee thereof, which legends will be removed (i) by
delivery of substitute certificates upon receipt of an opinion in form and
substance reasonably satisfactory to DST to the effect that such legends are no
longer required for the purposes of the Act and the rules and regulations of the
Commission promulgated thereunder or (ii) in the event of a sale of the
Securities which has been registered under the Act.
The undersigned further represents to, and covenants with USCS and DST that
the undersigned will not, during the period beginning on the date that DST gives
written notice that consummation of the Merger is reasonably expected to occur
within 30 days of the date of such notice, sell, transfer or otherwise dispose
of, or reduce any risk relative to, securities of USCS, or the Securities
received by the undersigned in the Merger or any other shares of the capital
stock of DST until after such time as results covering at least 30 days of
operations of DST (including the combined operations of USCS) have been
published by DST in the form of a quarterly earnings report, or an annual report
on Form 10-K, if such 30-day period includes the end of DST's fiscal year, an
effective registration statement filed with the Commission, a report to the
Commission on Form 10-K, 10-Q, or 8-K, or any other public filing or
announcement which includes such results of operations.
The undersigned acknowledges that it has carefully reviewed this letter and
understands the requirements hereof and the limitations imposed upon the
distribution, sale, transfer or other disposition of Securities.
Very truly yours,
_______________________________________________
Dated: ________________
<PAGE>
EXHIBIT 4.5
EXHIBIT 7.2(e)(i)
TO AGREEMENT AND
PLAN OF MERGER
FORM OF DST AFFILIATE AGREEMENT
Gentlemen:
The undersigned is an officer, director or holder of shares of Common
Stock, par value $0.01 per share ("Common Stock"), of DST Systems, Inc., a
Delaware corporation ("DST"), which is a party to a merger (the "Merger") of its
wholly-owned subsidiary with and into USCS International, Inc., a Delaware
corporation ("USCS").
The undersigned acknowledges that the undersigned may be deemed for some
purposes an "affiliate" of DST within the meaning of published rules and
regulations of the Securities and Exchange Commission (the "Commission"),
although nothing contained herein shall be construed as an admission of such
status.
The undersigned represents to, and covenants with DST and USCS that the
undersigned will not, during the period beginning on the date that DST gives
written notice that consummation of the Merger is reasonably expected to occur
within 30 days of the date of such notice, sell, transfer or otherwise dispose
of, or reduce any risk relative to, any shares of the capital stock of DST owned
by the undersigned until after such time as results covering at least 30 days of
operations of DST (including the combined operations of USCS) have been
published by DST in the form of a quarterly earnings report, or an annual report
on Form 10-K, if such 30-day period includes the end of DST's fiscal year, an
effective registration statement filed with the Commission, a report to the
Commission on Form 10-K, 10-Q, or 8-K, or any other public filing or
announcement which includes such results of operations.
The undersigned acknowledges that he has carefully reviewed this letter and
understands the requirements hereof and the limitations imposed upon the
distribution, sale, transfer or other disposition of securities.
Very truly yours,
_______________________________________________
[Name]
[Address]
[Dated: ________________
<PAGE>
EXHIBIT 5.1
[SNR Letterhead]
November 20, 1998
DST Systems, Inc.
333 West 11th Street, 5th Floor
Kansas City, Missouri 64105
Re: DST Systems, Inc Registration Statement on Form S-4 in connection with
Merger with USCS International, Inc.
Ladies and Gentlemen:
We have acted as counsel to DST Systems, Inc., a Delaware corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-4 which was filed by the Company with the Securities and Exchange
Commission (the "Commission") on November 20, 1998 (the "Registration
Statement"). The Registration Statement relates to registration by the Company
under the Securities Act of 1933, as amended (the "1933 Act"), of the offer and
sale of up to 14,291,378 shares (the "Shares") of the common stock of the
Company, par value $0.01 per share, in connection with a merger of DST
Acquisitions, Inc., a wholly-owned subsidiary of the Company ("Acquisition"),
with and into USCS International, Inc. pursuant to the terms of a Agreement and
Plan of Merger dated as of September 2, 1998 (the "Merger Agreement"). This
opinion is being furnished to you in accordance with the requirements of Item
601(b)(5) of regulation S-K under the 1933 Act.
Based upon and subject to our examinations and understandings described
herein and the assumptions, exceptions, qualifications and limitations set forth
herein, we are of the opinion that the issuance of the Shares has been duly
authorized and when issued in accordance with the terms and conditions of the
Merger Agreement the Shares will be validly issued, fully paid and
nonassessable.
In connection with this opinion, we have examined and relied upon, without
further investigation, the originals or copies, certified or otherwise
identified to our satisfaction, of such documents, certificates, records, and
oral statements of public officials, officers of the Company and others as we
deemed necessary as a basis for the opinions set forth herein including, without
limitation: (i) the Registration Statement (together with the form of
prospectus/proxy statement forming a part thereof); (ii) the Merger Agreement;
(iii) the Certificate of Incorporation of the Company, as restated (the
"Articles"), (iv) the Amended and Restated By-laws of the Company; (v)
resolutions of the Board of Directors of the Company relating to the
transactions contemplated by the Registration Statement.
<PAGE>
DST Systems, Inc.
November 9, 1998
Page 2
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of natural persons, the authenticity, accuracy and completeness
of all documents submitted to us as originals, the conformity to original
documents of all documents submitted to us as certified, conformed or
photostatic copies or by facsimile and the authenticity of the originals from
which such copies or facsimiles were made. In making our examination of
documents executed by parties other than the Company or Acquisition, we have
assumed that such parties had the power, corporate or otherwise, to enter into
and perform all obligations thereunder and have assumed the due authorization
thereof by all requisite action, corporate and other, and the execution and
delivery by such parties of such documents and the validity and binding effect
thereof.
This opinion letter is limited to the specific legal issues that it
expressly addresses, and accordingly, we express no opinion as to the laws of
any other jurisdiction other than the corporate law of Delaware. We are not
admitted to the Delaware Bar. In expressing our opinion herein, we have reviewed
and relied upon, without further investigation, the General Corporation Law of
the State of Delaware, as amended, and the reported cases interpreting it as
published in generally available sources.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to Sonnenschein Nath & Rosenthal
under the caption "Legal Opinions" in the prospectus filed as part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are in the category of persons whose consent is required under Section 7 of the
1933 Act or the rules and regulations of the Commission promulgated thereunder.
This opinion letter is as of the date set forth above, and we disclaim any
obligations to advise you and any other person, legal or natural, who is
authorized to rely on this opinion letter of changes in the applicable law or
the facts after such date even though such changes could affect our opinion
expressed herein.
Very truly yours,
/s/ Sonnenschein Nath & Rosenthal
<PAGE>
EXHIBIT 8.1
[SNR Letterhead]
November 20, 1998
DST Systems, Inc.
333 West 11th Street
Kansas City, Missouri 64105
Re: Agreement and Plan of Merger dated September 2, 1998 between DST
Systems, Inc. ("DST"), USCS International, Inc. ("USCS") and DST
ACQUISITIONS, INC. ("ACQUISITION SUB")
----------------------------------------------------------------
Ladies and Gentlemen:
We have acted as special counsel to DST, a Delaware corporation, in
connection with a proposed merger (the "Merger") of Acquisition Sub, a Delaware
corporation and wholly-owned subsidiary of DST, a Delaware corporation, with and
into USCS, a Delaware corporation, pursuant to an Agreement and Plan of Merger
dated September 2, 1998 (the "Merger Agreement") by and among DST, Acquisition
Sub and USCS. In the Merger, each issued and outstanding share of common stock
of USCS, par value $.01 per share, other than shares of USCS already owned by
DST, will be converted into the right to receive .62 of a share of common stock,
par value $.01 per share, of DST.
In that connection, you have requested our opinion regarding the material
federal income tax consequences of the Merger. In providing our opinion, we
have examined the Merger Agreement, the registration statement on Form S-4, as
amended to date (the "Registration Statement"), which includes the Joint Proxy
Statements/Prospectus of USCS and DST, as filed with the Securities and Exchange
Commission (the "SEC"), and such other documents and corporate records as we
have deemed necessary or appropriate for purposes of our opinion. In addition,
we have assumed that (i) the Merger will be consummated in the manner
contemplated by the Registration Statement and in accordance with the provisions
of the Merger Agreement, (ii) the statements concerning the Merger set forth in
the Merger Agreement and the Registration Statement are true, correct and
complete and will continue to be true, correct and complete at all times up to
and including the Closing Date, (iii) the representations made to us by DST and
USCS in their respective letters to us each dated the date hereof, and delivered
to us for purposes of this opinion are true, correct and complete and will
continue to be true, correct and complete at all times up to and including the
Closing Date ("Representation Letters") and (iv) any representations made in the
Representation Letters or in the Merger Agreement "to the best knowledge of", or
similarly
<PAGE>
DST Systems, Inc.
November 20, 1998
Page 2
qualified, are correct, and will continue to be true and correct and complete at
all times up to and including the Closing Date, in each case without such
qualification. If any of the above-described assumptions are untrue for any
reason or if the Merger is consummated in a manner that is inconsistent with the
manner in which it is described in the Merger Agreement or the Registration
Statement, our opinions as expressed below may be adversely affected and may not
be relied upon.
The opinions expressed herein are based upon existing statutory, regulatory
and judicial authority, any of which may be changed at any time with retroactive
effect. Our opinions are limited to the tax matters specifically covered
hereby, and we have not been asked to address, nor have we addressed, any other
tax consequences of the Merger or any other transactions.
Based upon the foregoing, we are of the opinion that (i) the Merger will be
treated for U.S. Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
("Code") and (ii) the discussion contained in the Registration Statement under
the caption "Material United States Federal Income Tax Consequences of the
Merger" represents an accurate summary of the material Federal income tax
consequences of the Merger in all material aspects.
We express no opinion on any issue relating to Federal income tax
consequences other than those described herein and under the caption "Material
United States Federal Income Tax Consequences of the Merger" in the Registration
Statement. This opinion is expressed as of the date hereof, and we disclaim any
undertaking to advise you of the subsequent changes of the matters stated,
represented or assumed herein or any subsequent changes in applicable law,
regulations or interpretations thereof.
We hereby consent to the filing of this opinion as Exhibit 8.1 to the
Registration Statement. We also consent to the references to Sonnenschein Nath &
Rosenthal under the captions "Legal Matters," "Material United States Federal
Income Tax Consequences of the Merger," "Conditions to the Merger," "Conditions;
Waivers" and "Legal Opinions," and to the inclusion of the summary of our
opinion in "Material United States Federal Income Tax Consequences of the
Merger," in the Prospectus filed as part of the Registration Statement. In
giving this consent, we do not thereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of 1933,
as amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
Very truly yours,
/s/ Sonnenschein Nath & Rosenthal
<PAGE>
EXHIBIT 8.2
November 20, 1998
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, California 95670
RE: AGREEMENT AND PLAN OF MERGER DATED SEPTEMBER 2, 1998
BETWEEN DST SYSTEMS, INC. ("DST"), USCS INTERNATIONAL, INC.
("USCS") AND DST ACQUISITIONS, INC. ("ACQUISITIONS SUB")
Ladies and Gentlemen:
We have acted as special counsel to USCS, a Delaware corporation, in connection
with a proposed merger (the "Merger") of Acquisition Sub, a Delaware corporation
and wholly-owned subsidiary of DST, a Delaware corporation, with and into USCS
pursuant to an Agreement and Plan of Merger dated September 2, 1998 (the "Merger
Agreement") by and among USCS, Acquisition Sub and DST. In the Merger, each
issued and outstanding share of common stock of USCS, par value $.01 per share,
other than shares of USCS already owned by DST, will be converted into the right
to receive .62 of a share of common stock, par value $.01 per share, of DST.
In that connection, you have requested our opinion regarding the material
federal income tax consequences of the Merger. In providing our opinion, we have
examined the Merger Agreement, the registration statement on Form S-4, as
amended to date (the "Registration Statement"), which includes the Joint Proxy
Statements/Prospectus of USCS and DST, as filed with the Securities and Exchange
Commission (the "SEC"), and such other documents and corporate records as we
have deemed necessary or appropriate for purposes of our opinion. In addition,
we have assumed that (i) the Merger will be consummated in the manner
contemplated by the Registration Statement and in accordance with the provisions
of the Merger Agreement, (ii) the statements concerning the Merger set forth in
the Merger Agreement and the Registration Statement are true, correct and
complete and will continue to be true, correct and complete at all times up to
and including the Closing Date, (iii) the representations made to us by DST and
USCS in their respective letters to us each dated the date hereof, and delivered
to us for purposes of this opinion are true, correct and complete
<PAGE>
USCS International, Inc.
November 20, 1998
Page 2
and will continue to be true, correct and complete at all times up to and
including the Closing Date ("Representations Letters") and (iv) any
representations made in the Representations Letters or in the Merger Agreement
"to the best knowledge of", or similarly qualified, are correct, and will
continue to be true and correct and complete at all times up to and including
the Closing Date, in each case without such qualification. If any of the above-
described assumptions are untrue for any reason or if the Merger is consummated
in a manner that is inconsistent with the manner in which it is described in the
Merger Agreement or the Registration Statement, our opinions as expressed below
may be adversely affected and may not be relied upon.
The opinions expressed herein are based upon existing statutory, regulatory and
judicial authority, any of which may be changed at any time with retroactive
effect. Our opinions are limited to the tax matters specifically covered
hereby, and we have not been asked to address, nor have we addressed, any other
tax consequences of the Merger or any other transactions.
Based upon the foregoing, we are of the opinion that (i) the Merger will be
treated for U.S. Federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended
("Code") and (ii) the discussion contained in the Registration Statement under
the caption "Material United States Federal Income Tax Consequences of the
Merger" represents an accurate summary of the material Federal Income tax
consequences of the Merger in all material aspects.
We express no opinion on any issue relating to Federal income tax consequences
other than those described herein and under the caption "Material United States
Federal Income Tax Consequences of the Merger" in the Registration Statement.
This opinion is expressed as of the date hereof, and we disclaim any undertaking
to advise you of the subsequent changes of the matters stated, represented or
assumed herein or any subsequent changes in applicable law, regulations or
interpretations thereof.
<PAGE>
USCS International, Inc.
November 20, 1998
Page 3
We hereby consent to the filing of this opinion as Exhibit 8.2 to the
Registration Statement. We also consent to the references to Graham & James LLP
under the caption "Legal Matters," "Material United States Federal Income Tax
Consequences of the Merger," "Conditions to the Merger," "Conditions; Waivers"
and "Legal Opinions," and to the inclusion of the summary of our opinion in
"Material United States Federal Income Tax Consequences of the Merger," in the
Prospectus filed as part of the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission promulgated
thereunder.
Very truly yours,
/s/ Graham & James LLP
- ----------------------
GRAHAM & JAMES LLP
<PAGE>
EXHIBIT 10.2
CERTIFICATE OF INCORPORATION
of
DST ACQUISITIONS, INC.
_________________________
FIRST: The name of this corporation is DST Acquisitions, Inc.
SECOND: The registered office of this Corporation in the State of Delaware
is located at 1209 Orange Street, in the City of Wilmington, County of New
Castle, Zip Code 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of stock that this Corporation shall
have authority to issue is One Thousand (1,000) shares of Common Stock, $.01 par
value per share. Each share of Common Stock shall be entitled to one vote.
FIFTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the bylaws of the Corporation.
SIXTH: The number of directors which constitute the whole Board of
Directors of the Corporation shall be as specified in the Bylaws of the
Corporation. At each annual meeting of stockholders, directors of the
Corporation shall be elected to hold office until the expiration of the term for
which they are elected and until their successors have been duly elected and
qualified; except that if any such election shall not be so held, such election
shall take place at a stockholders' meeting called and held in accordance with
the Delaware General Corporation Law.
SEVENTH: To the fullest extent permitted by the General Corporation Law of
Delaware as the same exists or as may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. Neither any
amendment nor repeal of this Article SEVENTH, nor the adoption of any provision
of this Certificate of Incorporation inconsistent with this Article SEVENTH,
shall eliminate or reduce the effect of this Article SEVENTH in respect of
<PAGE>
any matter occurring, or any cause of action, suit or claim that, but for this
Article SEVENTH, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
EIGHTH: The Corporation reserves the right at any time, and from time to
time, to amend, alter, change or repeal any provision contained in this
Certificate of Incorporation, and other provisions authorized by the laws of the
State of Delaware at the time in force may be added or inserted, in the manner
now or hereafter prescribed by law; and all rights, preferences and privileges
of whatsoever nature conferred upon stockholders, directors or any other persons
whomsoever by and pursuant to this Certificate of Incorporation in its present
form or as hereafter amended are granted subject to the rights reserved in this
article.
NINTH: The name and mailing address of the incorporator are as follows:
Name: Robert C. Canfield
Mailing Address: DST Systems, Inc.
333 West 11th Street - 5th Floor
Kansas City, Missouri 64105
THE UNDERSIGNED, the sole incorporator named above, hereby certifies that
the facts stated above are true as of this 28th day of August, 1998.
INCORPORATOR:
/s/ Robert C. Canfield
-------------------------------
Robert C. Canfield
<PAGE>
EXHIBIT 10.3
BYLAWS
OF
DST ACQUISITIONS, INC.
ARTICLE I
---------
OFFICES
-------
SECTION 1. REGISTERED OFFICE. The registered office shall be in the City
--------- -----------------
of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The corporation may also have offices at such
--------- -------------
other places both within and without the State of Delaware as the board of
directors may from time to time determine or the business of the corporation may
require.
ARTICLE II
----------
STOCKHOLDERS
------------
SECTION 1. MEETINGS. All meetings of the stockholders for the election of
--------- --------
directors or for any other purpose shall be held at such time and place, either
within or without the State of Delaware, as shall be designated from time to
time by the board of directors and stated in the notice of the meeting or in a
duly executed waiver of notice hereof.
SECTION 2. ANNUAL MEETINGS. An annual meeting of the stockholders shall
--------- ---------------
be held on the second Tuesday in December of each year, at 10:00 a.m., if not a
legal holiday, and if a legal holiday, then on the next succeeding day which is
not a legal holiday, or at such other date and time as shall be designated from
time to time by the board of directors and stated in the notice of the meeting.
At each annual meeting, the stockholders shall elect the board of directors and
transact such other business as may properly be brought before the meeting.
SECTION 3. MEETING NOTICES. Written notice of stockholder meetings,
--------- ---------------
whether annual or special, stating the place, date and hour of the meeting shall
be given to each stockholder entitled to vote at such meeting not less than ten
or more than sixty days before the date of the meeting. Written notice of a
special meeting shall state the purpose or purposes for which the meeting is
called. Notice of any meeting of stockholders shall not be required to be given
to any stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting was not lawfully called or convened. Except as otherwise required by
law, notice of any meeting of stockholders following an adjournment shall not be
required to be given if the time and place thereof are announced at the meeting
which is adjourned.
<PAGE>
SECTION 4. VOTING LISTS. The officer who has charge of the stock ledger
--------- ------------
of the corporation shall prepare and make or cause to be prepared and made
through a transfer agent appointed by the board of directors, at least ten days
before every meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a place
within the city where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where the
meeting is to be held. The list shall also be produced and kept at the time and
place of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders, for
--------- ----------------
any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called at any time by the chairman of the
board of directors, if any, or by the president and shall be called by the
chairman, president or the secretary at the request in writing of a majority of
the board of directors, or at the request in writing of stockholders owning a
majority in the amount of the entire capital stock of the corporation issued and
outstanding which are entitled to vote. Such request shall state the purpose or
purposes of the proposed meeting.
SECTION 6. QUORUM. The holders of a majority of the stock issued and
--------- ------
outstanding which are entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
When a quorum is present at any meeting, the vote of the holders of a
majority of the stock having voting power present in person or represented by
proxy shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the statutes or of the certificate of
incorporation, a different vote is required in which case such express provision
shall govern and control the decision of such question.
SECTION 7. VOTING OF SHARES. Unless otherwise specifically provided by
--------- ----------------
statute or the certificate of incorporation, or these by-laws each stockholder
shall at every meeting of the stockholders be entitled to one vote for each
share of the capital stock having voting power held by such stockholder.
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SECTION 8. PROXIES. Each stockholder entitled to vote at a meeting of
--------- -------
stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him or her
by proxy, but no proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
SECTION 9. INFORMAL ACTION BY STOCKHOLDERS. Whenever the vote of
--------- -------------------------------
stockholders at a meeting thereof is required or permitted to be taken for or in
connection with any corporate action, by any provision of the statutes, the
meeting and vote of stockholders may be dispensed with if all of the
stockholders who would have been entitled to vote upon the action if such
meeting were held shall consent in writing to such corporate action being taken;
or if the certificate of incorporation authorizes the action to be taken with
the written consent of the holders of less than all of the stock who would have
been entitled to vote upon the action if a meeting were held, then on the
written consent of the stockholders having not less than such percentage of the
number of votes as may be authorized in the certificate of incorporation;
provided that in no case shall the written consent be by the holders of stock
having less than the minimum percentage of the vote required by statute for the
proposed corporate action, and provided that prompt notice must be given to all
stockholders of the taking of corporate action without a meeting and by less
than unanimous written consent.
SECTION 10. STOCK LEDGER. The stock ledger of the corporation shall be
---------- ------------
the only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by Section 4 of this Article II or the books of the
corporation, or to vote in person or by proxy at any meeting of stockholders.
SECTION 11. CONDUCT OF MEETING. Unless otherwise provided by the board of
---------- ------------------
directors, the chief executive officer shall act as chairman; and the secretary,
or in his absence an assistant secretary, shall act as secretary of the meeting.
The order of business shall be determined by the chairman of the meeting.
ARTICLE III
-----------
DIRECTORS
---------
SECTION 1. NUMBER, TENURE AND QUALIFICATIONS. The Corporation shall have
--------- ---------------------------------
one or more directors, the number of directors to be determined from time to
time by vote of a majority of the directors then in office. The directors shall
be elected at the annual meeting of the stockholders, except as provided in
Section 2 of this Article, and each director elected shall hold office until his
or her successor is elected and qualified, or until his or her earlier
resignation or removal. Directors need not be stockholders.
SECTION 2. VACANCIES. Except as otherwise provided by law, any vacancy on
--------- ---------
the board of directors (whether because of death, resignation, removal, an
increase in the number of directors, or any other cause) may be filled by a
majority of the directors then in office, though less than a quorum, or by a
sole remaining director, and any director so chosen shall hold office
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<PAGE>
until the next annual election and until his or her successor is duly elected
and shall qualify, or until his or her earlier resignation or removal. If there
are no directors in office, then an election of directors may be held in the
manner provided by statute.
SECTION 3. GENERAL POWERS. The business of the corporation shall be
--------- --------------
managed under the direction of its board of directors which may exercise all
such powers of the corporation and do all such lawful acts and things as are not
by statute or by the certificate of incorporation or by these by-laws directed
or required to be exercised or done by the stockholders.
SECTION 4. MEETINGS. The board of directors of the corporation may hold
--------- --------
meetings, both regular and special, either within or without the State of
Delaware.
SECTION 5. FIRST MEETING. The first meeting of each newly elected board
--------- -------------
of directors shall be held at such time and place as shall be fixed by the vote
of the stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order to legally constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
SECTION 6. REGULAR MEETINGS. Regular meetings of the board of directors
--------- ----------------
may be held without notice at such time and at such place as shall from time to
time be determined by the board.
SECTION 7. SPECIAL MEETINGS. Special meetings of the board may be called
--------- ----------------
by either the chairman of the board, if any, or the president on two days'
notice to each director, either personally or by mail or by telegram; special
meetings shall be called by the president or the secretary in a like manner and
on like notice on the written request of two directors; provided, however, that
a meeting may be called on such shorter notice as the person or persons calling
such meeting may deem necessary or appropriate in the circumstances. Any
meeting of the board of directors shall be a legal meeting without any notice
thereof having been given if all the directors shall be present thereat or if
notice thereof shall be waived either before or after such meeting in writing by
all absentees therefrom provided a quorum be present thereat. Notice of any
adjourned meeting need not be given.
SECTION 8. QUORUM. At all meetings of the board a majority of the
--------- ------
directors shall constitute a quorum for the transaction of business and the act
of a majority of the directors present at any meeting at which there is a quorum
shall be the act of the board of directors, except as may be otherwise
specifically provided by statute or by the certificate of incorporation. If a
quorum shall not be present at any meeting of the board of directors the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
4
<PAGE>
SECTION 9. ORGANIZATION. At each meeting of the board of directors, the
--------- ------------
chairman of the board of directors, if any, or in his or her absence, the
president of the corporation, or in his or her absence, a vice chairman, or in
the absence of all of said officers, a chairman chosen by a majority of the
directors present, shall preside. The secretary of the corporation, or in his
or her absence, an assistant secretary, if any, or, in the absence of both the
secretary and assistant secretaries, any person whom the chairman shall appoint,
shall act as secretary of the meeting.
SECTION 10. INFORMAL ACTION BY DIRECTORS. Unless otherwise restricted by
---------- ----------------------------
the certificate of incorporation or these by-laws, any action required or
permitted to be taken at any meeting of the board of directors or of any
committee thereof may be taken without a meeting, if all members of the board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board or committee.
SECTION 11. PARTICIPATION BY CONFERENCE TELEPHONE. Unless otherwise
---------- -------------------------------------
restricted by the certificate of incorporation or these by-laws, members of the
board of directors, or any committee designated by the board, may participate in
a meeting of the board or such committee by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and participation in a meeting pursuant to this
Section shall constitute presence in person at such meeting.
SECTION 12. COMMITTEES. The board of directors may, by resolution passed
---------- ----------
by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the directors of the corporation. The
board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee; provided, however, that, if the resolution of the board of directors
so provides, in the absence or disqualification of any such member or alternate
member of such committee or committees, the member or members thereof present at
any meeting and not disqualified from voting, whether or not he, she or they
constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member or alternate member. Any such committee, to the extent provided in the
resolution of the board of directors, shall have and may exercise all the powers
and authority of the board of directors in the management of the business and
affairs of the corporation, but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution or amending the by-laws of the corporation; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
Such committee or committees shall have such name or names as may be determined
from time to time by resolution adopted by the board of directors. A majority of
those entitled to vote at any meeting of any committee shall constitute a quorum
for the transaction of business at that meeting.
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
5
<PAGE>
SECTION 13. COMPENSATION. The directors may be paid their expenses, if
---------- ------------
any, of attendance at each meeting of the board of directors or committee and
may be paid a fixed sum for attendance at each meeting of the board of directors
or such committee and/or a stated salary as director. No such payment shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor.
ARTICLE IV
----------
NOTICES
-------
SECTION 1. WRITTEN NOTICE. Whenever, under the provisions of the statutes
--------- --------------
or of the certificate of incorporation or of these by-laws, notice is required
to be given to any director or stockholder, such notice shall be in writing and
shall be given in person or by mail to such director or stockholder. If mailed,
such notice shall be addressed to such director or stockholder at his or her
address as it appears on the records of the corporation, with postage thereon
prepaid, and shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telegram, telex or facsimile transmission.
SECTION 2. WAIVER OF NOTICE. Whenever any notice is required to be given
--------- ----------------
under the provisions of the statutes or of the certificate of incorporation or
of these by-laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE V
---------
OFFICERS
--------
SECTION 1. NUMBER. The officers of the corporation shall be chosen by the
--------- ------
board of directors and shall include a president, a vice-president, a treasurer
and a secretary. The board of directors, in its discretion, may also choose a
chairman of the board of directors and one or more vice chairmen of the board of
directors from among their members and additional vice-presidents, and one or
more assistant treasurers and assistant secretaries. The board of directors may
appoint such other officers and agents as it shall deem desirable who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the board. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these by-laws otherwise provide. The officers of the corporation need not be
stockholders of the corporation.
SECTION 2. ELECTION AND TERM OF OFFICE. The board of directors at its
--------- ---------------------------
first meeting after each annual meeting of stockholders shall elect the officers
of the corporation. The officers of the corporation shall hold office until
their successors are chosen and qualify.
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SECTION 3. REMOVAL. Any officer elected or appointed by the board of
--------- -------
directors may be removed, with or without cause, at any time by the affirmative
vote of a majority of the board of directors or by any committee or superior
officer upon whom such power of removal may be conferred by the board of
directors.
SECTION 4. VACANCIES. Any vacancy occurring in any office of the
--------- ---------
corporation shall be filled by the board of directors.
SECTION 5. CHAIRMAN OF THE BOARD OF DIRECTORS. The chairman of the board
--------- ----------------------------------
of directors, if any, shall preside, if present, at all meetings of the board of
directors. Except where by law the signature of the president is required, the
chairman of the board of directors shall possess the same power as the president
to sign all documents of the corporation which the president may be authorized
to sign by these by-laws or by the board of directors. The chairman of the
board of directors shall see that all orders and resolutions of the board of
directors are carried into effect and shall from time to time report to the
board of directors all matters within his or her knowledge which the interests
of the corporation may require to be brought to their notice. During the
absence or disability of the president, the chairman of the board of directors
shall exercise all the powers and discharge all the duties of the president
unless the board of directors shall designate another officer to exercise such
powers and discharge such duties. The chairman of the board of directors shall
also perform such other duties and he or she may exercise such other powers as
from time to time may be prescribed by these by-laws or by the board of
directors.
SECTION 6. VICE CHAIRMEN OF THE BOARD OF DIRECTORS. The vice chairmen of
--------- ---------------------------------------
the board of directors, if any, shall perform such duties and may exercise such
powers as from time to time may be prescribed by the board of directors.
SECTION 7. PRESIDENT. The president shall be the chief executive officer
--------- ---------
of the corporation unless the board of directors shall designate another officer
as chief executive officer, and shall have general and active management of the
business, subject to the control of the board of directors. The president shall
vote all shares of stock of any other corporation standing in the name of this
corporation except where the voting thereof shall be expressly delegated by the
board of directors to some other officer or agent of the corporation. The
president shall also perform all duties incident to the office of the president
and such other duties as may be prescribed by these by-laws or by the board of
directors from time to time.
SECTION 8. THE VICE-PRESIDENTS. Each vice-president shall perform such
--------- -------------------
duties and have such powers as the board of directors or chief executive officer
may from time to time prescribe. At the request of the board of directors, the
vice-president (or in the event there be more than one vice-president, the vice-
presidents in the order designated, or in the absence of any designation, then
in the order of their election) shall perform the duties of the president, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the president.
7
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SECTION 9. THE TREASURER. If required by the board of directors, the
--------- -------------
treasurer shall give bond for the faithful discharge of his or her duties in
such sum and with such surety or sureties as the board of directors shall
determine. The treasurer (or if there is none, the chief financial officer)
shall: (a) have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or other
depositaries as shall be selected in accordance with the provisions of these by-
laws; (b) sign (unless the secretary or other proper officer thereunto duly
authorized by the board of directors shall sign), with the chairman of the board
of directors, or president, or a vice president, certificates for shares of the
capital stock of the corporation, the issue of which shall have been authorized
by resolution of the board of directors, provided that the signatures of the
officers of the corporation thereon may be facsimile as provided in these by-
laws; and (c) in general perform all the duties incident to the office of
treasurer and such other duties as from time to time may be assigned to him or
her by the chief executive officer or by the board of directors.
SECTION 10. THE SECRETARY. The secretary shall: (a) keep the minutes of
---------- -------------
the stockholders' and of the board of directors' meetings in one or more books
provided for that purpose; and at the request of the board of directors shall
also perform like duties for the standing committees thereof when required; (b)
see that all notices are duly given in accordance with the provisions of these
by-laws or as required by law; (c) be custodian of the corporate records; (d)
keep a register of the post office address of each stockholder which shall be
furnished to the secretary by such stockholder; (e) have general charge of the
stock transfer books of the corporation; (f) sign (unless the treasurer or other
proper officer thereunto duly authorized by the board of directors shall sign),
with the chairman of the board of directors, or president, or a vice president,
certificates for shares of the capital stock of the corporation the issue of
which shall have been authorized by resolution of the board of directors,
provided that the signatures of the officers of the corporation thereon may be
facsimile as provided in these by-laws; and (g) in general perform all duties
incident to the office of secretary and such other duties as from time to time
may be assigned to him or her by the chairman of the board, the president or by
the board of directors.
SECTION 11. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The assistant
---------- ----------------------------------------------
treasurers shall respectively, if required by the board of directors, give bonds
for the faithful discharge of their duties in such sums and with such sureties
as the board of directors shall determine. The assistant treasurers and
assistant secretaries, in general, shall perform such duties as shall be
assigned to them by the treasurer or the secretary, respectively, or by the
chief executive officer or the board of directors, and in the event of the
absence, inability or refusal to act of the treasurer or the secretary, the
assistant treasurers or assistant secretaries (in the order designated, or in
the absence of any designation, then in the order of their election) shall
perform the duties of the treasurer or the secretary, respectively.
SECTION 12. OTHER OFFICERS. Such other officers as the board of directors
---------- --------------
may choose shall perform such duties and have such powers as from time to time
may be assigned to them by the chief executive officer or the board of
directors. The board of directors may delegate to
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<PAGE>
any other officer of the corporation the power to choose such other officers and
to prescribe their respective duties and powers.
SECTION 13. OTHER POSITIONS. The chief executive officer may authorize the
---------- ---------------
use of titles, including the titles of chairman, president and vice president,
by individuals who hold management positions with the business groups, divisions
or other operational units of the corporation, but who are not and shall not be
deemed officers of the corporation. Individuals in such positions shall hold
such titles at the discretion of the appointing officer, who shall be the chief
executive officer or any officer to whom the chief executive officer delegates
such appointing authority, and shall have such powers and perform such duties as
such appointing officer may from time to time determine.
SECTION 14. SALARIES. The salaries of the officers shall be fixed from
---------- --------
time to time by the board of directors, or by one or more committees or officers
to the extent so authorized from time to time by the board of directors, and no
officer shall be prevented from receiving such salary by reason of the fact that
he or she is also a director of the corporation.
ARTICLE VI
----------
INTERESTED DIRECTORS AND OFFICERS
---------------------------------
SECTION 1. No contract or transaction between the corporation and one or
---------
more of its directors or officers, or between the corporation and any other
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
board of directors or a committee thereof which authorizes the contract or
transaction, or solely because his, her or their votes are counted for such
purpose, if:
(a) The material facts as to his or her relationship or interest and
as to the contract or transaction are disclosed or are known to the board
of directors or the committee, and the board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum; or
(b) The material facts as to his or her relationship or interests and
as to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the board of directors,
a committee thereof, or the stockholders.
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The common or interested directors may be counted in determining the
presence of a quorum at a meeting of the board of directors or of a committee
which authorizes the contract or transaction.
ARTICLE VII
-----------
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
SECTION 1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
--------- ------------------------
party or is threatened to be made a party to or is involved in or called as a
witness in any Proceeding (as hereinafter defined) because he or she is an
Indemnified Person (as hereinafter defined), shall be indemnified and held
harmless by the corporation to the fullest extent permitted under the Delaware
General Corporation Law (the "DGCL"), as the same now exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the corporation to provide broader indemnification rights than
the DGCL permitted the corporation to provide prior to such amendment). Such
indemnification shall cover all expenses incurred by an Indemnified Person
(including, but not limited to, attorneys' fees and other expenses of
litigation) and all liabilities and losses (including, but not limited to,
judgments, fines, ERISA or other excise taxes or penalties and amounts paid or
to be paid in settlement) incurred by such person in connection therewith.
Notwithstanding the foregoing, except with respect to indemnification
specified in Section 3 of this Article, the corporation shall indemnify an
Indemnified Person in connection with a Proceeding (or part thereof) initiated
by such person only if such Proceeding (or part thereof) was authorized by the
board of directors of the corporation.
For purposes of this Article:
(i) a "Proceeding" is an action, suit or proceeding, whether
civil, criminal, administrative or investigative, and any appeal therefrom;
(ii) an "Indemnified Person" is a person who is, was, or had agreed
to become a director or an officer or a Delegate, as defined herein, of the
corporation or the legal representative of any of the foregoing; and
(iii) a "Delegate" is a person serving at the request of the
corporation or a subsidiary of the corporation as a director, trustee,
fiduciary, or officer of such subsidiary or of another corporation,
partnership, joint venture, trust or other enterprise.
SECTION 2. EXPENSES. Expenses, including attorneys' fees, incurred by a
--------- --------
person indemnified pursuant to Section 1 of this Article in defending or
otherwise being involved in a Proceeding shall be paid by the corporation in
advance of the final disposition of such Proceeding, including any appeal
therefrom, upon receipt of an undertaking (the "Undertaking") by or on behalf of
such person to repay such amount if it shall ultimately be determined that he
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or she is not entitled to be indemnified by the corporation; provided, that in
connection with a Proceeding (or part thereof) initiated by such person, except
a Proceeding authorized by Section 3 of this Article, the corporation shall pay
said expenses in advance of final disposition only if such Proceeding (or part
thereof) was authorized by the board of directors. A person to whom expenses are
advanced pursuant hereto shall not be obligated to repay pursuant to the
Undertaking until the final determination of any pending Proceeding in a court
of competent jurisdiction concerning the right of such person to be indemnified
or the obligation of such person to repay pursuant to the Undertaking.
SECTION 3. PROTECTION OF RIGHTS. If a claim under Section 1 of this
--------- --------------------
Article is not promptly paid in full by the corporation after a written claim
has been received by the corporation or if expenses pursuant to Section 2 of
this Article have not been promptly advanced after a written request for such
advancement accompanied by the Undertaking has been received by the corporation,
the claimant may at any time thereafter bring suit against the corporation to
recover the unpaid amount of the claim or the advancement of expenses. If
successful, in whole or in part, in such suit, such claimant shall also be
entitled to be paid the reasonable expense thereof (including without limitation
attorneys' fees). It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
Proceeding in advance of its final disposition where the required Undertaking
has been tendered to the corporation) that indemnification of the claimant is
prohibited by law, but the burden of proving such defense shall be on the
corporation. Neither the failure of the corporation (including its board of
directors, independent legal counsel, or its stockholders) to have made a
determination, if required, prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances, nor an actual
determination by the corporation (including its board of directors, independent
legal counsel, or its stockholders) that indemnification of the claimant is
prohibited, shall be a defense to the action or create a presumption that
indemnification of the claimant is prohibited.
SECTION 4. MISCELLANEOUS.
--------- -------------
(i) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
-------------------------
this Article shall not be exclusive of any other rights which such person
may have or hereafter acquire under any statute, provision of the
certificate of incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise. The board of directors shall have
the authority, by resolution, to provide for such indemnification of
employees or agents of the corporation or others and for such other
indemnification of directors, officers or Delegates as it shall deem
appropriate.
(ii) INSURANCE, CONTRACTS AND FUNDING. The corporation may maintain
--------------------------------
insurance, at its expense, to protect itself and any director, officer,
employee, or agent of, or person serving in any other capacity with, the
corporation or another corporation, partnership, joint venture, trust or
other enterprise against any expenses, liabilities or losses, whether or
not the corporation would have the power to indemnify such person against
such expenses, liabilities or losses under the DGCL. The corporation may
enter into contracts with any director, officer or Delegate of the
corporation in furtherance of the provisions
11
<PAGE>
of this Article and may create a trust fund, grant a security interest or
use other means (including, without limitation, a letter of credit) to
ensure the payment of such amounts as may be necessary to effect the
advancing of expenses and indemnification as provided in this Article.
(iii) CONTRACTUAL NATURE. The provisions of this Article shall be
------------------
applicable to all Proceedings commenced or continuing after its adoption,
whether such arise out of events, acts or omissions which occurred prior or
subsequent to such adoption, and shall continue as to a person who has
ceased to be a director, officer or Delegate and shall inure to the benefit
of the heirs, executors and administrators of such person. This Article
shall be deemed to be a contract between the corporation and each person
who, at any time that this Article is in effect, serves or agrees to serve
in any capacity which entitles him to indemnification hereunder and any
repeal or other modification of this Article or any repeal or modification
of the DGCL or any other applicable law shall not limit any Indemnified
Person's entitlement to the advancement of expenses or indemnification
under this Article for Proceedings then existing or later arising out of
events, acts or omissions occurring prior to such repeal or modification,
including, without limitation, the right to indemnification for Proceedings
commenced after such repeal or modification to enforce this Article with
regard to Proceedings arising out of acts, omissions or events occurring
prior to such repeal or modification.
(iv) SEVERABILITY. If this Article or any portion hereof shall be
------------
invalidated or held to be unenforceable on any ground by any court of
competent jurisdiction, the decision of which shall not have been reversed
on appeal, such invalidity or unenforceability shall not affect the other
provisions hereof, and this Article shall be construed in all respects as
if such invalid or unenforceable provisions had been omitted therefrom.
ARTICLE VIII
------------
CERTIFICATES OF STOCK AND THEIR TRANSFER
----------------------------------------
SECTION 1. CERTIFICATES OF STOCK. Every holder of stock in the
--------- ---------------------
corporation shall be entitled to have a certificate, in such form as the board
of directors shall prescribe, signed in the name of the corporation by (i) the
chairman of the board of directors, president or a vice-president and (ii) by
the treasurer or an assistant treasurer or the secretary or an assistant
secretary of the corporation, certifying the number and class of shares owned by
him or her in the corporation. Any of or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with the
same effect as if he or she were such officer, transfer agent or registrar at
the date of issue.
SECTION 2. RECORDS OF CERTIFICATES. A record shall be kept of the name of
--------- -----------------------
the person, firm or corporation of record holding the stock represented by such
certificates, respectively,
12
<PAGE>
and the respective dates thereof, and in case of cancellation, the respective
dates of cancellation. Every certificate surrendered to the corporation for
exchange or transfer shall be cancelled and no new certificate or certificates
shall be issued in exchange for any existing certificate until such existing
certificate shall have been so cancelled, except in cases provided for in
Section 3 of this Article VIII.
SECTION 3. LOST CERTIFICATES. The board of directors may direct a new
--------- -----------------
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the board of
directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his or her legal representative, to advertise the same in such
manner as it shall require and/or to give the corporation a bond in such sum as
it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
SECTION 4. TRANSFERS OF STOCK. Upon surrender to the corporation or the
--------- ------------------
transfer agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
SECTION 4. FIXING RECORD DATE. In order that the corporation may
--------- ------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting.
SECTION 5. REGISTERED STOCKHOLDERS. The corporation shall be entitled to
--------- -----------------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
13
<PAGE>
ARTICLE IX
----------
GENERAL PROVISIONS
------------------
SECTION 1. EXECUTION OF DOCUMENTS. The chief executive officer, or any
--------- ----------------------
other officer, employee or agent of the corporation designated by the board of
directors or designated in accordance with corporate policy approved by the
board of directors, shall have the power to execute and deliver proxies, stock
powers, deeds, leases, contracts, mortgages, bonds, debentures, notes, checks,
drafts and other orders for payment of money and other documents for and in the
name of the corporation, and such power may be delegated (including the power to
redelegate) by the chief executive officer or to the extent provided in such
corporate policy by written instrument to other officers, employees or agents of
the corporation.
SECTION 2. DIVIDENDS. Dividends upon the capital stock of the
--------- ---------
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall end on
--------- -----------
the last day of December in each year.
SECTION 4. SEAL. The corporate seal shall have inscribed thereon the name
--------- ----
of the corporation, the year of its organization and the words "Corporate Seal,
Delaware." The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise. Unless the board of directors
shall otherwise direct in specific instances, the seal, when so impressed
or affixed, shall be attested by the signature of the secretary or an assistant
secretary.
The secretary shall be the custodian of the seal and shall affix the seal
to all papers which may require it upon the authorization of the chairman, the
president, a committee of the board of directors, or any other officer
designated by the board of directors.
14
<PAGE>
ARTICLE X
---------
AMENDMENTS
----------
SECTION 1. AMENDMENTS; GENERALLY. These by-laws may be altered, amended
--------- ---------------------
or repealed, in whole or in part, or new by-laws may be adopted by the
stockholders or the board of directors; provided, however, that notice of such
alteration, amendment, repeal or adoption of new by-laws be contained in the
notice of such meeting of stockholders or board of directors as the case may be.
All such amendments must be approved by either the holders of a majority of the
outstanding capital stock entitled to vote thereon or by the board of directors.
15
<PAGE>
EXHIBIT 10.9.2
SECOND AMENDMENT TO
THE EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
(1998 Restatement)
WHEREAS, by written instrument dated as of January 1, 1998, DST Systems,
Inc. amended and restated The Employee Stock Ownership Plan and Trust Agreement
(1998 Restatement); and
WHEREAS, DST Systems, Inc., in Section 13.02 of said Plan, reserved the
right to amend the Plan;
WHEREAS, DST Systems, Inc., finds it desirable to amend the Plan to provide
for the holding in the ESOP of common stock of FAM Holdings, Inc. distributed
with respect to common stock of Kansas City Southern Industries, Inc. held in
the ESOP; and to make conforming and clarifying changes related to the above;
and UMB Bank, N.A. agrees to such amendment.
NOW, THEREFORE, DST Systems, Inc. and UMB Bank, N.A. agree that The
Employee Stock Ownership Plan and Trust Agreement (1998 Restatement) be amended
as follows:
1. The third paragraph of the recitals to the Plan following "Witnesseth"
is amended to read as follows:
KCSI Shares transferred to this Plan from the Former Plan are held in
a KCSI Shares Fund. Following the Effective Date KCSI is distributing (the
"Spinoff") to its shareholders, including the Plan, substantially all of
the shares ("FAM Shares") owned by it of FAM Holdings, Inc. ("FAM").
Effective as of the Spinoff FAM Shares distributed to this Plan are held in
a FAM Shares Fund. The KCSI Shares Fund and FAM Shares Fund are provided
solely to permit the continued holding of KCSI Shares allocated to
Participants' Accounts following the transfer and FAM Shares allocated to
Participants' Accounts following the Spinoff. No future contributions or
investments may be made in the KCSI Shares Fund or the FAM Shares Fund.
2. A new Section 1.28(C) is added to read as follows:
(C) SPECIAL RULE FOR FAM GROUP SERVICE. For purposes of determining
service with an affiliate, an affiliate shall also include FAM Holdings,
Inc. ("FAM"), and any corporation, partnership, joint venture, or other
business entity that would be an affiliate of FAM under the foregoing
definitions of "affiliate" if FAM were substituted for DST therein (a "KCSI
Affiliate"); but only for periods (after the Effective Date) during which
DST is also a FAM affiliate under the foregoing definitions.
<PAGE>
3. The second paragraph of Section 1.33 is amended to read as follows:
For purposes of Sections 3.08, 5.09, 6.05, 8.10(A), 10.03(o), 10.17
and 11.01 only, in order to comply with Code Sections 401(a)(28), 409 and
411(d)(6), the term "Employer Securities" shall include voting common
stock of Kansas City Southern Industries, Inc., and of FAM Holdings,
Inc., which is readily tradable on an established securities market.
4. The first paragraph of Section 9.04 is amended to read as follows:
The Trustee shall maintain a separate Account, or multiple separate
Accounts, in the name of each Participant in the Plan to reflect the
Participant's Accrued Benefit under the Plan. The Trustee must maintain
for purposes of the Plan one Account designated as the Employer Securities
Account to reflect a Participant's interest in Employer Securities held by
the Plan, another Account designated as the General Investment Account to
reflect the Participant's interest in the Plan attributable to assets other
than Employer Securities and other than KCSI Shares and FAM Shares, another
Account designated as the KCSI Shares Account to reflect a Participant's
interest in the KCSI Shares held by the Plan, and another Account
designated as the FAM Shares Account to reflect a Participant's interest in
the FAM Shares held by the Plan. If a Participant reenters the Plan
subsequent to his having a Forfeiture Break in Service (as defined in
Section 5.08), the Trustee must maintain separate Accounts for the
Participant's pre-Forfeiture Break in Service Accrued Benefit and separate
Accounts for his post-Forfeiture Break in Service Accrued Benefit unless
the Participant's entire Accrued Benefit under the Plan is 100%
Nonforfeitable.
5. A new Section 9.06(D) is added to read as follows:
(D) FAM SHARES ACCOUNT. As of each valuation date of each Plan Year, the
Trustee first will reduce FAM Shares Accounts in the Plan for any
forfeitures arising under Section 5.09 and then will credit the FAM Shares
Account maintained for each Participant in the Plan with any forfeitures of
FAM Shares and with any stock dividends on FAM Shares allocated to his FAM
Shares Account. The Trustee will base allocations to the Participants'
Accounts on dollar values of FAM Shares or on the basis of actual shares
where there is a single class of FAM Shares. In making a forfeiture
reduction under this Section 9.06(D), the Trustee, to the extent possible,
first must forfeit from a Participant's General Investment Account before
making a forfeiture from his FAM Shares Account.
6. The first paragraph of Section 10.15 is amended to read as follows:
Each Participant (or the Beneficiary thereof) acting as a named
fiduciary shall have the right, with respect to Employer Securities, to
direct the Trustee as
2
<PAGE>
to the manner in which (a) to vote any stock allocated to his Employer
Securities Account as of the applicable record date of any shareholder
meeting in any matter put to a shareholder vote; and (b) to respond to a
tender offer, exchange offer or any other offer to purchase Employer
Securities allocated to the Participant's Employer Securities Account.
7. The fourth paragraph of Section 10.15 is amended to read as follows:
With regard to any tender offer, exchange offer or any other offer to
purchase Employer Securities, the Trustee or its designee will solicit such
instructions from Participants by distributing to each Participant such
information as is distributed to shareholders of the Employer generally in
connection with any such offer, and any additional information the Trustee
deems appropriate in order for each Participant to give instructions. A
reasonable deadline for the return of such materials may be specified.
8. The seventh paragraph of Section 10.15 is amended to read as follows:
In the event a Participant eligible to receive a distribution of that
Participant's Employer Securities Account does not elect in accordance with
Section 10.08 to receive the distribution in the form of Employer
Securities, a sale of the Employer Securities in such Account in order to
fund the resulting cash distribution shall be deemed to satisfy the
requirements of this Section 10.15.
9. Section 10.19 is amended to read as follows:
10.19 KCSI SHARE RESTRICTIONS. Any KCSI Shares acquired under the
-----------------------
Former Plan with the proceeds of an exempt loan and FAM Shares distributed
with respect to such KCSI Shares shall continue to be subject to the
provisions of Treas. Reg. Section 54-4975-7(b)(4), (10), (11) and
(12) relating to put, call or other options and to buy-sell or similar
arrangements, except to the extent these regulations are inconsistent with
Code Section 409(h).
10. These amendments shall be effective as of the date of distribution by
Kansas City Southern Industries, Inc., of substantially all of the shares owned
by it of FAM Holdings, Inc.
11. Except as herein amended, the Plan is hereby ratified and confirmed.
3
<PAGE>
IN WITNESS WHEREOF, DST Systems, Inc. and UMB Bank, N.A., have executed
this Second Amendment as of this 17th day of August, 1998.
DST SYSTEMS, INC.
By: /s/ Kenneth V. Hager
---------------------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer
and Treasurer
UMB BANK, N.A.
By: /s/ Mark P. Herman
---------------------------------------
Mark P. Herman
Senior Vice President
4
<PAGE>
EXHIBIT 10.9.3
THIRD AMENDMENT TO
THE EMPLOYEE STOCK OWNERSHIP PLAN
AND TRUST AGREEMENT
(1998 Restatement)
WHEREAS, by written instrument dated as of January 1, 1998, DST Systems,
Inc. amended and restated The Employee Stock Ownership Plan and Trust Agreement
(1998 Restatement); and
WHEREAS, DST Systems, Inc., in Section 13.02 of said Plan, reserved the
right to amend the Plan;
WHEREAS, DST Systems, Inc., finds it desirable to amend the Plan to
establish uniform quarterly distribution dates for certain distributions of
certain participants' accounts; to clarify the treatment of Qualified Domestic
Relations Orders ("QDROs"); and to make conforming and clarifying changes
related to the above; and UMB Bank, N.A. agrees to such amendment.
NOW, THEREFORE, DST Systems, Inc. and UMB Bank, N.A. agree that The
Employee Stock Ownership Plan and Trust Agreement (1998 Restatement) be amended
as follows:
1. The first paragraph of Section 6.01 is amended to read as follows:
Unless, pursuant to Section 6.03, the Participant or the Beneficiary
elects in writing to a different time or method of payment, the Advisory
Committee will direct the Trustee to commence distribution of a
Participant's Nonforfeitable Accrued Benefit in accordance with this
Section 6.01. A Participant must consent, in writing, to any distribution
required under this Section 6.01 if the present value of the Participant's
Nonforfeitable Accrued Benefit, at the time of the distribution to the
Participant, exceeds $5,000 and the Participant has not attained the later
of Normal Retirement Age or age 62. For all purposes of this Article VI,
the term "annuity starting date" means the first day of the first period
for which the Plan pays an amount as an annuity or in any
other form. For all purposes of this Plan, the "distribution date" is the
90th day after the end of the Plan Year or as soon as administratively
practicable thereafter (a "distribution date" or "annual distribution
date") unless the Plan specifies that distribution may also be made on the
30th day after the end of any of the first three calendar quarters of a
Plan Year or as soon as administratively practicable thereafter (a
"quarterly distribution date"). For purposes of the consent requirements
under this Article VI, if the present value of the Participant's
Nonforfeitable Accrued Benefit, at the time of any distribution, exceeds
$5,000, the Advisory Committee must treat that present value as exceeding
$5,000 for purposes of all subsequent Plan distributions to the
Participant.
<PAGE>
2. Subsection 6.01(C)(1) is amended to read as follows:
(1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES
NOT EXCEED $5,000. The Advisory Committee must direct the Trustee to
pay the deceased Participant's Nonforfeitable Accrued Benefit in a
single cash sum, on the annual or quarterly distribution date
following the calendar quarter in which the Participant's death
occurs, or, if later, in which the Advisory Committee receives
notification of or otherwise confirms the Participant's death, or as
soon as administratively practicable thereafter.
3. Subsection 6.03(A) is amended to read as follows:
(A) PARTICIPANT ELECTIONS AFTER TERMINATION OF EMPLOYMENT. If the present
value of a Participant's Nonforfeitable Accrued Benefit exceeds $5,000, he
may elect to have the Trustee commence distribution as of any distribution
date, but not earlier than the first annual distribution date after the
close of the Plan Year in which the Participant's Separation from Service
occurs. The Participant may reconsider an election at any time prior to
the annuity starting date and elect to commence distribution as of any
later annual or quarterly distribution date after the last day of the Plan
Year in which his Separation from Service occurred, or as soon as
administratively practicable thereafter. In the case of (i) a Participant
who has attained age 55 on or before the date of his Separation from
Service, or (ii) a Participant whose Separation from Service occurs because
of his disability, the Participant, in addition to the benefit payment
elections provided for in the first two sentences of this Section 6.03(A),
shall have the right to elect to have the Trustee commence distribution as
of any annual or quarterly distribution date after the end of the calendar
quarter in which his Separation from Service occurs, or as soon as
administratively practicable thereafter. A Participant who has separated
from Service may elect distribution as of any annual or quarterly
distribution date after the last day of the Plan Year in which his
Separation from Service occurred, or as soon as administratively
practicable thereafter, irrespective of the restrictions otherwise
applicable under this Section 6.03(A). If the Participant is partially
vested in his Accrued Benefit, an election under this Section 6.03(A) to
distribute prior to the Participant's incurring a Forfeiture Break in
Service (as defined in Section 5.08), must be in the form of a cash-out
distribution (as defined in Article V). A Participant may not receive a
cash-out distribution if, prior to the time the Trustee actually makes the
cash-out distribution, the Participant returns to employment with an
Employer.
4. Section 6.03(B) is amended to read as follows:
(B) PARTICIPANT ELECTIONS PRIOR TO TERMINATION OF EMPLOYMENT. After a
Participant (1) attains Normal Retirement Age or (2) attains 59-1/2 and has
at least five years of Participation in the Plan (including the Former
Plan), the Participant, until he retires, has a continuing election to
receive all or any portion of his
2
<PAGE>
Nonforfeitable Accrued Benefit. A Participant must make an election under
this Section 6.03(B) on a form prescribed by the Advisory Committee at any
time during the Plan Year for which his election is to be effective. In his
written election, the Participant must specify the percentage or dollar
amount he wishes the Trustee to distribute to him. The Participant's
election relates solely to the percentage or dollar amount specified in his
election form and his right to elect to receive an amount, if any, for a
particular Plan Year greater than the dollar amount or percentage specified
in his election form terminates on the Accounting Date. The Trustee must
make a distribution to a Participant in accordance with his election under
this Section 6.03(B) on the annual or quarterly distribution date after the
end of the calendar quarter within which the Participant files his written
election with the Trustee, or as soon as administratively practicable
thereafter. The Trustee will distribute the balance of the Participant's
Nonforfeitable Accrued Benefit not distributed pursuant to this election(s)
in accordance with the other distribution provisions of this Plan.
5. The first paragraph of Section 6.07 is amended to read as follows:
Nothing contained in this Plan prevents the Trustee, in accordance
with the direction of the Advisory Committee, from complying with the
provisions of a qualified domestic relations order (as defined in Code
Section 414(p)). This Plan specifically permits distribution to an
alternate payee under a qualified domestic relations order on any annual or
quarterly distribution date or as soon as administratively practicable
thereafter, irrespective of whether the Participant has attained his
earliest retirement age (as defined under Code Section 414(p)) under the
Plan. A distribution to an alternate payee prior to the Participant's
attainment of earliest retirement age is available only if the order
specifies distribution at that time or permits an alternate payee to elect
such earlier distribution. Nothing in this Section 6.07 allows an alternate
payee to receive distribution at a time otherwise not permitted under the
Plan nor in a form of payment not permitted under the Plan, nor does it
allow a Participant to receive distribution at a time or in a form not
authorized by Plan terms other than this Section 6.07.
6. Section 9.05 is amended to read as follows:
9.05 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each
--------------------------------------
Participant's Accrued Benefit consists of that portion of the net worth (at
fair market value) of the Plan which the net credit balance in his Accounts
bears to the total net credit balance in the Accounts of all Participants
in the Plan. For purposes of a distribution under the Plan, the value of a
Participant's Accrued Benefit is its value as of the valuation date
immediately preceding the applicable distribution date. A Participant's
Accrued Benefit shall not include or be deemed to include, any Employer
Security held in a suspense account, as provided in Section 10.03(B).
3
<PAGE>
7. Section 10.14 is amended to read as follows:
10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund
------------------
as of each Accounting Date to determine the fair market value of each
Participant's Accrued Benefit in the Trust. The Trustee also must value
the Trust Fund on the last day of each calendar quarter and such other
dates as directed in writing by the Advisory Committee.
8. The foregoing amendments shall be effective September 30, 1998.
9. Except as herein amended, the Plan is hereby ratified and confirmed.
IN WITNESS WHEREOF, DST Systems, Inc. and UMB Bank, N.A., have executed
this Third Amendment as of this first day of October, 1998.
DST SYSTEMS, INC.
By: /s/ Kenneth V. Hager
-------------------------------
Kenneth V. Hager
Vice President, Chief Financial
Officer and Treasurer
UMB BANK, N.A.
By: /s/ Mark P. Herman
-------------------------------
Mark P. Herman
Senior Vice President
4
<PAGE>
EXHIBIT 10.10.2
SECOND AMENDMENT TO
THE DST SYSTEMS, INC. PROFIT SHARING PLAN
AND TRUST AGREEMENT
(1996 Restatement)
WHEREAS, by written instrument dated December 30, 1996, DST Systems, Inc.
amended and restated The DST Systems, Inc. Profit Sharing Plan and Trust
Agreement (1996 Restatement); and
WHEREAS, DST Systems, Inc., in Section 11.02 of said Plan, reserved the
right to amend the Plan;
WHEREAS, DST Systems, Inc., finds it desirable to amend the Plan to
establish uniform quarterly distribution dates for certain distributions of
certain participants' accounts; to clarify the treatment of Qualified Domestic
Relations Orders ("QDROs"); and to make conforming and clarifying changes
related to the above; and UMB Bank, N.A. agrees to such amendment.
NOW, THEREFORE, DST Systems, Inc. and UMB Bank, N.A. agree that The DST
Systems, Inc. Profit Sharing Plan and Trust Agreement (1996 Restatement) be
amended as follows:
1. The first paragraph of Section 6.01 is amended to read as follows:
Unless, pursuant to Section 6.03, the Participant or the Beneficiary
elects in writing to a different time or method of payment, the Advisory
Committee will direct the Trustee to commence distribution of a
Participant's Nonforfeitable Accrued Benefit in accordance with this
Section 6.01. A Participant must consent, in writing, to any distribution
required under this Section 6.01 if the present value of the Participant's
Nonforfeitable Accrued Benefit, at the time of the distribution to the
Participant, exceeds $5,000 and the Participant has not attained the later
of Normal Retirement Age or age 62. Furthermore, the Participant's spouse
also must consent, in writing, to any distribution, for which Section 6.04
requires the spouse's consent. For all purposes of this Article VI, the
term "annuity starting date" means the first day of the first period for
which the Plan pays an amount as an annuity or in any other form. For all
purposes of this Plan, the "distribution date" is the 90th day after the
end of the Plan Year or as soon as administratively practicable thereafter
(a "distribution date" or "annual distribution date") unless the Plan
specifies that distribution may also be made on the 30th day after the end
of any of the first three calendar quarters of a Plan Year or as soon as
administratively practicable thereafter (a "quarterly distribution date").
For purposes of the consent requirements under this Article VI, if the
present value of the Participant's Nonforfeitable Accrued Benefit, at the
time of any distribution, exceeds $5,000, the Advisory Committee must treat
that present value as exceeding $5,000 for purposes of all subsequent Plan
distributions to the Participant.
<PAGE>
2. Subsection 6.01(C)(1) is amended to read as follows:
(1) DECEASED PARTICIPANT'S NONFORFEITABLE ACCRUED BENEFIT DOES
NOT EXCEED $5,000. The Advisory Committee, subject to the
requirements of Section 6.04, must direct the Trustee to pay the
deceased Participant's Nonforfeitable Accrued Benefit in a single cash
sum, on the annual or quarterly distribution date following the end of
the calendar quarter in which the Participant's death occurs, or, if
later, in which the Advisory Committee receives notification of or
otherwise confirms the Participant's death, or as soon as
administratively practicable thereafter.
3. Subsection 6.03(A) is amended to read as follows:
(A) PARTICIPANT ELECTIONS AFTER TERMINATION OF EMPLOYMENT. If the present
value of a Participant's Nonforfeitable Accrued Benefit exceeds $5,000, he
may elect to have the Trustee commence distribution as of any annual or
quarterly distribution date, but not earlier than the first annual
distribution date after the close of the Plan Year in which the
Participant's Separation from Service occurs. The Participant may
reconsider an election at any time prior to the annuity starting date and
elect to commence distribution as of any later annual or quarterly
distribution date after the end of any subsequent calendar quarter after
the last day of the Plan Year in which his Separation from Service
occurred, or as soon as administratively practicable thereafter. In the
case of (i) a Participant who has attained age 55 on or before the date of
his Separation from Service, or (ii) a Participant whose Separation from
Service occurs because of his disability, the Participant, in addition to
the benefit payment elections provided for in the first two sentences of
this Section 6.03(A), shall have the right to elect to have the Trustee
commence distribution as of any annual or quarterly distribution date after
the end of the calendar quarter in which his Separation from Service
occurs, or as soon as administratively practicable thereafter. A
Participant who has separated from Service may elect distribution as of any
annual or quarterly distribution date after the last day of the Plan Year
in which his Separation from Service occurred, or as soon as
administratively practicable thereafter, irrespective of the restrictions
otherwise applicable under this Section 6.03(A). If the Participant is
partially vested in his Accrued Benefit, an election under this paragraph
(A) to distribute prior to the Participant's incurring a Forfeiture Break
in Service (as defined in Section 5.08), must be in the form of a cash-out
distribution (as defined in Article V). A Participant may not receive a
cash-out distribution if, prior to the time the Trustee actually makes the
cash-out distribution, the Participant returns to employment with an
Employer.
2
<PAGE>
4. Section 6.03(B) is amended to read as follows:
(B) PARTICIPANT ELECTIONS PRIOR TO TERMINATION OF EMPLOYMENT.
(1) AT NORMAL RETIREMENT AGE. After a Participant attains Normal
Retirement Age, the Participant, until he retires, has a continuing
election to receive all or any portion of his Accrued Benefit. A
Participant must make an election under this paragraph on a form prescribed
by the Advisory Committee at any time during the Plan Year for which his
election is to be effective. In his written election, the Participant must
specify the percentage or dollar amount he wishes the Trustee to distribute
to him. The Participant's election relates solely to the percentage or
dollar amount specified in his election form and his right to elect to
receive an amount, if any, for a particular Plan Year greater than the
dollar amount or percentage specified in his election form terminates on
the Accounting Date. The Trustee must make a distribution to a Participant
in accordance with his election under this paragraph on the annual or
quarterly distribution date after the end of the calendar quarter within
which the Participant files his written election with the Trustee, or as
soon as administratively practicable thereafter. The Trustee will
distribute the balance of the Participant's Accrued Benefit not distributed
pursuant to his election(s) in accordance with the other distribution
provisions of this Plan.
(2) PRIOR TO NORMAL RETIREMENT AGE. For purposes of this paragraph,
the terms "eligible retirement plan," "direct rollover" and "eligible
rollover distribution" shall have the meanings ascribed to them in Section
6.08. Any Participant who has attained 59-1/2 and has at least five Years
of Service, until he retires, has a continuing election to direct the
Trustee to pay directly to an eligible retirement plan specified by the
Participant in a direct rollover all or any portion, with a minimum portion
of 20%, of his Nonforfeitable Accrued Benefit, provided that the payment is
an eligible rollover distribution. A Participant may make an election under
this paragraph on a form prescribed by the Advisory Committee at any time
during the Plan Year for which his election is to be effective. In his
written election, the Participant must specify the percentage or dollar
amount he wishes the Trustee to distribute. The Participant's election
relates solely to the percentage or dollar amount specified in his election
form and his right to elect to have directly rolled over an amount, if any,
for a particular Plan Year greater than the dollar amount or percentage
specified in his election form terminates on the Accounting Date. The
Trustee must pay the amount specified by the Participant in a direct
rollover in accordance with the Participant's election under this paragraph
on the annual or quarterly distribution date after the end of the calendar
quarter within which the Participant files his written election with the
Trustee, or as soon as administratively practicable thereafter. The Trustee
will distribute the balance of the
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<PAGE>
Participant's Nonforfeitable Accrued Benefit not distributed pursuant to
this election(s) under this Section 6.03(B) in accordance with the other
distribution provisions of this Plan.
If the Trustee makes a distribution (other than a cash-out
distribution described in Section 5.04) to a partially-vested Participant
pursuant to this Section 6.03(B), the Advisory Committee will establish a
separate Account for the Participant's Accrued Benefit. At any relevant
time following the distribution, the Advisory Committee will determined the
Participant's Nonforfeitable Accrued Benefit derived from Employer
contributions in accordance with the following formula: (P(AB+(RxD)) -
(RxD).
To apply this formula, "P" is the Participant's current vesting
percentage at the relevant time, "AB" is the Participant's Employer-derived
Accrued Benefit at the relevant time, "R" is the ratio of the Accrued
Benefit at the relevant time to the Accrued Benefit after the earlier
distribution, and "D" is the amount of the earlier distribution.
5. The second paragraph of Section 6.03(E) is amended to read as follows:
A Participant must make a written election under this Section 6.03(E)
on a form prescribed by the Advisory Committee not more than 90 nor less
than 60 days before the end of the calendar quarter preceding the
distribution. The distribution in accordance with the Participant's
timely-filed election will be made on the annual or quarterly distribution
date following the end of such calendar quarter or as soon as
administratively practicable thereafter.
6. The first paragraph of Section 6.07 is amended to read as follows:
Nothing contained in this Plan prevents the Trustee, in accordance
with the direction of the Advisory Committee, from complying with the
provisions of a qualified domestic relations order (as defined in Code
Section 414(p)). This Plan specifically permits distribution to an
alternate payee under a qualified domestic relations order on any annual or
quarterly distribution date or as soon as administratively practicable
thereafter, irrespective of whether the Participant has attained his
earliest retirement age (as defined under Code Section 414(p)) under the
Plan. A distribution to an alternate payee prior to the Participant's
attainment of earliest retirement age is available only if the order
specifies distribution at that time or permits an alternate payee to elect
such earlier distribution. Nothing in this Section 6.07 allows an alternate
payee to receive distribution at a time otherwise not permitted under the
Plan nor in a form of payment not permitted under the Plan, nor
4
<PAGE>
does it allow a Participant to receive distribution at a time or in a form
not authorized by Plan terms other than this Section 6.07.
7. Section 10.14 is amended to read as follows:
10.14 VALUATION OF TRUST. The Trustee must value the Trust Fund as
------------------
of each Accounting Date to determine the fair market value of each
Participant's Accrued Benefit in the Trust. The Trustee also must value
the Trust Fund on the last day of each calendar quarter and such other
dates as directed in writing by the Advisory Committee.
8. Section 14.01 is amended to read as follows:
14.01 REQUEST FOR WITHDRAWAL DUE TO FINANCIAL HARDSHIP. Every
------------------------------------------------------
Participant who has completed four (4) Years of Service for vesting
purposes, as defined in Sections 5.06 and 5.08, may request to withdraw all
or any portion, at his option, but not to exceed the value of such
Participant's vested interest which would be available under Section 5.03,
of the balance of his Accrued Benefit as the same shall stand on the last
day of the calendar quarter in which such request is made (after completion
of all adjustments to be made thereto as of the end of the calendar quarter
in which such request is made). Effective for Plan Years beginning after
December 31, 1989, a Participant may make such a withdrawal request if he
has either completed four (4) Years of Service for vesting purposes or been
a Participant in the Plan for all or part of at least four (4) Plan Years.
Such request for withdrawal shall be made in writing on a form satisfactory
to the Advisory Committee and such request shall be delivered to the
Advisory Committee not more than 90 nor less than 60 days before the end of
the calendar quarter preceding the distribution. The Advisory Committee
shall have complete discretion in approving a request for withdrawal due to
financial hardship and the amount thereof, PROVIDED; the Advisory Committee
shall grant its consent if satisfied from positive evidence presented by
the Participant, that the purpose of the request for withdrawal due to
financial hardship is:
(a) financing of the purchase, major repair or improvement of the
Participant's home;
(b) major illness or disability of the Participant, a member of
his immediate family or one dependent upon him;
(c) college or other post-high school education of the
Participant or one dependent upon him; a withdrawal pursuant to this
subparagraph (c)
5
<PAGE>
shall be distributed in approximately equal annual installments over
the scheduled course of the schooling. Installments after the initial
distribution will be paid only if the Participant delivers to the
Advisory Committee a copy of grades for the most recent quarter or
semester for which grades are available as well as a bill or other
appropriate written evidence sufficient to demonstrate to the Advisory
Committee the continuation by the Participant or dependent of his
course of schooling;
(d) financial hardship to the Participant caused by sickness,
accident or death in the Participant's immediate family; or
(e) such other condition or purpose which the Advisory Committee
shall determine, in accordance with uniform principles consistently
applied, is of sufficiently similar seriousness or worthiness to the
enumerated conditions and purposes as to constitute a financial
hardship;
and further provided, that in no event shall the Advisory Committee grant
such request from a Participant who has previously made a withdrawal
pursuant to this Section 14.01 unless, subsequent to the Plan Year in which
the Participant's most recent such request was made and granted, the
Participant has either completed four (4) additional Years of Service of
vesting purposes or has been a Participant in the Plan for all or part of
at least four (4) additional Plan Years. If the Advisory Committee would
otherwise grant a request for withdrawal for the financing of the purchase
of the Participant's home but for the fact that the Participant has not
obtained a signed contract for the purchase of the home, the Advisory
Committee shall approve the request subject to the condition that
Participant obtain a signed contract for purchase of a home.
9. Section 14.03 is amended to read as follows:
14.03 TIME OF PAYMENT. Except as provided in Section 14.06, following
---------------------
the close of the calendar quarter when any such request for withdrawal
shall be made and approved by the Advisory Committee, the Advisory
Committee shall direct the Trustee to pay and distribute to the Participant
the amount so specified. Payment shall be made on the annual or quarterly
distribution date following the end of the calendar quarter or as soon as
administratively practicable thereafter, or in the case of a request made
and approved in the last quarter of a Plan Year, as soon as
administratively practicable after the year-end adjustments to be made for
such Plan Year shall be completed; and the amount so distributed shall be
charged to the Participant's Account.
6
<PAGE>
10. Section 14.05 is amended to read as follows:
14.05 REQUEST FOR WITHDRAWAL DUE TO FINANCIAL HARDSHIP FOR
----------------------------------------------------------
PARTICIPANTS IN THE POLICYHOLDER SERVICE CORPORATION RETIREMENT PLAN. A
--------------------------------------------------------------------
Participant in the Policyholder Service Corporation Retirement Plan which
was merged with this Plan on December 31, 1991, may request a withdrawal
due to financial hardship of all or any portion, at his option, but not to
exceed the value of such Participant's vested interest which would be
available under Section 5.03, of the balance of his Accrued Benefit
attributable to contributions (including any rollover contributions) made
for Plan Years beginning on or after January 1, 1988 and to any rollover
contributions made prior to January 1, 1988, to the Policyholder Service
Corporation Retirement Plan prior to merger with this Plan, as the same
shall stand on the last day of the calendar quarter in which such request
is made (after completion of all adjustments to be made thereto as of the
end of the calendar quarter in which such request is made); PROVIDED, the
distribution provisions of Section 6.03(E) shall govern any request by a
Participant for a withdrawal from the Participant's Deferral Contributions
Account. Such request for withdrawal shall be made in writing on a form
satisfactory to the Advisory Committee and such request shall be delivered
to the Advisory Committee not more than 90 nor less than 60 days before the
end of the calendar quarter preceding the distribution. The Advisory
Committee shall have complete discretion in approving a request for
withdrawal due to financial hardship and the amount thereof; PROVIDED, the
Advisory Committee shall grant its consent if satisfied from positive
evidence presented by the Participant, that the purpose of the request for
withdrawal due to financial hardship is:
(a) financing of the purchase, major repair or improvement of
the Participant's home;
(b) major illness or disability of the Participant, a member of
his immediate family or one dependent upon him;
(c) college or other post-high school education of the
Participant or one dependent upon him; (a withdrawal pursuant to this
subparagraph (c) shall be distributed in approximately equal annual
installments over the scheduled course of the schooling. Installments
after the initial distribution will be paid only if the Participant
delivers to the Advisory Committee a copy of grades for the most
recent quarter or semester for which grades are available as well as a
bill or other appropriate written evidence sufficient to demonstrate
to the Advisory Committee the continuation by the Participant or
dependent of his course of schooling);
7
<PAGE>
(d) financial hardship to the Participant caused by sickness,
accident or death in the Participant's immediate family; or
(e) such other condition or purpose which the Advisory Committee
shall determine, in accordance with uniform principles consistently
applied, is of sufficiently similar seriousness or worthiness to the
enumerated conditions and purposes as to constitute a financial
hardship.
If the Advisory Committee would otherwise grant a request for
withdrawal for the financing of the purchase of the Participant's home
but for the fact that the Participant has not obtained a signed
contract for the purchase of the home, the Advisory Committee shall
approve the request subject to the condition that Participant obtain a
signed contract for purchase of a home.
The provisions of Sections 14.02, 14.03, 14.04 and 14.06 shall
apply to any withdrawals under this Section 14.05.
11. Section 14.06 is amended to read as follows:
14.06 SPECIAL RULES FOR WITHDRAWAL DUE TO PURCHASE OF HOME. This
----------------------------------------------------------
Section 14.06 shall apply to a Participant whose request or withdrawal for
the financing of the purchase of a home has been conditionally approved
pursuant to Section 14.01. If the Participant has not obtained a signed
contract for the purchase by the distribution date, the Trustee shall
continue to hold such approved amount and distribute it to the Participant
when he obtains a signed contract, provided that the Participant obtains a
signed contract within six (6) months of the originally applicable
distribution date. If the Participant does not obtain a signed contract
within six (6) months of the originally applicable distribution date, the
Participant's request shall be cancelled, and the Participant shall be
permitted to make a new request pursuant to Section 14.01 and 14.05
notwithstanding any requirement that the Participant otherwise wait four
(4) years.
12. Section 15.02 is amended to read as follows:
15.02 VALUE OF PARTICIPANT'S ACCRUED BENEFIT. The value of each
--------------------------------------
Participant's Accrued Benefit shall consist of that portion of the net
worth (at fair market value) of the Trust Fund which the net credit balance
in his Account therein bears to the total net credit balance in the
Accounts of all Participants plus the value of any segregated accounts
hereunder. For purposes of a distribution
8
<PAGE>
under the Plan, the value of a Participant's Accrued Benefit shall be its
value as of the valuation date immediately preceding the applicable
distribution date. Any distribution (other than a distribution from a
segregated Account) made to a Participant (or to his Beneficiary) more than
90 days after the most recent valuation date shall include interest on the
amount of the distribution as an expense of the Trust fund. The interest
accrues from such valuation date to the date of the distribution at a rate
of five percent (5%) per annum.
13. The foregoing amendments shall be effective September 30, 1998.
14. Except as herein amended, the Plan is hereby ratified and confirmed.
IN WITNESS WHEREOF, DST Systems, Inc. and UMB Bank, N.A., have executed
this Second Amendment as of this first day of October, 1998.
DST SYSTEMS, INC.
By: /s/ Kenneth V. Hager
---------------------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer
and Treasurer
UMB BANK, N.A.
By: /s/ Mark P. Herman
---------------------------------------
Mark P. Herman
Senior Vice President
9
<PAGE>
EXHIBIT 21
SCHEDULE OF SUBSIDIARIES OF DST SYSTEMS, INC.
STATE OF INCORPORATION/
NAME OF ENTITY JURISDICTION & DATE DOING BUSINESS AS
- -------------- ----------------------- -----------------
DST International Limited United Kingdom
DST Realty, Inc. Missouri - 5/21/82
Output Technologies, Inc. Missouri - 12/28/90
West Side Investments, Inc. Nevada - 2/11/98
==================================================================
Note: Significant subsidiaries as calculated under Rule 1-02(w) of Regulation
S-X, listed in alphabetical order. DST International Limited, DST Realty, Inc.
and Output Technologies, Inc. individually are not significant subsidiaries
under Rule 1-02(w) of Regulation S-X as of December 31, 1997.
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Joint Proxy Statement-Prospectus
constituting part of this Registration Statement on Form S-4 of DST Systems,
Inc. of our report dated February 26, 1998 relating to the consolidated
financial statements of DST Systems, Inc. appearing in DST Systems, Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1997 which is
attached to this Prospectus as Appendix C and our report dated February 6, 1998
relating to the consolidated financial statements of USCS International, Inc.,
appearing in USCS International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1997 which is attached to this Prospectus as Appendix H. We
also consent to the references to us under the headings "Experts" in such Joint
Proxy Statement-Prospectus and "Selected Consolidated Financial Data" in DST
Systems, Inc.'s Annual Report on Form 10-K. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Consolidated Financial Data."
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Kansas City, Missouri
November 19, 1998
<PAGE>
Exhibit 23.5
Corporate and Institutional
Client Group
101 California Street, Suite 1200
San Francisco, California 94111
415 676 3200
FAX 415 676 3299
[LOGO & MERRILL LYNCH LETTERHEAD APPEARS HERE]
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, California 95670
Dear Sir:
We hereby consent to the use of our opinion letter dated September 2,
1998 to the Board of Directors of USCS International, Inc. included as Appendix
B to the Joint Proxy Statement-Prospectus which forms a part of the Registration
Statement on S-4 relating to the proposed transaction between USCS
International, Inc. and DST Systems, Inc. and to the references of such opinion
in such Joint Proxy Statement-Prospectus under the captions "SUMMARY - Opinion
of USCS' Financial Advisor", "MERGER - Background of the Merger", "MERGER -
USCS' Reasons for the Merger; Recommendation of the USCS Board" and "MERGER -
Opinion of USCS' Financial Advisor". In giving such consent, we do not admit
that we come within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations issued by the Securities and Exchange Commission thereunder, nor do
we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations issued by the
Securities and Exchange Commission thereunder.
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: /s/ Merrill Lynch Pierce Fenner & Smith
---------------------------------------
November 17, 1998
