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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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
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DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
DELAWARE 43-1581814
(State or other jurisdiction (I.R.S. Employer identification
of incorporation or organization) 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:
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Title of each class Name of exchange on which registered
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COMMON STOCK, $0.01 PER SHARE PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
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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 26, 1999:
Common Stock, $.01 par value--$3,416,836,267
Number of shares outstanding of the Company's common stock as of February 26,
1999:
Common Stock, $.01 par value--62,983,157
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:
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PART OF FORM 10-K INTO WHICH
DOCUMENT INCORPORATED
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Company's Definitive Proxy Statement for the 1999 Annual Meeting of Part III
Stockholders, which will be filed no later than 120 days after December 31,
1998
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DST SYSTEMS, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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Cautionary Statement With Respect To Forward-Looking Comments................ 2
PART I
Item 1. Business..................................................................... 2
Item 2. Properties................................................................... 21
Item 3. Legal Proceedings............................................................ 22
Item 4. Submission of Matters to a Vote of Security Holders.......................... 22
Executive Officers and Significant Employees of the Company.................. 23
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters........ 24
Item 6. Selected Consolidated Financial Data......................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................... 26
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................... 42
Item 8. Financial Statements and Supplementary Data.................................. 43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure................................................................... 76
PART III
Item 10. Directors and Executive Officers of the Company.............................. 76
Item 11. Executive Compensation....................................................... 76
Item 12. Security Ownership of Certain Beneficial Owners and Management............... 76
Item 13. Certain Relationships and Related Transactions............................... 76
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 77
Signatures................................................................... 84
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ALLIANT-TM-, AUTOMATED WORK DISTRIBUTOR-REGISTERED TRADEMARK-,
AWD-REGISTERED TRADEMARK-, CLASSROM-REGISTERED TRADEMARK-, CUSTIMA-TM-,
CYBERCSR-REGISTERED TRADEMARK-, DDP/SQL-TM-, DIRECT ACCESS-TM-,
DST-REGISTERED TRADEMARK-, ENCORR-REGISTERED TRADEMARK-, ENTERPRISE REAL-TIME
RATING SYSTEM-TM-, ERTRS-TM-, EXACT VIEW(SM), FAN-REGISTERED TRADEMARK-,
FANMAIL-REGISTERED TRADEMARK-, FAST2000-TM-, FINANCIAL ACCESS
NETWORK-REGISTERED TRADEMARK-, GLOBAL PORTFOLIO SYSTEM-REGISTERED TRADEMARK-,
GPS-REGISTERED TRADEMARK-, HIPORTFOLIO/2-TM-, IMPART/2-TM-, INTEGRATED PHARMACY
NETWORK SYSTEM-TM-, INTELECABLE-REGISTERED TRADEMARK-,
IPNS-REGISTERED TRADEMARK-, OPENDATAWAREHOUSE-TM-, OPENFRONTOFFICE-TM-,
OPENMARKETDATAFEEDS-TM-, OPENMESSENGER-TM-, OPENORDERS-TM-,
OPENPERFORMANCESYSTEM-TM-, OPENPRODUCTS-TM-, OPENREPORTING-TM-, OPS-TM-,
OTI-REGISTERED TRADEMARK-, PALADIGN-TM-, PAS-TM-, PORTFOLIO ACCOUNTING
SYSTEM-TM-, POWERSTORE-REGISTERED TRADEMARK-,
RAPIDCONFIRM-REGISTERED TRADEMARK-, SECURITIES TRANSFER SYSTEM-TM-, STS-TM-,
TA2000-REGISTERED TRADEMARK-, TECHCONNECT-TM-, TRAC-2000-REGISTERED TRADEMARK-,
UPTIX-TM-, VISION MUTUAL FUND GATEWAY-REGISTERED TRADEMARK- referred to in this
Report are included among the Company's trademarks and service marks. AIX,
AS/400-REGISTERED TRADEMARK-,Challenge, COLD, DIRECTV-TM-, FUND/SERV-TM-,
NETWORKING-TM-, ORACLE, OS/2-REGISTERED TRADEMARK-, SYBASE,
UNIX-REGISTERED TRADEMARK-, WINDOWS-REGISTERED TRADEMARK-, WINDOWS
NT-REGISTERED TRADEMARK- and any other brand, service or product names or marks
referred to in this Report are trademarks or services marks, registered or
otherwise, of their respective holders.
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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 amended
Current Report on Form 8-K dated March 25, 1999, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission ("SEC") 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 25, 1999 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 I
ITEM 1. BUSINESS
This discussion of the business of DST Systems, Inc. ("DST" or the "Company")
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 segment and geographic information included in Item 8, Note 13 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.
RECENT DEVELOPMENTS IN THE COMPANY'S BUSINESS
The recent business developments of the Company and the Company's subsidiaries
follow.
USCS MERGER
On December 21, 1998, the Company and USCS International, Inc. completed their
merger (USCS Merger) through the issuance of .62 shares of DST common stock for
each outstanding share of USCS common stock. DST issued approximately 13.8
million shares of common stock in the transaction. The USCS Merger was accounted
for under the pooling of interests accounting method. Accordingly, the DST
financial results have been restated to combine the historical results of
operations of DST and USCS, adjusted for conformity of accounting policies
relating primarily to USCS' depreciation and amortization policies and
accounting for the costs of software developed for internal USCS use. In
connection with the USCS Merger, the Company incurred $26.0 million ($19.4
million after taxes) of merger-related costs which were charged to operations in
December 1998.
Both DST and USCS provide sophisticated information processing and computer
software services and products. DST primarily serves mutual funds, investment
managers, insurance companies, banks and other financial services organizations.
USCS primarily serves cable television, multi-service providers,
telecommunications and utilities companies. As a result of the Merger, the
combined companies have a significant presence in terms of market share in
financial services (primarily the mutual funds industry),
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customer management processing, and output solutions. Management believes the
combined knowledge and expertise of DST and USCS should result in increased
service capabilities and product offerings and should facilitate more rapid
expansion into new markets.
EQUISERVE
In December 1998, Boston EquiServe LP ("Boston EquiServe") and First Chicago
Trust Company of New York completed a transaction creating EquiServe LP
("EquiServe"), the largest securities transfer agent in the U.S. Prior to the
transaction, Boston EquiServe was a limited partnership, 50% owned by Boston
Financial Data Services, Inc. ("BFDS") (a 50% owned joint venture of DST and
State Street Corporation) and 50% by BankBoston Corporation. DST is currently
developing a new securities transfer system ("Fairway") to be used by EquiServe
to process all of its accounts. DST has also agreed with EquiServe to provide
the data processing services for EquiServe to use Fairway. 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 20% direct ownership interest in EquiServe (the "EquiServe
Contribution"). DST will also have a 10% indirect ownership interest in
EquiServe through BFDS after the EquiServe Contribution. DST believes that an
ownership in EquiServe provides the most effective participation in the
opportunities presented by the continued consolidation of the securities
transfer industry. The acceptance of the defined components of Fairway is
currently expected to occur in three stages beginning in the second quarter of
1999 and completing in the third quarter of 2000, at which time DST's
non-EquiServe stock transfer business will be transferred to EquiServe.
CUSTIMA
In August 1998, USCS purchased 100% of the stock of United Kingdom based Custima
International Holdings, plc ("Custima") for approximately $15.4 million
("Custima Acquisition"). Custima provides customer management software for the
utilities industry and positions the Company to expand into and provide software
and services to the U.S. utilities industry.
NARRATIVE DESCRIPTION OF BUSINESS
The Company has several operating business units that offer sophisticated
information processing and software services and products. These business units
have been aggregated into three operating segments (Financial Services, Customer
Management and Output Solutions). In addition, certain investments in equity
securities, financial interests and real estate holdings have been aggregated
into an Investments and Other Segment. A summary of each of the Company's
segments follows:
FINANCIAL SERVICES
The Financial Services Segment provides sophisticated information processing and
computer software services and products primarily to mutual funds, investment
managers, insurance companies, banks and other financial services organizations.
The Company's proprietary software systems include shareowner accounting and
recordkeeping systems offered to the U.S. mutual fund industry; a shareowner
accounting and recordkeeping system 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 managers; an image-based work management system offered primarily to
mutual funds, insurance companies and other financial services organizations;
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.
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The Financial Services Segment distributes its services and products on a direct
basis and through subsidiaries and joint venture affiliates in the U.S., Canada,
United Kingdom, Europe, Australia, South Africa and Asia-Pacific, and to a
lesser degree distributes such services and products through various strategic
alliances.
CUSTOMER MANAGEMENT
The Customer Management Segment provides sophisticated customer management
processing and computer software services and products to cable television,
direct broadcast satellite ("DBS"), wireless and wire-line telephony, utilities
and multi-service providers in more than 30 countries. The Company's proprietary
software systems enable its clients to manage mission-critical customer
relationship functions, including new account set-up, order processing, customer
support, customer billing, management reporting and marketing analysis.
The Customer Management Segment distributes its services and products on a
direct basis and through subsidiaries in North America, the United Kingdom and
parts of Europe and with international alliance partners in other regions of the
world. As a result of the Custima Acquisition, the Segment is offering its
software systems and services to the utilities industry.
OUTPUT SOLUTIONS
The Output Solutions Segment provides complete statement processing services and
solutions, including electronic presentment, which include generation of
customized statements that are produced in sophisticated automated facilities
designed to minimize turnaround time and mailing costs. This Segment provides
statement processing services and solutions in North America to customers of the
Company's Financial Services and Customer Management Segments, and to
telecommunications, utilities and other high volume industries which require
high quality, accurate and timely statement processing.
INVESTMENTS AND OTHER
The Investments and Other Segment holds certain investments in equity
securities, financial interests, the Company's real estate subsidiaries and the
Company's hardware leasing subsidiary. The Company holds certain investments in
equity securities with a market value of approximately $1.0 billion at December
31, 1998, including approximately 8.6 million shares of Computer Sciences
Corporation ("CSC") with a market value of $554.6 million and 6.0 million shares
of State Street Corporation ("State Street") with a market value of $420.8
million. Additionally, the Company owns and operates real estate in North
America which is held primarily for lease to the Company's other business
segments.
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INDUSTRY REVENUE
The Company's sources of revenue by major industries served are presented below.
The industries listed may be served by more than one of the Company's business
segments.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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(DOLLARS IN MILLIONS)
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U.S. REVENUES
Mutual fund / investment
management..................... $ 429.1 39.1% $ 374.0 39.3% $ 335.7 39.8%
Other financial services......... 126.9 11.6 109.2 11.5 91.1 10.8
Cable/satellite TV............... 211.6 19.3 197.6 20.8 172.1 20.4
Telecommunications and
utilities...................... 127.8 11.7 104.5 11.0 93.9 11.1
Other............................ 46.7 4.3 47.1 5.0 55.6 6.6
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Total U.S. revenues.......... 942.1 86.0 832.4 87.6 748.4 88.7
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INTERNATIONAL REVENUES
Mutual fund / investment
management..................... 98.7 9.0 67.4 7.1 57.5 6.8
Other financial services......... 23.6 2.1 24.2 2.5 18.0 2.1
Cable/satellite TV............... 21.6 2.0 16.7 1.8 11.2 1.3
Telecommunications and
utilities...................... 3.1 0.3 1.7 0.2 1.9 0.2
Other............................ 7.0 0.6 7.6 0.8 7.0 0.9
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Total international
revenues................... 154.0 14.0 117.6 12.4 95.6 11.3
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TOTAL REVENUES................... $ 1,096.1 100.0% $ 950.0 100.0% $ 844.0 100.0%
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FINANCIAL SERVICES SEGMENT
The Financial Services Segment attributes its growth to the expansion of the
mutual fund industry and to the Segment's business strategy. The primary
components of the Segment's ongoing business strategy are: (i) enhancement of
its technology base and development of new services and products to strengthen
its position as the leading provider of information processing services to the
U.S. mutual fund market; (ii) expansion into markets where it can provide
similar information processing and computer software services and products; and
(iii) formation of strategic alliances and joint ventures with or acquisitions
of established companies operating in target markets, both in the U.S. 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 timely and accurately process information. Computer
technology has provided an effective means of addressing this demand, but
requires significant capital investment and expertise. As a result, many
financial service organizations
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have relied on outside providers, such as the Company. The Company expects the
information processing needs of these organizations to grow in volume and
complexity presenting the Financial Services Segment with significant
opportunities to sell its services and products.
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YEAR ENDED DECEMBER 31,
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1998 1997 1996
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FINANCIAL SERVICES OPERATING DATA
Revenues (in millions)
U.S............................................................ $ 390.1 $ 338.0 $ 308.2
International.................................................. 117.5 87.0 70.0
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$ 507.6 $ 425.0 $ 378.2
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Mutual fund shareowner accounts processed (millions)
U.S............................................................ 49.8 45.0 41.1
Canada......................................................... 1.6 0.9 0.3
United Kingdom (1)............................................. 1.4 1.0 0.4
TRAC-2000 mutual fund accounts (millions) (2).................... 2.5 1.9 1.3
TRAC-2000 participants (thousands)............................... 905 696 560
IRA mutual fund accounts (millions) (2).......................... 12.0 9.6 8.7
Portfolio Accounting System portfolios........................... 1,962 1,925 1,725
Automated Work Distributor workstations.......................... 45,300 35,100 19,700
</TABLE>
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(1) Processed by EFDS, an unconsolidated affiliate of the Company
(2) Included in U.S. mutual fund shareowner accounts processed
U.S. MUTUAL FUND SHAREOWNER PROCESSING
Most of the Financial Services Segment'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, timely and accurate accounting and recordkeeping of
shareowner and fund investment activity is critical.
In addition, investors' attraction to a wide array of mutual fund investment
products with increasingly specialized features has significantly increased the
number of mutual fund shareowner accounts, the volume of transactions and the
complexity of 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. 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.
SHAREOWNER ACCOUNTING AND RECORDKEEPING
The proprietary applications system for U.S. mutual fund recordkeeping and
accounting is TA2000, which performs shareowner 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
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and other distributors; processing dividends; creating and tabulating proxies;
reporting sales; and providing information for printing of shareowner
transaction and statement 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, 1998, the Company provided shareowner accounting
processing services for approximately 49.8 million U.S. mutual fund shareowner
accounts.
Mutual fund shareowner services are offered 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 creates electronic
images of transactions and enables such images, together with the status of the
related transactions, 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 a per account and number of funds basis for system
processing services and on a per account, number of fund 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), 403(b), money purchase 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 potential for reconciliation problems that occur
when different systems are used for 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 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
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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 through the Internet.
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 pages and
enables the shareowners to 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 DATA SERVICES, INC. ("BFDS")
BFDS, a 50% owned joint venture with State Street, is an important distribution
channel for the Company's services and products. BFDS combines use of the
Company's proprietary applications and output solutions capabilities with the
marketing capabilities and custodial services of State Street to provide
full-service shareowner accounting and recordkeeping services to over 138 U.S.
mutual fund companies. 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
Financial Services Segment's largest customer, accounting for approximately
12.2% of the Segment's revenues in 1998.
AUTOMATED WORKFLOW MANAGEMENT
The Company's Automated Work Distributor ("AWD") system is a document based,
intelligent workflow and customer relationship management system. AWD captures
transactions at their source (such as paper, phone calls or faxes), converts
them into electronic documents, stores and electronically moves them to the
appropriate work area and person for processing. AWD integrates high-speed
scanning, character recognition, digitized voice, call center technology,
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.
Initially introduced to enhance the Company's mutual fund shareowner
recordkeeping 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
Windows, OS/2 and thin 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 U.S.,
Canada, United Kingdom, Europe, Australia, South Africa and Asia-Pacific. In
addition, Computer Sciences Corporation Financial Services Group ("CSC-FSG")
distributes the Company's AWD product to life and property and casualty
insurance companies worldwide.
The Company has developed modular components enabling AWD to support various
means of customer interaction. These products include EnCorr, which automates
the creation and printing of correspondence; PowerStore, which enables optical
media access for AWD users; AWD/RIP, which imports work into AWD from other
computer systems and external networks; AWD/ST which fully automates transaction
processing; and AWD/NetServer to extend AWD functionality to intranet and
Internet environments. AWD/Voice was developed to support the infrastructure
requirements of mid-to-high volume call centers. AWD/Voice integrates call
record/playback technology and computer-telephony integration technology into
the AWD system. AWD/Voice supports various call center desktop applications and
has been implemented in insurance and mutual funds environments.
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The Company derives AWD revenues from multi-year bundled service and usage
agreements based on the number of workstations accessing the software and fixed
fee perpetual license agreements that may include provisions for additional
license payments in the event the number of users increases. The Company also
derives AWD revenues from fees for customized installation and programming
services and annual maintenance fees.
PORTFOLIO ACCOUNTING AND INVESTMENT MANAGEMENT PRODUCTS
The Company offers products that support the portfolio accounting and investment
management functions of the financial services industry. These products include
the Portfolio Accounting System ("PAS"), HiPortfolio/2, OpenProducts and Global
Portfolio System ("GPS"). The Company 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. The Company derives revenues generally based on the number of
mutual fund portfolios processed by PAS.
HiPortfolio/2 is also designed for medium and large investment management firms
that are seeking a turnkey system for investment accounting that can meet their
local and international requirements with a minimum amount of customization.
HiPortfolio/2 is a scalable, comprehensive front, middle and back office
solution.
The range of OpenProducts include OpenFrontOffice (a front office GUI-based
trading system), OpenPerformance (a performance measurement and attribution
system), OpenDataWarehouse, OpenOrders (automated order management),
OpenReporting (high quality desktop publishing and client reporting),
OpenMessenger (Straight Through Processing), OpenMarketDataFeeds (management of
external market data) and a number of others under development.
GPS is designed for medium and large investment management companies with
advisory accounts that 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 can seamlessly integrate with the Company's range of
OpenProducts or can interface with a wide range of third-party systems.
The Company derives revenues from HiPortfolio/2, OpenProducts and GPS, from
license fees, fees for customized installation and programming services and
annual maintenance fees.
SECURITIES TRANSFER PRODUCTS
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 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. EquiServe currently uses
STS to process approximately 5.4 million accounts.
See "Recent Developments" above for further discussion of EquiServe.
9
<PAGE>
WINCHESTER INFORMATION PROCESSING SERVICES
Winchester Information Processing Services primarily supports the computing
needs of the Company's Financial Services Segment with two data centers in
Kansas City, Missouri.
The Winchester Data Center ("Winchester") is the Company's primary central
computer operations and data processing facility. Winchester has a total of
163,000 square feet, of which 76,000 square feet is raised floor computer room
space. Winchester has mainframe computers with a combined processing capacity of
over 4.3 billion instructions per second and direct access storage devices with
an aggregate storage capacity that exceeds 21 trillion bytes. Winchester also
contains over 150 servers supporting NT, UNIX, and AS/400 small and midrange
computing environments. These servers are used to support DST's products and
processing for certain of the Company's affiliates. The physical facility is
designed to withstand natural disasters including tornado-force winds.
The Poindexter Data Center ("Poindexter") supports 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. The computer room houses IBM
AS/400 computers and optical storage systems, which support over 2,000 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 250 servers
supporting various Company products and Winchester's remote tape storage using
IBM's automated tape libraries.
Both data centers are staffed 24-hours-a-day, seven-days-a-week and have
self-contained power plants with mechanical and electrical systems designed to
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 96,000 computer users,
has redundant pathing and software which provide 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 recovery
provider's facility and network to enable client access to the disaster recovery
facility. Poindexter's AS/400 processors and the AS/400 processors at Winchester
provide contingency plan capabilities for each other's processing needs. The
Company regularly tests the disaster recovery processes for both data centers.
ARGUS HEALTH SYSTEMS, INC. ("ARGUS")
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 solutions
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.
10
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INTERNATIONAL BUSINESSES
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 40
countries worldwide, serviced by offices in the United Kingdom, U.S., Australia,
New Zealand, Hong Kong, Singapore, Thailand, and the South Africa. Its primary
applications include HiPortfolio/2, a client server based investment management
system and OpenProducts, a series of high technology products directly
integrated with HiPortfolio/2. Among DST International's other products are
Impart/Uptix, Paladign and GPS. 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 the Company and State Street, EFDS provides
full and remote service processing for unit trusts and related products serving
1.4 million unitholder accounts at December 31, 1998. During 1998, EFDS began
implementation of FAST2000, a new unit trust accounting system. The Company
believes that the successful conversion of clients onto the new system, which is
expected to be completed by the end of 1999, should improve the profitability of
the joint venture in 2000 and allow it to pursue new clients in the United
Kingdom market.
DST CANADA, INC. ("DST CANADA")
DST Canada provides remote mutual fund shareowner processing and licenses its
mutual fund shareowner system to mutual fund companies primarily in the Canadian
financial services market. Revenues are derived from providing remote mutual
fund shareowner processing services and time and material fees for
client-specific enhancements and support to the remote processing system, and to
a lesser degree from licensing its mutual fund shareowner system to mutual fund
companies. DST Canada is currently enhancing its system for operation in the
Japanese marketplace in anticipation of a developing Japanese mutual fund
market.
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 U.S. off-shore mutual funds using TA2000.
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.
Headquartered in Chicago, DST Catalyst principally derives its revenues from
international locations where its software systems are being operated or are
installed. The Chicago Stock Exchange holds a 19% interest in DST Catalyst.
CUSTOMER CONCENTRATION
The Financial Services Segment's five largest clients accounted for 29.6%,
30.1%, and 29.9% of segment revenues in 1998, 1997 and 1996, respectively. BFDS,
the Segment's largest customer, accounted for 12.2%, 10.9%, and 11.4% of segment
revenues in 1998, 1997 and 1996, respectively.
11
<PAGE>
MARKETING / DISTRIBUTION
In the U.S. and Canada, the Financial Services Segment identifies potential
users of its products and services and tailors its marketing programs to focus
on their needs. The Segment's marketing efforts also include cross-selling the
Company's wide range of services and products to its existing clients. The
Segment's sales efforts are closely coordinated with its joint venture and
strategic alliance partners.
Sources of new business for the Segment include (i) existing clients,
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.
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.
DST International markets its investment management and portfolio accounting
software and services directly to medium and large investment management firms.
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 that can sell, install and implement these products.
COMPETITION
The Company believes that competition in the markets in which the Financial
Services Segment 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
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's shareowner accounting systems compete not only with third-party
providers but also with in-house systems and broker-dealer firms that perform
sub-accounting services for the brokerage firms' customers that purchase or sell
shares of mutual funds of the Company's clients. 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 believes its most significant competitors for third party
shareowner accounting systems are First Data Investor Services, Inc. and Sungard
Data Systems, Inc.
The Company has significant competition with its portfolio accounting and
investment management systems. Principal competitors are third-party software
service providers and those companies that 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 believes its most significant competitors for
portfolio accounting
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and investment management systems are Sungard Data Systems, Inc., State Street
Corporation (including Princeton Financial Systems, Inc.), Misys plc, SS&C
Technologies, Inc., and Datastream Systems, Inc.
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 Company
believes its most significant competitors for automated workflow systems are
Filenet Corporation, Pegasystems Inc., and Staffware plc.
CUSTOMER MANAGEMENT SEGMENT
The Customer Management Segment provides sophisticated customer management
processing and computer software services and products to cable television,
direct broadcast satellite ("DBS"), wireless and wire-line telephony,
multi-service providers and utilities which serve more than 44 million end-users
worldwide. The Company's proprietary software systems enable its clients to
manage mission critical customer relationship functions, including new account
set-up, order processing, customer support, customer billing, management
reporting and marketing analysis. The Company's software currently supports more
than 40% of U.S. cable and satellite television subscribers and is used by many
of the largest cable television service providers and the largest DBS provider
in the U.S.
The Segment primarily derives its revenues for customer management processing
and computer software services and products based on the number of end-users of
the services offered by its clients, the number of bills mailed and/or the
number of images produced under multi-year bundled service and usage agreements.
These agreements are typically subject to periodic renewals and inflation-based
fee adjustments. Certain of the Company's customers license the customer
management software under term license agreements.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CUSTOMER MANAGEMENT OPERATING DATA
Revenues (in millions)
U.S............................................................... $ 198.4 $ 186.2 $ 161.1
International..................................................... 23.3 16.7 11.2
--------- --------- ---------
$ 221.7 $ 202.9 $ 172.3
--------- --------- ---------
--------- --------- ---------
Cable/satellite TV subscribers processed (millions)
Total before discontinued customer................................ 35.6 30.8 26.9
Discontinued customer(1).......................................... 2.4 10.9 11.4
--------- --------- ---------
38.0 41.7 38.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) See also discussion in Customer Management Segment--Customer Concentration
The Company offers a variety of customer management services and products
designed to meet the needs of both global and local service providers. Most of
the Company's products are scaleable and are available in basic systems with
optional modules, including the Company's new Internet-based customer support
products, CyberCSR and TechConnect, which allow the service provider to design a
customized system which can effectively manage a growing customer base.
13
<PAGE>
SYSTEMS AND SERVICES
INTELECABLE
Intelecable is designed to support single and multi-service providers worldwide.
Intelecable is available on either a standalone or service bureau basis and
supports a diverse array of communications services, including cable television,
telephony, combined cable/telephony, interactive video and DBS. Intelecable is
based on an open systems, relational database architecture, which facilitates
customization and interoperability with other information systems without
complex code changes. Intelecable may be operated in a variety of foreign
languages, including Japanese and Chinese. First installed in 1993, Intelecable
is now installed in over 100 locations worldwide.
DDP/SQL
The Company's primary software system for the traditional North American cable
television provider market is DDP/SQL. Many of the largest cable television
service providers in the U.S. use the DDP/ SQL system. The Company offers
DDP/SQL on either a stand-alone or a service bureau basis. Stand-alone systems
currently support approximately 84% of the DDP/SQL client subscriber base, while
approximately 16% 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 access the Company's on-line processors via wide area
networks. DDP/SQL runs on 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's Investments and Other Segment also provides lease
financing and maintenance services primarily for companies operating systems on
a stand-alone basis.
SUBSCRIBER TRANSACTION MANAGEMENT SYSTEM ("STMS")
The Subscriber Transaction Management System was developed to manage the
customer management and output solutions related activities for DirecTV, Inc.,
the largest DBS provider in the U.S. The Company is expanding the scope of STMS
to address the needs of other direct broadcast satellite operators that provide
non-television and interactive services and to international providers.
ALLIANT
The Company markets its Alliant 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. Alliant 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.
ENTERPRISE REAL-TIME RATING SYSTEM ("ERTRS")
The Enterprise Real-Time Rating System is a rating engine designed to rate
cellular, wireline, data and Internet services, providing a complete convergence
rating system for carriers that bundle multiple service offerings to meet
customers' needs. The Company is currently marketing the ERTRS system on a
stand-alone basis and has integrated the ERTRS capability into the Intelecable
product.
CUSTIMA
The Company's CUSTIMA software system supports the customer management
activities of electric, gas, water and waste utilities. Functionality of the
application includes customer marketing, meter
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<PAGE>
management, complex billing, credit management and customer contact processing.
CUSTIMA is an open system product that runs on six hardware platforms.
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 operate 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 software provides
interactive instruction and product training on CD-ROM. The Company maintains
training facilities in California and the U.K.
CLIENT SUPPORT AND CARE
The Company provides worldwide training and support to its clients including
broad-based, 24-hour, 7-day support and technical assistance. Internationally,
Intelecable is supported by teams located in the U.S. and the U.K. as well as by
alliance partners.
CUSTOMER CONCENTRATION
The Customer Management Segment's five largest clients accounted for 54.8%,
58.5%, and 57.4% of segment revenues in 1998, 1997 and 1996, respectively.
Tele-Communications, Inc. ("TCI"), the Customer Management Segment's largest
customer, accounted for $35.9 million or 16.2%, $48.7 million or 24.0%, and
$52.0 million or 30.2% of total revenue in 1998, 1997, and 1996, respectively.
See also discussion of the Customer Management Segment's revenues and TCI under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 in this Form 10-K.
MARKETING / DISTRIBUTION
Software and services are sold primarily to cable, DBS, utility 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 Segment's international sales staff is coordinated by geographic area,
including dedicated account and technical support personnel located in the U.S.,
U.K., Brazil and Australia. In addition to direct sales, the Company has
contracted with alliance partners throughout the world who are responsible for
sales, marketing, support and local customization.
COMPETITION
The market for the Company's products and services in the Customer Management
Segment 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 customer management software systems are Convergys, Inc. and CSG
Systems International, Inc.
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.
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<PAGE>
OUTPUT SOLUTIONS SEGMENT
The Output Solutions Segment provides statement processing services and
solutions to customers of the Company's Financial Services and Customer
Management business segments, other parties in the telecommunications and
utilities industries as well as other industries which require high quality,
accurate and timely statement processing. The segment 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 statements as a communication and
marketing tool.
The Company is among the largest first class mailers in the U.S., mailing nearly
1.5 billion items in 1998. Revenues are generally dependent on the volume of
statements processed. The sources of revenue by major industry served are listed
below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OUTPUT SOLUTIONS OPERATING DATA
Revenues (in millions)
U.S. revenues
Mutual fund/investment management............................. $ 94.8 $ 84.5 $ 77.7
Other financial services...................................... 63.5 57.3 39.2
Cable/satellite TV............................................ 67.0 62.2 56.4
Telecommunications and utilities.............................. 126.0 104.5 93.9
Other......................................................... 50.2 44.0 52.7
--------- --------- ---------
401.5 352.5 319.9
--------- --------- ---------
International revenues
Mutual fund/investment management............................. 1.6 0.3 0.1
Other financial services...................................... 3.2 4.4 6.2
Telecommunications and utilities.............................. 1.4 1.7 1.9
Other......................................................... 7.0 7.5 6.1
--------- --------- ---------
13.2 13.9 14.3
--------- --------- ---------
$ 414.7 $ 366.4 $ 334.2
--------- --------- ---------
--------- --------- ---------
Images produced (millions)...................................... 5,087 4,221 3,806
Items mailed (millions)......................................... 1,490 1,331 1,206
</TABLE>
OUTPUT SERVICES AND SOLUTIONS
Statement processing services and solutions are provided in a fully integrated
and automated production environment that rapidly and cost-effectively transform
electronic data received from the client into informative, accurate and
customized statements. Because of its highly automated production environment,
the Company is able to maximize postal savings while minimizing delivery time
for its clients.
For the financial services industry, the Company performs electronic printing,
variable and selective insertion, presorted mailing and distribution of custom
designed shareowner and other account based communications, including
transaction confirmations, dividend checks, account statements and year-end tax
reports.
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<PAGE>
The Company provides statement processing services and solutions to the
cable/satellite TV, telecommunications, utilities, transportation and other
service industries. The Company cost-effectively transforms electronic data
received from the client into informative, accurate and customized billing
statements.
To address the needs of multi-service providers, the Company also offers
consolidated statements, 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 statement
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 statement processing
functions to the Company.
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 international markets.
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 development of electronic statement presentment. The
proliferation of on-line services and the Internet provides an opportunity for
service providers to provide statements to customers electronically through
personal computers or related devices. The Company believes that, as electronic
statements and payment solutions become more accepted, communications service
providers, utilities, financial services and other industries will require
electronic statement presentment capabilities. The Company 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 statementing
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.
RAPID CONFIRM
For the brokerage industry, the Company offers Rapid Confirm, one of the fastest
ways to deliver trade confirmations. Utilizing MailNet, the largest domestic
distributive print network, the Company provides speed of delivery through the
United States Postal Service (USPS). With distributive print-mail sites
strategically located throughout the U.S., 90 percent of the Company's mail is
delivered in two days or less at discounted presort rates. Confirmations can be
consolidated, householded, and may be printed with dynamic highlight color for
greater visual impact.
STATEMENT-BASED MARKETING SERVICES
The Company provides statement-based marketing services that allow its clients
to transform regular customer statements into communication tools. The 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
17
<PAGE>
statement to reinforce a corporate image, advertise special offers and features,
deliver customer-specific messages and otherwise market their services to their
customers.
COMPUTER OUTPUT LASER DISC
Info-Disc allows clients to access accurate images of printed customer documents
on-line as they appear on paper, including logos, personalized pie charts and
custom graphics. Info-Disc can index up to 255 data fields and can utilize up to
five criteria at a time, making search and retrieval of information quick and
efficient. Info-Disc also allows the flexibility to transfer customer
information to spreadsheets and create reports from indexed data. The Company
also holds a 20% interest in PSI Technologies Corporation ("PSI"), the developer
of the Info-Disc software technology. In conjunction with this investment, the
Company exclusively markets PSI's software technology to the mutual fund
industry.
EXACT VIEW
An alternative viewing mechanism to the Computer Output Laser Disc is Exact
View, which combines the Company's statement data management and imaging
capabilities with proven archive technology to allow customer service
representatives to view an exact replica of each customer statement. Exact View
is a client-server solution on an open platform architecture that works easily
with standard industry products. The database is compatible with a variety of
server platforms leveraging standard database software.
DIRECT ACCESS
Direct Access is a unique web-based program that enables our billing customers
to have real-time monitoring and reporting functions. Using standard internet
browsers and entry through secured access to our extranet, customers can monitor
their data from the time of completed transmission to the moment it leaves the
Company's facilities, thus providing the power to view every step of the process
remotely.
COMPUTER OUTPUT MICROFILM
For statement information that must be stored for long periods of time for
historical or legal purposes and referenced only occasionally, the Company
offers a computer output to microfilm product, usually in the form of
microfiche. Retrieval costs are considerably lower for this type of media than
for others.
FULFILLMENT AND TELEMARKETING
The Company offers a variety of telemarketing and fulfillment services including
i) Call Center Management to support the literature distribution needs of its
clients; ii) Pick & Pack Services offering dynamic package configuration and
inventory management; and iii) Replenishment Print Services offering
print-on-demand technology; and iv) Electronic fulfillment over the Internet.
PRODUCTION FACILITIES
The Company's primary production facilities are in Northern California, Kansas
City, Hartford, Boston, Denver, St. Louis, New York, and Toronto. These
facilities use both roll form and sheet fed production processes and can perform
variable and selective insertion and pre-sorted mailing.
The Company has patented processes and technologies, that provide a fully
integrated, computerized and automated production environment. The production
system (i) processes, logs, verifies and authenticates customer data, (ii)
creates automated production controls for a statement, including form bar codes,
weight and thickness parameters, unique statement tracking numbers, "due out"
dates, address
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correction, carrier route/delivery point bar codes and postal processing
parameters, (iii) models production runs 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 architecture and has high-speed data-transmission capabilities. A
local area network links the production equipment to the production control
system.
CUSTOMER CONCENTRATION
The Output Solutions Segment's five largest clients accounted for 26.5%, 29.6%
and 31.8% of the segment's revenues in 1998, 1997 and 1996, respectively. The
segment's largest customer, Ameritech Corporation, accounted for $41.4 million
or 10.0%, $39.3 million or 10.7%, and $41.1 million or 12.3% of total revenue in
1998, 1997, and 1996, respectively.
MARKETING / DISTRIBUTION
The Company believes that sales of separate statement processing services to
financial services, telecommunications, cellular, utility, 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
statement processing marketing effort that seeks to exploit what the Company
believes is significant growth potential in that market. The Company has entered
into alliances with partners such as Xerox, Mellon Bank, LHS Group, Microsoft,
Intuit, CheckFree and CyberCash to jointly market its statement processing and
electronic presentment capabilities.
The Company's Output Solutions Segment distributes its products to the mutual
fund, banking, brokerage, insurance, healthcare, telecommunications,
transportation, utilities and other service industries. A team of client
administrators manages the needs of clients and a national sales force supports
efforts in the U.S. and Canada.
COMPETITION
The key competitive factors in the Output Solutions Segment are quality of
services, quality of customer support, ability to handle large volumes at month
and quarter ends and speed of production. The most significant competitors for
statement/output solutions services are in-house service providers, local
companies in the cities where the Company's printing operations are located and
other national competitors such as Moore Corporation Ltd. The Company believes
that it competes effectively with others in the market.
INTELLECTUAL PROPERTY
The Company holds 21 U.S. patents covering various aspects of its statement
processing services. In addition, the Company has applied for 7 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, 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.
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INVESTMENTS AND OTHER SEGMENT
The Company's Investments and Other Segment is comprised of certain investments
in equity securities, financial interests and the Company's real estate and
hardware leasing subsidiaries and affiliates.
INVESTMENTS
The Company holds certain investments in equity securities with a market value
of approximately $1.0 billion at December 31, 1998, including approximately 8.6
million shares of Computer Sciences Corporation with a market value of $554.6
million and 6.0 million shares of State Street Corporation with a market value
of $420.8 million.
REAL ESTATE
The Company's real estate subsidiaries own approximately 193,000 square feet of
office space and 187,000 square feet of production facilities which are held
primarily for lease to the Company's other business segments. The real estate
subsidiaries also hold master leases in certain properties which are leased to
the Company's operating segments.
HARDWARE LEASING
The Company provides hardware leasing services to selected customer management
software clients that purchase stand-alone systems primarily in the U.S.
SOFTWARE DEVELOPMENT AND MAINTENANCE
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. Costs and expenses include approximately $165.5 million, $135.6
million and $107.2 million in 1998, 1997 and 1996, respectively, for software
development and maintenance and enhancements to the Company's proprietary
systems and software products. Capitalized development costs for systems to be
sold or licensed to third parties were approximately $2.5 million, $3.1 million
and $0.3 million in 1998, 1997 and 1996, respectively.
EMPLOYEES
As of December 31, 1998, the Company and its majority owned subsidiaries
employed approximately 8,600 employees, including approximately 3,800 in the
Financial Services Segment, 1,000 in the Customer Management Segment and 3,800
in the Output Solutions Segment. In addition, 50% owned unconsolidated
affiliates of the Company and its subsidiaries employed approximately 4,200
employees, including approximately 3,400 at BFDS. 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.
20
<PAGE>
ITEM 2. 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>
OWNED/ SQUARE
LOCATION USE (1) LEASED (2) FEET
- --------------------------------------------------------------------------- -------------- ----------- ---------
<S> <C> <C> <C>
FINANCIAL SERVICES SEGMENT (3)
Kansas City, MO............................................................ Data center Owned 163,000
Kansas City, MO............................................................ Office space Owned 132,000
Kansas City, MO............................................................ Production Owned 16,000
Kansas City, MO............................................................ Office space Leased 701,000
Boston, MA................................................................. Office space Leased 24,000
Canada..................................................................... Office space Leased 34,000
United Kingdom............................................................. Office space Leased 47,000
Australia.................................................................. Office space Leased 28,000
CUSTOMER MANAGEMENT SEGMENT (3)
Charlotte, NC.............................................................. Office space Leased 36,000
El Dorado Hills, CA........................................................ Office space Owned 48,000
Rancho Cordova, CA......................................................... Office space Leased 152,000
United Kingdom............................................................. Office space Leased 30,000
OUTPUT SOLUTIONS SEGMENT (3)
El Dorado Hills, CA........................................................ Office space Leased 29,000
El Dorado Hills, CA........................................................ Production Owned 366,000
Sacramento, CA............................................................. Production Leased 304,000
Kansas City, MO............................................................ Production Owned 306,000
Kansas City, MO............................................................ Office space Owned 13,000
Kansas City, MO............................................................ Production Leased 32,000
East Hartford, CT.......................................................... Production Leased 75,000
Braintree, MA.............................................................. Production Leased 81,000
Westwood, MA............................................................... Production Leased 128,000
New York, NY............................................................... Production Leased 30,000
St. Louis, MO.............................................................. Production Leased 40,000
Denver, CO................................................................. Production Leased 94,000
Mt. Prospect, IL........................................................... Production Leased 110,000
Wheeling, IL............................................................... Production Leased 26,000
Canada..................................................................... Production Owned 61,000
Canada..................................................................... Production Leased 66,000
INVESTMENTS AND OTHER SEGMENT
Kansas City, MO............................................................ Office space Owned 81,000
Kansas City, MO............................................................ Office space Leased 13,000
</TABLE>
The Company also owns approximately 278 acres of undeveloped land adjacent to
its buildings in El Dorado Hills, CA and a 515,000 square foot underground
storage facility in the Kansas City, MO area that is primarily leased to third
parties.
(1) Property specified as being used for production in the above table includes
space used for manufacturing and warehouse space.
21
<PAGE>
(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 of
approximately 101,000 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, New Zealand and Brazil. The property
listed in the table as owned by the Company is subject to mortgage
indebtedness in an aggregate amount of approximately $24.8 million as of
December 31, 1998.
(3) Includes approximately 517,000 square feet of property owned or leased by
the Company's real estate subsidiaries that are leased to other segments of
the Company, including approximately 285,000 sq. ft. in the Financial
Services Segment, 48,000 sq. ft. in the Customer Management Segment and
184,000 in the Output Solutions Segment.
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, management believes,
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Shareholders of DST Systems, Inc. on
December 21, 1998. Proxies for the meeting were solicited pursuant to Regulation
14A. Listed below are the matters voted on at the Company's Special Meeting.
These matters are fully described in the Company's Joint Proxy
Statement/Prospectus dated November 25, 1998. Beneficial owners of 43,496,806
shares, or 88.7%, of the shares of Common Stock outstanding on the record date
of November 6, 1998, were present in person or by proxy at the special meeting.
These shares were voted on the matters considered as follows. Based upon votes
required for approval, each of the matters passed.
1) Approval of the USCS Merger, including issuance of DST Common Stock pursuant
to the merger agreement between the Company and USCS International:
<TABLE>
<S> <C>
For........................... 43,337,888
Against....................... 108,665
Withheld...................... 50,253
----------
Total......................... 43,496,806
----------
----------
</TABLE>
2) Amendment of DST Stock Option and Performance Award Plan to increase the
number of shares of DST Common Stock available for awards thereunder:
<TABLE>
<S> <C>
For........................... 30,669,269
Against....................... 12,771,878
Withheld...................... 55,659
----------
Total......................... 43,496,806
----------
----------
</TABLE>
22
<PAGE>
EXECUTIVE OFFICERS AND SIGNIFICANT EMPLOYEES 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 11, 1999.
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.
THOMAS A. MCDONNELL, age 53, 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 September 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, Inc. ("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 56, is Executive Vice President of the Company. He has
served as 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.
JAMES C. CASTLE, PH.D., age 62, has served as director of the Company since
December 1998 and as Chairman, Chief Executive Officer and director of USCS
since 1992.
CHARLES W. SCHELLHORN, age 50, has served since March 1999 as Vice Chairman of
USCS. He had previously served since 1990 as President and since 1991 as
Chairman of Output Technologies, Inc., a wholly owned subsidiary of the Company.
JONATHAN J. BOEHM, age 38, 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 an
officer of Kemper Service Company from October 1990 through November 1997.
ROBERT C. CANFIELD, age 60, has served as Senior Vice President, General Counsel
and Secretary of the Company since August 1995 and as Senior Vice President-Law
of the Company from March 1992 to August 1995.
KENNETH V. HAGER, age 48, 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 and internal audit functions of the Company. He
is a director of Digital Holdings, Inc.
C. RANDLES LINTECUM, age 54, has served as President of Output Technologies,
Inc. since March 1999. He has served since July 1995 as President of
International Billing Services, Inc., a wholly owned subsidary of USCS. He
served from February 1995 to July 1995 as Senior Vice President Marketing and
Distribution of USCS and from May 1993 to February 1995 as Vice President
Corporate Development of USCS.
23
<PAGE>
JOHN W. MCBRIDE, age 57, joined the Company in 1985 and has served as Group Vice
President of the Company since 1993. He is responsible for the operations of the
Company's Winchester and Poindexter Data Centers.
MICHAEL F. MCGRAIL, age 51, has served since April 1995 as President of
CableData, Inc., a wholly owned subsidiary of USCS. Since December 1993, he has
been President and Managing Director of CableData International, Ltd., a wholly
owned subsidiary of CableData, Inc.
ROBERT L. TRITT, age 43, joined the Company in 1977 and has served as Group Vice
President of the Company since 1989. He is responsible for the Company's remote
mutual fund processing operations and for mutual fund product development.
MICHAEL A. WATERFORD, age 56, 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. MICHAEL WINN, age 52, has served since June 1993 as Managing Director of DST
International Limited, a wholly owned subsidiary of 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" on the New York Stock
Exchange ("NYSE") and the Chicago Stock Exchange. As of March 17, 1999, there
were approximately 27,000 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 14, Quarterly
Financial Data (Unaudited) ("Note 14"), in this Form 10-K is incorporated by
reference in partial response to this Item 5. The prices set forth in Note 14 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, 1998
was $57.0625.
24
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. This selected consolidated financial data has been derived from the
Company's consolidated financial statements which have been restated to reflect
the USCS Merger. The selected consolidated balance sheet data as of December 31,
1998 and 1997 and the selected consolidated income statement data for the years
ended December 31, 1998, 1997 and 1996 were derived from the Company's audited
consolidated financial statements and the related notes thereto which are
included in Item 8 of this Annual Report on Form 10-K. The selected consolidated
balance sheet data as of December 31, 1996, 1995 and 1994 and the selected
consolidated income statement data for the years ended December 31, 1995 and
1994 were derived from the separate audited financial statements of DST and USCS
as adjusted for the USCS Merger not included 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 Annual Report 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues........................................ $ 1,096.1 $ 950.0 $ 844.0 $ 713.4 $ 590.5
Costs and expenses.............................. 834.7 719.6 653.0 571.6 473.0
Depreciation and amortization................... 108.8 103.5 99.1 87.7 68.7
Merger charges and other expenses (1) (2)....... 33.1 13.7
--------- --------- --------- --------- ---------
Income from operations.......................... 119.5 126.9 78.2 54.1 48.8
Interest expense................................ (8.6) (8.5) (10.5) (26.9) (18.3)
Other income, net............................... 7.4 5.8 4.5 4.9 3.5
Gains on sales of Continuum and IFTC (2)........ 223.4 43.6
Equity in earnings (losses) of unconsolidated
affiliates, net of income taxes............... (2.7) (1.3) (4.0) 6.4 22.2
--------- --------- --------- --------- ---------
Income before income taxes and minority
interests..................................... 115.6 122.9 291.6 82.1 56.2
Income taxes.................................... 44.3 42.9 113.3 49.5 18.9
--------- --------- --------- --------- ---------
Income before minority interests................ 71.3 80.0 178.3 32.6 37.3
Minority interests.............................. (0.3) 0.6 0.5 (1.1)
--------- --------- --------- --------- ---------
Net income (1) (2).............................. $ 71.6 $ 79.4 $ 177.8 $ 32.6 $ 38.4
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Basic earnings per share (3).................... $ 1.14 $ 1.25 $ 2.82 $ 0.71 $ 0.90
Diluted earnings per share (3).................. 1.11 1.23 2.78 0.70 0.89
Total assets.................................... $ 1,897.0 $ 1,548.5 $ 1,303.7 $ 912.8 $ 659.4
Long-term obligations........................... 49.7 97.4 81.5 103.6 213.4
Cash dividends per common share (3)............. $ $ $ $ $
</TABLE>
- ------------------------
(1) The Company recognized $33.1 million in merger and integration costs in
1998. See Note 3 to the consolidated financial statements.
(2) In the third quarter 1996, The Continuum Company, Inc. merged with Computer
Sciences Corporation ("CSC") in a tax-free share exchange and as a result
became a wholly owned subsidiary of CSC. As a result of the CSC/Continuum
merger, the Company recognized a one-time gain. See Note 3 to the
consolidated financial statements.
(3) The Company's capital structure substantially changed as a result of public
offerings of the Company's common stock in the fourth quarter 1995 and
second quarter 1996. Earnings per share data
25
<PAGE>
prior to the 1995 public offering is reflective of being a wholly owned
subsidiary of Kansas City Southern Industries, Inc. ("KCSI"). The Company
paid cash dividends of $150.0 million and $6.2 million to KCSI in 1995 and
1994, 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 1995 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 are 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 amended
Current Report on Form 8-K dated March 25, 1999, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission ("SEC") 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 25, 1999 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
Originally established in 1969, DST is a leading global provider of
sophisticated information processing and computer software services and products
to the financial services industry (primarily mutual funds and investment
managers), communications industry and other service industries. In December
1998, USCS International, Inc. ("USCS") became a wholly owned subsidiary of the
Company through the issuance of approximately 13.8 million shares of common
stock ("USCS Merger"). The USCS Merger was accounted for under the pooling of
interests accounting method. The Company's business units have been aggregated
into three operating segments (Financial Services, Customer Management and
Output Solutions). In addition, certain investments in equity securities,
financial interests and real estate holdings have been aggregated into an
Investments and Other Segment.
The Financial Services Segment'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 the number of accounts or
portfolios processed. The Company provides data processing services to Argus
Health Systems, Inc. ("Argus") and Computer Sciences Corporation Financial
Services Group ("CSC-FSG") to process their proprietary applications. Revenues
from Argus and CSC-FSG are primarily based upon data center capacity 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 U.S., certain mutual fund shareowner accounting systems.
Revenues for licensed software products are primarily comprised of: (i) license
fees; (ii) consulting and development revenues based primarily on time and
materials billings; and (iii) annual maintenance fees. The license fee component
of these revenues is not material. The Financial Services Segment derives part
of its net income from its pro rata share in the earnings (losses) of certain
unconsolidated affiliates, primarily Boston Financial Data Services, Inc.
("BFDS"), Argus, European Financial Data Services Limited ("EFDS") and prior to
its merger with Computer Sciences Corporation ("CSC") discussed below, The
Continuum Company, Inc. ("Continuum").
26
<PAGE>
The Customer Management Segment primarily derives its revenues from customer
management processing and computer software services and products based on the
number of end-users of the services offered by its clients, the number of bills
mailed and/or the number of images produced under multi-year bundled service and
usage agreements. Certain of the Company's customers, principally outside the
U.S., license the customer management software. Revenues for fixed fee license
agreements are recognized as the software is delivered and all customer
obligations have been met. Such fixed fee license amounts have not been
material.
The Output Solutions Segment's revenues for printing and mailing of customer
documents and archival depend on the number of statements mailed and/or the
number of images produced. Formatting and custom programming revenues are based
on time and materials billings or on the number of images produced. To attract
clients that want to take advantage of the Company's advanced output solutions
processing and functions in their own facilities, rather than on an outsourced
basis, the Company has licensed certain of its statement processing technology.
Revenues from licensed software products is not material.
The Investments and Other Segment's investment income (dividends and interest)
is recorded as other income. Income from financing leases is recognized as
revenue at a constant periodic rate of return on the net investment in the
lease. Rental income from Company owned and operated real estate is recorded as
revenue, but is eliminated in consolidation for the portion that relates to real
estate leased to the Company's other segments.
SIGNIFICANT EVENTS
USCS MERGER
Effective December 21, 1998, the Company acquired USCS, which was accounted for
as a pooling of interests. Accordingly, the Company's consolidated financial
statements for periods prior to December 21, 1998 have been restated to include
the financial position and results of operations of USCS. A summary of
historical results of DST and USCS are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Revenues
DST Systems, Inc................................................ $ 749.0 $ 650.7 $ 580.8
USCS International, Inc......................................... 347.1 299.3 263.2
--------- --------- ---------
Total revenues................................................ $ 1,096.1 $ 950.0 $ 844.0
--------- --------- ---------
--------- --------- ---------
Net income
DST Systems, Inc................................................ $ 73.9 $ 59.0 $ 167.2
USCS International, Inc......................................... 21.0 22.4 14.5
Conforming of accounting policies............................... (3.9) (2.0) (3.9)
Merger costs.................................................... (19.4)
--------- --------- ---------
Total net income.............................................. $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
In conjunction with the USCS Merger, certain conforming accounting adjustments
were recorded to conform the accounting policies of USCS relating primarily to
depreciation and amortization policies and the accounting for the costs of
software developed for internal USCS use. As a result of conforming accounting
policies, net income decreased $3.9 million, $2.0 million and $3.9 million for
each of the years ended December 31, 1998, 1997 and 1996, respectively.
Non-current assets decreased $33.3 million and $25.9 million at December 31,
1998 and 1997, respectively as a result of conforming
27
<PAGE>
accounting policies. DST purchased 1.1 million shares of USCS common stock
during the fourth quarter of 1997 at a cost of $21.7 million. Prior to the USCS
Merger, there were no significant intercompany transactions between the Company
and USCS.
In the fourth quarter of 1998, the Company recorded $26.0 million ($19.4 million
net of taxes) of charges related to the USCS Merger.
In December 1998, DST's management approved plans which include initiatives to
integrate the operations of certain DST and USCS subsidiaries and consolidate
facilities. Total accrued integration costs of $16.9 million were recorded in
the fourth quarter of 1998, of which $0.7 million, $3.4 million and $12.8
million relate to the Financial Services, Customer Management and Output
Solutions Segments, respectively.
Accrued integration costs include $3.2 million for the severance cost of
involuntary separation benefits related to approximately 250 employees of which
approximately 50 employees have separated from the Company as of December 31,
1998. Employee separations will affect the majority of business functions and
job classifications across the Customer Management ($1.7 million) and Output
Solutions ($1.5 million) Segments, principally in North America.
The integration plans include $10.2 million related to lease abandonment costs,
elimination of certain non-strategic business lines and the closing of certain
production and administration centers associated with the Customer Management
($1.1 million) and Output Solutions ($9.1 million) Segments. For the locations
to be closed and the non-strategic business lines to be eliminated, the tangible
and intangible assets to be disposed of have been written down by $4.6 million
to fair value. The integration plans also include $2.7 million ($0.7, $0.2, and
$1.8 million for the Financial Services, Customer Management, and Output
Solutions Segments, respectively) related to purchased software and other
commited costs of software/communications systems that will be abandoned.
Additionally, $0.8 million ($0.4 million in each of the Customer Management and
Output Solutions Segments) of costs have been expensed related to terminating
certain contractual obligations which have no future benefit as a result of the
USCS Merger.
The cash and non-cash elements of the charge were approximately $9.5 million and
$7.4 million, respectively. Details of the merger charges are as follows:
<TABLE>
<CAPTION>
UTILIZED
----------------------
BALANCE AT
ORIGINAL AMOUNT CASH NON-CASH DECEMBER 31, 1998
--------------- --------- ----------- -----------------
<S> <C> <C> <C> <C>
Employee severance benefits................... $ 3.2 $ 0.6 $ $ 2.6
Other......................................... 6.3 6.3
Write down of long-lived assets............... 7.4 7.4
----- --------- --- ---
$ 16.9 $ 0.6 $ 7.4 $ 8.9
----- --------- --- ---
----- --------- --- ---
</TABLE>
Most of remaining employee severance benefits are expected to be paid in 1999.
The balance of the accrued costs is related primarily to facilities that will be
closed. Lease payments on closed facilities and abandoned equipment have terms
which end in 1999 through 2003. Location closures are planned to occur through
the year 2000 once arrangements have been made to process continuing business at
other facilities. Two of the locations have been closed as of December 31, 1998.
The costs of transitioning the continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things, additional employee
costs, relocation and integration costs of moving to common internal systems.
Although precise estimates cannot be made, management does not believe such
costs will have
28
<PAGE>
a materially adverse effect on the Company's consolidated results of operations,
liquidity or financial position.
Transaction costs for the USCS Merger of $9.1 million include investment banker
fees, legal fees and other costs paid in connection with the merger.
STOCK REPURCHASE PROGRAMS
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. The Company
completed its purchase of the 1.2 million shares in March 1998 at a total cost
of approximately $42.7 million.
In December 1998, the Board of Directors approved a plan for DST to repurchase
600,000 shares of DST common stock at the rate of approximately 25,000 shares
per month in approximately equal monthly amounts beginning in February 1999,
subject to such variations as management considers appropriate, to provide
additional shares needed as a result of the USCS merger for use under various
DST option and benefit programs. Such purchases may be made in private or market
transactions and will be made in compliance with SEC regulations.
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. 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, 1998, no borrowings were outstanding under this facility.
EQUISERVE
In December 1998, Boston EquiServe LP ("Boston EquiServe") and First Chicago
Trust Company of New York completed a transaction creating EquiServe LP
("EquiServe"), the largest securities transfer agent in the U.S. Prior to the
transaction, Boston EquiServe was a limited partnership, 50% owned by Boston
Financial Data Services, Inc. ("BFDS") (a 50% owned joint venture of DST and
State Street Corporation) and 50% by BankBoston Corporation. DST is currently
developing a new securities transfer system ("Fairway") to be used exclusively
by EquiServe to process all of its accounts. DST has also agreed with EquiServe
to provide data processing services for EquiServe to use Fairway. Upon
acceptance of defined components of Fairway, DST will contribute Fairway and its
securities transfer processing business (approximately 2 million accounts) to
EquiServe for a 20% direct ownership interest in EquiServe (the "EquiServe
Contribution"). DST will also have a 10% indirect ownership interest in
EquiServe through BFDS after the EquiServe Contribution. DST believes that an
ownership in EquiServe provides the most effective participation in the
opportunities presented by the continued consolidation of the securities
transfer industry. The acceptance of the defined components of Fairway is
currently expected to occur in three stages beginning in the second quarter of
1999 and completing in the third quarter of 2000, at which time DST's
non-EquiServe stock transfer business will be transferred to EquiServe.
As Fairway is accepted and the transaction is completed, DST plans to account
for the EquiServe Contribution as a non-cash, non-taxable exchange. Accordingly,
no gain will be recognized from the EquiServe Contribution. The capitalized
costs associated with the Fairway development along with the net assets of the
securities transfer business contributed will become the basis of DST's
investment in
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EquiServe. DST expensed costs of Fairway development of $8.7 million, $3.6
million and $2.2 million in 1998, 1997 and 1996, respectively. The Company
expects to account for the investment in EquiServe on the equity method.
CONTINUUM
On August 1, 1996, Continuum merged with 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, DST 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 5% 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 $4.9 million in 1996. DST'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 CSC-FSG, formerly
Continuum, through DST's Winchester Data Center under a contract expiring in
September 1999. The merger has not affected the DST's existing agreements with
CSC-FSG for distribution of DST's AWD workflow 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 DST,
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, DST's common stock interest in
Continuum was reduced from approximately 29% to approximately 23%. As a result,
DST 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.
CUSTIMA ACQUISITION
In August 1998, USCS purchased 100% of the stock ("Custima Acquisition") of
United Kingdom based Custima International Holdings, plc ("Custima") for
approximately $15.4 million. The business acquired provides customer management
software for the utilities industry. The acquisition was accounted for as a
purchase, and accordingly, the Company's financial statements include Custima's
results of operations from the date of acquisition.
The purchase includes existing technology, in-process research and development
(IPR&D), trademarks and in-place workforce with an aggregate value of
approximately $18.1 million. The purchase price exceeded the fair market value
of net tangible assets acquired by $15.1 million; however, the purchase price
was less than the estimated fair value of all assets (tangible and intangible)
acquired. Accordingly, the non-current assets recorded in the transaction
(including IPR&D projects) were reduced on a pro-rata basis such that the total
amount of the assets recorded did not exceed the consideration paid.
The Company engaged a third party to perform an appraisal of the Custima
Acquisition (including the IPR&D projects acquired). The IPR&D projects included
improvements and increased functionality to the core billing product to adapt it
for competitive use within the U.S. and development of a new
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Java-based product which will allow large utilities to benefit from an advanced
billing system while utilizing their existing legacy database.
The IPR&D projects were estimated to be approximately 60% complete as of the
date of acquisition and were assigned a total value of $7.1 million (using the
income method discounted at 30% which did not differ significantly from the
stage of completion method, reduced to $6.0 million as result of the total
amount of the assets acquired from Custima, exceeding the consideration paid).
Phased completion and delivery of the projects are expected through mid-year
2000. The estimated cost of completion for the projects is $7.5 million with
cash inflows expected to commence shortly after the respective completion dates.
As with any software development project, there are inherent development risks
and periodic review of the projects can result in changes to the development
plan and the Company's business plans for the software.
In accordance with applicable accounting principles, the assigned value of the
IPR&D ($6.0 million) was expensed at the date of acquisition. Also, a charge for
redundant facilities and workforce of $1.1 million was recorded in connection
with USCS's purchase and consolidation of Custima. Intangible assets (other than
IPR&D) are being amortized on a straight-line basis over periods ranging from 3
to 10 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.
DBS SYSTEMS CORPORATION ("DBS SYSTEMS")
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems 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 20% and 60% of DBS Systems in December 1995
and May 1993, respectively. 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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RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING RESULTS
REVENUES
Financial Services.............................................. $ 507.6 $ 425.0 $ 378.2
Customer Management............................................. 221.7 202.9 172.3
Output Solutions................................................ 414.7 366.4 334.2
Investments and Other........................................... 34.1 33.7 25.9
Eliminations.................................................... (82.0) (78.0) (66.6)
--------- --------- ---------
$ 1,096.1 $ 950.0 $ 844.0
--------- --------- ---------
--------- --------- ---------
% change from prior year........................................ 15.4% 12.6% 18.3%
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
Financial Services.............................................. $ 85.4 $ 66.2 $ 47.1
Customer Management............................................. 22.3 28.3 15.8
Output Solutions................................................ 36.1 24.3 23.9
Investments and Other........................................... 8.8 8.1 5.1
--------- --------- ---------
152.6 126.9 91.9
MERGER CHARGES AND OTHER EXPENSES................................. 33.1 13.7
--------- --------- ---------
INCOME FROM OPERATIONS............................................ 119.5 126.9 78.2
Interest expense................................................ (8.6) (8.5) (10.5)
Other income, net............................................... 7.4 5.8 4.5
Gain on sale of Continuum....................................... 223.4
Equity in losses of unconsolidated affiliates, net of income
taxes......................................................... (2.7) (1.3) (4.0)
--------- --------- ---------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS................. 115.6 122.9 291.6
Income taxes.................................................... 44.3 42.9 113.3
Minority interests.............................................. (0.3) 0.6 0.5
--------- --------- ---------
NET INCOME........................................................ $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
--------- --------- ---------
Basic earnings per share.......................................... $ 1.14 $ 1.25 $ 2.82
Diluted earnings per share........................................ $ 1.11 $ 1.23 $ 2.78
</TABLE>
CONSOLIDATED REVENUES
Consolidated revenues increased $146.1 million or 15.4% in 1998 and $106.0
million or 12.6% in 1997. Revenue growth in 1998 was primarily a result of an
$82.6 million, or 19.4%, increase in Financial Services Segment revenues. This
increase in 1998 Financial Services Segment revenues resulted from increased
U.S. revenues of $52.1 million or 15.4%, primarily from an increase in mutual
fund shareowner accounts processed of 10.7% to 49.8 million at December 31,
1998, and an increase in international revenues of $30.5 million or 35.1% from
increased investment accounting software licenses and services and growth in
Canadian mutual fund processing revenues. These same trends contributed to the
1997 Financial Services Segment revenue growth of $46.8 million or 12.4% as U.S.
mutual fund shareowner accounts processed increased 9.5% to 45.0 million at
December 31, 1997.
Customer Management Segment revenues increased $18.8 million or 9.3% in 1998 and
$30.6 million or 17.8% in 1997. Exclusive of Tele-Communications, Inc. ("TCI")
(discontinued customer), revenues
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increased $31.6 million or 20.5% in 1998 and $33.9 million or 28.2% in 1997.
Growth in non-TCI customer management revenues resulted 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. In addition, the August 1998
acquisition of Custima added $3.9 million to 1998 revenues.
Output Solutions Segment revenues increased $48.3 million or 13.2% in 1998 and
$32.2 million or 9.6% in 1997. The growth is a result of an increase in volume
of statements and images produced from the growth in existing customers in the
Financial Services and Customer Management Segments and the acquisition of new
customers, primarily in telecommunications and other high-volume markets.
Investments and Other Segment revenues increased $0.4 million or 1.2% in 1998
and $7.8 million or 30.1% in 1997. Segment revenues are primarily rental income
for facilities leased to the Company's operating segments. The increase in 1997
results from the leasing of additional facilities.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
Consolidated income from operations before merger charges and other expenses,
increased $25.7 million or 20.2% in 1998 and $35.0 million or 38.1% in 1997. The
operating margin before merger charges and other expenses, was 13.9%, 13.4% and
10.9% in 1998, 1997 and 1996, respectively. The growth in 1998 was primarily a
result of a $19.2 million or 29.0% increase in the Financial Services Segment,
which resulted in an operating margin, before merger charges and other expenses,
of 16.8% in 1998 compared to 15.6% in 1997. The increase in 1998 Financial
Services Segment operating margin resulted from increased U.S. revenue and a
significant improvement in international operations. The improvement in 1997
Financial Services operating margin resulted from increased U.S. revenues.
In 1998, Customer Management Segment income from operations before merger
charges and other expenses decreased $6.0 million or 21.2% in 1998, primarily
attributable to costs incurred in transitioning new customers onto the Company's
products and services while transitioning TCI off and the consolidation of
Custima's operations. In 1997, Customer Management Segment income from
operations before merger charges and other expense, increased $12.5 million or
79.1% from increased revenues, productivity improvements as well as cost
containment efforts, and an increase in change order development revenues.
Output Solutions Segment income from operations before merger charges and other
expenses increased $11.8 million or 48.6% in 1998 and $0.4 million or 1.7% in
1997. Output Solutions Segment operating margin was 8.7%, 6.6% and 7.2% in 1998,
1997 and 1996, respectively. The decline in the 1997 operating margin percentage
is a result of increased costs associated with facility expansion,
implementation of new manufacturing and management information systems,
improvement and expansion of certain bill processing lines and new customer
conversions. The improvement in the 1998 operating margin percentage results
from processing efficiencies and increased volumes.
Investments and Other Segment income from operations before merger charges and
other expenses, was $8.8 million, $8.1 million, and $5.1 million in 1998, 1997
and 1996, respectively. The 1998 and 1997 operating margin was favorably
impacted from an increase in rental income as compared to 1996.
MERGER CHARGES AND OTHER EXPENSES
The 1998 results include recognition of $26.0 million of merger charges related
to the USCS Merger and $7.1 million of merger charges related to the Custima
Acquisition. In 1996, in connection with the Continuum Merger, the Company
accrued a one-time $13.7 million ESOP contribution which provided funding for
certain Continuum employee withdrawals from the ESOP.
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<PAGE>
INTEREST EXPENSE
Interest expense was $8.6 million in 1998 as compared to $8.5 million in 1997.
Average debt balances and interest rates for 1998 and 1997 were essentially the
same. Interest expense for 1997 decreased by $2.0 million, or 19.0% compared to
1996. Proceeds of the second quarter public stock offering were utilized to pay
down existing debt and resulted in decreased interest expense on a comparative
basis.
OTHER INCOME, NET
Other income consists mainly of dividends received on investments held by the
Company (principally shares of State Street stock) and amortization of deferred
non-operating gains. The 1998, 1997 and 1996 amounts include $1.9 million, $1.5
million and $0.4 million, respectively, of gains on the sale of marketable
securities.
GAIN ON THE SALE OF CONTINUUM
The 1996 amount represents the Company's gain on the Continuum Merger.
EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES
Equity in losses of unconsolidated affiliates increased $1.4 million in 1998 as
a result of lower earnings at Argus and non-recurring real estate debt financing
costs. Argus' 1998 earnings declined as a result of a significant client not
renewing its processing contract which expired in the first quarter of 1998.
Equity in losses of unconsolidated affiliates of $1.3 million were recorded in
1997 as compared to $0.9 million of equity in earnings in 1996 (excluding equity
in losses of Continuum from 1996 results) as a result of increased losses at
EFDS, partially offset by improved earnings at BFDS and Argus.
DST recorded losses from EFDS of $11.1 million, $11.8 million and $6.0 million
in 1998, 1997 and 1996, respectively. The losses at EFDS were the result of the
continued development of the new FAST2000 software and conversion activity
associated with converting existing clients from the old system to FAST2000.
EFDS' 1998 and 1997 costs were also impacted by business growth as accounts
serviced increased 40% to 1.4 million accounts in 1998 and 150% to 1.0 million
accounts in 1997.
INCOME TAXES
The Company's effective tax rate was 38.4%, 34.9% and 38.8% for the years ended
December 31, 1998, 1997 and 1996, respectively. Excluding the impact of the
previously discussed 1998 merger charges and all 1996 Continuum related equity
in earnings, gains and charges, the Company's effective tax rate would have been
34.5%, 34.9% and 36.4% for 1998, 1997 and 1996, respectively. 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, increased tax benefits
associated with 1998 and 1997 international operations, and the benefits
associated with new 1998 Missouri income apportionment rules designed to attract
and retain mutual fund service companies.
NET INCOME
The Company's net income (and earnings per share) for 1998, 1997 and 1996 was
$71.6 million ($1.14 basic earnings per share and $1.11 diluted earnings per
share), $79.4 million ($1.25 basic earnings per share and $1.23 diluted earnings
per share), and $177.8 million ($2.82 basic earnings per share and $2.78 diluted
earnings per share), respectively. Excluding the impact of the previously
discussed 1998 merger charges and all 1996 Continuum related equity in earnings,
gains and charges, the Company's net income and earnings per share for 1998,
1997, and 1996 would have been $97.7 million ($1.56 basic earnings per share and
$1.52 diluted earnings per share), $79.4 million ($1.25 basic earnings per share
34
<PAGE>
and $1.23 diluted earnings per share), and $54.7 million ($0.87 basic earnings
per share and $0.85 diluted earnings per share), respectively.
YEAR TO YEAR BUSINESS SEGMENT COMPARISONS
FINANCIAL SERVICES SEGMENT
REVENUES
Financial Services Segment revenues for 1998 increased 19.4% over 1997 to $507.6
million. U.S. Financial Services revenues increased 15.4% to $390.1 million in
1998. U.S. mutual fund processing revenues for 1998 increased 16.0% over the
prior year as shareowner accounts serviced increased 10.7% from 45.0 million at
December 31, 1997 to 49.8 million at December 31, 1998. During the fourth
quarter of 1998 new clients with 1.7 million accounts were added, while 1.7
million accounts derived from a broker-dealer were converted to the
broker-dealer's system. The Company also recognized a $3.9 million contract
termination fee in the fourth quarter 1998 from GT Global which terminated its
services with the Company as a result of its acquisition by the AIM Management
Group and a one-time $2.6 million contract termination fee from Zurich Kemper
Investments in the first quarter 1998 as a result of its merged operations with
Scudder. U.S. AWD product revenues for 1998 increased 17.0% over the prior year
primarily due to an increase in the number of AWD workstations licensed.
Financial Services Segment revenues from international operations for 1998
increased 35.1% to $117.5 million. The revenue increase resulted primarily from
increased investment accounting software licenses and services and growth in
Canadian mutual fund shareowner processing revenues. In addition, 1998 revenues
of $3.1 million were recorded by DST Catalyst, Inc. as compared to $1.2 million
during 1997. DST Catalyst was acquired in August 1997.
Segment revenues for the year ended December 31, 1997 increased 12.4% over 1996
to $425.0 million. U.S. revenues increased 9.7% to $338.0 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 1997. 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.
Segment revenues from international operations for 1997 increased 24.3% to $87.0
million, driven primarily by increases in investment accounting and AWD license
and service revenues. In addition, 1997 revenues of $1.2 million were recorded
by DST Catalyst, Inc. which was acquired in August 1997.
COSTS AND EXPENSES
Segment costs and expenses for 1998 and 1997 increased 19.3% to $360.5 million
and 10.9% to $302.3 million over the comparable prior year periods. Personnel
costs for 1998 and 1997 increased 24.0% and 13.6% over the comparable prior year
periods as a result of increased staff levels to support volume growth,
development costs for the Company's new securities transfer system (Fairway) and
increased wages for data processing professionals. 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 as depreciation expense.
The Financial Services Segment has experienced 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.
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<PAGE>
DEPRECIATION AND AMORTIZATION
Segment depreciation and amortization for 1998 increased 9.2% or $5.2 million.
The increase is primarily attributable to increased capital additions during
1998 and the fourth quarter of 1997, a one-time write-off of intangible assets
totaling $3.2 million in the first quarter 1998 and a $1.4 million accelerated
write-off of personal computers scheduled for replacement in the fourth quarter
1998, partially offset by the renegotiation of certain third party software
agreements, effective March 31, 1998, resulted in certain amounts being recorded
as costs and expenses instead of as depreciation expense. Segment depreciation
and amortization for 1997 decreased 3.3% or $1.9 million. The containment of
depreciation and amortization expenses in 1997 was primarily the result of lower
capital expenditures in 1997 and 1996 compared to prior years, decreases in the
unit costs of electronic data processing equipment and the Company's use of
accelerated depreciation methods.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
The Segment's income from operations before merger charges and other expenses
for 1998 and 1997, increased 29.0% to $85.4 million and 40.6% to $66.2 million
over the comparable prior year periods. The Segment's operating margins,
excluding merger charges, were 16.8%, 15.6% and 12.5% in 1998, 1997 and 1996.
The increases in Financial Services Segment operating margins are a result of
increased U.S. revenue and a significant improvement in international
operations.
CUSTOMER MANAGEMENT SEGMENT
REVENUES
Customer Management Segment revenues for 1998 increased 9.3% to $221.7 million
from $202.9 million in 1997. Equipment sales and services revenue increased to
$25.0 million in 1998 from $18.8 in 1997. Customer Management Segment revenues
for 1997 increased by 17.7% to $202.9 million from $172.3 million in 1996. The
growth in Customer Management Segment software and services revenues, 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. In addition, the August 1998 acquisition of Custima added $3.9 million
to 1998 revenues.
During 1998, TCI continued to remove subscribers from the Company's systems.
Revenues and percent of total Customer Management Segment revenues from TCI,
respectively, totaled $35.9 million and 16.2% in 1998, $48.7 million and 24.0%
in 1997, and $52.0 and 30.2% in 1996. Exclusive of revenues from TCI, the 1998
and 1997 revenue increases were 20.5% and 28.2%, respectively, as compared to
the prior year. TCI subscribers serviced by the Company totaled 2.4 million,
10.9 million and 11.4 million at December 31, 1998, 1997 and 1996, respectively.
The Company expects the TCI subscriber count to decrease to 1.0 million by June
1999.
COSTS AND EXPENSES
Segment costs and expenses for 1998 and 1997 increased 14.2% to $187.8 million
and 11.4% to $164.5 million over the comparable prior year periods. Personnel
costs for 1998 and 1997 increased 19.6% and 18.9%, respectively, over the
comparable prior year periods as a result of increased staff levels to support
volume growth and research and development costs relating primarily to ongoing
product development.
The Company has experienced 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
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<PAGE>
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 1998 and 1997 increased 14.9% to $11.6 million
and 13.5% to $10.1 million over the comparable prior year periods. The increases
in 1998 and 1997 are primarily attributable to increased goodwill amortization
relating to the Company's purchase of the remaining 20% minority interest in DBS
Systems in October 1997.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
The Segment's income from operations before merger charges and other expenses
for 1998 decreased $6.0 million as compared to 1997. The 1998 decrease is
attributable to costs associated with transitioning new customers on to the
Company's products and services while transitioning TCI off, increased goodwill
amortization relating to the Company's purchase of the remaining 20% minority
interest in DBS Systems in October 1997 and the 1998 consolidation of Custima's
operations. The Segment's income from operations before merger charges and other
expenses for 1997 increased $12.5 million as compared to 1996. The 1997 increase
is primarily attributable to increased subscriber and change order revenue in
1997. The Segment's operating margin before merger charges and other expenses
was 10.1%, 14.0% and 9.2% in 1998, 1997 and 1996, respectively.
OUTPUT SOLUTIONS SEGMENT
REVENUES
Output Solutions Segment revenues for 1998 increased 13.2% to $414.7 million as
compared to 1997. Output Solutions Segment revenues for 1997 increased by 9.6%
to $366.4 million from $334.2 million in 1996. The growth in segment revenue was
derived from an increase in the volume of statements and images produced because
of the growth of existing customers in the Financial Services and Customer
Management Segments and the acquisition of new customers, primarily in
telecommunications and other high-volume markets.
COSTS AND EXPENSES
Segment costs and expenses for 1998 and 1997 increased 12.2% to $350.9 million
and 10.4% to $312.8 million over the comparable prior year periods. Personnel
costs for 1998 and 1997 increased 11.9% and 13.2% over the comparable prior year
periods as a result of increased staff levels to support volume growth and
research and development costs relating primarily to ongoing product
development. In addition, costs of $5.1 million, $7.2 million and $4.7 million
to develop and implement a new manufacturing system were included in 1998, 1997
and 1996, respectively.
The Company has experienced 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 1998 decreased 5.5% to $27.7 million as
compared to 1997. Depreciation and amortization for 1997 increased 8.5% to $29.3
million from $27.0 million in 1996. The containment of depreciation and
amortization expenses in 1998 is primarily the result of lower capital
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expenditures in 1997 and 1998 compared to prior years, decreases in the unit
costs of electronic data processing equipment and the Company's use of
accelerated depreciation methods. The increase in depreciation and amortization
in 1997 as compared to 1996 is attributable to facility expansion and the
improvement and expansion of certain bill processing lines.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
The Segment's income from operations before merger charges and other expenses
for 1998 increased $11.8 million or 48.6% primarily attributable to realizing
processing efficiencies and economies of scale. In 1997, the Output Solutions
Segment's income from operations before merger charges and other expense,
increased $0.4 million or 1.6% as compared to 1996. The increase in income from
operations was significantly lower than the increase in revenues due to costs
associated with facility and processing line improvements and expansion, costs
to develop and implement a new manufacturing system, and new customer
conversions. The Segment's operating margins, excluding merger charges, were
8.7%, 6.6% and 7.2% in 1998, 1997 and 1996.
INVESTMENTS AND OTHER SEGMENT
REVENUES
Investments and Other Segment revenues totaled $34.1 million, $33.7 million and
$25.9 million in 1998, 1997 and 1996, respectively. Real estate revenues of
$27.8 million, $28.9 million and $22.6 million in 1998, 1997 and 1996 were
primarily derived from the lease of facilities to the Company's other business
segments. Revenues of $6.3 million, $4.8 million and $3.2 million in 1998, 1997
and 1996 were derived from the Segment's hardware leasing activities.
COSTS AND EXPENSES
Investments and Other Segment costs and expenses decreased in 1998 and increased
in 1997 primarily as a result of changes in real estate related costs.
DEPRECIATION AND AMORTIZATION
Investments and Other Segment depreciation and amortization increased $0.2
million in 1998 as a result of increased depreciation related to additional real
estate leasing activities and an increase in depreciation related to equipment
leased to customers. Depreciation and amortization increased by $2.8 million in
1997 as a result of an increase in depreciation related to equipment leased to
customers partially offset by a decrease in deprecation related to real estate
leasing activities.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES AND OTHER EXPENSES
The segment's income from operations before merger charges and other expenses
totaled $8.8 million, $8.1 million and $5.1 million in 1998, 1997, and 1996. The
increase in 1997 and 1998 income from operations as compared to 1996 is
primarily related to increased revenues from real estate and hardware leasing
activities.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $274.8 million, $148.7
million and $136.8 million in 1998, 1997 and 1996, respectively. Operating cash
flows in 1998 were impacted by net income of $71.6 million and the impact of
depreciation and amortization of $108.8 million, other non-cash charges and
accruals totaling $29.7 million (primarily the USCS Merger charges and the
Custima Acquisition merger charges) and $65.9 million of increases in other
liabilities (primarily customer deposits and deferred revenues). The Company
utilized its 1998 operating cash flow to reinvest
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in its existing business, fund investments and advances to unconsolidated
affiliates, repay debt and fund treasury stock purchases.
Operating costs include software development and maintenance costs relating to
internal use proprietary systems and non-capitalizable costs for systems to be
sold or licensed to third parties of approximately $165.5 million, $135.6
million and $107.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Capitalized development costs for systems to be sold or licensed
to third parties were approximately $2.5 million, $3.1 million and $0.3 million
for the years ended December 31, 1998, 1997 and 1996, respectively.
Accounts receivable increased in 1998 by approximately $13.0 million or 4.8%
primarily because of the increase in revenue. The Company collects from its
clients and remits to the U.S. Postal Service a significant amount of postage. A
significant number of 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 and
facilities. During the years ended December 31, 1998, 1997 and 1996, the Company
expended approximately $132.7 million, $82.6 million and $100.9 million,
respectively, in capital expenditures for equipment and facilities which
includes amounts directly paid by third-party lenders. Capital expenditures for
1998 include $17.4 million for assets placed in service in 1997 but not paid for
until 1998. 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 $48.0 million, $16.1 million and $23.3
million primarily for investments and advances to unconsolidated affiliates
during 1998, 1997 and 1996, respectively. In addition, the Company expended
$14.2 million, $16.8 million and $3.2 million during 1998, 1997 and 1996,
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 the Company's equity
investment in First of Michigan Capital Corporation.
The Company used its positive operating cash flow to reduce its debt. Total
long-term debt, including the current portion, was $61.8 million as of December
31, 1998 compared to $115.2 million at December 31, 1997. The Company maintains
$100 million in bank lines of credit for working capital requirements and
general corporate purposes, of which $50 million matures May 1999, $20 million
matures December 1999 and $30 million matures December 2000. 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 $23.0 million at December 31, 1998.
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 deemed appropriate. The Company expended $10.0 million,
$20.3 million, and $12.5 million in 1998, 1997 and 1996, respectively to
complete the purchases under this plan.
In December 1998, the Board of Directors approved a plan to repurchase 600,000
shares of common stock at a rate of approximately 25,000 shares per month
beginning in February 1999 to provide additional shares for use under various
DST option and benefit programs needed as a result of the USCS Merger. Such
purchases may be made in private or market transactions and will be made in
compliance with SEC regulations.
In the fourth quarter 1997, DST expended $21.7 million to purchase 1.1 million
shares of USCS common stock. These shares were retired in conjunction with the
USCS Merger.
39
<PAGE>
USCS, prior to the USCS Merger, expended approximately $6.2 million in 1998 and
$10.2 million in 1997 for the repurchase of common stock in order to meet
obligations under stock option plans, employee stock purchase plans and 401(k)
retirement plans. Substantially all these shares were reissued under the plans,
prior to the consummation of the USCS Merger.
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 suffice 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
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
depend 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,
or 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 has completed its review and evaluation of its mission critical U.S.
shareowner accounting and U.S. portfolio accounting related products, services
and internal systems and achieved material Year 2000 readiness in such products,
services and systems as of December 31, 1998. The Company anticipates readiness
for its other mission critical products, services and systems and products by
September 30, 1999. The Company will continue testing its systems with clients
and other third parties for Year 2000 related issues as needed throughout 1999,
as well as assisting clients with interrelated hardware and software upgrades,
subject to the cooperation of such third parties. The Company licenses certain
of its software products to third parties. The Company expects that customers
which elect to upgrade to current versions and customers with current
maintenance contracts will be provided with Year 2000 ready software by June 30,
1999. In certain cases, the Company will be required under applicable
maintenance contracts to provide Year 2000 ready software free of charge. The
Company believes that the cost of such upgrades will be immaterial.
The Company believes it will not experience any material Year 2000 problems from
most of its major vendors and suppliers; however, the Company is unable to
determine whether certain suppliers, principally the Company's utilities
providers, will likely be Year 2000 ready in time. As part of addressing its
Year 2000 issues, the Company is developing contingency plans. The Company has
had for several years formal contingency plans, including an uninterruptable
power supply with permanent generator backup, for its Winchester and Poindexter
Data Centers in the event of a natural disaster. The contingency plans are being
revised to address, to the extent possible, failures that could be caused by
Year 2000 issues. The Company expects to formalize contingency plans for its
U.S. shareowner accounting and U.S. portfolio accounting business units, which
would incorporate Year 2000 related contingencies, by March 31, 1999 and to
complete testing of the contingency plans by June 30, 1999. The Company expects
to formalize contingency plans for its other mission critical products, services
and systems by June 30, 1999 and to test the contingency plans by September 30,
1999. There can be no assurances
40
<PAGE>
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. 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.
Although the Company is not aware of any material operational or financial Year
2000-related issues not being addressed, the Company cannot assure 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.
INTERNAL USE SOFTWARE
Effective January 1, 1999, the Company adopted, as required, Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Prior to the adoption of SOP 98-1, the Company
expensed the costs of internally developed proprietary software as it was
incurred. SOP 98-1, effective for fiscal periods beginning after December 15,
1998, requires that certain costs for the development of internal use software
should be capitalized, including the costs of coding, software configuration,
upgrades and enhancements. Based on internal software development plans, the
Company estimates that $14.0 million to $20.0 million of costs related to the
development of internal use software could be capitalized for the year ending
December 31, 1999, net of related amortization. These costs, which have been
previously expensed, will be amortized under the Company's current policy on a
straight-line basis, depending on the nature of the project, generally over a
three to five year period beginning on the date such software is placed in
service. The estimated range of capitalizable development costs for internal use
software reflects the Company's current views. There may be differences between
these estimates and actual development costs, and those differences may be
material.
SEASONALITY
Generally, the Company does not have significant seasonal fluctuations in its
business operations. Processing and output solutions 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. Revenues and operating results from individual license sales depend
heavily on the timing and size of the contract.
COMPREHENSIVE INCOME
The Company's comprehensive income totaled $232.8 million, $181.9 million and
$252.0 million in 1998, 1997 and 1996, respectively. Comprehensive income
consists of net income of $71.6 million, $79.4 million and $177.8 million and
other comprehensive income of $161.2 million, $102.5 million and $74.2 million
in 1998, 1997 and 1996, respectively. Other comprehensive income consists of
unrealized gains (losses) on available-for-sale securities and foreign currency
translation adjustments. The Company had net unrealized gains on
available-for-sale securities of $161.2 million, $104.1 million and $72.6
million in 1998, 1997 and 1996, respectively. The Company's net unrealized gains
on available-for-sale securities results primarily from market appreciation of
the Company's investments in approximately 8.6 million shares of CSC common
stock and 6.0 million shares of State Street common stock. At December 31, 1998,
these two investments had an aggregate pre-tax unrealized gain of
41
<PAGE>
$581.8 million. The amounts of foreign currency translation adjustments included
in other comprehensive income are immaterial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operations of its businesses, the Company's financial results can be
affected by changes in interest rates, currency exchange rates and equity
pricing. Changes in interest rates and exchange rates have not materially
impacted the consolidated financial position, results of operations or cash
flows of the Company. Changes in equity values of the Company's investments have
had a material effect on the Company's comprehensive income and financial
position.
INTEREST RATE RISK
At December 31, 1998, the Company had $61.8 million of long-term debt, of which
$26.2 million was subject to variable interest rates (Federal Funds rates, LIBOR
rates, Prime rates). The Company estimates that a 10% increase in interest rates
would not be material to the Company's consolidated pretax earnings for 1999 or
to the fair value of its debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
The operation of the Company's subsidiaries in international markets results in
exposure to movements in currency exchange rates. The principal currencies
involved are the Canadian dollar, the Australian dollar and the British pound.
As currency exchange rates change, translation of the financial results of
international operations into U.S. dollars does not now materially affect, and
has not historically materially affected, the consolidated financial results of
the Company.
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. 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.
EQUITY PRICE RISK
The Company's investments in available-for-sale equity securities are subject to
price risk. The fair value of such investments, as of December 31, 1998 was
approximately $1.0 billion. The potential change in the fair value of these
investments, assuming a 10% change in prices would be approximately $100.0
million on a pretax basis. As discussed under "Comprehensive Income" in Item 7
above, net unrealized gains on the Company's investments in available-for-sale
securities have had a material effect on the Company's comprehensive income and
financial position.
42
<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 assurance that its 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 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/ PricewaterhouseCoopers LLP
Kansas City, Missouri
February 25, 1999
43
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................................. $ 28.1 $ 18.6
Accounts receivable (includes related party receivables of $9.9 and
$9.5)................................................................ 282.4 268.4
Inventories............................................................ 16.3 15.9
Deferred income taxes.................................................. 21.3 7.6
Other assets........................................................... 27.7 34.8
--------- ---------
375.8 345.3
Investments.............................................................. 1,130.5 815.8
Properties............................................................... 328.4 323.3
Intangibles and other assets............................................. 62.3 64.1
--------- ---------
Total assets......................................................... $ 1,897.0 $ 1,548.5
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year............................................... $ 12.1 $ 17.8
Accounts payable....................................................... 85.3 80.9
Accrued compensation and benefits...................................... 53.4 49.6
Deferred revenues and gains............................................ 41.1 27.2
Other liabilities...................................................... 76.7 36.5
--------- ---------
268.6 212.0
Long-term debt........................................................... 49.7 97.4
Deferred income taxes.................................................... 343.2 236.3
Other liabilities........................................................ 68.5 70.5
--------- ---------
730.0 616.2
--------- ---------
Commitments and contingencies (Note 12)..................................
--------- ---------
Minority interests....................................................... 0.8 1.4
--------- ---------
Stockholders' equity
Preferred stock, $0.01 par, 10,000,000 shares authorized and
unissued.............................................................
Common stock, $0.01 par, 125,000,000 shares authorized, 63,816,639 and
63,843,101 shares issued............................................. 0.6 0.6
Additional paid-in capital............................................. 462.3 466.1
Retained earnings...................................................... 378.1 306.5
Treasury stock, at cost................................................ (34.1) (40.4)
Accumulated other comprehensive income................................. 359.3 198.1
--------- ---------
Total stockholders' equity........................................... 1,166.2 930.9
--------- ---------
Total liabilities and stockholders' equity......................... $ 1,897.0 $ 1,548.5
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues (includes related parties revenues of $105.0, $90.2 and
$89.6).......................................................... $ 1,096.1 $ 950.0 $ 844.0
Costs and expenses................................................ 834.7 719.6 653.0
Depreciation and amortization..................................... 108.8 103.5 99.1
Merger charges and other expenses................................. 33.1 13.7
--------- --------- ---------
Income from operations............................................ 119.5 126.9 78.2
Interest expense.................................................. (8.6) (8.5) (10.5)
Other income, net................................................. 7.4 5.8 4.5
Gain on sale of Continuum......................................... 223.4
Equity in losses of unconsolidated affiliates, net of income
taxes........................................................... (2.7) (1.3) (4.0)
--------- --------- ---------
Income before income taxes and minority interests................. 115.6 122.9 291.6
Income taxes...................................................... 44.3 42.9 113.3
--------- --------- ---------
Income before minority interests.................................. 71.3 80.0 178.3
Minority interests................................................ (0.3) 0.6 0.5
--------- --------- ---------
Net income........................................................ $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
--------- --------- ---------
Average common shares outstanding................................. 62.7 63.6 63.0
Dilutive shares outstanding....................................... 64.3 64.7 64.0
Basic earnings per share.......................................... $ 1.14 $ 1.25 $ 2.82
Diluted earnings per share........................................ $ 1.11 $ 1.23 $ 2.78
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL OTHER TOTAL
NUMBER PAR PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
OF SHARES VALUE CAPITAL EARNINGS STOCK INCOME EQUITY
----------- --------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995....... 61.8 $ 0.6 $ 409.6 $ 70.9 $ $ 21.4 $ 502.5
Comprehensive income:
Net income..................... 177.8
Other comprehensive income..... 74.2
Comprehensive income......... 252.0
Issuance of common stock......... 2.5 54.1 0.1 54.2
Repurchase of common stock....... (0.4) (12.5) (12.5)
----- --------- ----------- ----------- ----------- ------ -----------
BALANCE, DECEMBER 31, 1996....... 63.9 0.6 463.7 248.7 (12.4) 95.6 796.2
Comprehensive income:
Net income..................... 79.4
Other comprehensive income..... 102.5
Comprehensive income......... 181.9
Issuance of common stock......... 0.3 2.4 2.4 4.8
Repurchase of common stock....... (1.6) (21.6) (30.4) (52.0)
----- --------- ----------- ----------- ----------- ------ -----------
BALANCE, DECEMBER 31, 1997....... 62.6 0.6 466.1 306.5 (40.4) 198.1 930.9
Comprehensive income:
Net income..................... 71.6
Other comprehensive income..... 161.2
Comprehensive income......... 232.8
Issuance of common stock......... 0.7 (2.9) 21.6 18.7
Repurchase of common stock....... (0.4) (0.9) (15.3) (16.2)
----- --------- ----------- ----------- ----------- ------ -----------
BALANCE, DECEMBER 31, 1998....... 62.9 $ 0.6 $ 462.3 $ 378.1 $ (34.1) $ 359.3 $ 1,166.2
----- --------- ----------- ----------- ----------- ------ -----------
----- --------- ----------- ----------- ----------- ------ -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE>
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS--OPERATING ACTIVITIES:
Net income........................................................ $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
Depreciation and amortization..................................... 108.8 103.5 99.1
Noncash portion of merger charges................................. 13.5
Equity in losses of unconsolidated affiliates..................... 2.7 1.3 4.0
Cash dividends received from unconsolidated affiliates............ 9.9 8.0
Gain on sale of Continuum......................................... (223.4)
Deferred taxes.................................................... (10.0) (3.1) 80.4
Changes in accounts receivable.................................... (13.0) (40.3) (30.5)
Changes in inventories and other current assets................... 6.6 (12.3) (1.6)
Changes in accounts payable and accrued liabilities............... 82.0 11.8 16.4
Other, net........................................................ 2.7 8.4 6.6
--------- --------- ---------
Total adjustments to net income................................... 203.2 69.3 (41.0)
--------- --------- ---------
Net........................................................... 274.8 148.7 136.8
--------- --------- ---------
CASH FLOWS--INVESTING ACTIVITIES:
Investments and advances to unconsolidated affiliates............. (48.0) (16.1) (23.3)
Capital expenditures.............................................. (132.7) (82.6) (100.9)
Net investment in leases.......................................... (11.9) (8.0) (7.4)
Principal collections on leases................................... 6.4 8.6 10.4
Payment for purchases of subsidiaries, net of cash acquired....... (14.2) (16.8) (3.2)
Other, net........................................................ 9.3 14.8 3.9
--------- --------- ---------
Net........................................................... (191.1) (100.1) (120.5)
--------- --------- ---------
CASH FLOWS--FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net....................... 7.9 2.4 53.7
Proceeds from issuance of long-term debt.......................... 7.4 2.8
Principal payments on long-term debt.............................. (23.4) (19.4) (45.6)
Net increase (decrease) in short-term notes payable............... (1.5) 2.6 (12.0)
Net increase (decrease) in revolving credit facilities............ (36.0) 25.5 3.6
Common stock repurchased.......................................... (16.2) (52.2) (12.5)
Other, net........................................................ (12.4) (5.6) (9.3)
--------- --------- ---------
Net........................................................... (74.2) (46.7) (19.3)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............. 9.5 1.9 (3.0)
Cash and cash equivalents, beginning of year...................... 18.6 16.7 19.7
--------- --------- ---------
Cash and cash equivalents, end of year............................ $ 28.1 $ 18.6 $ 16.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<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 to the financial services
industry (primarily mutual funds and investment managers), communications
industry and other service industries. In December 1998, the Company completed
its merger ("USCS Merger") with USCS International, Inc. ("USCS") through the
issuance of approximately 13.8 million shares of common stock. The USCS Merger
was accounted for under the pooling of interests accounting method. Accordingly,
the DST financial results have been restated to combine the historical results
of operations of DST and USCS, adjusted for conformity of accounting policies
relating primarily to USCS' depreciation and amortization policies and
accounting for the costs of software developed for internal USCS use.
The Company has several operating business units that offer sophisticated
information processing and software services and products. These operating
business units have been aggregated into three operating segments (Financial
Services, Customer Management and Output Solutions). In addition, certain
investments in equity securities, financial interests and real estate holdings
have been aggregated into an Investments and Other Segment. A summary of each of
the Company's segments follows:
FINANCIAL SERVICES
The Financial Services Segment provides sophisticated information processing and
computer software services and products primarily to mutual funds, investment
managers, insurance companies, banks and other financial services organizations.
The Company's software systems include shareowner accounting and recordkeeping
systems offered to the U.S. mutual fund industry; a shareowner accounting and
recordkeeping system 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 managers; an image-based work management system offered primarily to
mutual funds, insurance companies and other financial services organizations;
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.
The Financial Services Segment distributes its services and products on a direct
basis and through subsidiaries and joint venture affiliates in the U.S., Canada,
United Kingdom, Europe, Australia, South Africa and Asia-Pacific, and to a
lesser degree distributes such services and products through various strategic
alliances.
CUSTOMER MANAGEMENT
The Customer Management Segment provides sophisticated customer management
processing and computer software services and products to cable television,
direct broadcast satellite (DBS), wireless and wire-line telephony and
multi-service providers. The Company's software systems enable its clients to
manage mission-critical customer relationship functions, including new account
set-up, order processing, customer support, customer billing, management
reporting and marketing analysis.
The Customer Management Segment distributes its services and products on a
direct basis and through subsidiaries in North America, the United Kingdom and
parts of Europe and with international alliance partners in other regions of the
world. As a result of the acquisition of Custima, the Segment is also expanding
into the utilities industry.
48
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OUTPUT SOLUTIONS
The Output Solutions Segment provides complete statement processing services and
solutions, including electronic presentment, which include generation of
customized statements that are produced in sophisticated automated facilities
designed to minimize turnaround time and mailing costs. This Segment provides
statement processing services and solutions in North America to customers of the
Company's Financial Services and Customer Management business segments, and to
telecommunications, utilities and other high volume industries which require
high quality, accurate and timely statement processing.
INVESTMENTS AND OTHER
The Investments and Other Segment holds certain investments in securities,
financial interests, the Company's real estate subsidiaries and the Company's
hardware leasing subsidiary. The Company holds certain investments in equity
securities with a market value of approximately $1.0 billion at December 31,
1998, including approximately 8.6 million shares of Computer Sciences
Corporation ("CSC") with a market value of $554.6 million and 6.0 million shares
of State Street Corporation ("State Street") with a market value of $420.8
million. Additionally, the Company owns and operates real estate in North
America which is held primarily for lease to the Company's other business
segments.
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 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 services revenues are recognized upon completion of the
services provided. Revenues under bundled service agreements are recognized over
the life of the agreement based on usage and as the bundled services are
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. Revenue from equipment sales and sales-type leases is
recognized as equipment is shipped. Income from financing leases is recognized
as revenue at a constant periodic rate of return on the net investment in the
lease. Revenue from rentals and operating leases is recognized monthly as the
rent accrues. Billing for services in advance of performance is recorded as
deferred revenue. Allowances for billing adjustments are determined as revenues
are recognized and are recorded as reductions in revenues. Doubtful account
expense for the Company is immaterial.
The Company has entered into various agreements with related parties,
principally unconsolidated affiliates, to utilize the Company's data processing
facilities and its computer software systems. The
49
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company believes that the terms of its contracts with related parties are fair
to the Company and are no less favorable to the Company than those obtained from
unaffiliated parties.
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 revenues and to support the Company's operations,
are expensed as incurred. Effective January 1, 1999, the Company adopted, as
required, Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants. SOP 98-1, effective for periods beginning after December 15,
1998, requires that certain costs for the development of internal use software
including coding and software configuration costs, and costs of upgrades and
enhancements be capitalized. Based on internal software development plans, the
Company estimates that $14.0 to $20.0 million (unaudited) of costs related to
the development of internal use software could be capitalized for the year
ending December 31, 1999, net of related amortization. These costs, which have
been previously expensed, will be amortized under the Company's current policy
on a straight-line basis, depending on the nature of the project, generally over
a three to five year period beginning on the date such software is place in
service. The estimated range of capitalizable development costs for internal use
software reflects the Company's current views. There may be differences between
these estimates and actual development costs, and those differences may be
material.
Research and development costs for software that will be sold or licensed to
third parties 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 for software
that will be sold or licensed to third parties after the products reach
technological feasibility and it has been determined that the software will
result in probable future economic benefits and management has committed to
funding the project. These capitalized development costs are amortized on a
product-by-product basis using the greater of the amount computed by taking the
ratio of current year's net revenue to current year's net revenue plus estimated
future net revenues or the amount computed by the straight-line method over the
estimated useful life of the product, generally three to five years. The Company
evaluates the net realizable value of capitalized software development costs on
a product-by-product basis in accordance with SFAS ("Statement of Financial
Accounting Standards") No. 86. The cost of custom development that is required
and funded by a specific client is charged to costs and expenses as incurred.
A portion of the Company's development costs is funded by customers through
various programs, including product support and shared-cost arrangements.
Amounts received under the arrangements reduce the amount of development costs
either expensed or capitalized, depending on the terms of the agreement and the
nature of the software being developed.
50
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Operating costs include software development and maintenance costs relating to
internal proprietary systems and non-capitalizable costs for systems to be sold
or licensed to third parties of approximately $165.5 million, $135.6 million and
$107.2 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Capitalized development costs for systems to be sold or licensed
to third parties was approximately $2.5 million, $3.1 million and $0.3 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Amortization
expense related to capitalized development costs totaled $0.4 million for the
year ended December 31, 1998, while no amortization expense was recognized in
1997 or 1996 since the related software had not been placed in service.
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
primarily 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 interest or
significant influence; the cost method of accounting is used for investments of
less than 20% voting 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 accumulated other comprehensive income.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with major additions and
improvements capitalized. Cost includes the 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 3 to 10 years. Leasehold improvements are depreciated
using the straight-line method over the lesser of the term of the lease or life
of the improvements. 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, 1998. In conjunction with the USCS Merger, the Company
incurred certain integration costs related to lease abandonment charges and the
closing of certain production and administration centers as discussed in Note 3.
INTANGIBLES
Goodwill resulting from the cost of investments in excess of the underlying fair
value of identifiable net assets acquired is amortized over periods ranging from
3 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, 1998.
51
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
because those earnings have been and will continue to be reinvested. Beginning
in 1993, pursuant to the provisions of SFAS No. 109 (Note 8), 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, 1998, the cumulative amount of such
unremitted earnings was $37.8 million. 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, 1998 and 1997 were $2.5 million and $2.3 million, 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.
CUSTOMER DEPOSITS
The Company requires postage deposits from certain 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 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, 1998 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
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.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25 and has presented the required SFAS No. 123 pro
forma disclosures in Note 9.
52
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income. This
statement establishes rules for the reporting of comprehensive income and its
components. The Company's comprehensive income consists of net income,
unrealized gains (losses) on available-for-sale securities, net of deferred
income taxes, and foreign currency translation adjustments and is presented in
the Consolidated Statement of Stockholders' Equity. The adoption of SFAS No. 130
had no impact on total stockholders' equity or net income. Prior year's
financial statements have been prepared in accordance with the SFAS No. 130
requirements.
SEGMENT INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, in 1998 which changes the way the Company reports
information about its operating segments. The information for 1997 and 1996 has
been prepared in accordance with SFAS 131 requirements in order to conform to
the 1998 presentation.
3. ACQUISITIONS AND DISPOSITIONS
USCS MERGER
Effective December 21, 1998, the Company acquired USCS, which was accounted for
as a pooling of interests. Accordingly, the Company's consolidated financial
statements for periods prior to December 21, 1998 have been restated to include
the financial position and results of operations of USCS. A summary of
historical results of DST and USCS are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
DST Systems, Inc................................................ $ 749.0 $ 650.7 $ 580.8
USCS International, Inc......................................... 347.1 299.3 263.2
--------- --------- ---------
Total revenues.................................................... $ 1,096.1 $ 950.0 $ 844.0
--------- --------- ---------
--------- --------- ---------
Net income
DST Systems, Inc................................................ $ 73.9 $ 59.0 $ 167.2
USCS International, Inc......................................... 21.0 22.4 14.5
Conforming of accounting policies............................... (3.9) (2.0) (3.9)
Merger costs.................................................... (19.4)
--------- --------- ---------
Total net income.................................................. $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
--------- --------- ---------
</TABLE>
In conjunction with the USCS Merger, certain conforming accounting adjustments
were recorded to conform the accounting policies relating primarily to USCS'
depreciation and amortization policies and the accounting for the costs of
software developed for internal USCS use. As a result of conforming accounting
policies, net income decreased $3.9 million, $2.0 million and $3.9 million for
each of the years ended December 31, 1998, 1997 and 1996, respectively.
Non-current assets decreased $33.3 million and $25.9 million at December 31,
1998 and 1997, respectively, as a result of conforming accounting policies. DST
purchased 1.1 million shares of USCS common stock during the fourth quarter of
1997 at a cost of $21.7 million. Prior to the USCS Merger, there were no
significant intercompany transactions between the Company and USCS.
53
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1998, DST's management approved plans which include initiatives to
integrate the operations of certain DST and USCS subsidiaries and consolidate
facilities. Total accrued integration costs of $16.9 million were recorded in
the fourth quarter of 1998, of which $0.7 million, $3.4 million and $12.8
million relate to the Financial Services, Customer Management and Output
Solutions Segments, respectively.
Accrued integration costs include $3.2 million for the severance cost of
involuntary separation benefits related to approximately 250 employees of which
approximately 50 employees have separated from the Company as of December 31,
1998. Employee separations will affect the majority of business functions and
job classifications across the Customer Management ($1.7 million) and Output
Solutions ($1.5 million) Segments, principally in North America.
The integration plans include $10.2 million related to lease abandonment costs,
elimination of certain non-strategic business lines and the closing of certain
production and administration centers associated with the Customer Management
($1.1 million) and Output Solutions ($9.1 million) Segments. For the locations
to be closed and the non-strategic business lines to be eliminated, the tangible
and intangible assets to be disposed of have been written down by $4.6 million
to fair value. The integration plans also include $2.7 million ($0.7, $0.2, and
$1.8 million for the Financial Services, Customer Management, and Output
Solutions Segments, respectively) related to purchased software/communications
systems that will be abandoned. Additionally, $0.8 million ($0.4 million in each
of the Customer Management and Output Solutions Segments) of costs have been
expensed related to terminating certain obligations which have no future benefit
as a result of the USCS Merger.
The cash and non-cash elements of the charge were approximately $9.5 million and
$7.4 million, respectively. Details of the merger charge are as follows (in
millions):
<TABLE>
<CAPTION>
UTILIZED BALANCE AT
ORIGINAL -------------------------- DECEMBER 31,
AMOUNT CASH NON-CASH 1998
----------- ----- ------------- ---------------
<S> <C> <C> <C> <C>
Employee severance benefits........................................... $ 3.2 $ 0.6 $ $ 2.6
Other................................................................. 6.3 6.3
Write down of long-lived assets....................................... 7.4 7.4
----- --- --- ---
Total merger charges.................................................. $ 16.9 $ 0.6 $ 7.4 $ 8.9
----- --- --- ---
----- --- --- ---
</TABLE>
Most of the remaining employee severance benefits are expected to be paid in
1999. The balance of the accrued costs relates primarily to facilities that will
be closed. Lease payments on closed facilities and abandoned equipment have
terms which end in 1999 through 2003. Location closures are planned to occur
through the year 2000 once arrangements have been made to process continuing
business at other facilities. Two of the locations have been closed as of
December 31, 1998. The costs of transitioning the continuing business have not
been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things additional employee
costs, relocation and integration costs of moving to common internal systems.
Although precise estimates cannot be made, mangement does not believe such costs
will have a materially adverse effect on the Company's consolidated results of
operations, liquidity or financial position.
Transaction costs for the USCS Merger of $9.1 million include investment banker
fees, legal fees and other costs paid in connection with the merger.
54
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EQUISERVE
In December 1998, Boston EquiServe LP ("Boston EquiServe") and First Chicago
Trust Company of New York completed a transaction creating EquiServe LP
("EquiServe"), the largest securities transfer agent in the U.S. Prior to the
transaction, Boston EquiServe was a limited partnership, 50% owned by Boston
Financial Data Services, Inc. ("BFDS") (a 50% owned joint venture of the Company
and State Street Corporation) and 50% by BankBoston Corporation. DST is
currently developing a new securities transfer system ("Fairway") to be used by
EquiServe to process all of its accounts. The Company has also agreed with
EquiServe to provide the data processing services for EquiServe to use Fairway.
Upon acceptance of defined components of Fairway, DST will contribute Fairway
and its securities transfer processing business (approximately 2 million
accounts) to EquiServe for a 20% direct ownership interest in EquiServe (the
"EquiServe Contribution"). DST will also have a 10% indirect ownership interest
in EquiServe through BFDS, after the EquiServe Contribution. The Company
believes that an ownership in EquiServe provides the most effective
participation in the opportunities presented by the continued consolidation of
the securities transfer industry. The acceptance of the defined components of
Fairway is currently expected to occur in three stages beginning in the second
quarter of 1999 and completing in the third quarter of 2000, at which time the
Company's non-EquiServe securities transfer business will be transferred to
EquiServe. The Company expects to account for the investment in EquiServe on the
equity method.
As Fairway is accepted and the transaction is completed, the Company plans to
account for the EquiServe Contribution as a non-cash, non-taxable, like-kind
exchange of similar productive assets. Accordingly, no gain will be recognized
from the EquiServe Contribution. The capitalized costs associated with the
Fairway development along with the net assets of the securities transfer
business contributed will become the basis of the Company's investment in
EquiServe. The Company expensed costs of Fairway development of $8.7 million,
$3.6 million and $2.2 million in 1998, 1997 and 1996, respectively. The Company
expects to account for the investment in EquiServe on the equity method.
CUSTIMA
In August 1998, USCS purchased 100% of the stock ("Custima Acquisition") of
United Kingdom based Custima International Holdings, plc ("Custima") for
approximately $15.4 million. The business acquired provides customer management
software for the utilities industry. The acquisition was accounted for as a
purchase, and accordingly, the Company's financial statements include Custima's
results of operations from the date of acquisition.
The purchase includes existing technology, in-process research and development
(IPR&D), trademarks and in-place workforce with an aggregate value of
approximately $18.1 million. The purchase price exceeded the fair market value
of net tangible assets acquired by $15.1 million, however, the purchase price
was less than the estimated fair value of all assets (tangible and intangible)
acquired. Accordingly, the non-current assets recorded in the transaction
(including IPR&D projects) were reduced on a pro-rata basis such that the total
amount of the assets recorded did not exceed the consideration paid.
The Company engaged a third party to perform an appraisal of the Custima
Acquisition (including the IPR&D projects acquired). The IPR&D projects included
improvements and increased functionality to the core billing product to adapt it
for competitive use within the U.S. and development of a new Java-based product
which will allow large utilities to benefit from an advanced billing system
while utilizing their existing legacy database.
The IPR&D projects were estimated to be approximately 60% complete as of the
date of acquisition and were assigned a total value at $7.1 million (using the
income method discounted at 30% which did
55
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not differ significantly from the stage of completion method, reduced to $6.0
million as a result of the total amount of the assets acquired from Custima
exceeding the consideration paid). Phased completion and delivery of the
projects are expected through mid-year 2000. The estimated cost of completion
for the projects is $7.5 million with cash inflows expected to commence shortly
after the respective completion dates. As with any software development project,
there are inherent development risks and periodic review of the projects can
result in changes to the development plan and the Company's business plans for
the software.
In accordance with applicable accounting principles, the assigned value of the
IPR&D ($6.0 million) was expensed at the date of acquisition. Also, a charge for
redundant facilities and workforce of $1.1 million was recorded in connection
with USCS's purchase and consolidation of Custima. Intangible assets (other than
IPR&D) are being amortized on a straight-line basis over periods ranging from 3
to 10 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.
DBS SYSTEMS CORPORATION ("DBS SYSTEMS")
In October 1997, the Company purchased the remaining 20% minority interest in
DBS Systems for $13.2 million in cash. The excess of the purchase price over the
net assets acquired of $11.6 million has been assigned a useful life of 12
years. The Company had previously acquired 20% and 60% of DBS Systems in
December 1995 and May 1993, respectively. 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. ("DST CATALYST")
In August 1997, the Company formed DST Catalyst by purchasing an 81% interest in
the international information technology subsidiary of the Chicago Stock
Exchange. DST Catalyst provides software and services to support automated
securities exchange activities and broker order interfaces primarily outside the
U.S. On a pro forma basis, the acquisition did not have a material impact on the
Company's historical results of operations or financial position.
FIRST OF MICHIGAN CAPITAL CORPORATION ("FIRST OF MICHIGAN")
In July 1997, the Company sold its interest in First of Michigan 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.
THE CONTINUUM COMPANY, INC. ("CONTINUUM")
On August 1, 1996, 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 Employee Stock
Ownership Program ("ESOP") contribution to provide funding for certain Continuum
employee withdrawals from DST's ESOP. DST's shares of CSC represent an
approximate 5% 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 earnings
since that time have been
56
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
recognized by DST. DST recognized equity in losses of Continuum of $4.9 million
in 1996. 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.
4. PROPERTIES
Properties and related accumulated depreciation are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Land........................................................ $ 20.1 $ 21.8
Buildings................................................... 128.2 122.1
Data processing equipment................................... 296.9 275.1
Data processing software.................................... 112.8 102.8
Software development costs.................................. 7.9 5.4
Furniture, fixtures and other equipment..................... 209.6 187.9
Leasehold improvements...................................... 35.9 44.0
Capitalized leases.......................................... 4.5 4.7
Construction-in-progress.................................... 28.6 21.8
--------- ---------
844.5 785.6
Less accumulated depreciation and amortization.............. 516.1 462.3
--------- ---------
Net properties.............................................. $ 328.4 $ 323.3
--------- ---------
--------- ---------
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996, was
$94.9 million, $94.8 million and $91.1 million, respectively. Cost includes the
amount of interest cost associated with significant capital additions.
Capitalized interest was $0.1 million, $0.1 million and $1.1 million for the
years ended December 31, 1998, 1997 and 1996, respectively.
57
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
Investments are as follows (in millions):
<TABLE>
<CAPTION>
CARRYING VALUE
1998 DECEMBER 31,
OWNERSHIP --------------------
PERCENTAGE 1998 1997
------------- --------- ---------
<S> <C> <C> <C>
Available-for-sale securities:
Computer Sciences Corporation................................................. 5% $ 554.6 $ 360.4
State Street Corporation...................................................... 4% 420.8 347.5
Euronet Services, Inc......................................................... 11% 4.5 9.2
Other available-for-sale securities........................................... 38.7 8.2
--------- ---------
1,018.6 725.3
--------- ---------
Unconsolidated affiliates:
Boston Financial Data Services, Inc........................................... 50% 39.4 32.3
European Financial Data Services Ltd.......................................... 50% 5.5 6.2
Argus Health Systems, Inc..................................................... 50% 3.8 10.6
Other unconsolidated affiliates............................................... 25.6 14.9
--------- ---------
74.3 64.0
--------- ---------
Other:
Net investment in leases...................................................... 16.3 10.6
Other......................................................................... 21.3 15.9
--------- ---------
37.6 26.5
--------- ---------
Total investments......................................................... $ 1,130.5 $ 815.8
--------- ---------
--------- ---------
</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 3. 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 presented above was 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
presented above was based on the closing price on the New York Stock Exchange.
The Company received $3.0 million, $2.5 million and $2.2 million in dividends
from State Street in 1998, 1997 and 1996, respectively, which have been recorded
in other income.
Euronet Services, Inc. operates an independent, non-bank owned automatic teller
machine network as a service provider to banks and other financial institutions
in certain Central European countries. Euronet consummated an initial public
offering of its common stock in March 1997. The aggregate market value of the
Company's investment in Euronet's common stock presented above was based on the
closing price on the New York Stock Exchange.
58
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's investments in available-for-sale securities had an aggregate
market value of $1,018.6 million and $725.3 million and aggregate cost basis of
$427.9 million and $399.1 million at December 31, 1998 and 1997, respectively.
Proceeds of $7.0 million and gross realized gains of $1.9 million were recorded
in 1998 from the sale of available-for-sale securities. Gross unrealized holding
gains totaled $591.2 million and $326.2 million at December 31, 1998 and 1997,
respectively. Gross unrealized holding losses totaled $0.5 million December 31,
1998. There were no gross holding losses at December 31, 1997.
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.
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 implementing a new
unit trust accounting system for the United Kingdom market.
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. The
Company received a $9.5 million cash dividend from Argus in 1998 and a $9.5
million dividend from Argus in 1996, of which $8.0 million was cash.
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization is
as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Boston Financial Data Services, Inc................................... $ 7.2 $ 6.2 $ 5.4
European Financial Data Services Limited.............................. (11.1) (11.8) (6.0)
Argus Health Systems, Inc............................................. 2.7 4.5 1.7
Other................................................................. (1.1) (0.2) (0.3)
The Continuum Company, Inc. (1)....................................... (4.9)
--------- --------- ---------
$ (2.3) $ (1.3) $ (4.1)
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Through the period ended June 30, 1996.
59
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain condensed financial information of the unconsolidated affiliates follows
(in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................ $ 410.9 $ 336.1 $ 614.7
Costs and expenses.................................. 418.8 337.6 633.4
Net loss (1)........................................ (7.9) (1.5) (18.7)
Current assets...................................... 104.9 99.9
Noncurrent assets................................... 203.7 195.5
Current liabilities................................. 51.8 41.5
Noncurrent liabilities.............................. 208.0 174.7
Partners' and stockholders' equity.................. 48.8 79.2
</TABLE>
- ------------------------
(1) Includes Continuum through the period ended June 30, 1996.
Net investment in leases of $16.3 million and $10.6 million at December 31, 1998
and 1997, respectively, reflects the gross lease receivable from sales-type
leases and the estimated residual value of the leased equipment less unearned
income.
The Company has committed to make additional investments approximating $2.5
million related to certain private equity partnerships.
6. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets include the following items (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Intangibles.................................................. $ 103.3 $ 94.4
Less accumulated amortization................................ 43.9 32.8
--------- ---------
Net........................................................ 59.4 61.6
Other assets................................................. 2.9 2.5
--------- ---------
Total...................................................... $ 62.3 $ 64.1
--------- ---------
--------- ---------
</TABLE>
Intangibles exclude goodwill of $4.5 million and $4.6 million at December 31,
1998 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 $13.8 million, $8.7 million and $9.0 million for the years
ended December 31, 1998, 1997 and 1996, respectively.
60
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM DEBT
The Company is obligated under notes and other indebtedness as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Secured notes payable....................................... $ 10.5 $ 16.0
Mortgage notes.............................................. 24.8 34.0
Revolving credit facilities................................. 23.0 59.1
Other....................................................... 3.5 6.1
--------- ---------
61.8 115.2
Less debt due within one year............................... (12.1) (17.8)
--------- ---------
Long-term debt.............................................. $ 49.7 $ 97.4
--------- ---------
--------- ---------
</TABLE>
The secured notes payable primarily represent notes, which are secured by data
processing and production equipment and minimum rental receivables. These notes
are generally payable over 12 to 24 month periods with interest rates from 3.90%
to 9.72% at December 31, 1998.
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 are fixed and range from 8.39% to 10.0% at December 31, 1998.
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. No borrowings were outstanding at December 31, 1998, and borrowings of
$30.0 million were outstanding at December 31, 1997.
The Company and its subsidiaries maintain additional lines of credit totaling
$100 million for working capital requirements and general corporate purposes of
which $50 million matures May 1999, $20 million matures December 1999 and $30
million matures December 2000. Borrowings under the facilities are available at
rates tied to the Eurodollar, federal funds rates or LIBOR rates. Commitment
fees of 0.105% to 0.25% per annum are required on the unused portions.
Borrowings of $23.0 million and $29.1 million were outstanding under these
additional lines of credit at December 31, 1998 and 1997, respectively.
61
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future principal payments of indebtedness at December 31, 1998 are as follows
(in millions):
<TABLE>
<S> <C>
1999................................................................. $ 12.1
2000................................................................. 7.1
2001................................................................. 1.9
2002................................................................. 25.1
2003................................................................. 2.2
Thereafter........................................................... 13.4
---------
Total................................................................ $ 61.8
---------
---------
</TABLE>
Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
carrying value of long-term debt is considered to approximate fair value at
December 31, 1998 and 1997.
8. INCOME TAXES
As a result of the USCS Merger, USCS will be included with the Company and its
consolidated U.S. subsidiaries in filing a consolidated federal income tax
return beginning December 21, 1998. Prior to the USCS Merger, USCS and its
consolidated U.S. subsidiaries filed a separate consolidated federal income tax
return.
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.
The following summarizes pretax income (loss) (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
U.S................................................. $ 108.9 $ 133.0 $ 299.8
International....................................... 6.7 (10.1) (8.2)
--------- --------- ---------
Total............................................... $ 115.6 $ 122.9 $ 291.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
62
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax expense consists of the following components (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................. $ 43.3 $ 37.0 $ 28.5
State and local..................................... 5.0 6.0 3.9
International....................................... 6.0 3.0 0.5
--------- --------- ---------
Total current..................................... 54.3 46.0 32.9
--------- --------- ---------
Deferred:
Federal............................................. (5.0) (1.2) 67.3
State and local..................................... (2.8) (0.7) 13.3
International....................................... (2.2) (1.2) (0.2)
--------- --------- ---------
Total deferred.................................... (10.0) (3.1) 80.4
--------- --------- ---------
Total income tax expense.............................. $ 44.3 $ 42.9 $ 113.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
Differences between the Company's effective income tax rate and the U.S. federal
income tax statutory rate are as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense using the statutory rate in
effect.............................................. $ 40.5 $ 43.0 $ 102.1
Tax effect of:
State and local income taxes, net................... 1.4 3.4 11.2
International income taxes, net..................... (0.6) 1.1 1.1
Earnings of U.S. unconsolidated affiliates.......... (2.8) (3.1) (1.3)
Transaction costs for USCS Merger................... 3.2
Acquired in-process research and development
costs............................................. 2.1
Other............................................... 0.5 (1.5) 0.2
--------- --------- ---------
Total income tax expense.............................. $ 44.3 $ 42.9 $ 113.3
--------- --------- ---------
--------- --------- ---------
Effective tax rate.................................... 38.4% 34.9% 38.8%
Statutory federal tax rate............................ 35.0% 35.0% 35.0%
</TABLE>
63
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The federal and state deferred tax assets (liabilities) recorded on the
Consolidated Balance Sheet are as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C>
Liabilities:
Investments in available for sale securities............ $ (359.8) $ (256.5)
Unconsolidated affiliates and investments............... (2.1) (2.8)
Other, net.............................................. (9.4) (5.1)
--------- ---------
Gross deferred tax liabilities.......................... (371.3) (264.4)
--------- ---------
Assets:
Book accruals not currently deductible for tax.......... 17.2 13.7
Depreciation and amortization........................... 16.0 10.6
Deferred compensation and other employee benefits....... 11.9 7.8
International operating loss carryforwards.............. 2.5 2.7
Other, net.............................................. 1.8 0.9
--------- ---------
Gross deferred tax assets............................... 49.4 35.7
--------- ---------
Net deferred tax liability................................ $ (321.9) $ (228.7)
--------- ---------
--------- ---------
</TABLE>
9. STOCKHOLDERS' EQUITY
STOCK BASED COMPENSATION
In September 1995, the Company established the Stock Option and Performance
Award Plan, which now provides for the availability of 9,000,000 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.
USCS, prior to its merger with DST, issued stock options under five stock option
plans to directors, officers and key employees of USCS. Under the 1988, 1990,
1993 and 1996 USCS Stock Option Plans, options were granted at prices and with
terms and conditions established by USCS' Board of Directors at the date of
grant. Options under these plans vest over periods of up to sixty months and
expire ten years after the date of grant. Under the USCS Director's Stock Option
Plan, options were granted at fair market value and vested annually over three
years and expire five years after the date of grant. Upon completion of the USCS
Merger, each outstanding option to purchase USCS common stock issued pursuant to
USCS' stock option plans was assumed by DST. Each such option now constitutes 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 merger exchange ratio of 0.62 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 is equal to the exercise price per
share of such option before the USCS Merger divided by the merger exchange ratio
of 0.62, rounded up to the nearest whole cent. Pursuant to certain change in
control provisions in the USCS
64
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option Plans, approximately 50% of the unvested portions of the options
accelerated and became exercisable at the completion of the USCS Merger.
Compensation expense recognized in accordance with APB 25 was not material in
1998, 1997 and 1996.
Summary stock option activity is presented in the table below (shares in
millions):
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1.................... 4.6 $ 23.01 3.7 $ 18.50 3.4 $ 15.90
Granted..................................... 1.3 47.69 1.3 31.95 0.8 22.38
Exercised................................... (0.4) 16.34 (0.3) 7.52 (0.3) 3.39
Canceled.................................... (0.2) 31.30 (0.1) 20.67 (0.2) 15.88
--- --- ---
Outstanding at December 31.................. 5.3 $ 29.28 4.6 $ 23.01 3.7 $ 18.50
--- --- ---
--- --- ---
Exercisable at December 31.................. 3.5 $ 23.45 1.7 $ 18.87 1.2 $ 17.05
</TABLE>
Summary information concerning outstanding and exercisable stock options as of
December 31, 1998 follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
----------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ------------------------------ ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.34 -- $11.91............... 0.2 6.0 $ 7.35 0.2 $ 7.30
20.17 -- 21.51................ 2.5 6.9 20.83 2.1 20.87
26.21 -- 41.74................ 1.6 8.3 31.01 1.2 31.19
47.79 -- 62.34................ 1.0 9.3 53.73
-- -- -------- -- --------
$0.34 -- $62.34............... 5.3 7.7 $29.28 3.5 $23.45
</TABLE>
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>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income (millions): As reported $ 71.6 $ 79.4 $ 177.8
Pro forma 58.0 71.3 172.9
Basic earnings per share: As reported 1.14 1.25 2.82
Pro forma 0.92 1.12 2.75
Diluted earnings per share: As reported 1.11 1.23 2.78
Pro forma 0.90 1.10 2.70
</TABLE>
Pro forma net income for 1998 was significantly impacted by the acceleration of
vesting of certain USCS stock options at the time of the USCS Merger pursuant to
certain change in control provisions in the USCS Stock Option Plans.
65
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The weighted average fair value of options granted was $17.31, $13.06 and $11.83
for 1998, 1997 and 1996, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 1998, 1997 and
1996, respectively: expected option terms of 5.3, 5.7 and 7.1 years, volatility
of 28.4%, 30.7% and 41.6%, dividend yield of 0% and risk-free interest rates of
5.4%, 6.2% and 5.8%.
Prior to the USCS Merger, shares were issued under the USCS Employee Stock
Purchase Plan. Common stock purchases under the Plan totaled approximately
32,000 shares and 12,000 shares in 1998 and 1997, respectively. The weighted
average fair value of the employee purchase rights and compensation expense was
immaterial.
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows (in
millions, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net income............................................ $ 71.6 $ 79.4 $ 177.8
--------- --------- ---------
--------- --------- ---------
Average common shares outstanding..................... 62.7 63.6 63.0
Incremental shares from assumed conversions of stock
options............................................. 1.6 1.1 1.0
--------- --------- ---------
Dilutive potential common shares...................... 64.3 64.7 64.0
--------- --------- ---------
--------- --------- ---------
Basic earnings per share.............................. $ 1.14 $ 1.25 $ 2.82
Diluted earnings per share............................ $ 1.11 $ 1.23 $ 2.78
</TABLE>
STOCK ISSUANCE AND REPURCHASES
Net proceeds of $54.1 million were received in 1996 from the initial public
offering of USCS common stock.
In December 1998, the Board of Directors approved a plan for DST to repurchase
600,000 shares of DST common stock at the rate of approximately 25,000 shares
per month in approximately equal monthly amounts beginning in February 1999, to
provide additional shares needed as a result of the USCS Merger for use under
various DST option and benefit programs. Such purchases may be made in private
or market transactions and will be made in compliance with SEC regulations.
In the fourth quarter 1997, DST expended $21.7 million to purchase 1.1 million
shares of USCS common stock. These shares were retired in conjunction with the
USCS Merger.
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. The Company
expended $10.0 million, $20.3 million, and $12.5 million in 1998, 1997 and 1996,
respectively to complete the purchases under this plan.
USCS, prior to the USCS Merger, expended approximately $6.2 million in 1998 and
$10.2 million in 1997 for the repurchase of common stock in order to meet
obligations under stock option plans,
66
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employee stock purchase plans and 401(k) retirement plans. Substantially all
these shares were reissued prior to the USCS Merger.
The Company had 0.9 million and 1.3 million shares held in treasury at December
31, 1998 and 1997, respectively.
COMPREHENSIVE INCOME
Components of other comprehensive income consist of the following (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding gains arising during the
period.......................................... $ 266.4 $ 170.9 $ 119.1
Less reclassification adjustment for gains
included in net income.......................... (1.9)
Foreign currency translation adjustments............ (1.6) 1.6
Deferred income taxes............................... (103.3) (66.8) (46.5)
--------- --------- ---------
Other comprehensive income.......................... $ 161.2 $ 102.5 $ 74.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
Components of the related tax provision of other comprehensive income consists
of the following (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Unrealized gains on investments:
Unrealized holding gains arising during the
period............................................ $ 104.0 $ 66.8 $ 46.5
Less reclassification adjustment for gains included
in net income..................................... (0.7)
--------- --------- ---------
Deferred income taxes................................. $ 103.3 $ 66.8 $ 46.5
--------- --------- ---------
--------- --------- ---------
</TABLE>
RIGHTS PLAN
The Company is party to a Stockholder's Rights Agreement (the "Rights Plan")
dated as of October 6, 1995, and amended as of July 9, 1998. Each share of the
Company's common stock held of record on October 18, 1995 (when Kansas City
Southern Industries, Inc. ("KCSI") was then the sole stockholder of the Company)
and all shares of common stock issued in and subsequent to the Offerings have
received one Right. Each Right entitles its holder 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 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 (an
"Acquiring Person"), 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 any person's
intention to make a tender offer or
67
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchange offer that would result in ownership of 15% or more of the outstanding
common stock, unless the Board of Directors sets a later date in either event.
The Rights attached to the stock of an Acquiring Person become void. KCSI, its
subsidiary, FAM Holdings, Inc. ("FAM"), and certain entities affiliated with FAM
are in certain circumstances excluded from the definition of an "Acquiring
Person" under the Rights Plan.
The Rights Plan is intended to encourage a potential acquiring person 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. The Rights Plan may therefore have the
effect of delaying, deterring or preventing a change in control of the Company.
10. BENEFITS PLANS
The Company sponsors defined contribution 401(k) and profit sharing plans that
cover substantially all domestic employees following the completion of an
eligibility period. These plans provide for employer contributions based
primarily upon employee participation and are made at the discretion of the
Board of Directors. The total expense under these plans was $9.7 million, $9.2
million and $7.9 million in 1998, 1997 and 1996, respectively. The Company
funded $6.5 million of the 1997 obligation in 1998 with shares held in treasury
at the fair market value on the date of contribution.
Prior to 1998, DST participated in a multi-employer ESOP. In January 1998, the
Company formed The DST Systems, Inc. Employee Stock Ownership Plan ("DST ESOP")
and transferred all balances from DST's portion of the multi-employer ESOP to
the DST ESOP. This plan provide for employer contributions based primarily upon
employee participation and are made at the discretion of the Board of Directors.
The total expense under this plan was $1.0 million, $2.0 million and $13.7
million in 1998, 1997 and 1996, respectively.
USCS had two defined contribution stock ownership plans ("USCS ESOP") covering
substantially all employees who were employed by USCS as of February 18, 1993.
There were no contributions to the plans in 1998, 1997 and 1996. Under the
plans, USCS 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. USCS' repurchase obligations under the plans
lapsed effective with the initial public offering of USCS common stock. The USCS
ESOP was terminated effective January 1, 1997. An initial distribution from the
ESOP trust occurred in August 1997, with a total of approximately 321,000 shares
and cash of $579,000 distributed to the participants. In December 1997, the
remaining approximately 1.8 million shares and cash of $97,000 were distributed.
The Company has active and nonactive non-qualified deferred compensation plans
for senior management, certain highly compensated employees and directors. The
active 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. Amounts deferred under the plans totaled approximately
$22.5 million and $16.3 million at December 31, 1998 and 1997, respectively.
68
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information for the years ended December
31, (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest paid during the year.......................... $ 11.4 $ 6.2 $ 13.0
Income taxes paid during the year...................... 40.7 43.6 30.8
</TABLE>
In 1998, the Company received a $9.5 million dividend from Argus. The Company
also received a $9.5 million dividend from Argus in December 1996, $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.
The Company purchased mainframe computer equipment and other capital additions
in the amount of $30.2 million and $4.8 million in 1997 and 1996, respectively,
through secured notes payable or vendor financed installment notes which
required no direct outlay of cash. No such purchases occurred in 1998.
The renegotiation of certain third party software agreements, effective March
31, 1998, resulted in certain amounts being recorded as costs and expenses
instead of as depreciation expense.
12. COMMITMENTS AND CONTINGENCIES
The Company has future obligations under certain software license agreements and
operating leases. The operating leases, which include facilities, data
processing and other equipment have lease terms ranging from 1 to 25 years not
including options to extend the leases for various lengths of time. Rental
expense from operating leases was $40.9 million, $43.2 million and $40.4 million
for the years ended December 31, 1998, 1997 and 1996, respectively. Future
minimum rentals for the non-cancelable term of all operating leases and
obligations under software license agreements are as follows (in millions):
<TABLE>
<CAPTION>
SOFTWARE
NON-CANCELABLE LICENSE
LEASES AGREEMENTS TOTAL
--------------- ------------- ---------
<S> <C> <C> <C>
1999................................................... $ 29.7 $ 8.7 $ 38.4
2000................................................... 23.2 10.2 33.4
2001................................................... 16.1 7.7 23.8
2002................................................... 9.7 7.1 16.8
2003................................................... 6.0 0.2 6.2
Thereafter............................................. 38.4 0.4 38.8
------ ----- ---------
Total.................................................. $ 123.1 $ 34.3 $ 157.4
------ ----- ---------
------ ----- ---------
</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 unconsolidated real estate affiliates
and incurred occupancy expenses of $6.8 million, $6.6 million and $4.7 million
for the years ended December 31, 1998, 1997 and 1996, 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.
69
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1998 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.
70
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has four segments as defined in Note 1. The Company evaluates the
performance of its segments based on income before taxes, non-recurring items
and interest expense. Intersegment revenues are reflected at rates prescribed by
the Company and may not be reflective of market rates. Summarized financial
information concerning the segments is shown in the following tables (in
millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------
FINANCIAL CUSTOMER OUTPUT INVESTMENTS/ CONSOLIDATED
SERVICES MANAGEMENT SOLUTIONS OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues................... $ 506.4 $ 221.7 $ 357.0 $ 11.0 $ $ 1,096.1
Intersegment revenues............... 1.2 57.7 23.1 (82.0)
----------- ----------- ----------- ----- ----------- -----------
Total revenues...................... 507.6 221.7 414.7 34.1 (82.0) 1,096.1
Cost and expenses................... 360.5 187.8 350.9 17.5 (82.0) 834.7
Depreciation and amortization....... 61.7 11.6 27.7 7.8 108.8
Merger charges...................... 33.1 33.1
----------- ----------- ----------- ----- ----------- -----------
Income from operations.............. 85.4 22.3 36.1 8.8 (33.1) 119.5
Other income (loss), net............ 1.5 (0.6) 0.5 5.4 0.6 7.4
Equity in losses of unconsolidated
affiliates........................ (1.4) (1.3) (2.7)
----------- ----------- ----------- ----- ----------- -----------
Earnings before interest and income
taxes............................. $ 85.5 $ 21.7 $ 36.6 $ 12.9 $ (32.5) $ 124.2
----------- ----------- ----------- ----- ----------- -----------
----------- ----------- ----------- ----- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------------------------------
FINANCIAL CUSTOMER OUTPUT INVESTMENTS/ CONSOLIDATED
SERVICES MANAGEMENT SOLUTIONS OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues................... $ 424.3 $ 202.9 $ 310.9 $ 11.9 $ $ 950.0
Intersegment revenues............... 0.7 55.5 21.8 (78.0)
----------- ----------- ----------- ----- ----------- -----------
Total revenues...................... 425.0 202.9 366.4 33.7 (78.0) 950.0
Cost and expenses................... 302.3 164.5 312.8 18.0 (78.0) 719.6
Depreciation and amortization....... 56.5 10.1 29.3 7.6 103.5
----------- ----------- ----------- ----- ----------- -----------
Income from operations.............. 66.2 28.3 24.3 8.1 126.9
Other income (loss), net............ 0.8 (0.6) 0.7 4.7 0.2 5.8
Equity in losses of unconsolidated
affiliates........................ (0.9) (0.4) (1.3)
----------- ----------- ----------- ----- ----------- -----------
Earnings before interest and income
taxes............................. $ 66.1 $ 27.7 $ 25.0 $ 12.4 $ 0.2 $ 131.4
----------- ----------- ----------- ----- ----------- -----------
----------- ----------- ----------- ----- ----------- -----------
</TABLE>
71
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------
FINANCIAL CUSTOMER OUTPUT INVESTMENTS/ CONSOLIDATED
SERVICES MANAGEMENT SOLUTIONS OTHER ELIMINATIONS TOTAL
----------- ----------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
External revenues................... $ 378.2 $ 172.3 $ 284.0 $ 9.5 $ $ 844.0
Intersegment revenues............... 50.2 16.4 (66.6)
----------- ----------- ----------- ----- ----------- -----------
Total revenues...................... 378.2 172.3 334.2 25.9 (66.6) 844.0
Cost and expenses................... 272.7 147.6 283.3 16.0 (66.6) 653.0
Depreciation and amortization....... 58.4 8.9 27.0 4.8 99.1
Other expense....................... 13.7 13.7
----------- ----------- ----------- ----- ----------- -----------
Income from operations.............. 47.1 15.8 23.9 5.1 (13.7) 78.2
Other income (loss), net............ 1.4 0.2 (2.0) 3.7 1.2 4.5
Gain on sales of Continuum.......... 223.4 223.4
Equity in losses of unconsolidated
affiliates........................ (3.2) (0.8) (4.0)
----------- ----------- ----------- ----- ----------- -----------
Earnings before interest and income
taxes............................. $ 268.7 $ 16.0 $ 21.9 $ 8.0 $ (12.5) $ 302.1
----------- ----------- ----------- ----- ----------- -----------
----------- ----------- ----------- ----- ----------- -----------
</TABLE>
Earnings before interest and income taxes in the segment reporting information
above less interest expense of $8.6 million, $8.5 million and $10.5 million for
the year ended December 31, 1998, 1997 and 1996, respectively, is equal to the
Company's income before income taxes and minority interests on a consolidated
basis for the corresponding year.
The Financial Services Segment derives its revenues from two primary products
and services. Revenues from shareowner accounting products and services totaled
$384.0 million, $326.8 million and $285.9 million in 1998, 1997 and 1996,
respectively. Revenues from portfolio/investment management accounting products
and services totaled $101.0 million, $77.1 million and $69.8 million in 1998,
1997, and 1996, respectively.
72
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information concerning principal geographic areas is as follows (in millions):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
U.S............................................. $ 942.1 $ 832.4 $ 748.4
U.K............................................. 55.9 56.5 45.9
Canada.......................................... 31.4 26.4 24.3
Australia....................................... 13.9 13.1 15.3
Germany......................................... 8.6 1.3 0.3
Netherlands..................................... 8.3 4.6 0.8
Switzerland..................................... 6.1 0.5 0.2
South Africa.................................... 6.1 5.5 5.5
Others.......................................... 23.7 9.7 3.3
--------- --------- ---------
$ 1,096.1 $ 950.0 $ 844.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
Long-lived assets:
U.S............................................... $ 347.4 $ 342.1
U.K............................................... 17.0 18.0
Canada............................................ 12.5 12.8
Others............................................ 13.8 14.6
--------- ---------
$ 390.7 $ 387.5
--------- ---------
--------- ---------
</TABLE>
73
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables of quarterly financial data for the years ended December
31, 1998 and 1997 have been restated to combine the historical results of
operations of DST and USCS adjusted for conformity of accounting principles.
(dollars in millions, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1998
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues................................................ $ 266.0 $ 269.8 $ 268.8 $ 291.5 $ 1,096.1
Cost and expenses....................................... 198.4 207.6 207.0 221.7 834.7
Depreciation and amortization........................... 27.2 24.6 26.2 30.8 108.8
Merger charges.......................................... 7.1 26.0 33.1
----------- ----------- ----------- ----------- ---------
Income from operations.................................. 40.4 37.6 28.5 13.0 119.5
Interest expense........................................ (2.6) (2.3) (2.0) (1.7) (8.6)
Other income, net....................................... 1.0 1.3 3.7 1.4 7.4
Equity in earnings (losses) of unconsolidated
affiliates, net of taxes.............................. (0.4) 0.1 (1.2) (1.2) (2.7)
----------- ----------- ----------- ----------- ---------
Income before income taxes and minority interests....... 38.4 36.7 29.0 11.5 115.6
Income taxes............................................ 14.3 13.6 11.3 5.1 44.3
----------- ----------- ----------- ----------- ---------
Income before minority interests........................ 24.1 23.1 17.7 6.4 71.3
Minority interests...................................... (0.2) (0.1) (0.3)
----------- ----------- ----------- ----------- ---------
Net income.............................................. $ 24.1 $ 23.3 $ 17.7 $ 6.5 $ 71.6
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Basic average shares outstanding........................ 62.6 62.8 62.8 62.8 62.7
Basic earnings per share................................ $ 0.38 $ 0.37 $ 0.28 $ 0.10 $ 1.14(1)
Diluted average shares outstanding...................... 64.0 64.2 64.5 64.5 64.3
Diluted earnings per share.............................. $ 0.38 $ 0.36 $ 0.27 $ 0.10 $ 1.11
Common stock price ranges: High......................... $ 53.00 $ 56.81 $ 69.94 $ 59.75 $ 69.94
Low.......................... $ 40.25 $ 50.13 $ 47.88 $ 35.81 $ 35.81
</TABLE>
- ------------------------
(1) Earnings per share are computed independently for each of the quarters
presented. As such, the accumulation of 1998 quarterly earnings per share
may not equal the total computed for the year.
74
<PAGE>
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1997
----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues.................................................. $ 229.7 $ 228.1 $ 232.9 $ 259.3 $ 950.0
Cost and expenses......................................... 172.9 173.1 176.7 196.9 719.6
Depreciation and amortization............................. 25.1 25.1 26.6 26.7 103.5
----------- ----------- ----------- ----------- ---------
Income from operations.................................... 31.7 29.9 29.6 35.7 126.9
Interest expense.......................................... (2.5) (2.2) (1.9) (1.9) (8.5)
Other income, net......................................... 1.1 1.3 2.3 1.1 5.8
Equity in earnings (losses) of unconsolidated affiliates,
net of taxes............................................ 1.0 0.8 (0.4) (2.7) (1.3)
----------- ----------- ----------- ----------- ---------
Income before income taxes and minority interests......... 31.3 29.8 29.6 32.2 122.9
Income taxes.............................................. 11.4 10.4 10.6 10.5 42.9
----------- ----------- ----------- ----------- ---------
Income before minority interests.......................... 19.9 19.4 19.0 21.7 80.0
Minority interests........................................ 0.1 0.3 0.3 (0.1) 0.6
----------- ----------- ----------- ----------- ---------
Net income................................................ $ 19.8 $ 19.1 $ 18.7 $ 21.8 $ 79.4
----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ---------
Basic average shares outstanding.......................... 63.8 63.7 63.7 63.0 63.6
Basic earnings per share.................................. $ 0.31 $ 0.30 $ 0.30 $ 0.35 $ 1.25(1)
Diluted average shares outstanding........................ 64.8 64.8 65.0 64.2 64.7
Diluted earnings per share................................ $ 0.31 $ 0.29 $ 0.29 $ 0.34 $ 1.23
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>
- ------------------------
(1) Earnings per share are computed independently for each of the quarters
presented. As such, the accumulation of 1997 quarterly earnings per share
may not equal the total computed for the year.
75
<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 11, 1999 (the
"Definitive Proxy Statement") will be filed with the Securities and Exchange
Commission no later than 120 days after December 31, 1998.
(A) DIRECTORS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
headings "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.
76
<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 PricewaterhouseCoopers LLP dated February 25, 1999 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 statements 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.
2. Plan of acquisition, reorganization, arrangement, liquidation or succession
<TABLE>
<C> <S>
2 The Company's Agreement and Plan of Merger, dated September 2, 1998 by and among
DST Systems, Inc., DST Acquisitions, Inc. and USCS International, Inc, which is
attached as Exhibit 2 to the Company's Registration Statement on Form S-4 dated
November 20, 1998, (Commission file no. 333-67611) ("S-4"), is hereby incorporated
by reference as Exhibit 2.
</TABLE>
3. Articles of Incorporation and by-laws
<TABLE>
<C> <S>
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 "IPO
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 IPO Registration Statement, are hereby
incorporated by reference as Exhibit 3.2.
</TABLE>
4. Instruments defining the rights of security holders, including indentures
<TABLE>
<C> <S>
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 IPO 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
IPO 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 IPO
Registration Statement, are hereby incorporated by reference as Exhibit 4.3.
</TABLE>
77
<PAGE>
<TABLE>
<C> <S>
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.
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 IPO Registration Statement, is hereby
incorporated by reference as Exhibit 4.5.
4.6 The description set forth under the heading "Dividend Policy" in the Company's IPO
Registration Statement of the Common Stock on Form 8-A (Commission file no.
1-14036) is hereby incorporated by reference as Exhibit 4.6.
4.7 The description of the Company's common stock, par value $0.01 per share, set forth
in the Company's Registration Statement on Form 8-A dated January 21, 1998,
(Commission file no. 1-14036), is hereby incorporated by reference as Exhibit 4.7.
4.8 Paragraphs fourth, fifth, sixth, seventh, tenth, eleventh, and twelfth of Exhibit
3.1 are hereby incorporated by reference as Exhibit 4.8.
4.9 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 4.9.
4.10 The Affiliate Agreement with James C. Castle dated October 28, 1998, is attached as
Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036).
4.11 The Affiliate Agreement with George L. Argyros, Sr. dated September 3, 1998, is
attached as Exhibit 4.11 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (Commission file no. 1-14036).
4.12 The Stockholder Agreement with Kansas City Southern Industries, Inc. dated
September 2, 1998 is attached as Exhibit 4.12 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (Commission file no. 1-14036).
4.12.1 The First Amendment to the Stockholder Agreement with Kansas City Southern
Industries, Inc. dated October 29, 1998, which is attached as Exhibit 4.2.1 to the
Company's S-4, is hereby incorporated by reference as Exhibit 4.12.1.
4.13 The Stockholder Agreement with George L. Argyros, Sr. dated September 2, 1998, is
attached as Exhibit 4.13 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (Commission file no. 1-14036).
4.14 The Stockholder Agreement with James C. Castle dated September 2, 1998, is attached
as Exhibit 4.14 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036).
4.15 The Registration Rights Agreement with George L. Argyros, Sr., James C. Castle and
certain other individuals dated December 21, 1998 is attached as Exhibit 4.15 to
the Company's Annual Report on Form 10-K for the year ended December 31, 1998
(Commission file no. 1-14036).
</TABLE>
78
<PAGE>
<TABLE>
<C> <S>
4.16 The Five-Year Competitive Advance and Revolving Credit Facility Agreement ("Chase
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 4.16.
4.16.1 The Amendment to the Chase Agreement dated November 19, 1998, is attached as
Exhibit 4.16.1 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036).
</TABLE>
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
<TABLE>
<C> <S>
10.1 The Tax Disaffiliation Agreement between the Company and KCSI dated October 23,
1995, which is attached as Exhibit 10.4 to the Company's IPO Registration
Statement, is hereby incorporated by reference as Exhibit 10.1
10.2 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 IPO
Registration Statement, is hereby incorporated by reference as Exhibit 10.2.
10.3 The Agreement between State Street Boston Financial Corporation and Data-Sys-Tance
dated June 1, 1974 ("State Street Agreement"), which is attached as Exhibit 10.14
to the Company's IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.3.
10.3.1 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 IPO
Registration Statement, is hereby incorporated by reference as Exhibit 10.3.1.
10.3.2 The Amendment to the State Street Agreement between the Company and State Street,
dated February 6, 1992, is attached as Exhibit 10.3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 (Commission file no.
1-14036). Portions of this agreement are subject to confidential treatment.
10.4 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 IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.4.
10.5 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 IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.5.
10.6 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 IPO Registration Statement, is
hereby incorporated by reference as Exhibit 10.6.
</TABLE>
79
<PAGE>
<TABLE>
<C> <S>
10.7 The Contribution Agreement between DST Systems, Inc. and Boston EquiServe Limited
Partnership dated November 30, 1998, is attached as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (Commission file
no. 1-14036).
10.8 The Fairway System Software Development Agreement dated November 30, 1998, is
attached as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 (Commission file no. 1-14036).
10.9 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
10.9.
10.10 The Company's Incentive Compensation Plan, dated February 27, 1997, is attached as
Exhibit 10.10 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036).
10.11 The Company's Deferred Compensation Plan, dated May 12, 1998, is attached as
Exhibit 10.11 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036).
10.12 The Company's Directors' Deferred Fee Plan effective September 1, 1995, which is
attached as Exhibit 10.19 to the Company's Registration Statement, is hereby
incorporated by reference as Exhibit 10.12.
10.13 The 1999 USCS Executive Bonus Plan, is attached as Exhibit 10.13 to the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 (Commission file
no. 1- 14036). Portions of this agreement are subject to confidential treatment.
10.14 The USCS International, Inc. Deferred Compensation Plan, which is attached as
Exhibit 10.7 to USCS International, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1997 (Commission file no. 000-28268), is hereby incorporated by
reference as Exhibit 10.14.
10.15 The USCS International, Inc. Bonus Deferral Plan, which is attached as Exhibit 4.1
to USCS International, Inc.'s Registration Statement on Form S-8 dated August 29,
1997 (Commission file no. 333-34801), is hereby incorporated by reference as
Exhibit 10.15.
10.16 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 IPO Registration Statement, is hereby incorporated by
reference as Exhibit 10.16.
10.16.1 The Eighth Amendment to the Trust Agreement between the Company as settlor and
United Missouri Bank of Kansas City, N.A. as Trustee dated December 31, 1998, is
attached as Exhibit 10.16.1 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 (Commission file no. 1-14036).
10.17 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 IPO Registration Statement,
is hereby incorporated by reference as Exhibit 10.17.
10.17.1 The Amendment to the Trust Agreement by and between the Company as settlor and
United Missouri Bank of Kansas City, N.A., Trustee dated December 31, 1998, for the
benefit of James Horan, is attached as Exhibit 10.17.1 to the Company's Annual
Report of Form 10-K for the year ended December 31, 1998 (Commission file no.
1-14036).
</TABLE>
80
<PAGE>
<TABLE>
<C> <S>
10.18 The Employment Agreement between the Company and Thomas A. McDonnell dated January
1, 1999, is attached as Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 (Commission file no. 1-14036).
10.19 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 IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.19.
10.20 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 IPO Registration Statement, is hereby incorporated by reference as
Exhibit 10.20.
10.21 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 10.21.
10.22 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
10.22.
10.23 The Employment Agreement between USCS and James C. Castle dated August 10, 1992,
which is attached to USCS' Registration Statement on Form S-1, Registration No.
333-03842, is hereby incorporated by reference as Exhibit 10.23.
10.24 The USCS International, Inc. 1996 Directors' Stock Option Plan (the "Directors'
Plan") dated as of April 18, 1996, which is attached as Exhibit 10.5 to USCS
International, Inc.'s Registration Statement on Form S-1 (Commission File No.
333-3842) dated May 29, 1996, is hereby incorporated by reference as Exhibit
10.24.*
10.24.1 The First Amendment to the Directors' Plan dated February 22, 1998, which is
attached as Exhibit 4.6.2 to the Company's Registration Statement on Form S-8 dated
March 2, 1999 (Commission File No. 333-73241), is hereby incorporated by reference
as Exhibit 10.24.1.*
10.25 The USCS International, Inc. 1988 Incentive Stock Option Plan ("the 1988 USCS
Plan") dated July 1, 1988, as amended and restated as of March 5, 1997, which is
attached as Exhibit 4.6.1 to the Company's Registration Statement on Form S-8 dated
December 21, 1998 (Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.25.*
10.25.1 The Amendment dated January 22, 1998, to the 1988 USCS Plan, which is attached as
Exhibit 4.6.2 to the Company's Registration Statement on Form S-8 dated December
21, 1998 (Commission File No. 333-69393), is hereby incorporated by reference as
Exhibit 10.25.1.*
10.26 The USCS International, Inc. 1990 Stock Option Plan ("the 1990 USCS Plan") dated
December 31, 1990, as amended and restated as of March 5, 1997, which is attached
as Exhibit 4.7.1 to the Company's Registration Statement on Form S-8 dated December
21, 1998 (Commission File No. 333-69393), is hereby incorporated by reference as
Exhibit 10.26.*
10.26.1 The Amendment dated January 22, 1998, to the 1990 USCS Plan, which is attached as
Exhibit 4.7.2 to the Company's Registration Statement on Form S-8 dated December
21, 1998 (Commission File No. 333-69393), is hereby incorporated by reference as
Exhibit 10.26.1.*
10.27 The USCS International, Inc. 1993 Incentive Stock Option Plan ("the 1993 USCS
Plan") dated May 18, 1993, as amended and restated as of March 5, 1997, which is
attached as Exhibit 4.8.1 to the Company's Registration Statement on Form S-8 dated
December 21, 1998 (Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.27.*
</TABLE>
81
<PAGE>
<TABLE>
<C> <S>
10.27.1 The Amendment dated January 22, 1998, to the 1993 USCS Plan, which is attached as
Exhibit 4.8.2 to the Company's Registration Statement on Form S-8 dated December
21, 1998 (Commission File No. 333-69393), is hereby incorporated by reference as
Exhibit 10.27.1.*
10.28 The USCS International, Inc. 1989 Stock Option Plan ("the 1996 USCS Plan") dated
April 12, 1996, which is attached as Exhibit 4.9.1 to the Company's Registration
Statement on Form S-8 dated December 21, 1998 (Commission File No. 333-69393), is
hereby incorporated by reference as Exhibit 10.28*.
10.28.1 The Amendment dated July 25, 1996, to the 1996 USCS Plan, which is attached as
Exhibit 4.9.2 to the Company's Registration Statement on Form S-8 dated December
21, 1998 (Commission File No. 333-69393), is hereby incorporated by reference as
Exhibit 10.28.1.*
10.28.2 The Amendment dated January 23, 1997, to the 1996 USCS Plan, including the
footnote, which is attached as Exhibit 4.9.3 to the Company's Registration
Statement on Form S-8 dated December 21, 1998 (Commission File No. 333-69393), is
hereby incorporated by reference as Exhibit 10.28.2.
10.28.3 The Amendment dated January 22, 1998, to the 1996 USCS Plan, including the
footnote, which is attached as Exhibit 4.9.4 to the Company's Registration
Statement on Form S-8 dated December 21, 1998 (Commission File No. 333-69393), is
hereby incorporated by reference as Exhibit 10.28.3.
10.29 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 10.29.
10.29.1 The First Amendment to the DST Systems, Inc. 1995 Stock Option and Performance
Award Plan, approved May 13, 1997, 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), is hereby incorporated by reference as Exhibit 10.29.1.
10.29.2 The Second Amendment to the DST Systems, Inc. 1995 Stock Option and Performance
Award Plan approved December 21, 1998, set forth under "Proposal 2 for DST
Stockholders-- Amendment of the DST Plan--DST Plan Proposal; Recommendation of the
DST Board" in the S-4, is hereby incorporated by reference as Exhibit 10.29.2.
</TABLE>
- ------------------------
* The agreements and the amendments thereto are included as exhibits only to
the extent that they are incorporated into the option agreements assumed by
the Company with its acquisition of USCS.
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.
82
<PAGE>
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,
1998, (Commission file no. 1-14036).
22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
Not applicable.
23. CONSENTS OF EXPERTS AND COUNSEL
The consent dated March 26, 1999 of PricewaterhouseCoopers 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.
(B) REPORTS ON FORM 8-K DURING THE LAST CALENDAR QUARTER
The Company filed a Form 8-K dated October 22, 1998, under Item 5 of such form,
reporting the announcement of financial results for the quarter ended
September 30, 1998.
The Company filed a Form 8-K dated December 21, 1998, under Item 5 of such form,
reporting the announcement of the merger of USCS International, Inc. with a
wholly-owned subsidiary of the Company.
The Company filed a Form 8-K dated December 21, 1998, under Item 2 and 7 of such
form, reporting the merger of USCS International, Inc. with a wholly-owned
subsidiary of the Company, including financial information and exhibits
associated with the merger.
83
<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 25, 1999
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 25, 1999.
/s/ Thomas A. McDonnell
/s/ A. Edward Allinson ---------------------------
- ------------------------------ THOMAS A. MCDONNELL
A. EDWARD ALLINSON PRESIDENT AND CHIEF
DIRECTOR EXECUTIVE OFFICER,
DIRECTOR
/s/ Thomas A. McCullough
/s/ George L. Argyros, Sr. ---------------------------
- ------------------------------ THOMAS A. MCCULLOUGH
GEORGE L. ARGYROS, SR. EXECUTIVE VICE PRESIDENT,
DIRECTOR DIRECTOR
/s/ Michael G. Fitt /s/ James C. Castle
- ------------------------------ ---------------------------
MICHAEL G. FITT JAMES C. CASTLE
DIRECTOR DIRECTOR
/s/ Kenneth V. Hager
---------------------------
/s/ William C. Nelson KENNETH V. HAGER
- ------------------------------ VICE PRESIDENT, CHIEF
WILLIAM C. NELSON FINANCIAL OFFICER AND
DIRECTOR TREASURER (PRINCIPAL
FINANCIAL OFFICER)
/s/ John J. Faucett
/s/ M. Jeannine Standjord ---------------------------
- ------------------------------ JOHN J. FAUCETT
M. JEANNINE STANDJORD CONTROLLER (PRINCIPAL
DIRECTOR ACCOUNTING OFFICER)
84
<PAGE>
DST SYSTEMS, INC.,
1998 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 NUMBER DOCUMENT
- --------------- -------------------------------------------------------------------------------------------------
<C> <S>
4.10 Affiliate Agreement with James C. Castle
4.11 Affiliate Agreement with George L. Argyros, Sr.
4.12 Stockholder Agreement with Kansas City Southern Industries, Inc.
4.13 Stockholder Agreement with George L. Argyros, Sr.
4.14 Stockholder Agreement with James C. Castle
4.15 Registration Rights Agreement with George L. Argyros, Sr. and James C. Castle
4.16.1 Amendment to Chase Agreement
10.7 Contribution Agreement
10.8 Fairway System Software Development Agreement
10.10 Incentive Compensation Plan
10.11 Deferred Compensation Plan
10.13 1999 USCS Executive Bonus Plan
10.16.1 Eighth Amendment to the Trust Agreement
10.17.1 Amendment to the Trust Agreement
10.18 Employment Agreement with Thomas A. McDonnell
21.1 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
85
<PAGE>
Exhibit 4.10
DST Systems, Inc. USCS International, Inc.
333 West 11th Street, 5th Floor 2969 Prospect Park Drive
Kansas City, MO 64105 Rancho Cordova, CA 95670
Gentlemen:
The undersigned is a holder of shares or has a right to hold 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.
1
<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,
/s/James C. Castle
-------------------------------------
James C. Castle
USCS International, Inc.
2969 Prospect Park Drive
Rancho Cordova, CA 95670
Dated: 28 October 1998
2
<PAGE>
Exhibit 4.11
DST Systems, Inc. USCS International, Inc.
333 West 11th Street, 5th Floor 2969 Prospect Park Drive
Kansas City, MO 64105 Rancho Cordova, CA 95670
Gentlemen:
The undersigned is a holder of shares or has a right to hold 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.
1
<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 the earlier of (I) 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 or (ii)60 days from
the day on which the Merger takes place. Notwithstanding any other provision of
this letter, if the consummation of the Merger occurs after December 1, 1998 and
on or before December 31, 1998, the period referred to in this paragraph will
extend at least through February 15, 1999.
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,
/s/ George L. Argyros
--------------------------
George L. Argyros
Arnel & Affiliates
949 South Coast Drive, Suite 600
Costa Mesa, CA 92626-7737
Dated: 11-3-98
----------------
2
<PAGE>
Exhibit 4.12
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.
2. COVENANTS OF KCSI. Until the termination of this Agreement in accordance
with Section 6 hereof, KCSI agrees that:
1
<PAGE>
(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. 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
2
<PAGE>
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
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
3
<PAGE>
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 /s/Landon H. Rowland
-----------------------------------------------
Name:
Title
DST SYSTEMS, INC.
By /s/Kenneth V. Hager
-----------------------------------------------
Name:
Title
4
<PAGE>
Exhibit 4.13
USCS INTERNATIONAL, INC. STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated September 2, 1998 (this "Agreement") by the
undersigned stockholder ("Stockholder") of USCS International, Inc., a Delaware
corporation ("USCS") 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 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, Stockholder owns or beneficially owns 7,704,630 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 the 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, the parties agree 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
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transferee to execute an "Affiliate's Agreement" in the same form as other
affiliates of USCS have signed as required by the Merger Agreement.
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 laws and
except as contemplated by this Agreement.
4. AFFILIATES LETTER. Stockholder agrees to execute and deliver on a
timely basis and 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 and DST hereunder
shall terminate upon the earlier of the termination of the Merger Agreement
pursuant to its terms, or the Effective Time.
6. SUCCESSORS AND ASSIGNS BOUND. Any successor, assignee or
transferee of the 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.
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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 law 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.
Name: /s/ George L. Argyros, Sr.
---------------------------
George L. Argyros, Sr.
<PAGE>
Exhibit 4.14
USCS INTERNATIONAL, INC. STOCKHOLDER AGREEMENT
STOCKHOLDER AGREEMENT, dated September 2, 1998 (this "Agreement") by the
undersigned stockholder ("Stockholder") of USCS International, Inc., a Delaware
corporation ("USCS") 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 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, Stockholder owns or beneficially owns 328,409 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 the 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, the parties agree 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
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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.
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 laws and
except as contemplated by this Agreement.
4. AFFILIATES LETTER. Stockholder agrees to execute and deliver on a
timely basis and 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 and DST hereunder
shall terminate upon the earlier of the termination of the Merger Agreement
pursuant to its terms, or the Effective Time.
6. SUCCESSORS AND ASSIGNS BOUND. Any successor, assignee or transferee
of the 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.
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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 law
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.
Name: /s/James C. Castle
-------------------------------------
James C. Castle
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Exhibit 4.15
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is dated December 21,
1998 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:
<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 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.
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"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 than
twice, nor more than once in any twelve (12) month period under this Section
2.1(a), and, provided further, that:
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(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
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request under Section 2.1(a) during the twelve-month period following
the effectiveness of such proposed registration.
(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
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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 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
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(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 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.
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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 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
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<PAGE>
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 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
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<PAGE>
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;
(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
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<PAGE>
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 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
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<PAGE>
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
indemnifiedparty 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 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,
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<PAGE>
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 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.
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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 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
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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 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.
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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, 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,
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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.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
DST USCS
/s/Thomas A. McDonnell
- ------------------------------ -------------------------------------
Signature Signature
/s/James C. Castle
- ------------------------------ -------------------------------------
Thomas A. McDonnell, Chief James C. Castle, Chief
Executive Officer and Director Executive Officer and Chairman of the
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Affiliate Stockholder
/s/George L. Argyros
- -----------------------------
Signature
/s/George L. Argyros, Sr.
- -----------------------------
George L. Argyros, Sr.
949 So. Coast Drive, #600
- -----------------------------
Address
Costa Mesa, CA 92626
- -----------------------------
(714) 481-5055
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/C. Randles Lintecum
- -----------------------------
Signature
- -----------------------------
C. Randles Lintecum
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/Michael F. McGrail
- -----------------------------
Signature
- -----------------------------
Michael F. McGrail
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
- -----------------------------
Signature
/s/Larry W. Wangberg
- -----------------------------
Larry W. Wangberg
650 Townsend St.
- -----------------------------
Address
San Francisco, CA 94103
- -----------------------------
415-551-4916
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/J. L. Hesburgh
- -----------------------------
Signature
- -----------------------------
James L. Hesburgh
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
- -----------------------------
Signature
/s/J W Clark
- -----------------------------
John W. Clark
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
- -----------------------------
Signature
/s/T A Page
- -----------------------------
Thomas A. Page
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
- -----------------------------
Signature
/s/C D Martin
- -----------------------------
Charles D. Martin
5000 Birch Street, Suite 6200
- -----------------------------
Address
Newport Beach, CA 92660
- -----------------------------
949-833-3652
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/D R Hesse
- -----------------------------
Signature
- -----------------------------
Daniel R. Hesse
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/Claudia D. Coleman
- -----------------------------
Signature
Claudia D. Coleman
- -----------------------------
Claudia D. Coleman
3680 Fair Oaks Blvd.
- -----------------------------
Address
Sacramento, CA 93864
- -----------------------------
(916) 636-5553
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/Douglas L. Shurtleff
- -----------------------------
Signature
- -----------------------------
Douglas L. Shurtleff
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
Affiliate Stockholder
/s/James C. Castle
- -----------------------------
Signature
- -----------------------------
James C. Castle
- -----------------------------
Address
- -----------------------------
- -----------------------------
Facsimile Number
18
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EXHIBIT A
USCS INTERNATIONAL, INC.
STOCKHOLDERS
George L. Argyros, Sr.
Charles D. Martin
Daniel R. Hesse
Larry W. Wangberg
James L. Hesburgh
John W. Clark
Thomas A. Page
James C. Castle
C. Randles Lintecum
Michael F. McGrail
Douglas L. Shurtleff
Claudia D. Coleman
<PAGE>
Exhibit 4.16.1
FIRST AMENDMENT dated as of November 19, 1998 (this
"AMENDMENT") to the AMENDED AND RESTATED FIVE-YEAR COMPETITIVE
ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT dated as of
December 30, 1996 (as amended from time to time, the "CREDIT
AGREEMENT"; capitalized terms used and not otherwise defined
herein having the meaning assigned to them in the Credit
Agreement), among DST SYSTEMS, INC., a Delaware corporation (the
"BORROWER"); the lenders named therein (the "LENDERS") and THE
CHASE MANHATTAN BANK, as syndication agent and as administrative
agent for the Lenders (in such capacity, the "ADMINISTRATIVE
AGENT").
A. The Borrower has requested, and the Lenders and the
Administrative Agent have agreed, to amend certain sections of the Credit
Agreement on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual agreements
contained in this Amendment and other good and valuable consideration, the
sufficiency and receipt of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. AMENDMENT OF SECTION 1.01 OF THE CREDIT AGREEMENT.
Section 1.01 of the Credit Agreement is hereby amended by amending the last
sentence of the definition of "Indebtedness" to read in its entirety as follows:
"The Indebtedness of any person (other than a Nonsignificant
Subsidiary) shall include the Indetedness of any partnership in which
such person is a general partner.".
SECTION 2. AMENDMENT OF SECTION 3.11 OF THE CREDIT AGREEMENT.
Section 3.11 of the Credit Agreement is hereby deleted in its entirety and
replaced with the following:
"SECTION 3.11. FEDERAL RESERVE REGULATIONS. The execution,
delivery and performance of the Loan Documents, the Borrowings hereunder and the
use of proceeds hereof will not violate or be inconsistent with any of the
provisions of Regulation U, Regulation T or Regulation X."
SECTION 3. AMENDMENT OF SECTION 3.13 OF THE CREDIT AGREEMENT.
Section 3.13 of the Credit Agreement is hereby amended by adding the following
sentence at the end thereof:
"No part of the proceeds of any Loan will be used to purchase
or "carry" (as defined in Regulation U) Margin Stock."
SECTION 4. AMENDMENT OF SECTION 5.07 OF THE CREDIT AGREEMENT.
Section 5.07 of the Credit Agreement is hereby amended by adding the following
sentence at the end thereof:
"No part of the proceeds of any Loan will be used to purchase
or "carry" (as defined in Regulation U) Margin Stock."
SECTION 5. AMENDMENT OF SECTION 6.04 OF THE CREDIT AGREEMENT.
Section 6.04 of the Credit Agreement is hereby amended to read in its entirety
as follows:
" SECTION 6.04. MERGERS, CONSOLIDATIONS AND TRANSFERS OF
ASSETS. The Borrower will not, and will not permit any Subsidiary to, merge into
or consolidate with any other person, or permit any other person to merge into
or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one
transaction or in a series of transactions) all or any substantial part of its
assets (whether now owned or hereafter acquired) or any capital stock of any
Subsidiary, except that (a) the Borrower and any Subsidiary may sell assets in
the ordinary course of business, (b) if at the time thereof and immediately
after giving pro forma effect to any such transaction as if such transaction had
been completed on the first day of the quarterly period most recently ended, no
Event of Default or Default shall have occurred and be continuing (i) any person
may merge into the Borrower in a transaction in which the Borrower is the
surviving corporation, (ii) any person may merge into or
<PAGE>
2
consolidate with any other wholly owned Subsidiary in a transaction in which the
surviving entity is a wholly owned Subsidiary and no person other than the
Borrower or a wholly owned Subsidiary receives any consideration, (iii) any
Subsidiary may merge into or consolidate with (in each case, an "Acquisition")
any person (the "Acquiree") if such Subsidiary is the surviving entity or the
Acquiree is the surviving entity and becomes a Subsidiary as a result of such
Acquisition and (iv) the Borrower and the Subsidiaries may sell, transfer, lease
or dispose of any capital stock of any Subsidiary or any assets out of the
ordinary course of business having depreciated book values (determined in
accordance with GAAP) that in the aggregate for all such capital stock or all
such assets so disposed of during the term of this Agreement do not exceed the
greater of $10,000,000 and 10%of Consolidated Net Worth on any date of
determination to any other person.
SECTION 6. AMENDMENT OF SECTION 6.08 OF THE CREDIT AGREEMENT.
Section 6.08 of the Credit Agreement is hereby deleted in its entirety and
replaced with "INTENTIONALLY OMITTED".
SECTION 7. WAIVER. The Lenders hereby waive any Default or
Event of Default that may have occurred as a result of the operation of Section
3.11 or 6.08. The foregoing waiver shall be retroactive to December 30, 1996.
SECTION 8. REPRESENTATIONS AND WARRANTIES. The Borrower
represents and warrants to the Administrative Agent and to each of the Lenders
that:
(a) This Amendment has been duly authorized, executed and
delivered by the Borrower, and each of this Amendment and the Credit
Agreement, after giving effect to this Amendment, constitutes its
legal, valid and binding obligations enforceable in accordance with
their terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally, or by general
equity principles (whether enforcement is sought by proceedings in
equity or at law), including but not limited to principles governing
the availability of the remedies of specific performance and injunctive
relief.
(b) The representations and warranties set forth in Article
III of the Credit Agreement, after giving effect to this Amendment, and
in the other Loan Documents are true and correct in all material
respects as of the date hereof with the same effect as if made on the
date hereof, except to the extent such representations and warranties
expressly relate to an earlier date, in which case they were true and
correct in all material respects on and as of such earlier date.
(c) As of the date hereof, no Default or Event of Default has
occurred and is continuing or would result from the execution and
delivery of this Amendment.
SECTION 9. EFFECTIVENESS. This Amendment shall become
effective when the Administrative Agent shall have received copies hereof that,
when taken together, bear the signatures of the Borrower, the Administrative
Agent and the Required Lenders.
SECTION 10. APPLICABLE LAW. THIS AMENDMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.
SECTION 11. COUNTERPARTS. This Amendment may be executed in
two or more counterparts, each of which shall constitute an original, but all of
which when taken together shall constitute but one contract. Delivery of an
executed counterpart of a signature page by facsimile transmission shall be
effective as delivery of a manually executed counterpart of this Amendment.
SECTION 12. EXPENSES. The Borrower agrees to reimburse the
Administrative Agent for its reasonable out-of-pocket expenses in connection
with this Amendment, including the reasonable fees, charges and disbursements of
Cravath, Swaine & Moore, counsel for the Administrative Agent.
SECTION 13. LIMITED EFFECT OF AMENDMENT. Except as expressly
set forth herein, this Amendment shall not by implication or otherwise limit,
impair, constitute a Amendment of, or otherwise affect the rights and remedies
of the Lenders and the Administrative Agent under the Credit Agreement, or
alter, modify, amend or in any way affect any of the terms, conditions,
obligations, covenants or agreements contained in the Credit Agreement, all of
which are ratified and affirmed in all respects and shall continue in
<PAGE>
3
full force and effect. This Amendment shall apply and be effective only with
respect to the provisions of the Credit Agreement specifically referred to
herein.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed by their respective authorized officers as of the
day and year first written above.
DST SYSTEMS, INC., as Borrower,
by /s/ Kenneth V. Hager
-------------------------------------------
Name: Kenneth V. Hager
Title: Vice President, Chief Financial
Officer and Treasurer
THE CHASE MANHATTAN BANK,
individually and as Administrative Agent,
by /s/ Lenard Werner
----------------------------------------
Name:
Title:
THE INDUSTRIAL BANK OF JAPAN, LIMITED,
by /s/ Walter R. Wolff
----------------------------------------
Name: Walter R. Wolff
Title: Joint General Manager
THE LONG-TERM CREDIT BANK OF JAPAN, LTD.,
by /s/ Armund J. Schoen, Jr.
----------------------------------------
Name: Armund J. Schoen, Jr.
Title: Senior Vice President
NATIONSBANK, N.A.,
by /s/ Kevin C. Leader
----------------------------------------
Name: Kevin C. Leader
Title: Vice President
UMB Bank, n.a.,
by /s/ Douglas F. Page
----------------------------------------
Name: Douglas F. Page
Title: Executive Vice President
<PAGE>
4
MERCANTILE BANK.,
by /s/Gary S. Wilcutt
----------------------------------------
Name: Gary S. Wilcutt
Title: Vice President
CREDIT SUISSE FIRST BOSTON,
by /s/Chris T. Horgan
----------------------------------------
Name: Chris T. Horgan
Title: Vice President
<PAGE>
Exhibit 10.3.2
1992 AMENDMENT AGREEMENT
[THE PORTIONS OF THIS EXHIBIT MARKED BY AN ASTERISK ARE SUBJECT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.]
This 1992 Amendment Agreement (this "Agreement") is deemed effective as
of January ____, 1991 among State Street Boston Corporation, a Massachusetts
bank holding company ("SSB"), State Street Bank and Trust Company, a
Massachusetts corporation (the "Bank"), DST Systems, Inc., a Missouri
corporation ("DST"), and Boston Financial Data Services, Inc., a Massachusetts
corporation ("BFDS"), and joined in as to Sections 3.2 and 3.3 by Vantage
Computer Systems, Inc., a Delaware corporation ("Vantage").
RECITALS
WHEREAS, SSB and DST have entered into the Joint Venture Agreement
dated as of July 1, 1974 (said Joint Venture Agreement, as in effect on the date
hereof, being hereinafter referred to as the "Joint Venture Agreement"),
pursuant to which (i) SSB and DST agreed to undertake a joint business venture
to provide, among other things, mutual fund transfer agency, recordkeeping and
shareholder services and related services (said business being hereinafter
referred to collectively as the "Business"), and (ii) BFDS was formed and
designated as the vehicle to conduct the Business;
WHEREAS, pursuant to the Joint Venture Agreement or in furtherance of
the Business, the parties hereto and/or their affiliates have entered into
related agreements, which include (i) The First Refusal Agreement dated as of
July 1, 1974 between SSB and DST (said First Refusal Agreement, as in effect on
the date hereof, being hereinafter referred to as the "First Refusal
Agreement"), (ii) the Data-Processing Support Agreement dated as of July 1, 1974
between DST and BFDS pertaining to DST's computer system for investment company
transfer agency, recordkeeping and related services (said Data-Processing
Support Agreement, as in effect on the date hereof, being hereinafter referred
to as the "Mutual Fund Data Processing Agreement"); (iii) the Data-Processing
Support Agreement dated as of October 15, 1976 between DST and BFDS pertaining
to data-processing support for corporate recordkeeping, data-processing and
related services (said Data-Processing Support Agreement, as in effect on the
date hereof, being hereinafter referred to as the "STS Data Processing
Agreement"); (iv) the Service Agreement dated as of February 28, 1988 between
Policyholder Service Corporation, a corporation affiliated with DST ("PSC") now
styled as Vantage Computer Systems Inc., a Missouri corporation and BFDS
pertaining to data-processing support for services related to certain life
insurance and annuity products (said Service Agreement, as in effect on the date
hereof, being hereinafter referred to as the "PSC Agreement"); (v) the Service
Agreement dated as of July 1, 1974 between the Bank and BFDS (said Service
Agreement, as in effect on the date hereof, being hereinafter referred to as the
"Service Agreement"); (vi) the Preferred Stock Purchase Agreement dated as of
September 19, 1986 among SSB, DST and BFDS (said Preferred Stock Purchase
Agreement, as in effect on the date hereof, being hereinafter referred to as the
"Preferred Stock Purchase Agreement"); and (vii) the Lease Agreement between Two
Heritage Drive Associates and BFDS relating to the premises at Two Heritage
Drive, North Quincy,
<PAGE>
Massachusetts (said Lease, as in effect on the date hereof, being hereinafter
referred to as the "Lease"), each of the related agreements described in the
foregoing clauses (i) through (vii) being hereinafter referred to individually
as a "Related Agreement" and collectively as the "Related Agreements";
WHEREAS, the parties have agreed to amend the Joint Venture Agreement
and the Related Agreements.
NOW, THEREFORE, for good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto agree as follows:
1. DEFINITIONS. Capitalized terms used in the amendatory provisions
hereof and not otherwise defined herein are used as defined in the agreement
being amended thereby.
2. AMENDMENTS TO THE JOINT VENTURE AGREEMENT. The Joint Venture
Agreement is hereby amended, effective as of January 1, 1991, as follows:
The second sentence of Section 3.3 is deleted in its entirety and
replaced with the following sentence:
Such lease shall be in the form attached hereto as Exhibit 1 or in such
other form as SSB and DST may from time to time agree (the "Lease").
Section 9 is amended by adding the following ten sentences:
The intent of the parties is that DST will charge BFDS [*] for its [*].
DST agrees to cooperate with BFDS on any bids BFDS makes for any
potential full-service clients. Excluding existing relationships with
clients, DST cannot without the approval of State Street Boston
Corporation sell its services or the TA2000(TM) System if the effect of
such sale is to place tHE purchaser of such service and/or system into
competition with BFDS or NFDS in the business of providing mutual find
shareholder services; provided, however, that the restriction in this
section shall not apply to any use by IFTC or any successor to IFTC
whether by service agreement or by license of the DST TA2000(TM)
System. State Street Boston Corporation agrees thAT State Street Bank
shall not engage in any business in the United States which would cause
it to directly compete with BFDS' mutual fund shareholder transfer
agent or stock transfer businesses. This prohibition shall not apply to
any mutual fund shareholder servicing or stock transfer business which
State Street has offered to BFDS and which BFDS has declined to accept.
In the event a BFDS client asks DST to quote remote user fees, prior to
making such a quote, DST shall secure the approval of the Executive
Committee of the BFDS Board of Directors. [*]. All services provided to
the Corporation by DST and State Street Boston Corporation and its
affiliates and agents shall be at least equal in quality and response
time to services provided by them to any other person or entity. DST
hereby agrees to make accurate and complete books and records relating
to service, fees and levels of quality available for inspection by SSB
and its accountants, at SSB's expense, upon not
2
<PAGE>
less than five business days' prior notice to DST during DST's normal
business hours, at the place where such books and records are regularly
maintained. SSB hereby agrees that it shall cause the Bank to make
accurate and complete books and records relating to fees payable under
the Special Service Agreement dated as of January 1, 1991 between the
Corporation and the Bank and relating to service, fees, and levels of
quality available for inspection by DST and its accountants, at DST's
expense, upon not less than five business days' prior notice to the
Bank during the Bank's normal business hours, at the place where such
books and records are regularly maintained.
3. CONDITIONS PRECEDENT. The effectiveness of the amendments set forth
in Section 2 hereof and the obligations of the parties to fulfill the covenants
and agreements set forth in Section 5 hereof shall be subject to the
fulfillment, to the satisfaction of SSB and DST, of the following conditions
precedent:
3.1 SPECIAL SERVICE AGREEMENT. The special Service Agreement
in the form of Exhibit 2 hereto shall have been duly authorized,
executed and delivered by the Bank and BFDS and shall be in full force
and effect.
3.2 PURCHASE AGREEMENT. The Purchase Agreement in the form of
Exhibit 3 hereto shall have been duly authorized, executed and
delivered by Vantage and BFDS and shall be in full force and effect.
Vantage hereby agrees to comply with this Section 3.2.
3.3 PSC AGREEMENT. the PSC Agreement shall have been duly
rescinded by PSC and BFDS, subject to transition of the purchased
business pursuant to the Purchase Agreement. The documentation relating
to such recision shall be satisfactory in form and substance to SSB and
DST and shall be in full force and effect.
4. REPRESENTATIONS AND WARRANTIES. Each party hereto and Vantage hereby
represents and warrants to the other parties that:
4.1 AUTHORIZATION AND EXECUTION. Such party is a corporation
duly organized, legally existing and in good standing under the laws of
the state of its incorporation and has full corporate power and
authority to enter into and perform its obligations under this
Agreement and the other agreements to which it is or will become a
party pursuant hereto. Each of this Agreement and the other agreements
to which such party is or will become a party pursuant hereto has been
duly authorized, executed and delivered by such party, and constitutes
the legal, valid and binding obligation of such party, enforceable
against such party in accordance with its terms, subject to applicable
bankruptcy, insolvency and similar laws affecting creditor's rights
generally and subject to general principles of equity, regardless of
whether enforcement is sought in a proceeding in equity or at law.
4.2 NO VIOLATION; APPROVALS. The execution and delivery by
such party of this Agreement and the other agreements to which it is or
will become a party pursuant
3
<PAGE>
hereto does not, and the performance or observance by such party of the
terms, conditions or provisions hereof or thereof will not (i) conflict
with or violate any law, regulation or judicial or administrative order
by which such party is bound, (ii) conflict with or violate its charter
or by-laws, or (iii) conflict with, violate or result in the breach of
any agreement or instrument by which such party or its properties is
bound. No consent or approval of, giving of notice to, or taking any
action in respect of or by, any Federal, state or local governmental
authority or agency, or any other person, is required with respect to
the execution, delivery and performance by such party of this Agreement
or the other agreements to which it is or will become a party pursuant
hereto, except such consents, approvals, notices and other actions
which have been duly given, obtained or taken.
4.3 NO DEFAULTS. Such party is unaware of any material default
or breach, or any event which, with the giving of notice, the passage
of time, or both, would constitute a material default or breach, under
the Joint Venture Agreement or the Related Agreements to which it is a
party.
5. COVENANTS AND AGREEMENTS. On and after the date hereof, so long as
the Joint Venture Agreement remains in effect, each party hereto covenants that
it will comply with such of the following provisions as are applicable to it:
5.1 [*].
5.2 NO RENT INCREASES UNTIL JULY 1, 1996. The Bank covenants
to BFDS and DST that until July 1, 1996, it will not permit the lessor
under the Lease to charge base rent in excess of $13.52 per square foot
per annum. Operating costs shall be governed by the Lease. The Bank
agrees that it shall provide BFDS notice of any rent increases one year
prior to the renewal of the Lease.
5.3 FURTHER ASSURANCES. The parties hereto will cause to be
done, executed, acknowledged and delivered all such further acts,
conveyances and assurances as SSB or DST shall reasonably require for
accomplishing the purposes of this Agreement and consummating the
transactions contemplated hereby. Vantage hereby agrees to comply with
this Section as it relates to the Purchase Agreement and the
transactions contemplated thereby.
6. EFFECTIVE DATE; CONTINUING EFFECT. The Amendments to the Joint
Venture Agreement set forth in Section 2 hereof, and the amendments to certain
Related Agreements set forth in Sections 2 through 3 hereof, shall be deemed for
all purposes to have become effective on January 1, 1991. The Amendment to the
Lease set forth in Section 2 hereof shall be effective on July 1, 1991. Except
as specifically amended hereby, all of the terms and provisions of the Joint
Venture Agreement and the Related Agreements shall remain unmodified and are
hereby confirmed as continuing in full force and effect.
7. COUNTERPARTS. This Agreement may be executed by the parties hereto
in any
4
<PAGE>
number of counterparts, each of which when so executed shall be an original but
which together shall constitute one document.
8. HEADINGS. The headings in this Agreement are for convenience and
reference only and shall not modify, define, expand or limit any of the terms or
provisions hereof.
9. SAVINGS. This Agreement is the entire agreement of the parties with
respect to the subject matter hereof, and supersedes all prior negotiations and
agreements (written or oral) with respect thereto.
10. GOVERNING LAW. This Agreement shall be governed by, and construed
in accordance with, the laws (other than the conflicts of laws rules) of The
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto and Vantage have each caused
this Agreement to be duly executed and delivered by their respective duly
authorized officers.
STATE STREET BOSTON CORPORATION
By /s/ A. Edward Allinson
--------------------------------------
Title:
STATE STREET BANK AND TRUST COMPANY
By /s/ A. Edward Allinson
--------------------------------------
Title:
BOSTON FINANCIAL DATA SERVICES, INC.
By /s/ James S. Phalen
--------------------------------------
Title: President
DST SYSTEMS, INC.
By /s/ Thomas A. McCullough
--------------------------------------
Title: Executive Vice President 2/6/92
5
<PAGE>
Exhibit 10.7
CONTRIBUTION AGREEMENT
This is a Contribution Agreement, dated as of November 30, 1998,
between DST Systems Inc., a Delaware corporation (the "CONTRIBUTOR"), and Boston
EquiServe Limited Partnership, a Delaware limited partnership (the
"PARTNERSHIP").
WHEREAS, each of Contributor and the Partnership operates a
shareholders services business;
WHEREAS, Contributor has agreed, pursuant to the Development Agreement,
to develop proprietary software known as the Fairway System for use by the
Partnership in the Partnership Shareholder Services Business; and
WHEREAS, subject to the terms and conditions set forth below and in the
Development Agreement, Contributor desires to contribute, and to cause
Contributor GP (as defined below) to contribute, and the Partnership desires to
accept, the Fairway System (as defined below) and certain assets used in the
shareholder services business of Contributor in exchange for the issuance to the
Contributor, or an affiliate of the Contributor, of a 19.5% limited partnership
interest (as set forth herein) in the Partnership and the issuance to, DST Stock
Transfer, Inc., a wholly owned subsidiary of Contributor (the "CONTRIBUTOR GP")
of a 0.5% general partnership interest in the Partnership;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth below, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1. CERTAIN DEFINED TERMS. As used in this Agreement, the following
capitalized terms have the following meanings:
"ACCEPTANCE TESTING" shall have the meaning set forth in the
Development Agreement.
"ACQUIRED INTELLECTUAL PROPERTY" means the Acquired Assets referred to
in Sections 2.1(a) and 2.1(b) hereof and the STS License.
"AFFILIATE" means, with respect to any Person, any other Person
controlling, controlled by or under common control with, such Person. As used in
this definition, "CONTROL" (including, with its correlative meanings,
"CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the possession, directly
or indirectly, of power to direct or cause the direction of the management
<PAGE>
2
and policies of a Person, whether through the ownership of voting securities, by
contract or otherwise.
"AGREEMENT" means this Contribution Agreement, including all exhibits
and schedules hereto, as amended, restated or supplemented from time to time.
"BANK ONE" means BANK ONE CORPORATION, a Delaware corporation.
"BANK ONE CONTRIBUTION AGREEMENT" means the Contribution Agreement,
dated as of February 9, 1998, by and between BANK ONE and the Partnership.
"BANK ONE SUB" means FCTC General, Inc., a Delaware corporation.
"BFDS" means BFDS Limited, Inc., a Massachusetts corporation.
"BFDS SUB" means BFDS General, Inc., a Massachusetts corporation.
"BKB" means BankBoston, N.A., a national banking association.
"BKB SUB" means BancBoston Services, Inc., a Massachusetts corporation.
"BUSINESS DAY" means any other day than a day on which either the
Contributor or the Partnership is not open for business.
"CONTRIBUTED BUSINESS" shall mean the Acquired Assets and STS Customer
Contracts.
"CONTRIBUTOR" has the meaning set forth in the preamble.
"CONTRIBUTOR GP" has the meaning set forth in the recitals.
"CONTRIBUTOR MATERIAL ADVERSE EFFECT" means a material adverse effect
on the ability of Contributor or the Contributor GP to consummate the
transactions contemplated hereby or on the business, results of operations,
properties (including intangible properties), assets, liabilities or financial
condition of the Contributed Business.
"DELTA VANTAGE SYSTEM" means all of the Partnership's right, title and
interest in and to the computer program codes (including all object code, source
code, documentation and other media containing such code) comprising the "Delta
Vantage System" used by the Partnership to perform corporate stock transfer,
bond processing and mutual fund fulfillment functions and applicable interfaces
therefor, whether completed or in the process of development, and all
enhancements, upgrades or other modifications thereto.
"DELIVERY DATE" means the date by which each Release shall be delivered
by Contributor to the Partnership for Acceptance Testing as set forth in the
Development Agreement.
<PAGE>
3
"DEVELOPMENT AGREEMENT" means the agreement dated as of the date hereof
by and between the Partnership and the Contributor pursuant to which Contributor
agrees to develop and deliver the Fairway System for the Partnership, a copy of
which is attached hereto as EXHIBIT A.
"DISPUTE RESOLUTION PROCEDURES" shall have the meaning set forth in the
Development Agreement.
"FAIRWAY DATA PROCESSING AGREEMENT" means the Data Processing Service
Agreement to be entered into as of the date of the Final Closing by and between
the Contributor and the Partnership, in the form attached hereto as EXHIBIT B.
"FAIRWAY REMOTE SERVICE AGREEMENT" means the Remote Service Agreement
to be entered into as of the date hereof by and between the Contributor and the
Partnership, a copy of which is attached hereto as EXHIBIT C.
"FUNCTIONALITY" has the meaning set forth in the Development Agreement.
"GAAP", when used with respect to financial statements of any Person,
means generally accepted accounting principles and practices in effect from time
to time within the United States applied consistently throughout the period
involved by such Person.
"GOVERNMENT AUTHORITY" means any federal, national, state, municipal,
local, territorial or other governmental department, commission, board, bureau,
agency, regulatory authority, instrumentality, judicial or administrative body,
domestic or foreign.
"INTERIM ACCEPTANCE" shall have the meaning set forth in the
Development Agreement.
"PARTNERSHIP" has the meaning set forth in the preamble.
"PARTNERSHIP AGREEMENT" means the Second Amended and Restated Limited
Partnership Agreement, to be entered into as of the Initial Closing Date, among
BKB, BFDS, BANK ONE, Contributor, BKB Sub, BFDS Sub, BANK ONE Sub and
Contributor GP in the form attached hereto as SCHEDULE 10.2(a).
"PARTNERSHIP BUSINESS" means the business of providing services to:
(a) corporations and other securities issuers (excluding
open-end investment companies and unit investment trusts but including limited
partnerships, closed-end investment companies and issuers of American Depository
Receipts) (i) as registrar, transfer agent, dividend disbursement agent,
employee stock purchase plan agent, redemption agent, rights agent, exchange
agent, tender agent and reorganization agent, as applicable, (ii) as registrar
and paying agent for debt instruments (other than debt instruments with respect
to which such registrar or paying agent also acts as indenture trustee, fiscal
agent, issuing and paying agent, custodian or in similar capacities), (iii) as
proxy processing servicer, employee stock plan administrator, stock option
administrator, dividend reinvestment plan administrator and (iv) in similar
capacities,
<PAGE>
4
(b) stockholders and creditors as claims processor and in
similar capacities, including class action administration services, and/or
(c) government employees as government allotment administrator
and in similar capacities.
"PARTNERSHIP BUSINESS CONTRACTS" means the agreements entered into
between the Partnership or the Partnership Subsidiary, as applicable, and its
customers from time to time in connection with the Partnership Business, as such
agreements may be in effect from time to time, and the agreements entered into
between the existing partners in the Partnership and their respective customers,
the servicing obligations under which have been delegated to and the rights to
which have been assigned to the Partnership pursuant to the Shareholder Services
Agreements.
"PARTNERSHIP INTELLECTUAL PROPERTY" means all of the rights of the
Partnership or the Partnership Subsidiary, as applicable, in any trademarks,
service marks, trade names, design patents, patents, works of authorship,
copyrights, logos, inventions, computer software, trade secrets and other
confidential know-how protectible under applicable federal, state or foreign
law, and any other similar types of proprietary intellectual property
protectible under applicable federal, state or foreign law including all
applications, pending applications and registrations therefor, in each case to
the extent used by the Partnership or the Partnership Subsidiary, as applicable,
in connection with the conduct of the Partnership Business.
"PARTNERSHIP MATERIAL ADVERSE EFFECT" means a material adverse effect
on the ability of Partnership to consummate the transactions contemplated hereby
or on the business, results of operations, properties (including intangible
properties), assets, liabilities or financial condition of the Partnership and
its subsidiaries.
"PARTNERSHIP SUBSIDIARY" means Boston EquiServe Trust Company, N.A.,
limited purpose national bank.
"PARTNERSHIP THIRD PARTY INTELLECTUAL PROPERTY" means Partnership
Intellectual Property that is not owned by the Partnership or the Partnership
Subsidiary, as applicable, and is used by the Partnership or the Partnership
Subsidiary, as applicable, in the Partnership Business.
"PERMITTED LIENS" means any of the following liens created, incurred or
suffered to exist in, of or on the property of any Person: (i) liens for taxes,
assessments or governmental charges or levies, if the same shall not at the time
be delinquent or thereafter can be paid without penalty, or are being contested
in good faith by appropriate proceedings; (ii) liens imposed by law, such as
carriers', warehousemen's and mechanics' liens and other similar liens arising
in the ordinary course of business which secure payment of obligations not more
than 60 days past due or which are being contested in good faith by appropriate
proceedings and for which adequate reserves shall have been set aside on such
Person's books, as appropriate; (iii) liens arising out of pledges or deposits
under worker's compensation laws, unemployment insurance, old age pensions, or
other social security or retirement benefits, or similar legislation; (iv)
utility easements, building restrictions and such other encumbrances or charges
against real property as are of a nature generally existing with respect to
properties of a similar character and which do not in any
<PAGE>
5
material way affect the marketability of the same or interfere with the use
thereof in the Shareholder Services Business of such Person; and (v) liens
existing on the date hereof and described (x) in the case of Contributor or the
Contributor GP on SCHEDULE 1B and (y) in the case of the Partnership, on
SCHEDULE 1C.
"PERSON" means any individual, partnership, corporation, association,
trust, limited liability company, joint venture, unincorporated organization or
other entity and any government, governmental department or agency or political
subdivision thereof.
"RELATED AGREEMENTS" means those agreements by and between the
Partnership and the Contributor or the Contributor GP listed on SCHEDULE 1D
attached hereto.
"RELEASE" means any of Release 1.1, Release 1.2, Release 1.2.5, Release
1.3, or Release 1.3.5.
"RELEASE 1.2" means version 1.2 of the Fairway System to be developed
by Contributor and as more fully described in the Development Agreement.
"RELEASE 1.2.5" means version 1.2.5 of the Fairway System to be
developed by Contributor and as more fully described in the Development
Agreement.
"RELEASE 1.3" means version 1.3 of the Fairway System to be developed
by Contributor and as more fully described in the Development Agreement.
"RELEASE 1.3.5" means version 1.3.5 of the Fairway System to be
developed by Contributor and as more full described in the Development
Agreement.
"SHAREHOLDER SERVICES AGREEMENTS" means Services Agreements between BKB
and the Partnership and between SSBT and the Company, each dated September 29,
1995, as in effect from time to time.
"SPECIFICATIONS" shall have the meaning set forth in the Development
Agreement.
"STS CUSTOMER CONTRACTS" means the contracts listed on SCHEDULE 1A
hereto.
"STS DATA PROCESSING AGREEMENT" means the Data Processing Service
Agreement to be entered into as of the date of the Contributed Business Closing
by and between the Contributor and the Partnership, in the form attached hereto
as EXHIBIT D.
"STS LICENSE" means the royalty-free, worldwide license to the STS
System Software (as such term is defined in the STS License), including all
source code, object code and documentation, to be entered into as of the date of
the Contributed Business Closing by and between Contributor or Contributor GP
and the Partnership, substantially in the form of the license agreement)
attached as EXHIBIT G.
"SSBT" means State Street Bank and Trust Company, a Massachusetts trust
company.
<PAGE>
6
1.2. CROSS REFERENCES TO CERTAIN TERMS DEFINED ELSEWHERE IN THIS
AGREEMENT.
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Acquired Assets 2.1
BANK ONE Business 5.8
Claim 12.3
Closing(s) 8.7
Closing Dates(s) 8.7
Contributed Business Closing 8.3(a)
Contributed Business Closing Date 8.3(a)
Contributor Customers 4.8(e)
Contributor Losses 12.1
Contributor Necessary Permits 4.6
Contributor Shareholder Services Agreement 10.4(a)
Delivery Default 8.5(a)
Delivery Default Closing Date 8.5(b)
Delta Vantage Technical Documentation 5.18
Disclosing Party 6.5(b)
Encumbrances 4.3
Fairway System 2.1(b)
FCNB Business 5.8
Final Acceptance Default 8.6(a)
Final Acceptance Default Closing 8.6(b)
Final Acceptance Default Closing Date 8.6(b)
Final Closing 8.4(a)
Final Closing Date 8.4(a)
Indemnified Party 12.3(a)
Indemnifying Party 12.3(a)
Initial Closing 8.1(a)
Initial Closing Date 8.1(a)
Information 6.5(b)
Interim Closing 8.2(a)
Interim Closing Date 8.2(a)
Partnership Assets 5.3
Partnership Contracts 5.12(a)
Partnership Customers 5.12(d)
Partnership Employees 5.19
Partnership Losses 12.2
Partnership Necessary Permits 5.10
Proxy and Retained Rights License 2.2
Retained Liabilities 3
Retained Rights 2.2
Securities Act 4.12
Subject Losses 12.5
</TABLE>
<PAGE>
7
<TABLE>
<S> <C>
Third Party Claim 12.3
Undelegated Contracts 7.1(c)
</TABLE>
ARTICLE 2
CONTRIBUTION OF ASSETS
2.1. ACQUIRED ASSETS. Subject to the terms and conditions set forth in
this Agreement, the Contributor hereby agrees to, and to cause Contributor GP
to, contribute, assign, transfer and deliver to the Partnership, and the
Partnership hereby agrees to accept, acquire and take assignment and delivery
of, all of the following assets of the Contributor and the Contributor GP, all
of which assets are hereinafter referred to collectively as the "ACQUIRED
ASSETS":
(a) All of the rights of the Contributor and the Contributor
GP in any trademarks, service marks, trade names, design patents,
patents, works of authorship, copyrights, logos, inventions, computer
software, trade secrets and other confidential know-how protectible
under applicable federal, state or foreign law, and any other similar
types of proprietary intellectual property protectible under applicable
federal, state or foreign law including all applications, pending
applications and registrations therefor, in each case to the extent
used by Contributor or the Contributor GP in connection with the use of
the Contributed Business and required for the Partnership to satisfy
its obligations under the Contributor Shareholder Services Agreement,
as described on SCHEDULE 2.1(a) hereto;
(b) All of the right, title and interest of the Contributor
and the Contributor GP in and to all of the assets comprising the
"Fairway System" being developed by the Contributor pursuant to the
Development Agreement (as such term is more fully described in the
Development Agreement, the "FAIRWAY SYSTEM") including all
documentation and deliverables required to be delivered with the
Fairway System pursuant to the Development Agreement;
(c) Copies of (i) the accounting books, records and ledgers of
the Contributor and the Contributor GP relating to and used in or for
the Contributed Business, (ii) copies of all documents and records
relating to the Contributed Business, (iii) copies of the STS Customer
Contracts, and (iv) and all historical source data and other
information relating to the Contributed Business electronically stored
or otherwise recorded;
(d) All customer lists, customer records and information
relating to the Contributed Business (to the extent transferable);
(e) To the extent transferable, all licenses, permits or
governmental approvals applied for by, or issued or given to the
Contributor with respect to the Contributed Business, as described on
SCHEDULE 2.1(e) hereto; and
<PAGE>
8
2.2 CONTRIBUTOR RETAINED RIGHTS. Notwithstanding the assignment and
contribution of the Fairway System to the Partnership, Contributor shall retain
a fully-paid, non-exclusive, perpetual, irrevocable, worldwide license to (i)
use and to provide to others the know-how, solutions and objects developed for
or included in the Fairway System without limitation and (ii) use the separable,
discrete Functionality relating solely to proxy processing, (the "RETAINED
RIGHTS"), in the form attached as EXHIBIT E (the "PROXY AND RETAINED RIGHTS
LICENSE"), except only that Contributor may only use the Retained Rights in
compliance with the provisions of Section 16 of the form of Partnership
Agreement attached as SCHEDULE 10.2(a) hereto notwithstanding the fact that the
Partnership Agreement has not been executed by the parties as of the date of
this Agreement.
2.3 EXCLUDED ASSETS. Except for the Acquired Assets, neither
Contributor nor Contributor GP are contributing, assigning, or delivering to the
Partnership any assets.
ARTICLE 3
ASSUMPTION OF OBLIGATIONS
Anything in this Agreement to the contrary notwithstanding, the
Partnership shall not assume, and shall not be deemed to have assumed, any
liability or obligation of the Contributor or Contributor GP or the Contributed
Business whatsoever other than as specifically set forth in the Contributor
Shareholder Services Agreement (with all such non-assumed liabilities and
obligations referred to herein as the "RETAINED LIABILITIES").
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE CONTRIBUTOR
As a material inducement to the Partnership to enter into this
Agreement, Contributor hereby represents and warrants to the Partnership as
follows (with any item specifically disclosed in a Schedule hereunder deemed to
be disclosed for the purposes of any other Schedule hereunder):
4.1. ORGANIZATION, ETC. Each of the Contributor and Contributor GP is a
corporation duly organized and validly existing under its jurisdiction of
organization. Contributor GP has all requisite corporate power and authority to
own and operate the Acquired Assets and to carry on the Contributed Business as
now conducted by it. Each of Contributor and Contributor GP has the requisite
corporate power and authority to enter into this Agreement and the Related
Agreements to which it is a party and to perform its obligations hereunder and
thereunder.
4.2. AUTHORITY; COMPLIANCE WITH OTHER INSTRUMENTS; ENFORCEABILITY. The
execution, delivery and performance of this Agreement and each of the Related
Agreements to which either Contributor or Contributor GP is a party have been
duly authorized by all necessary corporate action on the part of Contributor or
Contributor GP, as applicable, and will not result in any
<PAGE>
9
violation of or conflict with or constitute a default under (i) any term of the
charter or by-laws or other constitutive documents of Contributor or Contributor
GP, as applicable, or (ii) any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to Contributor or
Contributor GP, as applicable, or otherwise result in the creation of any
Encumbrance upon any of the Acquired Assets, except for any such violation,
conflict or default under clause (ii) above or any such Encumbrance which shall
not, individually or in the aggregate, have a Contributor Material Adverse
Effect. This Agreement has been duly executed and delivered by Contributor and
constitutes, and each Related Agreement to which either Contributor or
Contributor GP is a party when executed and delivered by them will constitute,
the legal, valid and binding obligation of Contributor or Contributor GP, as
applicable, enforceable against Contributor or Contributor GP, as applicable, in
accordance with the terms hereof or thereof, subject only to the provisions of
bankruptcy, insolvency, moratorium, reorganization, fraudulent transfer or other
laws affecting the enforcement generally of creditors' rights and remedies.
4.3. TITLE TO ACQUIRED ASSETS. Contributor GP is the lawful owner of,
has good and valid title to, and, except for the consents to transfer described
on SCHEDULE 4.3 hereto, has the right to convey, transfer, assign and deliver
all of the Acquired Assets. Except as set forth on SCHEDULE 4.3 hereto, all of
the Acquired Assets and STS Customer Contracts are free and clear of any
security interests, pledges, liens, mortgages, deeds of trust, conditional sales
agreements, title retention agreements, material defects as to title or
restrictions against the transfer and assignment thereof (other than Permitted
Liens and other than restrictions against transfer and assignment in the STS
Customer Contracts) (collectively, "ENCUMBRANCES"). At each Closing, Contributor
will cause Contributor GP to, and the Contributor GP will, convey, transfer,
assign and deliver to the Partnership the Acquired Assets required to be
conveyed at such Closing, free and clear of any Encumbrances other than
Permitted Liens. There are no filings under the Uniform Commercial Code or
similar statute in any jurisdiction showing Contributor or Contributor GP as
debtor which create or perfect or which purport to create or perfect any
Encumbrance in or on any of the Acquired Assets other than Permitted Liens.
4.4. GOVERNMENTAL CONSENTS. Except for the Consent of the Federal
Reserve Bank of New York under its STS Customer Contract, no consent, approval
or authorization of, or registration, qualification or filing with, any
governmental agency or authority is required for the execution and delivery of
this Agreement or any Related Agreements by Contributor or Contributor GP or for
the consummation by Contributor or Contributor GP of the transactions
contemplated hereby or thereby.
4.5. [RESERVED]
4.6. COMPLIANCE WITH LAWS, ETC. Each of Contributor and the Contributor
GP is, and after giving effect to the transactions contemplated hereby,
Contributor and the Contributor GP will be, in compliance with all rules and
regulations applicable to the Contributed Business under applicable federal or
state law, except for any lack of compliance which, individually or in the
aggregate, would not have a Contributor Material Adverse Effect. In addition,
Contributor and the Contributor GP have all licenses, permits, ratings and
approvals of all federal, state, local or
<PAGE>
10
foreign governmental or regulatory bodies necessary for Contributor and the
Contributor GP to operate the Contributed Business as presently operated, except
for any licenses, permits, ratings and approvals the absence of which,
individually or in the aggregate, would not have a Contributor Material Adverse
Effect (the "CONTRIBUTOR NECESSARY PERMITS"). SCHEDULE 4.6 lists all Contributor
Necessary Permits. To the knowledge of Contributor and the Contributor GP, (a)
all of the Contributor Necessary Permits are in full force and effect, and (b)
no suspension or cancellation of any Contributor Necessary Permit has been
threatened, and no proceeding seeking any such suspension or cancellation is
pending.
4.7. LITIGATION, ETC. No civil, criminal, administrative or other
regulatory governmental action, suit, demand, claim, hearing, proceeding or
investigation is as of the date of this Agreement or as of the each Closing Date
pending or, to the knowledge of Contributor and the Contributor GP, threatened,
against Contributor and the Contributor GP or any of their directors or officers
which questions (a) the validity of this Agreement or challenges any of the
transactions contemplated hereby or (b) otherwise relates to the Contributed
Business or any of the Acquired Assets.
4.8. CONTRACTS.
(a) Each of the STS Customer Contracts is a valid, binding and
enforceable obligation of Contributor or Contributor GP party thereto, and, to
the knowledge of Contributor or the Contributor GP, the other party or parties
thereto (subject only to the provisions of bankruptcy, insolvency, moratorium,
reorganization, fraudulent transfer or other laws affecting the enforcement
generally of creditors' rights and remedies) and is in full force and effect.
There are no material oral modifications in effect with respect to any of the
STS Customer Contracts except as described on SCHEDULE 4.8(a).
(b) Except for the requirement to obtain consents as identified on
SCHEDULE 4.3 and as provided in SCHEDULE 4.8(e), neither Contributor nor the
Contributor GP party thereto nor, to the knowledge of Contributor or Contributor
GP, the other party or parties thereto, is in breach or non-compliance, or, to
the knowledge of Contributor and Contributor GP, is considered to be in breach
or non-compliance by the other party thereto, and no event has occurred or,
other than with respect to obligations not currently due, failed to occur which
event or failure would, with the passage of time or the giving of notice or
both, be a breach of any term of any of the STS Customer Contracts.
(c) Except as set forth on SCHEDULE 4.3, no STS Customer Contract
contains, in the aggregate, terms (i) commercially unreasonable or (ii) not
customary in similar contracts pertaining to the provision of services provided
in the Shareholder Services Business.
(d) All of the STS Customer Contracts require the consent of the
customer to delegate Contributor's obligations thereunder. No other consents are
required to delegate to the Partnership the services to be performed by the
Partnership under the STS Customer Contracts.
(e) SCHEDULE 4.8(e) sets forth the name of each customer pursuant to
each STS Customer Contract (the "CONTRIBUTOR CUSTOMERS"), and the gross revenues
received by
<PAGE>
11
Contributor and Contributor GP from each Contributor Customer for each of the
years 1996, 1997 and for the ten-month period ending October 31, 1998. Except as
disclosed on SCHEDULE 4.8(e) (such Schedule 4.8(e) to be updated for purposes of
this representation as of the Contributed Business Closing Date, which changes
shall not be deemed inaccuracies for the purpose of this representation and
warranty unless such changes were known as of the date of this Agreement), as of
the date of this Agreement and as of the Contributed Business Closing Date,
neither Contributor nor the Contributor GP has any knowledge that any
Contributor Customer (i) has expressed any material dissatisfaction with the
business relationship between the Contributor Customer and Contributor or the
Contributor GP concerning the Contributed Business provided by the Contributor,
(ii) has notified Contributor or the Contributor GP orally or in writing that it
intends to terminate a STS Customer Contract or an existing relationship
concerning the Contributed Business provided by Contributor or seek a payment or
reduction in fees, or (iii) has informed Contributor or the Contributor GP that
it believes the assignment of, or delegation of duties under, its STS Customer
Contract would violate the terms of such contract or entitle the Contributor
Customer to a payment or reduction in fees. Except as set forth in SCHEDULE
4.8(e), as of the date of this Agreement and the Contributed Business Closing
Date, none of the Contributor Customers is an Affiliate of Contributor or
Contributor GP.
4.9. INTELLECTUAL PROPERTY.
(a) SCHEDULE 4.9(a) sets forth a complete list of all
third-party software utilized to support the software subject to the STS License
and run such software on user workstations, all of which is generally available
to the public.
(b) Neither Contributor, Contributor GP nor any of their
Affiliates has authorized any Person to use any of the Acquired Intellectual
Property other than the Partnership and pursuant to the STS Customer Contracts.
(c) The right, title and interest to be assigned, transferred
and conveyed to the Partnership by Contributor and the Contributor GP with
respect to the Acquired Intellectual Property pursuant to this Agreement will
be, subject to receipt by Contributor or Contributor GP of any necessary third
party consents or approvals, adequate to vest the Partnership with such right,
title and interest in and to the Acquired Intellectual Property as shall be
necessary to enable the Partnership to conduct the Contributed Business in the
manner such business is currently conducted by Contributor and the Contributor
GP and to use the Fairway System.
(d) Except as set forth on SCHEDULE 4.3, there are no
Encumbrances on any of the Acquired Intellectual Property. Except as set forth
on SCHEDULE 4.3, neither Contributor nor the Contributor GP has received any
claim or demand asserted in writing by any Person pertaining to the Acquired
Intellectual Property, and no proceedings have been instituted or are pending or
threatened in writing which challenge the rights of Contributor or the
Contributor GP, in respect thereof. Except as set forth on SCHEDULE 4.3, none of
the proprietary rights of Contributor or the Contributor GP in the Acquired
Intellectual Property violates the rights of any Person or is being violated by
any other Person, other than violations that would not, individually or in the
aggregate, have a Contributor Material Adverse Effect. None of the Acquired
<PAGE>
12
Intellectual Property is subject to any outstanding order, decree, judgment,
stipulation, injunction or agreement binding on Contributor or Contributor GP
restricting the scope of its use by Contributor or, to the knowledge of
Contributor or the Contributor GP, is subject to any other restriction on the
scope of such use. Neither Contributor nor Contributor GP is violating the
rights of any Person with respect to any Acquired Intellectual Property.
4.10. NON-COMPETITION AGREEMENTS. Except as set forth in SCHEDULE 4.10,
neither Contributor nor Contributor GP is a party to or bound by any agreement,
written or oral, which is, or as a result of the transactions contemplated
hereby would become, applicable to the Partnership or any of its Affiliates or
its current or future employees and which would in any way limit the ability or
authority of the Partnership or any of its Affiliates or its current or future
employees to compete with, or engage in, any line of business contemplated to be
conducted by the Partnership, including, without limitation, the Contributed
Business or any and all transfer agency functions.
4.11. BROKERAGE AGREEMENTS. Neither Contributor nor the Contributor GP
nor any Affiliate of Contributor or Contributor GP has employed or is subject to
any valid claim of any broker, finder, consultant or other intermediary in
connection with the transactions contemplated by this Agreement who would be
entitled to any commission or broker's or finder's fee in connection with the
transactions contemplated hereby.
4.12. INVESTMENT REPRESENTATION. Each of Contributor and Contributor GP
(i) understands that the partnership interests to be issued in exchange for the
Acquired Assets and Contributed Business have not been and will not be
registered under the Securities Act of 1933, as amended (the "SECURITIES ACT"),
in reliance upon the exemption provided in Section 4(2) of the Securities Act,
or registered or qualified under the securities laws or "blue sky" laws of any
jurisdiction; (ii) represents and warrants that Contributor and Contributor GP,
respectively, (a) have such knowledge, sophistication and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Partnership, (b) are able to bear the economic
risk of an investment in the Partnership and (c) are "accredited investors"
within the meaning of Section 2(15) of the Securities Act and (iii) are
acquiring the partnership interests for their own respective accounts as to
which each exercises sole investment discretion, for investment purposes only
and not with a view to any distribution in violation of the Securities Act.
4.13. THIRD PARTY LICENSE FEES.
(a) Schedule 4.13 lists, to the knowledge of Contributor, all third
party license fees and annual maintenance fees relating to software used by
Contributor at its data center facilities to run the Fairway System and the STS
System which would be incurred in connection with a transfer of the Fairway
System and the STS System to the Partnership if the transfer were to occur at
the date of this Agreement.
(b) All fees incurred by Contributor in connection with the
contribution of the Fairway System and the licensing of the STS System to the
Partnership, including but not
<PAGE>
13
limited to fees resulting from the status of the Partnership as owner of the
Fairway System or exclusive licensee of the STS System upon contribution or
licensing such systems, shall be paid by the Contributor EXCEPT that such fees
shall be paid by the Partnership to the extent such fees are based on (A)
additional Functionalities of the Fairway System identified in the course of
development of the Fairway System under the Development Agreement; (B)
Enhancements (as defined in the Development Agreement) in the Fairway System; or
(C) changes to the Partnership organization or ownership that may cause
additional fees to be due. Except for any fees described in clauses (A)-(C) of
this Section 4.13, and any other fees expressly set forth in clauses (A), (B)
and (E) of Paragraph 2(b)(iii) of the Development Agreement, no additional third
party license fees shall be due to or assessed by Contributor in respect of this
Agreement; provided, that (i) the direct and indirect ownership of Contributor
in the Partnership, in the aggregate, does not fall below 20% (PROVIDED,
HOWEVER, that transfers by Contributor of its interest in the Partnership shall
not be included within this clause (i)); and (ii) the System and the software
included in the Software Requirements are used solely by the Partnership. Except
as described above and in Paragraph 2(b)(iii) of the Development Agreement,
Contributor will not incur any additional third party software fees without the
Partnership's consent, which will not be unreasonably withheld. Contributor will
make a reasonable effort to work to minimize the third party license and
maintenance fees necessary to run the STS System and the Fairway System
following Contribution; provided, that actions taken to minimize such costs
shall not (1) subject Contributor to loss of any rights to use any third party
software; (2) cause Contributor to incur any penalties or costs; or (3) relieve
the Partnership of its responsibility for third party fees as described in
clauses (A)-(C) herein and in clauses (A), (B) and (E) of Paragraph 2(b)(iii) of
the Development Agreement. The Partnership shall receive Contributor's most
favorable customer rates for any proprietary Contributor software in the STS
System and the Fairway System; provided, that the Partnership has licensed use
of such software for at least as many workstations as other Contributor
customers who receive such rates. Notwithstanding any provision of this Section
4.13(b) to the contrary, Contributor shall be responsible for payment of any
fees incurred by Contributor in connection with the contribution of the Fairway
System and the STS System to the Partnership with respect to any third party
software vendor omitted from Schedule 4.13 and not covered by clauses (A)-(C) of
this Section 4.13(b).
4.14. INCREMENTAL FEES UNDER CONTRIBUTED BUSINESS CONTRACTS. Except in
connection with obtaining necessary consents as set forth on SCHEDULE 4.3,
neither the Contributor nor the Partnership will be required to pay any
incremental fee or penalty under any STS Customer Contract as a result of the
consummation of the transactions contemplated hereby.
4.15. ABSENCE OF OTHER WARRANTIES. Except as and to the extent
expressly set forth in this Agreement, neither Contributor nor Contributor GP
(i) makes any representations or warranties whatsoever, and (ii) each disclaims
any liability and responsibility for any negligent representation, warranty,
statement or information made or communicated, by oversight or otherwise (orally
or in writing), to the Partnership (including without limitation, any opinion,
information, projection, statement or advice which may have been provided to the
Partnership by
<PAGE>
14
any employee, officer, agent, stockholder or other representative of Contributor
or the Contributor GP in connection with the transactions contemplated hereby).
For purposes of this Agreement, the term "knowledge of Contributor", "knowledge
of Contributor GP" or similar qualifiers shall be limited to the actual
knowledge of any of the officers and employees of the Contributor or the
Contributor GP listed on SCHEDULE 4.16 hereto.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE PARTNERSHIP
As a material inducement to the Contributor to enter into this
Agreement, the Partnership hereby represents and warrants to the Contributor as
follows (with any item specifically disclosed in a Schedule hereunder deemed to
be disclosed for the purposes of any other Schedule hereunder):
5.1. ORGANIZATION, ETC.. The Partnership is a Delaware limited
partnership validly existing and in good standing under the laws of the State of
Delaware or and the Partnership Subsidiary is a limited purpose national bank
duly organized under the laws of the United States, and each has all requisite
power and authority to own and operate the assets owned by it, to carry on its
business as now conducted by it and to enter into this Agreement and the other
Related Agreements to which it is a party and to perform its obligations
hereunder and thereunder.
5.2. AUTHORITY; COMPLIANCE WITH OTHER INSTRUMENTS; ENFORCEABILITY. The
execution, delivery and performance of this Agreement and each Related Agreement
to which the Partnership is a party has been duly authorized by all necessary
partnership action on the part of the Partnership and will not result in any
violation of or conflict with or constitute a default under (i) any term of the
Partnership Agreement or other constitutive documents of the Partnership or the
Partnership Subsidiary or (ii) any agreement or instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to the Partnership or
the Partnership Subsidiary or otherwise result in the creation of any
Encumbrance upon any of the assets of the Partnership or the Partnership
Subsidiary, except for any such violation, conflict or default under clause (ii)
above or any such Encumbrance which shall not, individually or in the aggregate,
have a Partnership Material Adverse Effect. This Agreement has been duly
executed and delivered by the Partnership and constitutes, and each Related
Agreement to which the Partnership is a party when executed and delivered by the
Partnership will constitute, the legal, valid and binding obligation of the
Partnership, enforceable against the Partnership in accordance with its terms
subject only to the provisions of bankruptcy, insolvency, moratorium,
reorganization, fraudulent transfer or other laws affecting the enforcement
generally of creditors' rights and remedies.
5.3. ADEQUACY OF PARTNERSHIP ASSETS. Except as described on SCHEDULE
5.3, the Partnership or the Partnership Subsidiary owns or has the right to all
of the assets necessary to conduct the Partnership Business as conducted
immediately prior to the date hereof and the Final Closing Date (the
"PARTNERSHIP ASSETS") (such SCHEDULE 5.3 to be updated to the Final Closing
<PAGE>
15
Date to reflect changes occurring in the ordinary course of business, which
changes shall not be deemed to be inaccuracies for purposes of this
representation).
5.4. TITLE TO PARTNERSHIP ASSETS.
(a) The Partnership or the Partnership Subsidiary is the
lawful owner of, and has good and valid title to, all of the Partnership Assets
necessary to the operation of the Partnership Business as operated on the date
hereof and the Final Closing Date. Except as set forth on SCHEDULE 5.4(a)
hereto, all of the Partnership Assets and Partnership Contracts are free and
clear of any security interests, pledges, liens, mortgages, deeds of trust,
conditional sales agreements, title retention agreements, material defects as to
title (other than Permitted Liens and other than restrictions against transfer
and assignment in the Partnership Business Contracts). There are no filings
under the Uniform Commercial Code or similar statute in any jurisdiction showing
the Partnership or the Partnership Subsidiary as debtor which create or perfect
or which purport to create or perfect any Encumbrance in or on any of the
Partnership Assets except with respect to Permitted Liens.
(b) All of the Partnership Assets that are in tangible form
are located at the addresses set forth in SCHEDULE 5.4(b).
5.5. PARTNERSHIP INTERESTS. The partnership interests to be issued
pursuant to this Agreement are duly authorized and, when issued, will be validly
issued, fully paid and nonassessable.
5.6. BROKERAGE AGREEMENTS. Neither the Partnership nor the Partnership
Subsidiary has employed or is subject to any valid claim of any broker, finder,
consultant or other intermediary in connection with the transactions
contemplated by this Agreement who would be entitled to any commission or
broker's or finder's fee in connection with the transactions contemplated
hereby.
5.7. GOVERNMENTAL CONSENTS. Except (a) as set forth on SCHEDULE 5.7
hereto and (b) for filing and recording appropriate documents normally required
in connection with conveyance of title to personal and real property, no
consent, approval or authorization of, or registration, qualification or filing
with, any governmental agency or authority is required for the execution and
delivery of this Agreement or any Related Agreements by the Partnership or for
the consummation by the Partnership of the transactions contemplated hereby or
thereby.
5.8. FINANCIAL STATEMENTS. Attached hereto as SCHEDULE 5.8A are copies
of the balance sheets of the Partnership as of December 31, 1997, and the
related statements of income, changes in stockholders' equity and cash flows for
fiscal year 1997, accompanied by the audit report of Ernst & Young, LLP,
independent accountants for the Partnership. Attached hereto as SCHEDULE 5.8B
are copies of the unaudited balance sheets of the Partnership as of March 31,
1998 and the related unaudited statements of income, changes in stockholders'
equity, and cash flow for the three (3) months then ended, including in each
case the notes thereto. Attached hereto as SCHEDULE 5.8C are copies of (i) the
unaudited pro forma balance sheet as of December 31, 1996
<PAGE>
16
for the shareholder services business to be contributed by BANK ONE pursuant to
the BANK ONE Contribution Agreement (the "BANK ONE BUSINESS") and the related
unaudited pro forma statement of income, changes in stockholder's equity and
cash flows for fiscal year 1996, including in each case the notes thereto, (ii)
the unaudited pro forma balance sheet as of November 30, 1997 for the BANK ONE
Business and the related unaudited pro forma statement of income, changes in
stockholder's equity, and cash flow for the eleven (11) months then ended,
including in each case the notes thereto, and (iii) the unaudited pro forma
statement of income (including all charges incurred for intercompany purchased
services), for the BANK ONE Business for fiscal year 1997, including the notes
thereto, in each case, as delivered to the Partnership pursuant to the BANK ONE
Contribution Agreement. Except as set forth on SCHEDULE 5.8A, the financial
statements of the Partnership fairly present (including the related notes, where
applicable) the financial position and results of the operations and cash flows
and changes in shareholders' equity of the Partnership for the respective fiscal
periods or as of the respective dates therein set forth; and each of such
statements (including the related notes, where applicable) has been and will be
prepared in accordance with GAAP consistently applied during the periods
involved, except as otherwise set forth in the notes thereto (subject, in the
case of unaudited interim statements, to normal year-end adjustments and the
absence of footnotes thereto). The books and records of the Partnership have
been, and are being, maintained in accordance with GAAP and applicable legal and
regulatory requirements.
5.9. INSURANCE. The Partnership maintains insurance with respect to its
business, assets and properties of the kinds, with respect to the risks, and in
such amounts as are consistent with prudent business practices.
5.10. COMPLIANCE WITH LAWS, ETC. Each of the Partnership and the
Partnership Subsidiary is, and after giving effect to the transactions
contemplated hereby will be, in compliance with all rules and regulations
applicable to its business under applicable federal or state law, except for any
lack of compliance which, individually or in the aggregate, would not have a
Partnership Material Adverse Effect. In addition, the Partnership and each
Partnership Subsidiary has all licenses, permits, ratings and approvals of all
federal, state, local or foreign governmental or regulatory bodies necessary for
the Partnership and each Partnership Subsidiary to operate its business as
presently operated, except for any licenses, permits, ratings and approvals the
absence of which, individually or in the aggregate, would not have a Partnership
Material Adverse Effect (the "PARTNERSHIP NECESSARY PERMITS"). SCHEDULE 5.10
lists all Partnership Necessary Permits. To the knowledge of the Partnership:
(a) all of the Partnership Necessary Permits are in full force and effect, and
(b) no suspension or cancellation of any Partnership Necessary Permit has been
threatened, and no proceeding seeking any such suspension or cancellation is
pending.
5.11. LITIGATION, ETC. Except as set forth on SCHEDULE 5.11 hereto, no
civil, criminal, administrative or other regulatory governmental action, suit,
demand, claim (including employee or employment claims), hearing, proceeding or
investigation is as of the date of this Agreement or as of each Closing Date
(such SCHEDULE 5.11 to be updated with respect to the following clause (a) for
purposes of the representation as of each Closing Date, which changes shall not
be deemed inaccuracies for the purposes of this representation and warranty)
pending or, to the
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17
knowledge of the Partnership, threatened, against the Partnership, any
Partnership Subsidiary, or any of their respective directors or officers which
questions (a) the validity of this Agreement or challenges any of the
transactions contemplated hereby or (b) otherwise relates to its business or any
of the Partnership's Assets, except for any threatened action, suit, demand,
claim, hearing or investigation that singly or in the aggregate would not have
Partnership Material Adverse Effect.
5.12. CONTRACTS.
(a) Each contract to which the Partnership or the Partnership
Subsidiary is a party, including, without limitation, the BANK ONE Contribution
Agreement (collectively, the "PARTNERSHIP CONTRACTS") is a valid, binding and
enforceable obligation of the Partnership or the Partnership Subsidiary and, to
the knowledge of the Partnership, the other party or parties thereto (subject
only to the provisions of bankruptcy, insolvency, moratorium, reorganization,
fraudulent transfer or other laws affecting the enforcement generally of
creditors' rights and remedies), and is in full force and effect. There are no
material oral modifications in effect with respect to any of the Partnership
Contracts except as described on SCHEDULE 5.12(a).
(b) Except as specifically identified in SCHEDULE 5.12(b), neither the
Partnership nor the Partnership Subsidiary nor, to the knowledge of the
Partnership, the other party or parties thereto, is in breach or non-compliance,
or is considered to be in breach or non-compliance by the other party thereto,
and no event has occurred or failed to occur which event or failure would, with
the passage of time or the giving of notice or both, be a breach, of any term of
any of the Partnership Contracts.
(c) Attached as part of SCHEDULE 5.12(c) are copies of standard forms
of Partnership Business Contracts. Except as disclosed on SCHEDULE 5.12(c), no
Partnership Business Contract which deviates from the standard forms attached
hereto contains, in the aggregate, terms (i) commercially unreasonable or (ii)
not customary in similar contracts pertaining to the provision of services
provided in the Shareholder Services Business.
(d) SCHEDULE 5.12(d) sets forth a list of each of the Persons for which
the Partnership is currently providing services under Partnership Business
Contracts (with such Persons at any time of reference referred to herein as the
"PARTNERSHIP CUSTOMERS"). Except as disclosed on SCHEDULE 5.12(d), as of the
date of this Agreement and as of each Closing Date (such SCHEDULE 5.12(d) to be
updated for purposes of this representation as of the Final Closing Date, which
changes shall not be deemed inaccuracies for the purposes of this representation
and warranty unless such changes should have been known as of the date of this
Agreement or any earlier Closing Date), the Partnership has no knowledge that
any Partnership Customer (i) has expressed any material dissatisfaction with the
business relationship between such Partnership Customer and the Partnership or
the Partnership Subsidiary, as applicable, (ii) has notified the Partnership or
the Partnership Subsidiary, as applicable, orally or in writing that it intends
to terminate an existing relationship with the Partnership, or seek a payment or
reduction in fees or (iii) has informed the Partnership or the Partnership
Subsidiary that the transactions contemplated by this Agreement would violate
the terms of such contract or entitle such
<PAGE>
18
Partnership Customer to a payment or reduction in fees. Except as set forth in
SCHEDULE 5.12(d), as of the date of this Agreement no Partnership Customer is an
Affiliate of the Partnership.
(e) Except as described on SCHEDULE 5.12(e), no employee of the
Partnership or the Partnership Subsidiary has any employment contract or other
agreement or arrangement with the Partnership by which such employee is employed
by the Partnership or the Partnership Subsidiary on any basis other than as an
"at will" employee or by which the Partnership or the Partnership Subsidiary is
restricted in any manner from terminating the services of such employee at any
time without penalty or payment, subject only to the provisions of the
Partnership Employee Benefit Plans. A copy of each such employment contract or
other agreement or arrangement is included in SCHEDULE 5.12(e).
5.13. PARTNERSHIP INTELLECTUAL PROPERTY. (a) SCHEDULE 5.13(a) sets
forth a complete list of all Partnership Intellectual Property that is material
to the business, results of operations, properties (including intangible
properties), assets, liabilities or financial condition of the Partnership
Business, specifying in each case the manner in which such Partnership
Intellectual Property is protected (including the status of any applications or
registrations therefor) and, in the case of Partnership Third Party Intellectual
Property, the license or other agreement pursuant to which the Partnership or
the Partnership Subsidiary has the right to use such Partnership Third Party
Intellectual Property, other than Partnership Third Party Intellectual Property
generally available to the public.
(b) Except as set forth on SCHEDULE 5.13(b), none of the
Partnership Intellectual Property is used by the Partnership or the Partnership
Subsidiary or, to the knowledge of the Partnership, any Affiliate of the
Partnership (other than in the Partnership Business), and, to the knowledge of
the Partnership, neither the Partnership or the Partnership Subsidiary nor any
Affiliate of the Partnership has authorized any Person to use any of the
Partnership Intellectual Property. The registrations of trademarks, service
marks and copyrights and patents listed on SCHEDULE 5.13(a) (such SCHEDULE
5.13(a) to be updated as of each Closing Date, which changes shall not be deemed
inaccuracies for the purposes of this representation and warranty unless such
changes should have been known as of the date of this Agreement or any earlier
Closing Date) are valid, subsisting and maintained in full accordance with
applicable law and none have lapsed, expired or been abandoned, provided, that
no representation or warranty is made under this sentence with respect to any
Partnership Third Party Intellectual Property.
(c) Neither the Partnership nor the Partnership Subsidiary has
failed to prosecute properly or maintain or otherwise jeopardized the legal
protection of any Partnership Intellectual Property that (i) provides a material
competitive advantage to it in the Partnership Business and (ii) the legal
protection of which is material to the value of such business.
(d) There are no Encumbrances on any of the Partnership
Intellectual Property. Neither the Partnership nor the Partnership Subsidiary
has received any claim or demand asserted in writing by any Person pertaining to
the Partnership Intellectual Property, and no proceedings have been instituted
or are pending or threatened in writing which challenge the rights of the
Partnership or the Partnership Subsidiary in respect thereof. None of the
proprietary
<PAGE>
19
rights of the Partnership or the Partnership Subsidiary in the Partnership
Intellectual Property violates the rights of any Person or is being violated by
any other Person, other than violations that would not, individually or in the
aggregate, have a Partnership Material Adverse Effect. None of the Partnership
Intellectual Property is subject to any outstanding order, decree, judgment,
stipulation, injunction or agreement binding on the Partnership restricting the
scope of its use by the Partnership or the Partnership Subsidiary (other than
restrictions contained in license agreements pursuant to which Partnership Third
Party Intellectual Property is used by the Partnership or the Partnership
Subsidiary), or, to the knowledge of the Partnership, is subject to any other
restriction on the scope of such use. Neither the Partnership nor the
Partnership Subsidiary is violating the rights of any Person with respect to any
Partnership Intellectual Property.
5.14. LEASES. The Partnership or the Partnership Subsidiary owns all of
the right, title and interest in, to and under the leases of personal and real
property used in the operation of the business of the Partnership as it is
currently conducted.
5.15. REGULATORY APPROVALS. The Partnership is not aware of any reason
why any of the necessary consents or approvals of governmental authorities
referred to in Section 5.7 above or of other non-governmental third parties
would not be obtained within a time period sufficient to enable the parties to
consummate the transactions contemplated by this Agreement.
5.16. NON-COMPETITION AGREEMENTS. Except as set forth in SCHEDULE 5.16,
neither the Partnership nor the Partnership Subsidiary is a party to or bound by
any agreement, written or oral, which is, or as a result of the transactions
contemplated hereby, would become applicable to the Partnership or any of its
Affiliates or its current or future employees and would in any way limit the
ability or authority of the Partnership or any of its Affiliates or its current
or future employees to compete with, or engage in, any line of business
contemplated to be conducted by the Partnership.
5.17. ENVIRONMENTAL COMPLIANCE. Except where the failure of any of the
following to be true and correct has not had and would not reasonably be
expected to have, and as set forth on SCHEDULE 5.17, individually or in the
aggregate, a Partnership Material Adverse Effect: (a) each of the Partnership
and the Partnership Subsidiary is in compliance with all applicable
environmental laws; (b) each of the Partnership and the Partnership Subsidiary
has all permits, authorizations and approvals required under any applicable
environmental laws and is in compliance with their respective requirements; (c)
there are no pending or threatened environmental claims against the Partnership
or the Partnership Subsidiary; and (d) under applicable law, there are no
circumstances with respect to any operations of the Partnership or the
Partnership Subsidiary or the use by either of them of any of its interests in
any real property that are reasonably likely to form the basis of an
environmental claim against the Partnership or the Partnership Subsidiary.
5.18. DELTA VANTAGE SYSTEM.
(a) The Delta Vantage System and the technical and descriptive
materials relating to the acquisition, design, development, use, maintenance or
marketing of computer code
<PAGE>
20
and program documentation and materials relating to the Delta Vantage System
(the "DELTA VANTAGE TECHNICAL DOCUMENTATION") are free and clear of all liens,
claims, encumbrances, rights or equities whatsoever of any third party other
than liens granted to SSBT and BKB pursuant to the Partnership Credit Agreement.
The Delta Vantage System and the Delta Vantage Technical Documentation do not
infringe any patent, copyright, or trade secret of any third party. The source
code and system specifications for the Delta Vantage System have been maintained
by the Partnership, in confidence, have been disclosed by the Partnership, as
applicable, only to employees and consultants having "a need to know" the
contents thereof in connection with the performance of their duties to the
Partnership, and the Partnership has protected the Delta Vantage System and the
Delta Vantage Technical Documentation as trade secrets.
(b) PROCEDURES FOR COPYRIGHT PROTECTION. In no instance has eligibility
of the Delta Vantage System or the Delta Vantage Technical Documentation for
protection under applicable copyright law been forfeited to the public domain by
omission of any required notice or any other action.
(c) PERSONNEL AGREEMENTS. No personnel of the Partnership or an
Affiliate including employees, agents, consultants, and contractors, have any
ownership rights in the Delta Vantage System or the Delta Vantage Technical
Documentation.
(d) ADEQUACY OF DELTA VANTAGE SYSTEM. The Delta Vantage System will
perform as it does on the date hereof and is free of any program code errors or
defects that would adversely affect the use of the Delta Vantage System by the
Partnership or the licensees of the Delta Vantage System.
(e) THIRD-PARTY COMPONENTS IN DELTA VANTAGE SYSTEM. The Partnership has
validly and effectively obtained the right and license to use, copy, modify, and
distribute the third-party programming and materials needed to operate the Delta
Vantage System and the Delta Vantage Technical Documentation. The Delta Vantage
System and the Delta Vantage Technical Documentation contain no other derivative
works, programming or materials in which any third party may claim superior,
joint, or common ownership, including any right or license.
(f) THIRD-PARTY INTERESTS OR MARKETING RIGHTS IN DELTA VANTAGE SYSTEM.
Neither the Partnership nor any Affiliate has granted, transferred, or assigned
any right or interest in the Delta Vantage System to any Person. There are no
contracts, agreements, licenses, and other commitments or arrangements in effect
with respect to the use, marketing, distribution, licensing, or promotion of the
Delta Vantage System.
5.19. EMPLOYEES. The Partnership has made available to the Contributor
a list of all employees of the Partnership Business (the "PARTNERSHIP
EMPLOYEES"), showing for each the position held, the period employed by the
Partnership or the Partnership Subsidiary, as applicable, and current salary or
rate of pay. None of the Partnership Employees is covered by any collective
bargaining or similar agreement. There is no strike or other labor dispute
pending or, to the knowledge of the Partnership, threatened, against the
Partnership or the Partnership Subsidiary, as applicable, which could have a
Partnership Material Adverse Effect.
<PAGE>
21
5.20. INCREMENTAL FEES UNDER PARTNERSHIP BUSINESS CONTRACTS. Neither
the Partnership nor the Contributor will be required to pay any incremental fee
or penalty under any Partnership Business Contract as a result of the
consummation of the transactions contemplated hereby.
5.21. ABSENCE OF OTHER WARRANTIES. Except as and to the extent
expressly set forth in this Agreement, the Partnership (i) makes no
representations or warranties whatsoever, and (ii) disclaims any liability and
responsibility for any negligent representation, warranty, statement or
information made or communicated, by oversight or otherwise (orally or in
writing), to the Contributor (including without limitation, any opinion,
information, projection, statement or advice which may have been provided to the
Contributor by any employee, officer, agent, stockholder or other representative
of the Partnership in connection with the transactions contemplated hereby).
For purposes of this Agreement, the term "knowledge of the Partnership" or
similar qualifiers shall be limited to the actual knowledge of any of the
officers and employees of the Partnership listed on SCHEDULE 5.22 hereto.
ARTICLE 6
CERTAIN TRANSITIONAL COVENANTS
6.1. ORDINARY COURSE OPERATION BY CONTRIBUTOR AND CONTRIBUTOR GP.
Contributor agrees that, between the date hereof and the Final Closing Date, it
will operate and will cause the Contributor GP to operate the Contributed
Business only in the ordinary course on a basis consistent with past practice.
Without limiting the generality of the foregoing, Contributor agrees that,
unless otherwise consented to by the Partnership:
(i) the Contributed Business will be conducted only in
the ordinary course;
(ii) the insurance on the Contributed Business in place on
the date hereof shall be maintained in all material
respects, provided such insurance is available;
(iii) Contributor will not, and will not permit the
Contributor GP to, permit any Encumbrance to be
placed upon any of the Acquired Assets, except for
permitted liens;
(iv) no existing STS Customer Contract with any Customer
shall be terminated by Contributor or the Contributor
GP (other than by expiration in accordance with its
terms) or be materially amended or modified by
Contributor or the Contributor GP, unless the
Partnership shall have been notified of the same and
the Partnership shall have failed to object within
ten (10) Business Days of receipt of such notice;
<PAGE>
22
(v) Contributor will not, and will not permit the
Contributor GP to, do any act or omit to do any act
which will cause a material breach of any contract or
commitment that is materially related to the
Contributed Business;
(vi) no Acquired Assets shall be sold or transferred
except in the ordinary course; and
(vii) no claims of Contributor or the Contributor GP
relating to the Contributed Business shall be
released or rights of Contributor or the Contributor
GP waived except in the ordinary course or, with
respect to any material release or waiver relating to
a STS Customer Contract, unless the Partnership shall
have consented to the same or failed to notify
Contributor or the Contributor GP of its objection
thereto within ten (10) Business Days after notice
thereof to the Partnership.
In addition, Contributor will, and will cause the Contributor GP to:
(x) use all reasonable efforts to preserve the
Contributed Business and to keep available the
services of its full-time officers and employees
involved with the Contributed Business, provided,
however, that neither Contributor nor Contributor GP
shall be obligated to increase the compensation of
any such person;
(y) comply in all material respects with all
applicable laws, ordinances, rules and
regulations relating to the Contributed Business; and
(z) maintain the books of account and records of the
Contributed Business in the ordinary course and in
accordance with past practices.
6.2. ORDINARY COURSE OPERATION BY THE PARTNERSHIP. The Partnership
agrees that, between the date hereof and the Final Closing Date, it will
operate, and will cause the Partnership Subsidiary to operate, its respective
business only in the ordinary course on a basis consistent with past practice.
Without limiting the generality of the foregoing, the Partnership agrees that
unless otherwise consented to by the Contributor:
(i) except for the consummation of the transactions
contemplated by the BANK ONE Contribution Agreement,
the Partnership Business will be conducted only in
the ordinary course;
(ii) the insurance on the Partnership Business in place on
the date hereof shall be maintained in all material
respects;
(iii) no salaries or wages of any officer or employee of
the Partnership or any Partnership Subsidiary shall
be increased and no bonus, pension, option, incentive
or deferred compensation, retirement, death, profit
sharing, or
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23
similar benefits of the officers or employees of the
Business of the Partnership shall be established or
increased, except in accordance with past practices
(including scheduled periodic increases in the
ordinary course);
(iv) the Partnership will not permit any Encumbrance to be
placed upon any of the Partnership Assets other than
pursuant to the Amended and Restated Credit Agreement
contemplated by the BANK ONE Contribution Agreement;
(v) no existing Partnership Business Contract with any
Partnership Customer shall be terminated by the
Partnership (other than by expiration in accordance
with its terms) or be materially amended or modified
by the Partnership, the Partnership Subsidiary or any
Partner, unless the Contributor shall have been
notified of the same and the Contributor shall have
failed to object within ten (10) Business Days of
receipt of such notice;
(vi) The Partnership will not, and will not permit the
Partnership Subsidiary or any Partner to, do any act
or omit to do any act which will cause a material
breach of any contract or commitment that is
materially related to the Partnership Business;
(vii) no property of the Partnership shall be sold or
transferred except in the ordinary course; and
(viii) no claims of the Partnership relating to the
Partnership Business shall be released or rights of
the Partnership waived except in the ordinary course
or, with respect to any material release or waiver
relating to a Partnership Business Contract, unless
the Contributor shall have consented to the same or
failed to notify the Partnership of its objection
thereto within 10 Business Days after notice thereof
to Contributor.
In addition, the Partnership will:
(x) use all reasonable efforts to preserve its business
and to keep available the services of the full-time
officers and employees of the Partnership and the
Partnership Subsidiaries involved in such businesses;
(y) comply in all material respects with all
applicable laws, ordinances, rules and
regulations relating to its business; and
(z) maintain the books of account and records of its
business in the ordinary course in accordance with
past practices.
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24
6.3. COOPERATION. Each of the parties hereto will cooperate in good
faith and use reasonable efforts to cause the transactions contemplated by this
Agreement and the Related Agreements to be consummated in accordance with the
terms and conditions of this Agreement and the Related Agreements. The foregoing
obligations in this Section 6.3 shall not be deemed to require any party hereto
to waive any right under this Agreement or any Related Agreement.
6.4. CURRENT INFORMATION. Unless restricted by law, during the period
from the date of this Agreement to the Final Closing, each of the parties hereto
will cause one or more of its representatives to confer on a regular and
frequent basis with representatives of the other party hereto with respect to
the status of the ongoing operations of the Contributed Business and the
Partnership Business. Each party will promptly notify the other of any material
change in the normal course of their respective Shareholder Services Business or
in the operation of its properties relating thereto and, to the extent permitted
by applicable law, of any governmental complaints, investigations or hearings
(or communications indicating that the same may be contemplated), or the
institution or the threat of material litigation involving such party which
would in any manner, challenge, prevent, alter or materially delay any of the
transactions contemplated hereby or by the Related Agreements, and each party
will keep the other parties informed with respect to such events. Each party
hereto will also notify the other parties hereto of the status of regulatory
applications and third party consents related to the transactions contemplated
hereby.
6.5. ACCESS, INFORMATION AND CONFIDENTIALITY.
(a) Each party hereto shall, and shall cause each of their respective
subsidiaries to, with respect to the Shareholder Services Business conducted by
each party afford the other party and its representatives (including, without
limitation, officers and employees and their authorized agents, counsel,
accountants and other professionals retained) such access during normal business
hours throughout the period prior to the Final Closing Date to its books,
records (including, without limitation, appropriate work papers of independent
auditors under normal professional courtesy), properties, personnel and to such
other information related to the transactions contemplated herein as either the
Partnership may reasonably request, unless restricted by law or by contract.
(b) Each party to this Agreement shall hold, and shall cause its
respective subsidiaries and their directors, officers, employees, agents,
consultants and advisors to hold, in strict confidence and use solely for the
purpose of consummating the transactions contemplated by this Agreement and for
no other purpose including, without limitation, any purpose which is directly or
indirectly detrimental to the disclosing party or any of its respective
Affiliates, unless disclosure to a banking or other regulatory authority is
necessary or appropriate or unless compelled to disclose by judicial or
administrative process or, in the written opinion of its counsel, by other
requirement of law or the applicable requirements of any regulatory agency or
relevant stock exchange, all non-public records, books, contracts, reports,
instruments, computer data and other data and information (collectively,
"INFORMATION") concerning the other party (or, if required under a contract with
a third party, such third party) furnished it by such other party or its
representatives pursuant to this Agreement or any other Related Agreement,
except to the
<PAGE>
25
extent that such Information can be shown to have been (a) previously known by
such party on a non-confidential basis, (b) available to such party on a
non-confidential basis from a source other than the disclosing party, (c) in the
public domain through no fault of such party or (d) later lawfully acquired from
other sources by the party to which it was furnished, and none of the parties
shall release or disclose such Information to any other person, except its
auditors, attorneys, financial advisors, bankers, other consultants and advisors
and, to the extent permitted above, to bank regulatory authorities. In the event
that a party to this Agreement becomes compelled to disclose any Information in
connection with any necessary regulatory approval or by judicial or
administrative process, such party shall provide the party who provided such
Information (the "DISCLOSING PARTY") with prompt prior written notice of such
requirement so that the Disclosing Party may seek a protective order or other
appropriate remedy. In the event that such protective order, or other remedy is
not obtained, only that portion of the Information which is legally required to
be disclosed shall be so disclosed.
6.6. CONSENTS AND APPROVALS OF THIRD PARTIES. Each party hereto shall
use all reasonable efforts to make all filings with, and obtain all consents and
approvals of, any other Person necessary or desirable for the consummation of
the transactions contemplated by this Agreement.
6.7. CONTRIBUTOR GP BOARD OBSERVER. From the date hereof until the
Initial Closing Date, the Contributor GP shall be entitled to receive notice of,
and to have one non-voting representative present at, all meetings of the Board
of Directors of the Partnership. The Contributor GP's representative shall be
excused from such meetings while business with or concerning the Contributor or
the Contributor GP is to be discussed.
ARTICLE 7
CERTAIN ADDITIONAL TRANSITIONAL MATTERS
7.1 TRANSFERS REQUIRING CONSENT.
(a) To the extent that any of Contributor or Contributor GP's
obligations under any STS Customer Contract is not capable of being delegated by
Contributor or the Contributor GP to the Partnership pursuant to this Agreement
and the Contributor Shareholder Services Agreement without the consent, approval
or waiver of a third Person, and such consent has not been obtained prior to the
Contributed Business Closing Date, or if such transfer or attempted transfer
would constitute a breach thereof or a violation of any law, rule or regulation,
nothing in this Agreement will constitute a transfer or an attempted transfer
thereof.
(b) Notwithstanding anything contained in this Agreement to the
contrary, the Contributor or the Contributor GP, as applicable, will not be
obligated to delegate to the Partnership any of its obligations in and to any of
the STS Customer Contracts referred to in paragraph (a) without first having
obtained all consents, approvals and waivers necessary for such delegation. The
Contributor or Contributor GP will use all reasonable efforts and the
<PAGE>
26
Partnership will cooperate with the Contributor and the Contributor GP to obtain
such consents, approvals and waivers, to resolve the practicalities of transfer
referred to in paragraph (a) and to obtain any other consents, approvals and
waivers necessary to transfer to the Partnership any obligations under such STS
Customer Contracts. Each of the Partnership and the Contributor and the
Contributor GP shall bear its own expenses incurred in connection with such
efforts.
(c) In the event that such consents, approvals and waivers to the
delegation referred to in paragraph (a) have not been obtained by the
Contributor or the Contributor GP, as applicable, prior to the Contributed
Business Closing Date, then, unless and until any such STS Customer Contract
(collectively, "UNDELEGATED CONTRACTS") is assigned to the Partnership, the
Contributor, Contributor GP and the Partnership will use all reasonable efforts
to (i) provide to the Partnership the benefits and burdens of any Undelegated
Contract referred to in paragraph (a), (ii) cooperate in any reasonable and
lawful arrangement designed to provide such benefits to the Partnership,
including without limitation the appointment of the Partnership as the agent of
the Contributor or the Contributor GP for purposes of such Undelegated Contract,
and (iii) enforce, at the request of the Partnership and for the account of the
Partnership, any rights of the Contributor arising from any such Undelegated
Contract (including without limitation the right to elect to terminate such
Undelegated Contract in accordance with the terms thereof upon the advice of the
Partnership).
<PAGE>
27
7.2. DST PARTNERSHIP INTEREST. Notwithstanding anything to the contrary
herein or in the Partnership Agreement, as in effect from time to time, the
Percentage Interest of Contributor or Contributor GP will not be diluted by the
issuance of any incremental partnership interest to Bank One pursuant to Section
12.2 of the Bank One Contribution Agreement.
ARTICLE 8
CLOSINGS;
CONSEQUENCES FOR FAILURE TO TIMELY DELIVER RELEASES FOR TESTING;
CONSEQUENCES FOR FAILURE TO TIMELY DELIVER FUNCTIONALITY
8.1. INITIAL CLOSING.
(a) INITIAL CLOSING DATE. Subject to the terms and conditions set forth
herein and in the Development Agreement, the consummation of the contribution of
those Acquired Assets comprising Releases 1.1 and 1.2 as contemplated by this
Agreement and the Development Agreement shall take place at a closing (the
"INITIAL CLOSING") to be held at the Boston, Massachusetts offices of Bingham
Dana LLP, on the tenth day after the date of Interim Acceptance of Release 1.2
by the Partnership in accordance with the terms of the Development Agreement or
on such other date as shall be agreed to in writing by all of the parties
hereto. The date on which the Initial Closing actually occurs is sometimes
referred to herein as the "INITIAL CLOSING DATE". In consideration of the
contribution by the Contributor to the Partnership of the Acquired Assets
comprising Releases 1.1 and 1.2, the Partnership shall, on the Initial Closing
Date, issue to the Contributor an undiluted direct 9.5% limited partnership
interest in the Partnership and issue to Contributor GP an undiluted direct 0.5%
general partnership interest in the Partnership as it exists at such time.
(b) DELIVERY AT THE INITIAL CLOSING. At the Initial Closing, the
Contributor and the Contributor GP shall duly execute and deliver to the
Partnership or its designated Affiliate such instruments of assignment or
transfer with respect to the Acquired Assets contributed hereby comprising
Releases 1.1 and 1.2 as contemplated by the Development Agreement as the
Partnership may reasonably request and as may be necessary to vest in the
Partnership or its designated Affiliates good record title to all of the
Acquired Assets comprising Releases 1.1 and 1.2 contributed pursuant hereto as
required under the Development Agreement.
8.2. INTERIM CLOSING.
(a) INTERIM CLOSING DATE. Subject to the terms and conditions set forth
herein and in the Development Agreement, the consummation of the contribution of
those Acquired Assets comprising Release 1.2.5 as contemplated by this Agreement
and the Development Agreement shall take place at a closing (the "INTERIM
CLOSING") to be held at the Boston, Massachusetts offices of Bingham Dana LLP,
on the tenth day after the date of delivery of Release 1.3 by the Contributor to
the Partnership in accordance with the terms of the Development Agreement
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28
(provided Interim Acceptance of Release 1.2.5 by the Partnership has occurred in
accordance with the Development Agreement) or on such other date as shall be
agreed to in writing by all of the parties hereto. The date on which the Interim
Closing actually occurs is sometimes referred to herein as the "INTERIM CLOSING
DATE". In consideration of the contribution of the Acquired Assets comprising
Release 1.2.5, the Partnership shall issue to the Contributor and Contributor GP
additional partnership interests in the Partnership so that, upon such issuance,
Contributor shall have in the aggregate an undiluted direct 14.5% limited
partnership interest in the Partnership and Contributor GP shall have, in the
aggregate, an undiluted direct 0.5% general partnership interest in the
Partnership as it then exists. The date on which the Interim Closing actually
occurs is sometimes referred to herein as the "INTERIM CLOSING DATE".
(b) DELIVERY AT THE INTERIM CLOSING. At the Interim Closing, the
Contributor and the Contributor GP shall duly execute and deliver to the
Partnership or its designated Affiliate such instruments of assignment or
transfer with respect to the Acquired Assets contributed hereby comprising
Release 1.2.5 as the Partnership may reasonably request and as may be necessary
to vest in the Partnership or its designated Affiliates good record title to all
of the Acquired Assets comprising Release 1.2.5 contributed pursuant hereto as
required under the Development Agreement.
8.3. CONTRIBUTED BUSINESS CLOSING.
(a) CONTRIBUTED BUSINESS CLOSING DATE. Subject to the terms and
conditions set forth herein and in the Development Agreement, the consummation
of the contribution of the Contributed Business shall take place at a closing
(the "CONTRIBUTED BUSINESS CLOSING") to be held at the Boston, Massachusetts
offices of Bingham Dana LLP, on the earlier of (i) April 30, 2000 and (ii) the
Delivery Default Closing Date or such other date as mutually agreed to by the
parties hereto. The date on which the Contributed Business Closing actually
occurs is sometimes referred to herein as the "CONTRIBUTED BUSINESS CLOSING
DATE".
(b) DELIVERY AT THE CONTRIBUTED BUSINESS CLOSING. At the Contributed
Business Closing, the Contributor and the Contributor GP shall duly execute and
deliver to the Partnership or its designated Affiliate such instruments of
assignment or transfer with respect to the Acquired Assets contributed pursuant
hereto comprising the Contributed Business as the Partnership may reasonably
request and as may be necessary to vest in the Partnership or its designated
Affiliates good record title to all of the Acquired Assets comprising the
Contributed Business contributed pursuant hereto.
8.4. FINAL CLOSING.
(a) FINAL CLOSING DATE. Subject to the terms and conditions set forth
herein and in the Development Agreement, the consummation of the contribution of
Releases 1.3 and 1.3.5 as contemplated by this Agreement and the Development
Agreement shall take place at a closing (the "FINAL CLOSING") to be held at the
Boston, Massachusetts offices of Bingham Dana LLP, on the tenth business day
after the date of the Final Acceptance by the Partnership of the Fairway System
in accordance with the terms of the Development Agreement or on such other date
as
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29
shall be agreed to in writing by all of the parties hereto. The date on which
the Final Closing actually occurs is sometimes referred to herein as the "FINAL
CLOSING DATE". In consideration of the contribution of the Acquired Assets
comprising Release 1.3, Release 1.3.5 and of all other Acquired Assets
comprising the Fairway System and the Contributed Business not previously
delivered at any other Closing, the Partnership shall issue to the Contributor
and Contributor GP additional partnership interests in the Partnership so that,
upon such issuance, Contributor shall have in the aggregate an undiluted direct
19.5% limited partnership interest in the Partnership and Contributor GP shall
have, in the aggregate, an undiluted direct 0.5% general partnership interest in
the Partnership as it then exists.
(b) DELIVERY AT THE FINAL CLOSING. At the Final Closing, the
Contributor and the Contributor GP shall duly execute and deliver to the
Partnership or its designated Affiliate such deeds, bills of sale, certificates
of title and other instruments of assignment or transfer with respect to the
Acquired Assets contributed hereby compromising Releases 1.1, 1.2, 1.2.5, 1.3
and 1.3.5, as the Partnership may reasonably request and as may be necessary to
vest in the Partnership or its designated Affiliates good record title to all of
the Acquired Assets contributed hereby and as required by the Development
Agreement which were not previously delivered by the Contributor at any other
Closing.
8.5. CONSEQUENCES FOR FAILURE TO TIMELY DELIVER RELEASES FOR ACCEPTANCE
TESTING.
(a) Notwithstanding anything to the contrary herein, as provided in the
Development Agreement, in the event that the delivery of any Release occurs
after its scheduled Delivery Date and the expiration of the applicable cure
period, and the Contributor is found, pursuant to the Dispute Resolution
Procedures set forth in the Development Agreement, at fault for such late
delivery (a "DELIVERY DEFAULT"), as its exclusive remedy (i) the Partnership
shall have the right to cause Contributor to pay all reasonable costs and
expenses of a third party developer to complete the development of any remaining
undelivered Functionality in accordance with the Specifications (having
reference to the rates quoted by recognized software consultants for similar
services on software systems of comparable complexity), and, (ii) the total
percentage interest in the Partnership issued to the Contributor shall be
reduced from 20% to 15% (an undiluted direct 14.5% limited partner interest and
an undiluted direct 0.5% general partner interest).
(b) DELIVERY DEFAULT CLOSING. Upon the election of the Partnership and
subject to the terms and conditions set forth herein and in the Development
Agreement, at a closing (the "DELIVERY DEFAULT CLOSING") to be held at the
Boston, Massachusetts offices of Bingham Dana LLP on the tenth Business Day
after the date of the final determination of the arbitrator in accordance with
the terms of the Development Agreement or on such other date as shall be agreed
to in writing by all of the parties hereto, the Contributor shall deliver to the
Partnership all of the Acquired Assets comprising the Fairway System and the
Contributed Business, in each case, to the extent not previously delivered at
any other Closing. In consideration of the contribution of such assets, the
Partnership shall issue to the Contributor and Contributor GP such amount of
additional partnership interests in the Partnership, if any, as shall be
required to ensure that, upon such issuance, Contributor shall have in the
aggregate an undiluted direct 14.5% limited partnership interest in the
Partnership and Contributor GP shall have, in the aggregate, an undiluted direct
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30
0.5% general partnership interest in the Partnership as it then exists. The date
on which the Deliver Default Closing actually occurs is sometimes referred to
herein as the "DELIVERY DEFAULT CLOSING DATE".
(c) DELIVERY AT THE DELIVERY DEFAULT CLOSING. At the Delivery Default
Closing, the Contributor and the Contributor GP shall duly execute and
deliver to the Partnership or its designated Affiliate such deeds, bills of
sale, certificates of title and other instruments of assignment or transfer
with respect to the Acquired Assets contributed hereby compromising the
Fairway System and the Contributed Business, as the Partnership may
reasonably request and as may be necessary to vest in the Partnership or its
designated Affiliates good record title to all of the Acquired Assets
contributed pursuant hereto and as required by the Development Agreement
which were not previously delivered by the Contributor at any other Closing.
8.6. CONSEQUENCES FOR FAILURE TO OBTAIN FINAL ACCEPTANCE.
(a) Notwithstanding anything to the contrary herein, as provided in the
Development Agreement, in the event that the Fairway System as a whole is not
accepted by the Final Acceptance Date set forth in the Development Agreement and
the expiration of the applicable cure period, and the Contributor is found,
pursuant to the Dispute Resolution Procedures set forth in the Development
Agreement, at fault for such failure to obtain Final Acceptance (a "FINAL
ACCEPTANCE DEFAULT"), the Partnership shall have as its exclusive remedy the
right to cause Contributor to pay all reasonable costs and expenses of a third
party developer to complete the development of any remaining unaccepted
Functionality in accordance with the Specifications (having reference to the
rates quoted by recognized software consultants for similar services on software
systems of comparable complexity).
(b) FINAL ACCEPTANCE DEFAULT CLOSING. In the event of Final Acceptance
Default, upon the election of the Partnership and subject to the terms and
conditions set forth herein and in the Development Agreement, at a closing (the
"FINAL ACCEPTANCE DEFAULT CLOSING") to be held at the Boston, Massachusetts
offices of Bingham Dana LLP on the tenth Business Day after the later of (i) the
date of Final Acceptance of the Fairway System as completed by the third party
developer chosen by the Partnership, pursuant to commercially reasonable
criteria, pursuant to the Development Agreement and (ii) the date of final
payment by Contributor of all monies owed to such third party developer for
completing the Fairway System, the Partnership shall issue to the Contributor
and Contributor GP additional partnership interests in the Partnership so that,
upon such issuance, Contributor shall have, in the aggregate, an undiluted
direct 19.5% limited partnership interest in the Partnership and Contributor GP
shall have, in the aggregate, an undiluted direct 0.5% general partnership
interest in the Partnership as it then exists. The date on which the Final
Acceptance Default Closing actually occurs is sometimes referred to herein as
the "FINAL ACCEPTANCE DEFAULT CLOSING DATE".
(c) DELIVERY AT THE FINAL ACCEPTANCE DEFAULT CLOSING. At the Final
Acceptance Default Closing, the Contributor and the Contributor GP shall duly
execute and deliver to the Partnership or its designated Affiliate such deeds,
bills of sale, certificates of title and other
<PAGE>
31
instruments of assignment or transfer with respect to the Acquired Assets
contributed hereby compromising the Fairway System and the Contributed Business,
as the Partnership may reasonably request and as may be necessary to vest in the
Partnership or its designated Affiliates good record title to all of the
Acquired Assets contributed hereby and as required by the Development Agreement
which were not previously delivered by the Contributor at any other Closing.
8.7. CLOSING DEFINITIONS. The Initial Closing, Interim Closing, the
Contributed Business Closing, the Delivery Default Closing, the Final Acceptance
Default Date and the Final Closing are each referred to herein individually as a
"CLOSING " and collectively as the "CLOSINGS". The Initial Closing Date, the
Interim Closing Date, the Contributed Business Closing Date, the Delivery
Default Closing Date, the Final Acceptance Default Closing Date and the Final
Closing Date are each referred to herein individually as a "CLOSING DATE" and
collectively as the "CLOSING DATES".
ARTICLE 9
TERMINATION
9.1. GROUNDS FOR TERMINATION. This Agreement may be terminated at any
time prior to the Final Closing:
(i) by mutual written consent of the parties hereto;
(ii) by Contributor or the Partnership (provided that the
terminating party is not then in material breach of
any representation, warranty, covenant or other
agreement contained herein), in the event of a
material breach by the other party of any
representation, warranty, covenant or other agreement
contained herein, which breach is not cured after
thirty (30) days written notice thereof is given to
the party committing such breach; or
(iii) by Contributor or the Partnership if the Development
Agreement shall have been terminated pursuant to the
terms thereof.
9.2. EFFECTS OF TERMINATION. In the event of termination of this
Agreement by either the Partnership or Contributor as provided in Section 9.1
above, this Agreement shall forthwith become null and void (other than Section
6.5(b) hereof, which shall remain in full force and effect) and there shall be
no further liability on the part of the Partnership or their respective officers
or directors to the other, except any liability of the Partnership or
Contributor under said Section 6.5(b) and in the event of a willful breach by
either party of any representation, warranty, covenant or agreement contained in
this Agreement, in which case, the breaching party shall remain liable for any
and all damages, costs and expenses, including all reasonable attorneys' fees,
sustained or incurred by the non-breaching party as a result thereof or in
connection therewith or with the enforcement of its rights hereunder.
<PAGE>
32
ARTICLE 10
CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP
10.1. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
EACH CLOSING. The obligations of the Partnership to consummate each Closing
under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at each Closing, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE AT EACH CLOSING DATE;
NO MATERIAL ADVERSE EFFECT. Except as otherwise permitted or
contemplated by this Agreement, the representations and warranties of
Contributor contained in this Agreement and the Related Agreements
shall have been true and correct in all material respects at and as of
the date hereof, and shall be true and correct in all material respects
at and as of each Closing Date with the same force and effect as though
newly made at and as of each Closing Date (except for representations
and warranties which by their terms relate solely to a prior date,
which representations and warranties shall have been true as of the
respective dates thereof and for the respective periods covered
thereby). No event or events shall have occurred since December 31,
1996 that, individually or in the aggregate, have had or would
reasonably be expected to have a Contributor Material Adverse Effect.
(b) OFFICERS CERTIFICATE. Contributor shall have delivered to
the Partnership a certificate dated as of such Closing Date signed by
an authorized officer of Contributor and certifying the satisfaction of
the conditions set forth in this Agreement to be completed prior to or
as of such Closing Date.
(c) CONSENTS. Any consent, approval or authorization necessary
for the consummation of the transaction contemplated hereby by shall
have been obtained and shall be in full force and effect on each
relevant Closing Date. Except as otherwise set forth in Section 7.1
hereof, all consents of non-governmental third parties required for the
consummation of the transactions contemplated hereby at any closing
shall have been obtained and shall be in full force and effect the
applicable Closing Date.
(d) NO LEGAL RESTRAINT. No order, injunction or other legal
restraint or prohibition issued by any federal or state banking or
other regulatory authority or court of competent jurisdiction shall
prohibit the consummation of the transactions contemplated hereby.
(e) DELIVERY OF OTHER DOCUMENTS. Contributor shall have
furnished the Partnership with such certificates, instruments or other
documents in the name or on behalf of Contributor, executed by
appropriate officers of Contributor or others, including, without
limitation, certificates or correspondence of governmental agencies or
authorities or non-governmental third parties, to evidence fulfillment
of the conditions set forth in this Article 10 as the Partnership may
reasonably request; PROVIDED, HOWEVER, that
<PAGE>
33
any such certificate, instrument or other document so requested by the
Partnership shall be of a type that is customary in transactions
similar to the transactions contemplated hereby.
10.2. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
THE INITIAL CLOSING. In addition to the satisfaction of the conditions set forth
in section 10.1, the obligations of the Partnership to consummate the Initial
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Initial Closing of each of the following
conditions:
(a) PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE, Contributor,
BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall have each
executed and delivered the Partnership Agreement substantially in the
form set forth on SCHEDULE 10.2(a), and such agreement shall be in full
force and effect.
(b) CONTRIBUTOR'S PERFORMANCE. Each of the obligations of
Contributor or Contributor GP to be performed or complied with on or
before the Initial Closing Date pursuant to the terms of this
Agreement, the Development Agreement or any other related Agreement
shall have been duly and fully performed or complied with in all
material respects on or before the Initial Closing Date.
(c) BANK ONE CLOSING.The transactions contemplated by the BANK
ONE Contribution Agreement shall have been consummated at a closing as
contemplated therein.
(d) FAIRWAY DATA PROCESSING AGREEMENT. The Partnership and the
Contributor shall have entered into the Fairway Data Processing
Agreement on substantially the terms set forth on EXHIBIT B, and the
Fairway Data Processing Agreement shall be in full force and effect.
10.3. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
THE INTERIM CLOSING. In addition to the satisfaction of the conditions set forth
in section 10.1, the obligations of the Partnership to consummate the Interim
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Interim Closing of each of the following
conditions:
(a) CONSUMMATION OF THE INITIAL CLOSING/CONTRIBUTED BUSINESS
CLOSING. The Contributor and the Partnership shall have consummated the
Initial Closing, and, in the event the Interim Closing is to occur
after April 30, 2000, the Contributed Business Closing.
(b) CONTRIBUTOR'S PERFORMANCE. Each of the obligations of
Contributor to be performed or complied with on or before the Interim
Closing Date pursuant to the terms of this Agreement, the Development
Agreement or any other Related Agreement shall
<PAGE>
34
have been duly and fully performed or complied with in all material
respects on or before the Interim Closing Date.
(c) AMENDMENT TO PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE,
Contributor, BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall
have each executed and delivered an amendment to Partnership Agreement
of the Partnership to reflect the resulting ownership interests of each
of the partners.
10.4. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
THE CONTRIBUTED BUSINESS CLOSING. In addition to the satisfaction of the
conditions set forth in section 10.1, the obligations of the Partnership to
consummate the Contributed Business Closing under this Agreement and the Related
Agreements shall be subject to the satisfaction, prior to or at the Contributed
Business Closing of each of the following conditions:
(a) CONTRIBUTOR SHAREHOLDER SERVICES AGREEMENT. The
Partnership and the Contributor shall have entered into the Contributor
Shareholder Services Agreement on substantially the terms set forth on
SCHEDULE 10.4(a) (the "CONTRIBUTOR SHAREHOLDER SERVICES AGREEMENT"),
and the Contributor Shareholder Services Agreement shall be in full
force and effect.
(b) STS LICENSE. The Partnership and the Contributor shall
have entered into the STS License, and the STS License shall be in full
force and effect.
(c) STS DATA PROCESSING AGREEMENT. The Partnership and the
Contributor shall have entered into the STS Data Processing Agreement
on substantially the terms set forth on EXHIBIT D, and the STS Data
Processing Agreement shall be in full force and effect.
(d) CONTRIBUTOR'S PERFORMANCE. Each of the obligations of
Contributor to be performed or complied with on or before the
Contributed Business Closing Date pursuant to the terms of this
Agreement, the Development Agreement or any other Related Agreement
shall have been duly and fully performed or complied with in all
material respects on or before the Contributed Business Closing Date.
10.5. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
THE FINAL CLOSING. In addition to the satisfaction of the conditions set forth
in section 10.1, the obligations of the Partnership to consummate the Final
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Final Closing of each of the following
conditions:
(a) CONSUMMATION OF THE INITIAL CLOSING, THE INTERIM CLOSING
AND THE CONTRIBUTED BUSINESS CLOSING. The Contributor and the
Partnership shall have consummated the Initial Closing, the Interim
Closing and the Contributed Business Closing, or in lieu of the Initial
Closing or the Interim Closing, the Delivery Default Closing.
<PAGE>
35
(b) CONTRIBUTOR'S PERFORMANCE. Each of the obligations of
Contributor to be performed or complied with on or before the Final
Closing Date pursuant to the terms of this Agreement, the Development
Agreement or any other Related Agreement shall have been duly and fully
performed or complied with in all material respects on or before the
Final Closing Date.
(c) AMENDMENT TO PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE,
Contributor, BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall
have each executed and delivered an amendment to Partnership Agreement
of the Partnership to reflect the resulting ownership interests of the
partners.
10.6. CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE
THE DELIVERY DEFAULT CLOSING. In addition to the satisfaction of the conditions
set forth in Section 10.1, the obligations of the Partnership to consummate the
Delivery Default Closing under this Agreement and the Related Agreements shall
be subject to the satisfaction, prior to or at the Delivery Default Closing of
the conditions set forth in Sections 10.2(a), 10.2(d), 10.3(c), 10.4(a),
10.4(b), and 10.4(c) to the extent not satisfied at any prior Closing.
10.7 CONDITIONS TO THE OBLIGATIONS OF THE PARTNERSHIP TO CONSUMMATE THE
FINAL ACCEPTANCE DEFAULT CLOSING. In addition to the satisfaction of the
conditions set forth in Section 10.1, the obligations of the Partnership to
consummate Final Acceptance Default Closing under this Agreement and the Related
Agreements shall be subject to the satisfaction, prior to or at the Final
Acceptance Default Closing, of the conditions set forth in Sections 10.2(a),
10.2(d), 10.3(c), 10.4(a), 10.4(b), and 10.4(c) to the extent not satisfied at
any prior Closing.
ARTICLE 11
CONDITIONS TO THE OBLIGATIONS OF CONTRIBUTOR
11.1 CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
EACH CLOSING. The obligations of the Contributor to consummate each Closing
under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at each Closing, of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES TRUE AT EACH CLOSING DATE;
NO MATERIAL ADVERSE EFFECT. Except as otherwise permitted or
contemplated by this Agreement, the representations and warranties of
Partnership contained in this Agreement and the Related Agreements
shall have been true and correct in all material respects at and as of
the date hereof, and shall be true and correct in all material respects
at and as of each Closing Date with the same force and effect as though
newly made at and as of each Closing Date (except for representations
and warranties which by their terms relate solely to a prior date,
which representations and warranties shall have been true as of the
respective dates thereof and for the respective periods covered
thereby). No event or
<PAGE>
36
events shall have occurred since December 31, 1996 that, individually
or in the aggregate, have had or would reasonably be expected to have a
Partnership Material Adverse Effect.
(b) CONSENTS. Any consent, approval or authorization listed on
SCHEDULE 5.7 shall have been obtained and shall be in full force and
effect on each Closing Date. Except as otherwise set forth in Section
7.1 hereof, all consents of non-governmental third parties required for
the consummation of the transactions contemplated hereby shall have
been obtained and shall be in full force and effect on each respective
Closing Date.
(c) NO LEGAL RESTRAINT. No order, injunction or other legal
restraint or prohibition issued by any federal or state banking or
other regulatory authority or court of competent jurisdiction shall
prohibit the consummation of the transactions contemplated hereby.
(d) OFFICERS CERTIFICATE. Partnership shall have delivered to
the Contributor a certificate dated as of the Initial Closing Date
signed by an authorized officer of Partnership and certifying the
satisfaction of the conditions set forth in this Agreement to be
completed prior to or as of such Closing Date.
(e) DELIVERY OF OTHER DOCUMENTS. The Partnership shall have
furnished the Contributor with such certificates, instruments or other
documents in the name or on behalf of the Partnership, executed by
appropriate officers of the Partnership or others, including, without
limitation, certificates or correspondence of governmental agencies or
authorities or non-governmental third parties, to evidence fulfillment
of the conditions set forth in this Article 11 as the Contributor may
reasonably request; PROVIDED, HOWEVER, that any such certificate,
instrument or other document so requested by the Contributor shall be
of a type that is customary in transactions similar to the transactions
contemplated hereby.
11.2. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE INITIAL CLOSING. In addition to the satisfaction of the conditions set forth
in section 11.1, the obligations of the Contributor to consummate the Initial
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Initial Closing of each of the following
conditions:
(a) PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE, Contributor,
BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall have each
executed and delivered the Partnership Agreement substantially in the
form set forth on SCHEDULE 10.2(a), and such agreement shall be in full
force and effect.
(b) PARTNERSHIP'S PERFORMANCE. Each of the obligations of
Partnership to be performed or complied with on or before the Initial
Closing Date pursuant to the terms of this Agreement, the Development
Agreement or any other related Agreement shall have been duly and fully
performed or complied with in all material respects on or before the
Initial Closing Date.
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37
(c) BANK ONE CLOSING. The transactions contemplated by the
BANK ONE Contribution Agreement shall have been consummated at a
closing as contemplated therein.
(d) PROXY AND RETAINED RIGHT LICENSE. Contributor and the
Partnership shall have entered into the Proxy and Retained Rights
License, and the Proxy and Retained Rights License shall be in full
force and effect.
(e) FAIRWAY DATA PROCESSING AGREEMENT. The Partnership and the
Contributor shall have entered into the Fairway Data Processing
Agreement on substantially the terms set forth on EXHIBIT B, and the
Fairway Data Processing Agreement shall be in full force and effect.
11.3. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE INTERIM CLOSING. In addition to the satisfaction of the conditions set forth
in Section 11.1, the obligations of the Contributor to consummate the Interim
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Interim Closing of each of the following
conditions:
(a) CONSUMMATION OF THE INITIAL CLOSING/CONTRIBUTED BUSINESS
CLOSING. The Partnership and the Contributor shall have consummated the
Initial Closing, and, in the event the Interim Closing is to occur
after April 30, 2000, the Contributed Business Closing.
(b) PARTNERSHIP'S PERFORMANCE. Each of the obligations of
Partnership to be performed or complied with on or before the Interim
Closing Date pursuant to the terms of this Agreement, the Development
Agreement or any other Related Agreement shall have been duly and fully
performed or complied with in all material respects on or before the
Interim Closing Date.
(c) AMENDMENT TO PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE,
Contributor, BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall
have each executed and delivered an amendment to Partnership Agreement
of the Partnership to reflect the resulting ownership interests of the
parties.
11.4. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE CONTRIBUTED BUSINESS CLOSING. In addition to the satisfaction of the
conditions set forth in section 11.1, the obligations of the Contributor to
consummate the Contributed Business Closing under this Agreement and the Related
Agreements shall be subject to the satisfaction, prior to or at the Contributed
Business Closing of each of the following conditions:
(a) CONTRIBUTOR SHAREHOLDER SERVICES AGREEMENT. The
Partnership and the Contributor shall have entered into the Contributor
Shareholder Services Agreement, and the Contributor Shareholder
Services Agreement shall be in full force and effect.
<PAGE>
38
(b) STS LICENSE. The Partnership and the Contributor shall
have entered into the STS License, and the STS License shall be in full
force and effect.
(c) STS DATA PROCESSING AGREEMENT. The Partnership and the
Contributor shall have entered into the STS Data Processing Agreement
on substantially the terms set forth on EXHIBIT D, and the STS Data
Processing Agreement shall be in full force and effect.
(d) PARTNERSHIP'S PERFORMANCE. Each of the obligations of
Partnership to be performed or complied with on or before the
Contributed Business Closing Date pursuant to the terms of this
Agreement, the Development Agreement or any other Related Agreement
shall have been duly and fully performed or complied with in all
material respects on or before the Contributed Business Closing Date.
11.5. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE FINAL CLOSING. In addition to the satisfaction of the conditions set forth
in section 11.1, the obligations of the Contributor to consummate the Final
Closing under this Agreement and the Related Agreements shall be subject to the
satisfaction, prior to or at the Final Closing of each of the following
conditions:
(a) CONSUMMATION OF THE INITIAL CLOSING, INTERIM CLOSING AND
THE CONTRIBUTED BUSINESS CLOSING. The Partnership and the Contributor
shall have consummated the Initial Closing and the Contributed Business
Closing, or in lieu of the Initial Closing or the Interim Closing, the
Delivery Default Closing.
(b) PARTNERSHIP'S PERFORMANCE. Each of the obligations of
Partnership to be performed or complied with on or before the Final
Closing Date pursuant to the terms of this Agreement, the Development
Agreement or any other Related Agreement shall have been duly and fully
performed or complied with in all material respects on or before the
Final Closing Date.
(c) AMENDMENT TO PARTNERSHIP AGREEMENT. BKB, BFDS, BANK ONE,
Contributor, BKB Sub, BFDS Sub, BANK ONE Sub and Contributor GP shall
have each executed and delivered an amendment to Partnership Agreement
of the Partnership to reflect the resulting ownership interests of the
partners.
11.6. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE DELIVERY DEFAULT CLOSING. In addition to the satisfaction of the conditions
set forth in Section 11.1, the obligations of the Contributor to consummate the
Delivery Default Closing under this Agreement and the Related Agreements shall
be subject to the satisfaction, prior to or at the Delivery Default Closing, of
the conditions set forth in Sections 11.2(a), 11.2(d), 11.3(c), 11.4(a), 11.4(b)
and 11.4(c), to the extent not satisfied at any prior Closing.
<PAGE>
39
11.7. CONDITIONS TO THE OBLIGATIONS OF THE CONTRIBUTOR TO CONSUMMATE
THE FINAL ACCEPTANCE DEFAULT CLOSING. In addition to the satisfaction of the
conditions set forth in Section 11.1, the obligations of the Partnership to
consummate the Final Acceptance Default Closing, as the case may be, under this
Agreement and the Related Agreements shall be subject to the satisfaction, prior
to or at the Final Acceptance Default Closing, Sections 11.2(a), 11.2(d),
11.3(c), 11.4(a), 11.4(b) and 11.4(c), to the extent not satisfied at any prior
Closing.
ARTICLE 12
INDEMNIFICATION
12.1. INDEMNITY BY THE CONTRIBUTOR. (a) Contributor agrees to indemnify
and hold the Partnership, and its Affiliates, employees, officers, directors,
controlling persons, successors and assigns, harmless from and with respect to
any and all claims, liabilities, losses, damages, diminution in value, costs and
expenses, including without limitation the reasonable fees and disbursements of
counsel and expert witnesses, net of insurance proceeds received (collectively,
the "CONTRIBUTOR LOSSES"), related to or arising directly or indirectly out of
(i) any inaccuracies in any representation or warranty made by Contributor in
this Agreement or the Development Agreement, determined without regard to any
qualifier relating to knowledge, materiality or Material Adverse Effect or any
similar qualifier and only to the extent that Contributor Losses relating to or
arising directly or indirectly out of such inaccuracies exceed $100,000 in the
aggregate, (ii) any failure or breach by Contributor of any covenant,
obligation, or undertaking made by Contributor in this Agreement or the
Development Agreement, (iii) liabilities of Contributor or Contributor GP
relating to employee benefit plans of the Contributor or the Contributor GP (iv)
the operation of the Contributed Business by Contributor or Contributor GP or
any predecessor of any such Person prior to the Final Closing, including all
civil, criminal, administrative or other regulatory governmental action, suit,
demand, claim (including employee or employment claims), hearing, proceeding or
investigation, or (v) the Retained Liabilities.
(b) In addition, the Contributor agrees to indemnify and hold the
Partnership, and its Affiliates, employees, officers, directors, controlling
persons, successors and assigns, harmless from and with respect to any and all
Contributor Losses relating to or arising directly or indirectly out of any
claim made, or any suit, action, investigation, demand or proceeding brought
against the Partnership or any of its Affiliates relating to or arising out of
any act or omission by Contributor or the Contributor GP any predecessor of any
such Person or any such Person's agents, directors, officers, employees or
representatives or relating to the Contributed Business on or before the Final
Closing Date.
12.2. INDEMNITY BY THE PARTNERSHIP. (a) The Partnership agrees to
indemnify and hold Contributor, and Contributor GP, and their Affiliates,
employees, officers, directors, controlling persons, successors and assigns,
harmless from and with respect to any and all claims, liabilities, losses,
damages, diminution in value, costs and expenses, including without limitation
the reasonable fees and disbursements of counsel and expert witnesses, net of
insurance proceeds
<PAGE>
40
received (collectively, the "PARTNERSHIP LOSSES"), related to or arising
directly or indirectly out of (i) any liabilities incurred by Contributor in
connection with the performance after the Contributed Business Closing of the
Contributed Business Contracts by the Partnership; (ii) the operation of the
Contributed Business by the Partnership after the Contributed Business Closing,
except in the case of any Partnership Losses arising out of an event as to which
the Partnership is itself indemnified under any other Related Agreement by the
party indemnified by the Partnership pursuant to this Section 12.2
(b) The Partnership agrees to indemnify and hold Contributor and its
Affiliates, employees, officers, directors, controlling persons, successors and
assigns, harmless from and with respect to any and all Partnership Losses
related to or arising directly or indirectly out of (i) any inaccuracies in any
representation or warranty made by the Partnership in this Agreement or the
Development Agreement, determined without regard to any qualifier relating to
knowledge, materiality or Material Adverse Effect or any similar qualifier and
only to the extent that Partnership Losses relating to or arising directly or
indirectly out of such inaccuracies exceed $100,000 in the aggregate, (ii) any
failure or breach by the Partnership of any covenant, obligation, or undertaking
made by the Partnership in this Agreement or the Development Agreement;
PROVIDED, HOWEVER, that for such liabilities delineated in clauses 12.2(b)(i)
and 12(b)(ii), the Partnership shall indemnify the Contributor for Partnership
Losses net of any recovery by the Partnership from any indemnity to the
Partnership from BKB, BFDS or BANK ONE for such liabilities by increasing the
Contributor's limited partnership interest in the Partnership by the
"Contributor's Lost Interest" which is equal to (1) the Contributor's
partnership interest multiplied by the difference between (x) the Partnership
Loss, net of any recovery by the Partnership from any indemnity to the
Partnership from BKB, BFDS or BANK ONE from such liabilities minus (y) any tax
benefits attributable to such Partnership Loss divided by (2) the Fair Market
Value of the Partnership. For purposes of this section 12.2(b), "Fair Market
Value" shall be the appraised value of the Partnership for the fiscal year most
recently ended.
(c) Attached hereto as EXHIBIT F, for illustrative purposes only, is an
example of the calculation of Partnership indemnification calculated pursuant to
Sections 12(b)(i) and 12.2(b)(ii).
12.3. CLAIMS.
(a) Any party seeking indemnification hereunder (the "INDEMNIFIED
PARTY") shall promptly notify the party hereto obligated to provide
indemnification hereunder (the "INDEMNIFYING PARTY") of any action, suit,
proceeding, demand or breach (a "CLAIM") with respect to which the Indemnified
Party claims indemnification hereunder, provided that failure of the Indemnified
Party to give such notice shall not relieve the Indemnifying Party of its
obligations under this Article 12 except to the extent, if at all, that such
Indemnifying Party shall have been prejudiced thereby. If such Claim relates to
any action, suit, proceeding or demand instituted against the Indemnified Party
by a third party (a "THIRD PARTY CLAIM"), upon receipt of such notice from the
Indemnified Party the Indemnifying Party shall be entitled to participate in the
defense of such Third Party Claim, and if and only if each of the following
conditions is
<PAGE>
41
satisfied, the Indemnifying Party may assume the defense of such Third Party
Claim, and in the case of such an assumption the Indemnifying Party shall have
the authority to negotiate, compromise and settle such Third Party Claim:
(i) the Indemnifying Party confirms in writing that it is
obligated hereunder to indemnify the Indemnified Party with respect to
such Third Party Claim; and
(ii) there is no conflict of interest which would make
separate representation by the Indemnified Party's own counsel
advisable.
The Indemnified Party shall retain the right to employ its own counsel and to
participate in the defense of any Third Party Claim, the defense of which has
been assumed by the Indemnifying Party pursuant hereto, but the Indemnified
Party shall bear and shall be solely responsible for its own costs and expenses
in connection with such participation. The Indemnifying Party shall not, without
the prior written consent of the Indemnified Party, settle or compromise any
claim or consent to the entry of any judgment that does not include as an
unconditional term thereof the giving by the claimant or the plaintiff to the
Indemnified Party a release from all liability in respect of such claim.
(b) In the event of any Claim under Section 12.1 or 12.2 hereof, the
Indemnified Party shall advise the Indemnifying Party in writing of the amount
and circumstances surrounding such Claim. With respect to liquidated Claims, if
within thirty (30) days the Indemnifying Party has not contested such Claim in
writing, the Indemnifying Party will pay the full amount thereof within ten (10)
days after the expiration of such period.
12.4. TIME LIMITS. No claim for indemnification under this Article 12
may be asserted for the first time for any breach of any representation or
warranty after the third anniversary of the earlier of the Delivery Default
Closing Date or Final Closing Date.
12.5. EXCLUSIVE REMEDY; DAMAGE LIMITATIONS. Contributor and the
Partnership acknowledge and agree that, except as set forth in Section 8.5 and
with respect to a Delivery Default and Section 8.6 with Respect to the Final
Acceptance Default, and except for the right to seek specific performance of
covenants and other agreements, the indemnification rights and remedies
available to each party under this Article 12 shall be the sole and exclusive
rights and remedies of the Partnership and Contributor with respect to any
Contributor Losses or Partnership Losses arising out of or relating in any way
to (i) any breach of this Agreement, (ii) the acquisition of the Contributed
Business by the Partnership and the acquisition of their interests in the
Partnership by Contributor and Contributor GP, or (iii) the consummation of the
transactions contemplated hereby (collectively, the "SUBJECT LOSSES"),
including, without limitation, any claims, rights or remedies for negligent
misrepresentation. Without limiting the generality of the foregoing, except as
specifically authorized by this Article 12, the Partnership and Contributor
hereby waive, release and disclaim any claims, rights or remedies arising in
tort, by statute, or otherwise, with respect to the Subject Losses. As provided
in Section 13.6, in no event shall the Partnership or Contributor be entitled to
recover from the other party hereto for incidental, consequential, exemplary or
punitive damages, and for all purposes of this
<PAGE>
42
Agreement, neither the term "CONTRIBUTOR LOSSES" nor the term "PARTNERSHIP
LOSSES" shall be deemed to include any such damages.
ARTICLE 13
GENERAL
13.1. EXPENSES. Except as expressly set forth in this Agreement, all
expenses of the preparation, execution and consummation of this Agreement and
the Related Agreements and of the transactions contemplated hereby, including,
without limitation, attorneys', accountants' and outside advisers' fees and
disbursements, shall be borne by the party incurring such expenses.
13.2. NOTICES. All notices, demands and other communications hereunder
shall be in writing or by written telecommunication, and shall be deemed to have
been duly given if delivered personally or if mailed by certified mail, return
receipt requested, postage prepaid or if sent by overnight courier or sent by
written telecommunication, as follows:
If to the Contributor:
DST Systems, Inc.
333 West 11th Street
5th Floor
Kansas City, Missouri 64105
Attention: President
with a copy sent contemporaneously to:
DST Systems, Inc.
333 West 11th Street
5th Floor
Kansas City, Missouri 64105
Attention: Legal Department
If to the Partnership:
Boston EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Chief Executive Officer
with a copy sent contemporaneously to:
<PAGE>
43
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
Attention: David M. Elwood, Esq.
Senior Counsel
and
Bingham Dana LLP
150 Federal Street
Boston, MA 02110
Attention: Norman J. Shachoy, Esq.
13.3. ENTIRE AGREEMENT. This Agreement (including the Exhibits and
Schedules hereto), together with the Development Agreement and the other Related
Agreements, contains the entire understanding of the parties hereto and thereto,
supersedes all prior agreements and understandings relating to the subject
matter hereof and thereof and shall not be amended except by a written
instrument hereafter signed by all of the parties hereto or thereto, as
applicable. No waiver of any provision of this Agreement shall be effective
unless evidenced by a written instrument signed by the waiving party. Each of
the parties hereto further acknowledge and agree that, in entering into this
Agreement and entering into the Related Agreements, they have not in any way
relied upon any oral or written agreements, statements, promises, information,
arrangements, understandings, representations or warranties, express or implied,
not specifically set forth in this Agreement or the Related Agreements.
13.4. GOVERNING LAW. This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of Delaware without
regard to its conflict of laws rules.
13.5. CONSENT TO JURISDICTION. Each of the parties hereto agrees that
any suit, action or proceeding instituted against such party under or in
connection with this Agreement shall be brought, non-exclusively in a court of
competent jurisdiction of the State of Delaware. By execution hereof, each party
hereto irrevocably waives any objection to, and any right of immunity on the
grounds of, improper venue, the convenience of the forum, the personal
jurisdiction of such courts or the execution of judgments resulting therefrom.
Each party hereto hereby irrevocably accepts and submits to the exclusive
jurisdiction of such courts in any such action, suit or proceeding.
13.6. WAIVER OF CERTAIN DAMAGES. EACH OF THE PARTIES HERETO TO THE
FULLEST EXTENT PERMITTED BY LAW IRREVOCABLY WAIVES ANY RIGHTS THAT THEY MAY HAVE
TO PUNITIVE, SPECIAL, EXEMPLARY OR CONSEQUENTIAL DAMAGES IN RESPECT OF ANY
LITIGATION BASED UPON, OR ARISING OUT OF, THIS AGREEMENT, THE DEVELOPMENT
AGREEMENT OR
<PAGE>
44
ANY RELATED AGREEMENT OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS OR
ACTIONS OF ANY OF THEM RELATING THERETO.
13.7. SECTIONS AND SECTION HEADINGS. The headings of sections and
subsections are for reference only and shall not limit or control the meaning
thereof.
13.8. ASSIGNS. This Agreement, the Development Agreement and the other
Related Agreements shall be binding upon and inure to the benefit of the parties
hereto and their respective heirs, successors and permitted assigns. Neither
this Agreement and the Related Agreements nor the obligations of any party
hereunder or thereunder shall be assignable or transferable by such party
without the prior written consent of the other party hereto or thereto.
13.9. NO IMPLIED RIGHTS OR REMEDIES. Except as otherwise expressly
provided herein, nothing herein expressed or implied is intended or shall be
construed to confer upon or to give any Person, except the parties and their
respective successors, if any, hereto, any rights or remedies under or by reason
of this Agreement.
13.10. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13.11. CONSTRUCTION. The language used in this Agreement will be deemed
to be the language chosen by the parties to express their mutual intent, and no
rule of strict construction will be applied against any party.
13.12. SEVERABILITY. The invalidity or unenforceability of any
particular provision of this Agreement or any Related Agreement shall not affect
the other provisions hereof or thereof, and this Agreement shall be construed in
all respects as if such invalid or unenforceable provision was omitted.
13.13. SURVIVAL. The representations and warranties of each of the
Partnership and Contributor contained in this Agreement or otherwise made in
writing in connection with the transactions contemplated hereby shall survive
the Final Closing and the consummation of the transactions contemplated hereby
until the third anniversary of the Final Closing Date.
<PAGE>
IN WITNESS WHEREOF, and intending to be legally bound hereby, the
parties hereto have caused this Agreement to be duly executed and delivered as a
sealed instrument as of the date and year first above written.
DST SYSTEMS, INC.
By: /s/ Thomas A. McCullough
-----------------------------------
Name: Thomas A. McCullough
Title: Executive Vice President
BOSTON EQUISERVE LIMITED PARTNERSHIP
By: /s/ Joseph L. Hooley
-----------------------------------
Name: Joseph L. Hooley
Title: Chairman of the Board
<PAGE>
Exhibit 10.8
FAIRWAY SYSTEM
SOFTWARE DEVELOPMENT AGREEMENT
This Software Development Agreement ("Agreement") is made as of this
30th day of November, 1998, by and between DST SYSTEMS, INC., a Delaware
corporation with offices located at 333 West 11th Street, 5th Floor, Kansas
City, Missouri 64105 ("DST"), and Boston EquiServe Limited Partnership, a
Delaware limited partnership with offices located at 150 Royall Street, Canton,
Massachusetts 02021 (the "Partnership").
WHEREAS, DST is developing proprietary software known as the "Fairway
System" (the "System") for use by the Partnership in its "Shareholder Services
Business" as defined in the Contribution Agreement being entered between the
parties hereto and others simultaneously herewith ("Contribution Agreement");
WHEREAS, DST agrees to complete the development of the System in
accordance with the terms of this Agreement;
WHEREAS, pursuant to the Contribution Agreement, all rights in the
System will be contributed to the Partnership following acceptance of the System
by the Partnership in exchange for a limited and general partnership interest in
the Partnership to be granted to DST as provided in the Contribution Agreement;
NOW, THEREFORE, DST and the Partnership do hereby agree as follows:
1. DEFINED TERMS.
--------------
Acceptance Certificate: Paragraph 13(e);
Acceptance Cure Period: Paragraph 15(c)(ii);
Acceptance Date: Paragraph 13(a);
Acceptance Testing: Paragraph 13(b);
Acceptance Testing Procedures: Paragraph 14;
Amended Partnership Agreement: Paragraph 16(a);
Approved Change: Paragraph 7(a);
Approved Clarification: Paragraph 8;
Arbitrator: Paragraph 22(c);
Business Day: Paragraph 8(a);
Change: Paragraph 7(a);
Change Control Manager; Paragraph 7(a);
Change Control Procedure: Paragraph 7;
Clarification: Paragraph 7(a)(i);
Clarification Procedures: Paragraph 8;
Contribution Agreement: Recitals;
Corrective Modifications: Paragraph 7(a)(ii);
Corrective Modification Procedures: Paragraph 9;
Data Processing Agreement: Paragraph 11(a);
Delivery Cure Period: Paragraph 15(c)(i);
Delivery Dates: Paragraph 13(a);
Development Conventions: Paragraph 2(b)(v);
<PAGE>
2
Dispute Resolution Procedures: Paragraph 22;
DST Item: Paragraph 20(a);
Enhancement: Paragraph 7(a)(iii);
Estimated Function: Paragraph 11;
Executable Program: Paragraph 15(d)(i);
FCNC: Paragraph 11(a);
Final Acceptance: Paragraph 15(b);
Final Acceptance Date: Paragraph 13(a);
Function: Paragraph 2(b)(i);
Functionality: Paragraph 2(b)(i);
Functionality Testing: Paragraph 14(a)(i);
Hardware Requirements: Paragraph 2(b)(ii);
Herein: Paragraph 24(e);
Hereinafter: Paragraph 24(e);
Hereof: Paragraph 24(e);
Hereunder: Paragraph 24(e);
Including: Paragraph 24(e);
Interim Acceptance: Paragraph 15(a);
Indemnitees: Paragraph 20(c);
Indemnitor: Paragraph 20(c);
Level One Problem: Paragraph 9(b)(i);
Level Two Problem: Paragraph 9(b)(ii);
Level Three Problem: Paragraph 9(b)(iii);
Maintenance Documentation: Paragraph 15(d)(iii);
Maintenance Tools: Paragraph 15(d)(iv);
Model Office: Paragraph 12(b);
Partnership Indemnitees: Paragraph 20(a);
Performance Metrics: Paragraph 9 (b)(i);
Problem: Paragraph 7(a)(ii);
Problem Tracking System: Paragraph 9(a);
Project Control Books: Paragraph 2(c);
Project Representatives: Paragraph 22(b);
PTS: Paragraph 9(a);
Regression Testing: Paragraph 14(a)(iii);
Releases: Paragraph 2(a);
Retained Rights: Paragraph 16(a)
Remote Service Agreement: Paragraph 6;
Shareholder Services Business: Recitals;
Scope Documents: Paragraph 2(b)(i);
Software Requirements: Paragraph 2(b)(iii);
Source Code: Paragraph 15(d)(v);
Specifications: Paragraph 2(b)(v);
Stress Testing: Paragraph 14(a)(ii);
System: Recitals;
Third Party Software: Paragraph 11;
Third Party Fees: Paragraph 11;
User Documentation: Paragraph 15(d)(ii);
Weekly Schedule: Paragraph 9(a).
<PAGE>
3
2. DEVELOPMENT OF THE SYSTEM.
(a) SYSTEM; RELEASES. DST shall complete the design and
development of the System in accordance with the Functionality described below.
All costs and expenses of the design and development of the System shall be
borne by DST unless otherwise provided in this Agreement. The System will be
developed and delivered in phases (the "Releases"), identified as Releases 1.1,
1.2, 1.2.5, 1.3 and 1.3.5. Release 1.1 has been delivered to the Partnership and
has met the criteria for Interim Acceptance, subject only to the obligation of
DST to correct Level One Problems which arise during Regression Testing which
were not detected during Acceptance Testing of Release 1.1. Release 1.2 has been
delivered to the Partnership. Releases 1.2.5, 1.3 and 1.3.5 will be delivered in
accordance with the Delivery Dates for those Releases. Each Release will be
contributed to the Partnership in exchange for the Partnership interests
described in the Contribution Agreement.
(b) SPECIFICATIONS.
(i) FUNCTIONALITY. The functional specifications for
each of the Releases (the "Functionality") are attached hereto as Exhibit A.
Further details and descriptions of the individual components of the
Functionality (each, a "Function") may be more fully described in "Scope
Documents" to be agreed upon by the parties using the procedures described in
Paragraph 8.
(ii) HARDWARE REQUIREMENTS. The hardware
configuration requirements of the System for the workstation and application
servers through Release 1.3.5 (the "Hardware Requirements") are attached hereto
as Exhibit B. The Partnership will pay for the cost of all Hardware
Requirements. The Hardware Requirements are subject to any changes which may be
agreed upon by the parties and included in the Project Control Books during the
development process pursuant to the Change Control Procedure described in
Paragraphs 7 through 10 hereof. Modifications to the Hardware Requirements or
other Specifications required by changes to hardware and operating systems made
by the suppliers of such hardware and operating systems shall be treated as
Enhancements.
(iii) SOFTWARE REQUIREMENTS. The third party software
and DST software products required either for incorporation into the System
through Release 1.3.5 or for operation of the System through Release 1.3.5 on
the workstation and application servers (collectively, the "Software
Requirements") are attached hereto as Exhibit C. The Partnership will pay or
reimburse DST for the cost of all license fees, maintenance and support fees for
the Software Requirements. All Software Requirements for which, to the knowledge
of DST, the Partnership shall or may be responsible for payment of a fee as a
<PAGE>
4
condition to its use of the System are listed on Exhibit C; provided, that the
Software Requirements and Exhibit C are subject to modification based on (A)
additional Functionalities of the System identified in the course of
development; (B) Approved Changes identified pursuant to the Change Control
Procedure described in Paragraphs 7 through 10 hereof; (C) changes to
maintenance fees, support fees or license fees by providers of the Software
Requirements; (D) changes to the, functionality, specifications or support of
the software included in the Software Requirements, or new releases or
replacement products for such software; or (E) changes to the Partnership
organization or ownership that may cause additional fees to be due.
Modifications to the Software Requirements or other Specifications required by
items (A)-(E) in the preceding sentence shall be treated as Enhancements. Except
for any fees for the Software Requirements, including any modifications thereof
described in this paragraph, and any other fees expressly set forth in this
Agreement and in Section 4.13 of the Contribution Agreement (with respect to
portions of the System not covered by the Software Requirements), no additional
fees of any nature shall be due to or assessed by DST in respect of this
Agreement; provided, that (i) the direct and indirect ownership of DST in the
Partnership, in the aggregate, does not fall below 20% (PROVIDED, HOWEVER, that
transfers by DST of its interest in the Partnership shall not be included within
this clause (i)); and (ii) the System and the software included in the Software
Requirements are used solely by the Partnership. Except as described above and
in Section 4.13 of the Contribution Agreement, DST will not incur any additional
third party software fees without the Partnership's consent, which will not be
unreasonably withheld. DST will make a reasonable effort to work with the
Partnership to minimize the third party license and maintenance fees necessary
for the Software Requirements following Contribution; provided, that actions
taken to minimize such costs shall not (i) subject DST to loss of any rights to
use any third party software; (ii) cause DST to incur any penalties or costs; or
(iii) relieve the Partnership of its responsibility for third party fees as
described herein and in the Contribution Agreement. The Partnership shall
receive DST's most favorable customer rates for any proprietary DST software in
the Software Requirements; provided, that the Partnership has licensed use of
such software for at least as many workstations as other DST customers who
receive such rates.
(iv) COMMUNICATIONS. The Partnership shall be
responsible for the communications requirements, including the selection of
carriers, for the System. The Partnership will provide to DST the Partnership's
specifications for communications lines and will identify to DST the carriers
which the Partnership proposes to engage to provide communications lines, each
of which must, in the reasonable judgment of DST, be compatible with the
Hardware Requirements, the Performance Metrics and the Software Requirements.
The communications requirements shall not be deemed part of the Hardware
Requirements.
(v) SPECIFICATIONS. The Functionality, Hardware
Requirements and Software Requirements constitute the complete description of
the requirements for each Release of the System and shall be referred to herein
as the "Specifications." Exhibit I describes the conventions that DST is
following to develop the System with respect to (a) size limitations for data
fields, (b) capacity limitations and (c) functional limitations (collectively,
the "Development Conventions"). If any Problem identified in the course of
Acceptance Testing is attributable to a failure of DST to follow the Development
Conventions, then DST shall be responsible for resolving such Problem at
<PAGE>
5
its expense. If any such Problem is due to an Enhancement requested by the
Partnership, then the costs associated with resolving such Problem shall be
borne by the Partnership and such actions shall be treated as an Enhancement.
Any modifications to the Development Conventions or modifications to the
Specifications on the System which arise from modifications to the Development
Conventions, shall be treated as an Enhancement. The Development Conventions are
part of the Specifications.
(c) PROJECT CONTROL BOOK. DST will create and maintain a
Project Control Book for each Release which contains all the Specifications for
that Release, including all Scope Documents agreed upon by the parties for any
Function. The Partnership will be provided with a current copy of the Project
Control Book for each Release. All Scope Documents, additional Hardware
Requirements, additional Software Requirements and any other modifications to
the Specifications made pursuant to the Change Control Procedure shall be deemed
to be part of the Specifications only upon their inclusion in the Project
Control Book. The Project Control Book may be modified during development of the
System only through the Change Control Procedure. DST will provide the
Partnership with copies of all modifications to the Project Control Book.
3. PROJECT REPRESENTATIVES. Each party shall designate a Project
Representative to be the main contact for that party concerning performance by
each party of its obligations under this Agreement. The Project Representative
for each party will maintain its Project Control Book. Either party may change
its Project Representative upon prior written notice to the other party.
4. DELIVERY OF FUNCTIONALITY. DST will endeavor to deliver individual
Functions of each Release prior to the Delivery Date of the Release, and the
Partnership will endeavor to begin Acceptance Testing of individual delivered
Functions, to the extent practicable, as early as practicable prior to delivery
of the full Release; provided, that the Partnership shall make decisions with
respect to Acceptance Testing of individual Functions by reference to its
ability to perform meaningful testing of such Functions and the System. From
time to time during development of each Release, DST will provide the
Partnership with its projected delivery dates for individual Functions prior to
the Delivery Dates for the respective Releases in order to facilitate Acceptance
Testing of individual Functions. The Delivery Dates for each Release shall be
the only delivery dates binding on DST.
5. EXCLUSIVE USE OF SYSTEM. During the planning and development of the
System through Final Acceptance, DST shall make the System available for the
exclusive use of the Partnership, subject to the DST rights set forth in Section
2.2 of the Contribution Agreement.
<PAGE>
6
6. OPERATION AND SUPPORT OF THE SYSTEM BY DST PRIOR TO FINAL
ACCEPTANCE. Functions or Releases which are placed into production pursuant to
Paragraph 13(f) prior to transfer of ownership of such Functions or Releases to
the Partnership pursuant to the Contribution Agreement, shall be operated and
supported by DST for the Partnership pursuant to the Fairway System Remote
Service Agreement, dated concurrently herewith, between DST and the Partnership
(the "Remote Service Agreement").
7. CHANGE CONTROL PROCEDURES.
(a) IDENTIFICATION OF CHANGES. DST and the Partnership shall
each designate a Change Control Manager for their respective organizations. From
time to time, either DST or the Partnership may propose changes to the
Specifications (each a "Change") by completing one of the forms described below
and giving it to the Change Control Manager of the other party. The parties
shall designate by mutual agreement each proposed Change as a Clarification,
Corrective Modification or Enhancement, as described below. In the event that
the parties are not able to agree upon the classification of any proposed
Change, either party may refer the matter to the Dispute Resolution Procedures.
Neither party will obtain any benefits or obligations of any Change until such
Change is approved by each party in accordance with the procedures specified in
Paragraphs 7 through 10 hereof or as determined by the Dispute Resolution
Procedures (an "Approved Change").
(i) CLARIFICATIONS. A Clarification is a Change which
requires a revision of the Specifications which shall be developed through the
Clarification Procedures pursuant to Paragraph 8.
(ii) CORRECTIVE MODIFICATIONS. A Corrective
Modification is a fix of a defect, error, bug or problem in the System which
causes the System to fail to conform to the Specifications ("Problem")
identified as a Level One or Level Two Problem during either the development
process or Acceptance Testing and addressed through the Problem Tracking System
pursuant to Paragraph 9.
(iii) ENHANCEMENTS. An Enhancement is a function
outside the scope of the Specifications beneficial to the operation of the
System, or any other change designated as an Enhancement in this Agreement,
addressed through the Enhancement procedures pursuant to Paragraph 10.
(b) INCORPORATION OF APPROVED CHANGES. Approved Changes shall
be included within the relevant Scope Document or shall be the subject of a
separate Scope Document, as applicable, and shall be included in the Project
Control Book as part of the Specifications. Approved Changes will be
incorporated into then current development efforts or deferred to later
development work in accordance with the schedule agreed upon for each Approved
Change. No Approved Change shall extend the Delivery Date or Acceptance Date for
any Release unless such extension has been agreed to by the parties or required
by the Arbitrator as provided herein.
(c) SOLE RIGHT TO DEVELOP. No person or entity other than DST
will be permitted to develop any aspect of or modification or enhancement to the
System prior to Final Acceptance of all Releases which DST is obligated to
deliver pursuant to this
<PAGE>
7
Agreement without the prior written consent and direction of DST, except as
provided in Paragraph 15(c).
8. CLARIFICATION PROCEDURES.
(a) SCOPE DOCUMENT PROCEDURES. Scope Documents will be
prepared by the parties, and revised periodically, to further define and clarify
portions of Functionality to be included in each Release. Each Scope Document
will consist of an overview of the Functionality covered by the Scope Document,
a list of use cases, assumptions, exclusions and issues. Following an internal
review by DST a copy of the proposed Scope Document will be forwarded to the
Partnership for its review. The Partnership will review the proposed Scope
Document and deliver any proposed corrections, modifications or comments, in
writing, to the Change Control Manager at DST within two (2) weeks after receipt
of the proposed Scope Document by the Partnership. Within two (2) weeks after
receipt by DST of written comments on the Scope Document from the Partnership,
DST will prepare a revised Scope Document and return it to the Partnership.
Within two (2) weeks after receipt of the revised Scope Document, the
Partnership will prepare and forward to DST any proposed revisions to the Scope
Document. During the periods referred to above, the parties will cooperate with
each other in good faith to resolve questions which need to be resolved to
interpret, respond to and finalize each Scope Document. Within five business
days after receipt from the Partnership of any proposed final revisions to the
Scope Document, DST will notify the Partnership of its acceptance or rejection
of such proposed revisions. If the parties cannot agree upon the final terms of
the Scope Document, then the matter shall be referred to arbitration in
accordance with the Dispute Resolution Procedures. As used herein, "business
day" means any day other than (i) a Saturday or Sunday, or (ii) a day on which
state or national banking institutions are authorized or obligated by law to
remain closed in the States of Illinois, Massachusetts, Missouri or Kansas.
(b) CLARIFICATIONS OTHER THAN SCOPE DOCUMENTS. Either party
may propose a Clarification other than a Scope Document by completing a Change
Control Form in the form attached hereto as Exhibit D, delivering it to the
Change Control Manager of the other party and complying with this Paragraph.
Within seven (7) days after identification of a Change as a Clarification, DST
will submit a Clarification proposal to the Partnership in writing, which
proposal shall include the estimated delivery date of the Clarification and any
anticipated impact of the proposed Clarification on the relevant Functions,
Releases or Delivery Dates. The Partnership shall respond to the Clarification
proposal in writing within seven (7) days after receipt, indicating its approval
of the Clarification proposal or its request for revisions of the Clarification
proposal. DST will
<PAGE>
8
reply to any requested revisions in the Clarification proposal in writing within
seven (7) days after receipt of the Partnership's comments. DST will undertake
Approved Clarifications at its expense. If the parties cannot agree on a
Clarification proposal within fourteen (14) days after DST's submission of the
Clarification proposal to the Partnership, either party may refer the matter to
the Dispute Resolution Procedures. DST will document the reasons for rejection
of any Clarification. Failure of the Partnership to accept a Clarification
proposal within the time provided shall be deemed to be rejection of such
proposal.
9. CORRECTIVE MODIFICATION PROCEDURES.
(a) PROBLEM TRACKING SYSTEM. If the Partnership identifies a
Problem before or during the Acceptance Testing Procedures, it will notify DST
of the Problem by entering the appropriate information into the DST Problem
Tracking System ("PTS"), to which both parties will have electronic access. A
screen print from the PTS relating to Problem reporting is attached hereto as
Exhibit E. DST shall also notify the Partnership of Problems it identifies by
entering them into the PTS.
(b) CLASSIFICATION. DST will classify each Problem in
accordance with its severity:
(i) LEVEL ONE. A Level One Problem is a single
Problem which deprives, or more than one related Problems which together
deprive, the System of any material Function or materially interferes with the
achievement of one or more Performance Metrics (as defined in Exhibit F) and
which can be repeated by the Partnership in the course of operation of the
System in accordance with the Specifications. DST is obligated to correct Level
One Problems at its expense. A Level One Problem may preclude Interim Acceptance
or Final Acceptance until corrected.
(ii) LEVEL TWO. A Level Two Problem is a Problem
which deprives the System of any non-material Function or lowers the level of
System performance, without depriving the System of any material Function or
materially interfering with the achievement of one or more Performance Metrics,
and which can be repeated by the Partnership in the course of operation of the
System in accordance with the Specifications. DST may implement a workaround for
Level Two Problems until a permanent Corrective Modification can be developed.
DST is obligated to correct Level Two Problems at its expense. A Level Two
Problem will not delay Interim Acceptance or Final Acceptance, but DST is
obligated to address any remaining Level Two Problems through Corrective
Modifications after Final Acceptance.
(iii) LEVEL THREE. A Level Three Problem is a Problem
having no material affect on System Functionality or performance and which is
minor and generally is cosmetic, including minor or cosmetic Documentation
issues. DST is not obligated to correct Level Three Problems. Level Three
Problems will not delay Interim Acceptance or Final Acceptance. The Partnership
will be responsible for correction of Level Three Problems using its internal
support staff at its expense.
(iv) DISPUTES. Upon notice from the Partnership of a
claimed Problem, DST and the Partnership will cooperate with each other to
determine whether a Problem exists and, if so, whether it is a Level One, Level
Two or Level Three Problem. If the parties dispute the existence or
classification of a Problem, such dispute will be
<PAGE>
9
resolved through the Dispute Resolution Procedures.
(c) PROPOSED CORRECTIVE MODIFICATIONS.
(i) LEVEL ONE PROBLEMS. If a Problem is classified as
a Level One Problem prior to the Delivery Date for a Release, DST will implement
a fix or remedy for the Level One Problem as soon as practicable prior to the
Delivery Date for that Release. If the fix or remedy requires a Corrective
Modification, then DST will (A) estimate the timing for delivery of the
Corrective Modification; and (B) describe the impact of the proposed Corrective
Modification on the relevant Specifications or Delivery Dates and any
Clarifications necessitated by the Problem or Corrective Modification. For Level
One Problems classified during the Acceptance Testing Procedures for a Release,
DST will fix the Level One Problems which require Corrective Modifications, and
deliver such Corrective Modifications within the time set forth in the
Acceptance Testing Procedures.
(ii) LEVEL TWO PROBLEMS. If a Problem is classified
as a Level Two Problem at any time prior to Acceptance, DST will implement a
Corrective Modification as soon as practicable at DST's expense and will provide
the Partnership with notice describing: (A) an estimate of the timing for
delivery of the proposed Corrective Modification; and (B) a description of any
related Clarification proposed by DST. For Level Two Problems identified during
the Acceptance Testing of a Release, DST shall correct such Level Two Problems
at its expense, but such Level Two Problems will not delay Interim Acceptance or
Final Acceptance.
10. ENHANCEMENT PROCEDURES.
(a) PROPOSED ENHANCEMENTS. As soon as practicable after
classification of a proposed Change as an Enhancement, DST shall notify the
Partnership in writing whether it will undertake the Enhancement and, if so,
will provide the Partnership with a good faith estimate of the cost and
estimated timing of completion of the Enhancement, and any impact that
development of the Enhancement Proposal may have on any relevant Specifications
or Delivery Dates. All Scope Documents and requirements for Enhancements shall
be separately included in the Project Control Book but shall not be included in
the Specifications and shall not be subject to Acceptance Testing. The parties
will enter into separate acceptance testing and scheduling of the development of
individual Enhancements.
(b) APPROVAL OF ENHANCEMENT PROPOSALS. As soon as practicable
after receipt of a proposal for an Enhancement, the Partnership will notify DST
in writing of its approval of such Enhancement proposal or its request for
revisions of the Enhancement proposal. DST will reply to any requested revisions
in writing as soon as
<PAGE>
10
practicable after receipt of the Partnership's comments. If the Partnership
declines DST's proposal or revised proposal, DST shall have no further
obligation regarding that Enhancement proposal or revised proposal. Failure of
the Partnership to accept an Enhancement within ten (10) days after receipt of
notice from DST that a response is due shall be deemed to be rejection of such
proposal.
(c) REGULATORY CHANGES. Changes in the Specifications for the
System based on changes in laws, regulations or standard industry procedures
shall be treated as Enhancements.
11. OBLIGATIONS WITH RESPECT TO CERTAIN FUNCTIONALITY.
(a) With respect to the three (3) items of Functionality described on
Exhibit A as Dividend Reinvestment, Employee Plans and Open Enrollment, the
Partnership agrees to pay a portion of DST's development costs under the
following circumstances. DST will be responsible for development of these three
items of Functionality up to a combined total of 40,000 hours of development
time. If any development time in excess of 40,000 hours is required to complete
development of these three items of Functionality, the Partnership will pay DST
for one-half of such excess development hours at DST's standard rates. The
Partnership may pay for its share of such excess development hours by deducting
the number of hours representing its share of the excess hours from the total
number of hours of development time provided by DST to the Partnership pursuant
to Paragraph 1.03 of the Fairway System Data Processing Agreement ("Data
Processing Agreement") between DST and the Partnership being entered
simultaneously herewith.
(b) DST shall account for the time it expends in the delivery of the
development services described in (a) above in a manner consistent with DST's
regular business practices. DST shall maintain records sufficient to document
the development services performed for the Partnership pursuant to this
Paragraph 11 (and Paragraph 1.03 of the Data Processing Agreement), including
the time expended in delivering such services during the term of this Agreement
and for a period of two (2) years after expiration or termination of this
Agreement. Upon reasonable advance notice from the Partnership, DST shall
provide the Partnership and its designees with reasonable access to such records
during DST's regular business hours. Any dispute between the parties with
respect to the delivery of such development services shall be resolved using the
Dispute Resolution Procedures.
12. PREPARATION FOR ACCEPTANCE TESTING.
(a) STAFF. The Partnership shall maintain a staff of
sufficient experience with all necessary skills and in sufficient number to
perform the Acceptance Testing Procedures for each Release by the Acceptance
Date for such Release.
(b) FACILITIES. All Acceptance Testing shall be done by the
Partnership in an agreed upon test environment rather than a production
environment. The Partnership shall maintain a logically segregated test
environment which shall include a Model Office at the Partnership's Canton,
Massachusetts, facilities, configured with work stations containing hardware
consistent with the Hardware Requirements and software
<PAGE>
11
consistent with the Software Requirements and meeting the other configuration
requirements specified in the Project Control Books to enable Acceptance Testing
to be performed expeditiously and on a basis consistent with the Specifications.
The test environment also will include a separate communications link to DST's
test facilities in Kansas City. DST will have a reasonable number of
representatives present at the Model Office during the Partnership's Acceptance
Testing. DST's permitted presence during Acceptance Testing shall not relieve
the Partnership of its obligations to perform Acceptance Testing by the
Acceptance Dates.
(c) TEST SCRIPTS. The Partnership shall commence development
of initial test scripts for each Release as soon as practicable and shall
deliver the initial test scripts to DST as soon as they are complete, but in any
event not less than thirty (30) days prior to the Delivery Date for that
Release. The test scripts shall be written in conformity with the Specifications
and shall address both Functionality and Regression Testing, as described below.
During Acceptance Testing, any revised test scripts will be delivered as soon as
practicable to DST. The test scripts and test data together with the Acceptance
Testing Procedures as agreed by the parties shall simulate, as closely as
practicable, the type of data which would be encountered by the System in a
hypothetical production environment. Notwithstanding the foregoing, the
Partnership shall not be limited to use of the test scripts in conducting
Acceptance Testing of any Release. The Partnership shall not use production data
for Acceptance Testing.
13. DELIVERY AND ACCEPTANCE DATES.
(a) RELEASES. Each Release will be delivered to and accepted
by the Partnership by the following dates:
<TABLE>
<CAPTION>
RELEASE "DELIVERY DATE" "ACCEPTANCE DATE"
- ------- -------------- -----------------
<S> <C> <C>
Version 1.1 Delivered Interim Acceptance has occurred
Version 1.2 Delivered February 28, 1999
Version 1.2.5 February 28, 1999 August 31, 1999
Version 1.3 April 30, 2000 October 31, 2000
Version 1.3.5 April 30, 2000 October 31, 2000
("Final Acceptance Date")
</TABLE>
Notwithstanding any provision of this Agreement to the contrary, DST may not
deliver Release 1.3 to the Partnership for Acceptance Testing until after
Interim Acceptance of
<PAGE>
12
Release 1.2.5. All other Releases may be delivered even if prior Releases have
not been delivered or accepted.
(b) TESTING OBLIGATIONS. On or before each Delivery Date, DST
shall deliver to the Partnership the Release in the form of the Executable
Program (and to the extent applicable the Source Code), and User Documentation
for that Release, corresponding to such Delivery Date. Upon receipt of a Release
from DST, the Partnership shall promptly install the Release in the test
environment and DST will provide reasonable installation support in the event
that the Partnership has difficulty installing the Release. Following
installation, the Partnership shall promptly commence Acceptance Testing in
accordance with the Acceptance Testing Procedures and shall use its best efforts
to adhere to all relevant dates in the Acceptance Testing Procedures. The
Partnership will enter all Level One or Level Two Problems into the PTS, and
will make a good faith effort to enter such Problems into the PTS as soon as
they may be discovered during any Acceptance Testing period. The Partnership
hereby covenants to DST that until Final Acceptance (or upon the determination
by the Arbitrator pursuant to Paragraph 15(c) that the Partnership may complete
development of the System), the Partnership shall not make any modification to
the System or any Source Code delivered to it by DST.
(c) DEEMED ACCEPTANCE. Any failure by the Partnership to
perform its Acceptance Testing and Problem identification obligations or to
conclude Acceptance Testing of any Release by the relevant Acceptance Date (as
may be extended as provided herein) shall result in Interim Acceptance of that
Release. Failure of the Partnership to complete all Acceptance Testing of the
System by the Final Acceptance Date (as may be extended as provided herein) will
be deemed Final Acceptance of the System. In the event of a dispute over
implementation of the Acceptance Testing Procedures or whether Interim
Acceptance or Final Acceptance has occurred, the dispute shall be resolved by
the Dispute Resolution Procedures.
(d) ACCEPTANCE CERTIFICATE. If at any time prior to the
Acceptance Date for any Release, DST reasonably believes that it has met the
criteria for Interim Acceptance of that Release or Final Acceptance of the
System, DST may deliver to the Partnership a certificate of acceptance for the
Partnership to sign and return to DST (the "Acceptance Certificate"). The
Partnership may sign and return the Acceptance Certificate to indicate Interim
Acceptance of that Release or Final Acceptance of the System, or return the
Acceptance Certificate with a written statement that indicates the Level One
Problems that the Partnership believes remain in such Release. If the
Partnership fails to return the Acceptance Certificate, either party may refer
the matter to the Dispute Resolution Procedures.
(e) CONTINUED TESTING. In the event of any Level One or Level
Two Problems classified during Acceptance Testing, the Partnership shall use
reasonable efforts to continue Acceptance Testing of any part of the System not
materially affected by the Problem. When Corrective Modifications are delivered
by DST, the Partnership shall perform retests which are reasonable for the size
and quantity of the Corrective Modifications delivered, as agreed by the
parties. Any disputes over the Corrective Modifications delivered by DST, or any
retests, will be referred to the Dispute Resolution Procedures.
<PAGE>
13
(f) PRODUCTION CONVERSION. In the course of Acceptance
Testing, the Partnership may install one or more Releases into the Partnership's
production environment, convert accounts onto the Release, and begin using the
Release to process such accounts; provided, that: (i) no Release will be put
into production without the prior written consent of DST; and (ii) if a Level
One or Level Two Problem is identified after a Release is put into production
but prior to Final Acceptance, a reasonable effort to correct such Problem shall
be made at the Partnership's expense by DST support personnel assigned to the
System pursuant to the Remote Service Agreement. If such DST support personnel
are unable to correct the Problem after making a reasonable effort, DST will use
its System development staff to provide a Corrective Modification for such
Problem at no additional charge to the Partnership for such development staff.
The existence of any Level Two Problems or Level Three Problems will not delay
Acceptance. After Final Acceptance, DST shall have no obligation to correct any
Problem, other than Level Two Problems detected during Acceptance Testing prior
to Final Acceptance, unless the parties enter into a support and maintenance
agreement providing for such services.
14. ACCEPTANCE TESTING PROCEDURES. All Acceptance Testing shall be done
in a test environment and not in a production environment.
(a) TEST TYPES. Acceptance Testing may include the following
three (3) types of testing, each of which must be completed by the Acceptance
Date for that Release and by the Final Acceptance Date for the System:
(i) FUNCTIONALITY TESTING. Functionality Testing
shall test whether the Release or Function being tested operates in accordance
with the Functionality in the test environment without regard to Performance
Metrics.
(ii) STRESS TESTING. Stress Testing shall test
whether the Release being tested operates in accordance with Performance Metrics
in the test environment. If the Partnership elects to conduct Stress Testing,
this type of testing shall be done under conditions which (A) simulate
workstation and/or account volumes consistent with those reasonably expected to
be encountered in the Partnership's production environment; and (B) are
consistent with the design of the System and the scope of the Specifications. If
the parties are able to acquire tools which the parties agree accomplish both
(A) and (B), then such tools will be applied in the Acceptance Testing
environment to measure the workstation or data volume handling capabilities of
the System against the test environment Performance Metrics in Exhibit F. If
such tools cannot be used, DST will share with the Partnership the results of
DST's internal stress testing processes. After the Partnership has received
DST's test results, if reasonably required by the Partnership, the parties will
use their best efforts, at the Partnership's expense (including payment of
<PAGE>
14
charges for time spent by DST's System development staff at DST's standard
rates), to create a test environment at the Model Office, incorporating clerical
staff and administrators at work stations at appropriate levels, but not more
than 900 workstations, for the purpose of completing such Performance Metrics
Stress Testing. To the extent that DST reasonably believes that its assistance
in the creation of such test environment may impact its ability to comply with
any Delivery Date or Acceptance Date, then DST shall notify the Partnership of
such concern and DST will provide testing assistance only if the parties agree
on extension of any dates for DST's subsequent performance. DST will not be
obligated to correct any condition which affects the achievement of any one or
more Performance Metrics to the extent such condition is caused by (A) any
failure of third party computer equipment, software and other systems included
in the Hardware Requirements or the Software Requirements (other than computer
equipment, software or other systems developed by subcontractors of DST to
assist in the performance of this Agreement) to perform in accordance with the
user documentation published by the manufacturers and developers of such
equipment, software and systems; (B) performance characteristics of
telecommunications lines or services provided by telecommunications carriers;
(C) any equipment, software or systems owned or operated by the Partnership,
excluding the System; or (D) by actions or inactions of the Partnership or its
authorized representatives.
(iii) REGRESSION TESTING. Regression Testing consists
of Functionality Testing (defined in Paragraph 14(a)(i)) and shall test (A) the
Functionality of Release 1.2 together with Release 1.1; (B) the Functionality of
Release 1.2.5 together with Releases 1.1 and 1.2; (C) the Functionality of
Release 1.3 together with Releases 1.1, 1.2 and 1.2.5; and (D) the Functionality
of Release 1.3.5 together with Releases 1.1, 1.2, 1.2.5 and 1.3.
(b) ACCEPTANCE TESTING OF RELEASES.
(i) TESTING CYCLES. All Acceptance Testing for
Releases 1.2, 1.2.5, 1.3 and 1.3.5 shall be completed by the Acceptance Date for
that Release. Upon delivery of any Release, the Partnership will install such
Release and to the extent practicable begin testing of one or more Functions in
short cycles, and will report any Problems promptly to the PTS. The parties will
meet weekly to agree upon a weekly schedule (the "Weekly Schedule") which lists
the most important Level One Problems in the PTS and the date by which such
Problems, if not resolved, may prevent the Partnership from further meaningful
Acceptance Testing. The Weekly Schedule will be arranged in descending date
order. The Weekly Schedule also will identify steps that each party must take to
complete each Acceptance Testing cycle and the date by which such steps are
scheduled to be completed. DST will address the Level One Problems in the order
of priority established by the parties in the Weekly Schedule, and the parties
shall each take the steps described in the Weekly Schedule in a timely manner.
As DST delivers Corrective Modifications, the Corrective Modifications will be
included in the Acceptance Testing procedure set forth in this Paragraph 14(b),
which procedure will be repeated for such Corrective Modifications. If DST
exceeds the agreed date for delivering any Corrective Modifications for a Level
One Problem in any Release (as established in any Weekly Schedule), the
Partnership shall be entitled to extend the agreed date for performing
Acceptance Testing on the Release (or the affected portions of the Release), as
established in any Weekly Schedule, by an equal number of days. The
<PAGE>
15
Acceptance Date for that Release, however, will not be altered unless the
aggregate delays by DST in delivering Corrective Modifications for Level One
Problems in such Release, with equivalent extensions of the Partnership's
schedule for completing Acceptance Testing on such Release, causes the agreed
date for performance of Acceptance Testing (as established in the then most
recent Weekly Schedule) to conclude after the Acceptance Date for that Release.
(ii) ANY REMAINING PROBLEMS. If the Partnership has
met all of its Acceptance Testing obligations, and the parties agree that any
Level One Problems remain after the Acceptance Date for that Release, DST shall
determine the amount of time necessary to resolve any remaining Level One
Problems and will inform the Partnership whether it will delay the Delivery
Dates of any subsequent Releases or the Acceptance Dates for those Releases,
impacting the Final Acceptance Date. DST will notify the Partnership of the
estimated time for delivery of Corrective Modifications for any remaining Level
Two Problems.
(iii) STRESS AND REGRESSION TESTING. Stress Testing
or Regression Testing of the System shall take place during the Acceptance
Testing for the most recently delivered Release. Acceptance of each Release by
the Partnership shall be subject to correction of any Level One Problems which
are detected by the Partnership in the course of Stress Testing and/or
Regression Testing of the most recently delivered Release.
15. ACCEPTANCE.
(a) RELEASES. Interim Acceptance of a Release shall have
occurred when:
(i) All Acceptance Testing (other than that Stress
Testing and Regression Testing the Partnership elects to perform after delivery
of Release 1.3.5) has been completed for that Release; the Partnership has not
identified any Level One Problems which remain outstanding in that Release; and
either the Partnership has not identified any Level Two Problems which remain
outstanding in that Release, or DST has provided estimated time frames to fix
any remaining Level Two Problems in the Release;
(ii) The Partnership notifies DST in writing of
Interim Acceptance of the Release, or the Partnership and DST have agreed in
writing as to Interim Acceptance of the Release;
(iii) Interim Acceptance is deemed to have occurred
as provided in Paragraph 13(c) or (d); or
<PAGE>
16
(iv) The Partnership signs and returns an Acceptance
Certificate.
(b) FINAL ACCEPTANCE. Final Acceptance will occur upon the
actual or deemed agreement by the Partnership that no Level One Problems remain
in the System. Final Acceptance shall not be deemed a waiver of DST's obligation
to correct any Level Two Problems identified during Acceptance Testing in
accordance with Paragraph 14.
(c) DELAYED DELIVERY OR ACCEPTANCE.
(i) DELIVERY CURE PERIOD. In the event that delivery
of Release 1.2.5, 1.3, or 1.3.5 of the System occurs after the Delivery Date for
that Release or such later date as may be applicable due to time extensions as
permitted herein, such delay shall be treated as a contract dispute subject to
the Dispute Resolution Procedures. If the Dispute Resolution Procedures
determine that such delay is DST's fault, DST will have a total of twelve (12)
months of time from the Delivery Date for such Release or such later date as may
be applicable due to time extensions as permitted herein, to deliver such
Release (the "Delivery Cure Period"). If at the conclusion of the Delivery Cure
Period the outcome of the Dispute Resolution Procedures is that the Partnership
undertakes to complete development of any remaining undelivered Release or
Functionality, then, as its exclusive remedy, the Partnership may recover from
DST all reasonable costs incurred by it to complete development of any remaining
undelivered Release or Functionality in accordance with the Specifications
(having reference to the rates quoted by recognized software consultants for
similar services on software systems of comparable complexity)to the extent
allowed under the Dispute Resolution Procedures and DST's interest in the
Partnership shall be as provided in Paragraph 8.5 of the Contribution Agreement.
(ii) ACCEPTANCE CURE PERIOD. In the event that Final
Acceptance of the System does not occur within the Acceptance Cure Period for
Release 1.3.5, such delay shall be treated as a contract dispute subject to the
Dispute Resolution Procedures. If the Dispute Resolution Procedures determine
that such delay is DST's fault, DST will have the equivalent of a total of
twelve (12) months of time from the Final Acceptance Date or such later date as
may be applicable due to time extensions as permitted herein, to prepare and
deliver Corrective Modifications so that the Release is in condition for Final
Acceptance, (the "Acceptance Cure Period"). The time available to DST during the
Acceptance Cure Period shall elapse only while DST is preparing a Corrective
Modification for delivery to the Partnership. The time from the date of delivery
of the Corrective Modification to the Partnership through the date of the
Partnership report of any remaining Level One or Level Two Problems to the PTS
shall not reduce the length of time available to DST during the remaining
portion of the Acceptance Cure Period. If at the conclusion of the Acceptance
Cure Period the outcome of the Dispute Resolution Procedures is that the
Partnership undertakes to complete development of any remaining Release or
Functionality that is not in condition for Final Acceptance, then, as its
exclusive remedy, the Partnership may recover from DST all reasonable costs
incurred by it to complete development in accordance with the Specifications
(having reference to the rates quoted by recognized software consultants for
similar services or software systems of comparable complexity) required for
Final Acceptance of the System to the extent allowed under the Dispute
Resolution Procedures, and DST's interest in the Partnership shall be as
provided in Paragraph 8.6 of the Contribution Agreement.
<PAGE>
17
(iii) DELIVERABLES. Upon the determination by the
Arbitrator that the Partnership may retain a third party to complete development
required for Final Acceptance of the System, DST shall deliver to the
Partnership (or at the Partnership's direction, to such third party) copies of
the materials specified in Paragraph 15(d)(i)-(vi), as they exist as of the date
of such determination, and upon such delivery, the Partnership shall release DST
from any and all obligations to perform any further development work on the
System and any other obligations hereunder except for obligations under
Paragraphs 17, 18, 19 and 20 (subject to the limitations set forth in those
paragraphs).
(iv) DEVELOPMENT AGREEMENT WITH THIRD PARTY. The
Partnership will enter into a development agreement with any third party that it
selects to perform services pursuant to this Paragraph 15(c) that includes
provisions calculated to preserve the confidentiality of the DST Confidential
Information and to result in only such development work necessary for Final
Acceptance. Paragraphs 7(c), 17, 19(b)(iii) and 23(c) shall not limit the rights
of the Partnership or any third party the Partnership selects to perform the
development services authorized pursuant to the Dispute Resolution Procedures.
(d) DELIVERABLES AT FINAL ACCEPTANCE. Upon Final Acceptance
DST will deliver the following items to the Partnership, to the extent that
these items have not previously been delivered to the Partnership:
(i) The Executable Program, which shall mean the
machine-readable object code version of each Release.
(ii) The User Documentation, which shall mean with
respect to any Release, such documents as may be necessary or appropriate to
instruct a user with prior training in the operation of the Release or similar
products how to install, implement and use the Release, including user guides or
manuals and functional specifications to the extent in existence. User
Documentation includes the items listed in Exhibit J attached hereto.
(iii) The Maintenance Documentation, which shall
mean, as to any Release, (A) the documentation (in human-readable and magnetic
media) required to permit a programmer skilled in application level computer
programming to program, compile, maintain and update or enhance the Source Code
for such Release and the Release, itself; (B) a human-readable list (specifying
product name and version) of all readily available off-the-shelf programming and
maintenance software tools used by DST to perform the foregoing and to read all
such media; and (C) the documentation (in human-readable and magnetic media)
required to use all utilities and tools developed by DST for use in coding,
testing and analyzing the System.
(iv) A list of the Maintenance Tools, which shall
mean as to any
<PAGE>
18
Release, all programming and maintenance software tools used by DST to program,
compile, maintain and update or enhance the Source Code for such Release and
such Release, itself; including such tools as are proprietary to DST or are
readily available, off-the shelf tools.
(v) The Source Code, which shall mean as to any
Release (A) the printed sequenced list of computer instructions that (x) when
compiled or interpreted by a computer using available compilers or interpreters,
are sufficient to recreate the then-latest version of the Executable Program;
and (y) are readily comprehensible by a programmer skilled in application level
computer programming and from which (with the Maintenance Documentation) such
person could readily modify, correct and update the Release; and (B) magnetic
media containing the foregoing in a form suitable for compilation or
interpretation by computer.
(vi) The object model, data dictionary and Data
Definition language (DDL) for the Fairway DB2 Database.
(vii) A non-transferable, non-exclusive, paid-up and
royalty-free license to use, for the Partnership's internal future development
of the System by the Partnership's internal staff or consultants (provided any
such consultants enter into a non-disclosure agreement with the Partnership that
contains terms consistent with this Agreement to preserve DST's proprietary and
intellectual property rights in such materials) any utilities and software
tools, and any related documentation and source code that were developed by DST
for use in coding, testing and analyzing the System, including both (A) the
printed sequenced list of computer instructions and (B) magnetic media
containing such instructions in a form suitable for compilation or
interpretation by computer.
16. RESERVED.
17. CONFIDENTIALITY.
(a) CONFIDENTIAL INFORMATION. All information pertaining to
the System, the development services rendered hereunder, and the business of the
parties, including the Executable Program, User Documentation, Maintenance
Documentation, Maintenance Tools, Source Code, descriptions, designs, flow
charts, supplier lists, customer lists, business plans and practices, whether or
not trade secrets, are the confidential and proprietary information of DST or
the Partnership, respectively (collectively, the "Confidential Information").
Except as expressly provided herein or as necessary to carry out the express
purposes of this Agreement, until Final Acceptance neither party shall use,
copy, disclose, publish, release, sub-license, loan or transfer all or any part
of the Confidential Information of the other party, without the other party's
express prior written permission, as more fully described in Paragraphs 17(b)
through (e) below. Following Final Acceptance, confidentiality shall be
controlled by the Amended Partnership Agreement and not by this Agreement.
(b) SAFEGUARDING CONFIDENTIALITY. Each party shall take all
reasonable precautions to safeguard the confidentiality of the Confidential
Information of the other party, including compliance with any password and other
security procedures and any steps that the other party may reasonably request
from time to time. Neither party will disclose, in whole or in part, whether in
writing or orally, the Confidential Information of the other party except to
those of its employees who have the need to know such information in the
performance of
<PAGE>
19
their duties hereunder, and to any consultants or independent contractors
retained by the receiving party who have specifically agreed in writing to be
bound by these confidentiality obligations.
(c) EXCEPTIONS. The confidentiality obligations described
herein shall not apply to any information which is or becomes generally known
through no fault of the receiving party.
(d) BREACH OF CONFIDENTIALITY OBLIGATIONS. Each party
acknowledges that the breach of any provision of this Agreement relating to the
confidentiality of the Confidential Information of the other party will cause
the other party irreparable injury and damage, and that injunctive relief is
both necessary and appropriate, in addition to any other rights or remedies
available to the other party at law or in equity. Each party agrees that no bond
shall be required in connection with the application for such equitable relief.
(e) NO TRANSFER OF RIGHTS. Except as otherwise provided in
this Agreement and the Contribution Agreement, all Confidential Information
shall remain the property of the originating party, and the disclosure of the
Confidential Information to the receiving party shall not be construed to
transfer any other rights in the Confidential Information to the receiving party
that are not specifically provided for elsewhere hereunder.
18. TRANSFER OF KNOWLEDGE.
Attached as Exhibit H is a mutually agreed plan addressing the transfer
of System knowledge from DST to the Partnership.
19. REPRESENTATIONS AND WARRANTIES.
(a) BY DST. DST represents, warrants and covenants as follows:
(i) It has the full legal power and authority to
enter into this Agreement and to fully perform all of its obligations hereunder.
(ii) During the period of development of the System
as described herein, DST shall reasonably endeavor, in light of its business
circumstances, to employ or retain its development staff as it is in place as of
the date of execution of this Agreement and to use such staff to provide the
development services described herein, subject to normal attrition and business
urgencies.
(iii) The System shall be delivered "as is" without
any performance warranty of any kind, the Partnership having been provided the
opportunity to conduct
<PAGE>
20
Acceptance Testing before Final Acceptance.
(iv) To DST's knowledge, the System when used in
accordance with the User Documentation will not infringe or violate any U.S.
patent, copyright, trademark or trade secret right of any third party.
(v) The System will be "Year 2000 Compliant" which
means that, as to any software in the System, such software correctly perform
all date-related operations (A) without additional human intervention, other
than original data entry of any date; (B) without regard to whether any date
involved in the operation occurs in the 20th or 21st century; and (C) without
regard to the System date at the time the calculation is performed. Without
limiting the foregoing, the System software must (U) accept as input (by key
entry or otherwise) fully specified dates (four-digit year, month and date of
month); (V) if two-digit year specifications are accepted as input, correctly
translate such dates without additional human intervention into fully specified
dates in a manner that unambiguously preserves the user's intent in light of the
application context; (W) perform all date-related arithmetic and logical
operations correctly (for example, January 2, 2000 is greater than December 31,
1999; January 2, 2000 minus December 31, 1999 equals two days); (X) sort
date-related information in correct chronological order; (Y) otherwise correctly
process dates, including without limitation, updating dates, maintaining dates
and reporting correctly dates in a manner that is unambiguous in light of the
applicable context; and (Z) store internal, date-related information (including
all interim date-related results) in a manner that is unambiguous (in the
context of software processing) as to century and permit all of the foregoing to
occur correctly without additional human intervention; provided, that no failure
to be Year 2000 Compliant shall be deemed to have occurred (1) if DST
demonstrates that the noncompliance is due solely to invalid, incorrect or
otherwise corrupt data supplied by any source other than the System or another
proprietary system of DST; (2) in respect of data or other information supplied
by a third party to the Partnership directly or through products supplied by
DST, if the third-party data or information is not used by the System in any
calculation or sorting, but is merely viewed by the Partnership using software
supplied by DST; or (3) if DST demonstrates that the noncompliance is due solely
to hardware, firmware or software not supplied by DST (other than such
third-party hardware, firmware or software that falls into either of the two
following categories: (i) with which the System is intended to interface, if any
agreement assigns to DST the responsibility for ensuring the correct operation
of such interface; or (ii) that is required, selected, embedded or supplied by
DST).
(vi) To DST's knowledge, the System will contain no
virus, worm or built-in or use-driven destruction mechanism, including timebombs
or trojan horses.
(vii) DST covenants that it will grant access to its
books and records concerning the development services described herein to
federal and other governmental agencies and regulators with jurisdiction over
the Partnership relating to the System and to auditors acting on their behalf,
when such an audit is required by law or regulation and is authorized by the
Partnership and after the agency, regulators or auditors have agreed in writing
to maintain the confidentiality of DST's books and records; provided, that such
audit shall be subject to at least five (5) business days' prior written notice,
shall take place during DST's regular business hours, shall minimize any
disruption to DST's activities and shall be conducted at the Partnership's
expense. In the event that such an audit causes any delay in the development of
the System, the Delivery Dates may be extended by DST for a number of
<PAGE>
21
days corresponding to the length of the delay caused by the audit and if the
Delivery Dates are extended, the Acceptance Dates will also be extended by an
equal number of days.
(viii) The warranties under Paragraph 19(a)(iv), (v)
and (vi) shall not apply in the event and to the extent that any breach of
warranty is the result of (A) any misuse, modification, enhancement, addition or
other change to the System made by or on behalf of the Partnership or its
customers or any third party retained by the Partnership pursuant to Paragraph
15(c), it being understood that any such party is not acting on behalf of DST
(except to the extent that such modifications, enhancements, additions or
changes were made by or on behalf of DST); (B) the Partnership's failure to use
any modification, enhancement, addition or other change to the System made
available by DST at no charge (but including Enhancements which are subject to a
charge) to achieve or maintain specific Functionality and that does not detract
from the Functionality; (C) the Partnership's use of the System in combination
with any hardware, software, product, process, information, directions or
materials not owned, developed, specified, modified or delivered by DST; or (D)
the Partnership's use of the System other than for the intended purposes. The
warranties under Paragraph 19(a)(iv), (v) and (vi) also shall not apply upon the
Partnership's completion of development of the System, as provided in Paragraph
15(c).
THE FOREGOING WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR
IMPLIED, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE, AND ANY OTHER OBLIGATIONS OR LIABILITIES ON THE PART
OF DST ARISING OUT OF OR IN CONNECTION WITH ITS PERFORMANCE HEREUNDER.
(b) BY THE PARTNERSHIP. The Partnership represents and
warrants and covenants as follows:
(i) It has the full legal power and authority to
enter into this Agreement and to fully perform all of its obligations hereunder.
(ii) To the Partnership's knowledge, any ideas,
information, designs or materials proposed by the Partnership for inclusion in
the System do not and will not infringe or violate any patent, copyright,
trademark or trade secret right of any third party.
(iii) Except upon a determination by the Arbitrator
that the Partnership may complete development of the System, as provided in
Paragraph 15(c), the Partnership will not (A) make or retain others to make any
misuse, modification, enhancement, addition or other change to the System that
may infringe or breach the intellectual property or contractual rights of
others; (B) fail to use any modification, enhancement, addition or other change
to the System made available by DST at no charge (but including Enhancements
<PAGE>
22
which are subject to a charge) to achieve or maintain specific Functionality and
that does not detract from the Functionality; (C) use the System in combination
with any hardware, software, product, process, information, directions or
materials not owned, developed, specified, modified or delivered by DST; or (D)
use the System other than for the intended purposes. If the outcome of the
Dispute Resolution Procedures is that the Partnership is entitled to retain a
third party to complete development of any Release or Functionality, the
Partnership and not DST shall be responsible and liable for any infringement or
breach of the intellectual property or contractual rights of others to the
extent caused by any misuse, modification, enhancement, addition or other
changes to the System made or provided by or on behalf of the third party.
The foregoing warranties will survive any assignment or transfer of the
Partnership's rights and obligations under this Agreement.
20. INDEMNIFICATION.
(a) INTELLECTUAL PROPERTY INFRINGEMENT. DST will defend,
indemnify and hold harmless the Partnership, its subsidiaries, parent
corporations, affiliates, officers, directors, independent contractors,
partners, shareholders, employees, agents, customers and successors and assigns
(the "Partnership Indemnitees") from and against any claim, suit, demand, loss,
damage, expense (including reasonable attorneys' fees) or liability alleging
that the System or any part thereof (the "DST Item") infringes or
misappropriates any intellectual property right of any third party (including
any U.S. patent, copyright or trade secret); provided, that DST will not be
obligated to indemnify the Partnership Indemnitees if the alleged infringement
is caused by (i) any misuse, modification, enhancement, addition or other change
to the System made by or on behalf of the Partnership or its customers or any
third party retained by the Partnership pursuant to Paragraph 15(c), it being
understood that any such party is not acting on behalf of DST (except to the
extent that such misuse, modifications, enhancements, additions or other changes
were made by or on behalf of DST); (ii) the Partnership's failure to use any
modification, enhancement, addition or other change to the System made available
by DST at no charge (but including Enhancements which are subject to a charge)
to achieve or maintain specific Functionality and that does not detract from the
Functionality; (iii) the Partnership's use of the System in combination with any
hardware, software, product, process, information, directions or materials not
owned, developed, specified, modified or delivered by DST; or (iv) the
Partnership's use of the System other than for the intended purposes. If any DST
Item for which DST may be obligated to provide Indemnification under this
Paragraph 20(a) is held to constitute an infringement or misappropriation of a
third party's rights or if in DST's opinion such DST Item is likely to be held
to constitute an infringement or misappropriation, DST may at its expense and
option: (i) procure the right for the Partnership to continue using such DST
Item; (ii) replace such DST Item with a non-infringing and non-misappropriating
equivalent; or (iii) modify such DST Item to make it non-infringing and
non-misappropriating while conforming to the Specifications; provided, that any
replacement or modified System so submitted shall be subject to Acceptance
Testing pursuant to Paragraphs 13, 14 and 15 (using such dates as reasonably
agreed by the parties). If DST, in its reasonable judgment, concludes that none
of the foregoing alternatives is economically feasible, then DST shall so notify
the Partnership in writing and propose a change to the affected Functionality in
accordance with the Clarification Procedures described in Paragraph 8. The
foregoing remedies constitute the Partnership's sole and exclusive remedies and
DST's entire liability to the Partnership with
<PAGE>
23
respect to intellectual property infringement and misappropriation; PROVIDED
that if the Clarification proposed by DST embodies a loss of Functionality that
is so significant that it constitutes a Level One Problem, the Partnership may
treat the proposed Clarification as a contract dispute subject to the Dispute
Resolution Procedures and, if the outcome of the Dispute Resolution Procedures
is that the Partnership is entitled to retain a third party to complete
development of the System, then the Partnership may recover from DST the costs
incurred by it to complete the development of the System to the extent allowed
under the Dispute Resolution Procedures.
(b) OTHER CLAIMS. Excluding any indemnification for
infringement which is solely governed by Paragraph 20(a), each party
("Indemnitor") will defend, indemnify and hold harmless the other party, its
subsidiaries, parent corporations, affiliates, officers, directors, partners,
shareholders, employees, agents and their successors and assigns ("Indemnitees")
from and against any claim, suit, demand, loss, damage, expense (including
reasonable attorney's fees) or liability that may result from, arise out of or
relate to: (i) bodily injury, tangible personal or real property damage arising
from the Indemnitor's performance or failure to perform under this Agreement;
(ii) breach of any representation, warranty or covenant hereunder by the
Indemnitor. The foregoing indemnification obligations shall not apply to the
extent that such claims arise from (A) the Indemnitee's negligence or willful
misconduct; or (B) the Indemnitee's material breach of this Agreement.
(c) PROCEDURE. To receive the benefit of the indemnifications
provided hereunder the party seeking indemnification must promptly notify the
other party in writing of a claim or suit and provide reasonable cooperation (at
the Indemnitor's expense) and tender to the Indemnitor full authority to defend
or settle the claim or suit. Neither party has any obligation to indemnify the
other party in connection with any settlement made without the Indemnitor's
written consent. The Indemnitor may not settle any claim or suit that is the
subject of Paragraph 20(b) without the prior written consent of the Indemnitee,
which consent shall not be unreasonably withheld. The Indemnitee has the right
to employ separate counsel in any suit or claim; provided, that the fees and
expenses of such counsel shall be an expense of the Indemnitee unless employment
of such counsel has been specifically authorized by Indemnitor.
21. LIMITATION OF LIABILITY. IN NO EVENT SHALL EITHER PARTY BE LIABLE
FOR CONSEQUENTIAL, INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES
OR EXPENSES (INCLUDING, WITHOUT LIMITATION, DAMAGES DUE TO LOSS OF PROFITS, LOSS
OF PRODUCTION, LOSS OF SAVINGS, LOSS OF COMPETITIVE ADVANTAGE, LOSS OF GOODWILL,
AND BUSINESS INTERRUPTION) ARISING FROM OR RELATED TO THIS AGREEMENT, OR TO ANY
OF THE SERVICES OR WORK PRODUCT TO BE PROVIDED PURSUANT TO THIS AGREEMENT, OR TO
ANY OTHER SUBJECT MATTER OF THIS AGREEMENT. THE
<PAGE>
24
PROVISIONS OF THE NEXT PRECEDING SENTENCE SHALL APPLY: (A) REGARDLESS OF THE
TYPE OF CLAIM, WHETHER IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, OR OTHER
LEGAL OR EQUITABLE THEORY; AND (B) REGARDLESS OF THE CAUSE OF SUCH DAMAGES, EVEN
IF THE OTHER PARTY HAS BEEN INFORMED OF SUCH DAMAGES, AND EVEN IF SUCH DAMAGES
WERE FORESEEABLE; AND (C) REGARDLESS OF ANY CLAIM OR FINDING WITH RESPECT TO THE
ADEQUACY, FAILURE OF PURPOSE, OR SUFFICIENCY OF ANY REMEDY PROVIDED FOR UNDER
THIS AGREEMENT. EACH PARTY SHALL REMAIN RESPONSIBLE FOR MANAGING ITS BUSINESS,
INCLUDING THE EFFECTS UPON ITS BUSINESS OF THE OTHER PARTY'S PERFORMANCE OR
NON-PERFORMANCE UNDER THIS AGREEMENT, AND SHALL TAKE COMMERCIALLY REASONABLE
STEPS TO MITIGATE THE OTHER PARTY'S LIABILITY FOR DIRECT DAMAGES.
22. DISPUTE RESOLUTION PROCEDURES.
(a) BY THE PARTIES. Disputes arising hereunder shall be
submitted to the parties for resolution under the following escalation
procedures. The Project Representatives of each party shall attempt to resolve a
dispute within one (1) business day of identification of the dispute. If the
Project Representatives are not able to agree within that time frame, the
dispute shall be escalated to a supervisor designated by each party as provided
in Paragraph 22(b) who shall attempt to resolve the dispute within one (1)
business day of the escalation. If the supervisors are not able to agree within
that time frame, the dispute shall be escalated to an executive designated by
each party as provided in Paragraph 22(b) who shall attempt to resolve the
dispute within two (2) business days of the escalation. If the executives are
not able to agree within that time frame, the dispute shall be referred to
arbitration under Paragraph 22(c). Delivery and acceptance obligations of the
parties will remain unchanged during the escalation process under Paragraphs
22(a) and (b) unless both parties' designated representatives for dispute
resolution agree otherwise in writing.
(b) DESIGNATED REPRESENTATIVES. The parties have designated
their respective Project Representatives, Change Control Managers, supervisors
and executives as follows:
<TABLE>
<CAPTION>
DST PARTNERSHIP
--- -----------
<S> <C> <C>
Project Representative Mike Gentry, Craig Alie
Systems Officer
Change Control Manager Candi Lacy, Craig Alie
Business Analyst Manager
Supervisor Mike Waterford, Marty Lee
Group Vice President
Executive Tom McCullough, Mort Comer
Executive
Vice President
</TABLE>
The parties may change their designated representatives for dispute resolution
from time to
<PAGE>
25
time by providing prior notice to the other party as provided in Paragraph
24(d).
(c) BY THE ARBITRATOR. In the event that the dispute is not
resolved by the means provided in Paragraph 22(a) above, the dispute shall be
referred, by either party providing notice to the other, to an independent,
technically qualified arbitrator with experience in software development
projects (the "Arbitrator") to resolve such disputes through binding
arbitration. The Arbitrator shall be a representative of a Big 5 accounting firm
that does not have a material relationship with either party hereto nor with any
partner of the Partnership. The Arbitrator shall be selected by mutual agreement
of the parties, which shall not be unreasonably withheld or delayed. In the
event that the parties are unable to agree upon an Arbitrator from a Big 5
accounting firm as described above, the parties shall seek an Arbitrator from
candidates presented by the American Arbitration Association ("AAA") and using
the AAA's selection procedure. The parties may replace the Arbitrator at any
time only by mutual written agreement. In the event that the Arbitrator dies or
becomes incapacitated or is unwilling to serve, the parties shall select a
replacement using the selection process described above. The parties shall have
three (3) business days after the referral to present their positions in writing
to the Arbitrator, after which the Arbitrator shall provide each party with a
copy of the written submission of the other, and set a date for a hearing. The
Arbitrator shall have sole discretion regarding the admissibility of evidence
and conduct of the hearing. At least three (3) business days prior to the
hearing, each party shall submit to the other and to the Arbitrator a copy of
all exhibits on which such party intends to rely at the hearing. There shall be
no other discovery from either party. The Arbitrator may conduct the hearing at
a location selected by the Arbitrator and shall endeavor to resolve the matter
through a binding decision issued within ten (10) business days after the
deadline for presentation of the parties' positions. The Arbitrator shall have
the authority to award actual money damages, specific performance, and temporary
injunctive relief, but shall not have the authority to award exemplary or
punitive damages, and the parties expressly waive any claimed right to such
damages. The arbitration shall be of each party's individual claims only, and no
claim of any other party shall be subject to arbitration in such proceeding. The
Arbitrator's ruling shall be final, binding on both parties and not appealable.
The parties intend and agree that resolution of disputes shall be finally
concluded by the Arbitrator and that neither party shall have the right to seek
recourse or relief in the courts from an arbitration decision. The arbitration
procedure provided herein shall be the sole forum in which disputes between the
parties may be resolved.
(d) PAYMENT OF ARBITRATOR'S FEES. The losing party in the
arbitration of any dispute shall pay the fees incurred by the Arbitrator in
handling that dispute. If neither side is the losing party or if the Arbitrator
determines that the fees should be allocated in a different manner, payment of
the Arbitrator's fees shall be made in accordance with the determination of the
Arbitrator.
<PAGE>
26
(e) EFFECT ON PERFORMANCE. The Arbitrator shall have authority
to extend Delivery Dates or Acceptance Dates only to the extent that matters are
in dispute that adversely impact any party's ability to deliver or accept the
relevant Release. Both parties shall be obligated to continue to perform unless
and until the Arbitrator rules that they are not obligated to do so. Failure to
perform without such a ruling by the Arbitrator shall be at the risk of the
non-performing party. If the Arbitrator recognizes or permits a delay caused by
escalation or arbitration which affects the development process, the Release
Delivery Dates shall be extended for the period of such delay. If the Arbitrator
recognizes or permits such a delay which affects Acceptance Testing, the
Partnership shall segregate the disputed issue and continue with all other
Acceptance Testing, including Regression Testing, to the extent practicable. If
such segregation is not practicable, the Arbitrator shall determine the amount
of necessary delay in the Acceptance Dates set forth in Paragraph 13(a). The
parties mutually agree that any such delay should be kept to a minimum.
23. EXPIRATION OR TERMINATION.
(a) EXPIRATION. This Agreement shall expire upon delivery by
the Partnership to DST of DST's total partnership interests in the Partnership
pursuant to the Contribution Agreement
(b) TERMINATION BY EITHER PARTY. Either party may terminate
this Agreement upon notice to the other party if: (i) the other party is
liquidated, dissolved or ceases to carry on business on a regular basis; or (ii)
any federal or state bankruptcy, insolvency or receivership proceeding is
instituted by or against the other party unless, in the case of an involuntary
proceeding, it is dismissed within forty-five (45) days.
(c) SURVIVAL. The following provisions shall survive
expiration or termination of this Agreement for any reason: Paragraph 15(c)
(Delayed Delivery); Paragraph 16 (DST Rights After Contribution); Paragraph 19
(Warranties); Paragraph 20 (Indemnification); Paragraph 21 (Limitation of
Liability); Paragraph 23 (Termination); and Paragraph 24 (General Provisions).
Paragraph 17 (Confidentiality) shall survive expiration or termination of this
Agreement in the event that Final Acceptance does not occur, subject to the
provisions of Paragraph 15(c) regarding use of a third party to complete the
System in accordance with a decision of the Arbitrator. Upon expiration or
termination of this Agreement in the event Final Acceptance does not occur, each
party shall return to the other or destroy any tangible materials in any medium
embodying or containing any Release or Functionality previously delivered,
including all deliverables associated therewith; PROVIDED that in the event that
the outcome of the Dispute Resolution Procedures pursuant to Paragraph 15(c) is
that the Partnership undertakes to complete development of the System, then so
long as DST receives the equity to which it is entitled under Paragraph 8.6 or
Paragraph 8.7 of the Contribution Agreement, as the case may be, the Partnership
shall not be required to return or destroy any DST Confidential Information
relating to the System. Confidential Information of the other party, and shall
not thereafter use or disclose such Confidential Information.
<PAGE>
27
24. GENERAL PROVISIONS.
(a) ENTIRE AGREEMENT; MODIFICATION. This Agreement, including
the Exhibits hereto, contains all of the agreements, representations and
understandings of the parties with respect to the subject matter hereof, and
supersedes any previous agreements, representations and understandings with
respect to the subject matter. In the event of a conflict between this Agreement
and the Exhibits hereto, this Agreement controls. This Agreement may not be
modified or amended except by a separate written instrument duly executed by the
parties.
(b) WAIVER. No provision of or right under this Agreement
shall be deemed to have been waived by any act or acquiescence on the part of
either party, its agents or employees, or by any custom or practice of the
parties with regard to the terms of performance hereof, but only by an
instrument in writing signed by an authorized officer of each party. No waiver
by either party of any breach of this Agreement by the other party shall be
effective as to any other breach, whether of the same or any other term or
condition and whether occurring before or after the date of such waiver.
(c) CHOICE OF LAW. This Agreement shall be governed by the law
of the state of Delaware, without giving effect to choice of law principles.
(d) NOTICE. All notices and other communications hereunder
shall be in writing or by written telecommunication, and shall be deemed to have
been duly given upon the earlier of (i) personal delivery; (ii) receipt if sent
by postage-prepaid United States Registered or Certified Mail, Return Receipt
Requested; (iii) the second next business day after deposit if sent by a
reputable overnight courier; or (iv) upon electronic confirmation of receipt if
sent by written telecommunication and confirmed by one of the other means of
notice, as follows:
If to the Partnership:
EquiServe Limited Partnership
150 Royall Street
Canton, Massachusetts 02021
Attention: Chief Executive Officer
Facsimile No.: 781-575-4188
<PAGE>
28
If to DST:
DST Systems, Inc.
333 West 11th Street
5th Floor
Kansas City, Missouri 64105
Attention: Executive Vice President
Facsimile No.: 816-435-8630
With a copy to:
Randall D. Young, Esq.
Vice President and Counsel
DST Systems, Inc.
333 West 11th Street
5th Floor
Kansas City, Missouri 64105
Facsimile No.: 816-435-1563
Any party may change the address to which notice is to be sent hereunder by
giving the other party notice in the manner set forth herein.
(e) WORD MEANING. Except as otherwise provided, as used herein
the term "days" means calendar days. Words such as "herein," "hereinafter,"
"hereof" and "hereunder" refer to this Agreement as a whole and not merely to a
paragraph or section in which such words appear, unless the context otherwise
requires. The singular shall include the plural and each masculine, feminine and
neuter reference shall include and refer also to the others, unless the context
otherwise requires. "Including" shall mean including without limitation.
Captions of the paragraphs and subparagraphs of this Agreement are for reference
purposes only and do not constitute terms or conditions of this Agreement, and
shall not limit or affect the terms or conditions hereof.
(f) INDEPENDENT CONTRACTOR. Each of the parties hereto is an
independent contractor and shall not be considered an agent or representative of
the other for any purpose under this Agreement.
(g) NON-ASSIGNMENT. This Agreement may not be assigned by
either party without the written consent of the other, such consent not to be
unreasonably withheld. DST at its option may subcontract its obligations
hereunder, but shall remain responsible for the performance of its
subcontractors.
(h) SEVERABILITY. If any provision of this Agreement is held
by a court of competent jurisdiction or by the Arbitrator to be unenforceable or
illegal for any reason, such illegality or unenforceability shall not affect the
validity or enforceability of any or all of the remaining provisions hereof and
the remaining provisions hereof, if capable of substantial performance, shall
remain in full force and effect.
<PAGE>
29
(i) HEADINGS. The headings and captions used in this Agreement
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
(j) CONSTRUCTION. The parties agree that the terms and
conditions of the Agreement are the result of negotiations between the parties
and that no part of this Agreement shall be construed against or in favor of any
party by reason of the extent to which any party or its professional advisors
participated in the preparation of the Agreement.
(k) NO THIRD-PARTY BENEFICIARIES. Each party intends that this
Agreement shall not benefit or create any right or cause of action in or on
behalf of any person or entity other than the parties.
(l) INSURANCE. Each party will determine the types and amounts
of insurance coverage it requires in connection with this Agreement, and neither
party is required to obtain insurance for the benefit of the other party,
including without limitation business interruption insurance. Each party will
pay all costs and receive all benefits under policies arranged by it. Each party
waives rights of subrogation it may otherwise have regarding the other party's
insurance policies.
(m) COUNTERPARTS. This Agreement may be executed in any number
of counterparts and either party hereto may execute any such counterpart, each
of which when executed and delivered shall be
<PAGE>
30
deemed to be an original and all of which counterparts taken together shall
constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized officers as of the date first written above.
DST SYSTEMS, INC. BOSTON EQUISERVE LIMITED
PARTNERSHIP
By: /s/Thomas A. McCullough By: /s/Joseph L. Hooley
-------------------------------- --------------------------------
Name: Thomas A. McCullough Name: Joseph L. Hooley
Title: Executive Vice President Title: Chairman
<PAGE>
Exhibit 10.10
DST SYSTEMS, INC.
OFFICERS INCENTIVE PLAN
SECTION 1. PURPOSE
The purpose of the Officers Incentive Plan is to reward plan participants for
achieving defined earnings per share objectives that support increasing
profitability of DST Systems, Inc. The Plan provides both annual and long-term
incentives, contingent upon meeting annual and cumulative Earnings Per Share
goals. The Company intends that the Plan will facilitate in securing, retaining,
and motivating employees of superior capability; in providing competitive
management compensation; and in linking incentive awards to objectives that
should enhance shareholder value.
SECTION 2. DEFINITIONS
When used in the Plan, the following words and phrases shall have the following
meanings:
(a) "Affiliate" means any entity other than the Company or a Subsidiary of
which the Company or a Subsidiary directly or indirectly owns 50% or
more of the combined voting power of all classes of stocks of such
entity or 50% or more of the ownership interests in such entity.
(b) "Beneficiary" means the person, persons, trust, or trusts which have
been designated by a Participant in his or her most recent written
beneficiary designation filed with the Company to receive the benefits
specified under this Plan, if any, upon the Participant's death, or, if
there is no designated Beneficiary or surviving designated Beneficiary,
then the person, persons, trust, or trusts entitled by will or the laws
of descent and distribution to receive such benefits.
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(c) "Board" means the Board of Directors of the Company.
(d) "Committee" means the Compensation Committee of the Board or such
other Board Committee as may be designated by the Board to administer
the Plan; provided, however, that the Committee shall consist of two or
more directors of the Company each of whom is a "disinterested person"
within the meaning of Rule 16b-3 under the Securities Exchange Act of
1934, as amended from time to time and an "outside director" as
required by Section 162(m) of the Internal Revenue Code.
(e) "Common Stock" means the Common Stock of the Company.
(f) "Common Stock Outstanding" means the weighted average number of actual
shares of Common Stock issued and outstanding during the Plan Year,
determined in accordance with generally accepted principles. In the
event of a reorganization, recapitalization, stock split, spin off,
stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the capital structure of the Company,
the Committee may make such adjustment, if any, as it deems appropriate
in the determination of Common Stock Outstanding.
(g) "Company" means DST Systems, Inc., a corporation organized under the
laws of Delaware, or any successor company.
(h) "Disability" means the Participant, because of a physical or mental
disability, will be unable to perform the duties of his or her
customary position of employment (or is unable to engage in any
substantial gainful activity for DST) for an indefinite period which
the Committee considers will be of long continued duration. The Plan
considers a Participant disabled on the date the Committee determines
the Participant satisfies the definition of disability. The Committee
may require a Participant to submit
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to a physical examination in order to confirm disability. The Committee
will apply the provisions of this section in a nondiscriminatory,
consistent and uniform manner.
(i) "Earnings Per Share" or "EPS" means Income divided by the number of
shares of Common Stock Outstanding.
(j) "Income" means net income of the Company and its consolidated
Subsidiaries, determined in accordance with generally accepted
principles, consistently applied, for any Plan Year for which the
incentive awards are calculated, as reported by the Company and
certified by the Company's independent certified public accountants.
(k) "Market Price" means the closing price of Common Stock on the New York
Stock Exchange.
(l) "Participant(s)" mean all officers of the Company and such officers of
Subsidiaries and Affiliates as designated from time to time by the
Compensation Committee.
(m) "Plan" means this Officers Incentive Plan, as it may be amended from
time to time.
(n) "Plan Year" means the fiscal year of the Company. The first Plan
Year will begin January 1, 1997 and end December 31, 1997.
(o) "Restricted Common Stock" means Common Stock delivered in payment of an
incentive award and subject to restrictions described in Section 7.
(p) "Subsidiary" means a corporation, domestic or foreign, the majority of
the voting stock of which is owned directly or indirectly by the
Company.
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<PAGE>
(q) "Targeted Earnings Per Share" or "Targeted EPS" means the Earnings Per
Share criteria to be established by the Committee, from time to time
and in its sole discretion, pursuant to Section 4(b) for purposes of
determining incentive awards.
SECTION 3. ELIGIBILITY AND PARTICIPATION
Except in the event of (i) retirement on or after age 60, (ii) Disability, (iii)
death, or (iv) termination without cause, a Participant must be an active
employee of the Company, a Subsidiary, or Affiliate on December 31 of the Plan
Year to be eligible for an incentive award. In the event of retirement,
Disability, death, or termination without cause, the incentive award as
calculated at the end of and for the full Plan Year shall be pro-rated to
reflect the actual period of employment during the Plan Year.
SECTION 4. INCENTIVE AWARD DETERMINATION
(a) INCENTIVE AWARD OPPORTUNITY As soon as practical after adoption of the
Plan, the Committee shall establish Threshold, Target, and Maximum
incentive award opportunity levels (expressed as percentages of base
salary as of the beginning of the Plan Year) for each Participant level
in the Plan for the 1997, 1998, and 1999 Plan Years. For Plan Years
following 1999, the Committee shall establish award opportunity levels
at the times and in the manner it deems appropriate for carrying out
the intent of this Plan .
The amount of the incentive award earned will be pro-rated between
incentive award opportunity levels to reflect actual performance
attained. No incentive award will be payable with respect to a
performance measure and weighting where less than Threshold
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<PAGE>
performance has been attained. No incentive award for a Plan Year shall
exceed 250% of the Participant's base salary as of the beginning of the
Plan Year.
(b) PERFORMANCE MEASURES AND WEIGHTING As soon as practical after
adoption of the Plan, the Committee shall establish performance
criteria and weighting between performance criteria for each level of
incentive award opportunity for the 1997, 1998, and 1999 Plan Years.
The performance criteria shall be based upon 1997 Targeted Earnings Per
Share for each of the Threshold, Target and Maximum incentive award
opportunity levels, annual increases in the Targeted Earnings Per Share
for 1998 and 1999, and cumulative Targeted Earnings Per Share. For Plan
Years following 1999, the Committee shall establish performance
criteria, based on Earnings Per Share, and weighting among criteria for
each Participant at the times and in the manner it deems appropriate
for carrying out the intent of this Plan.
Weighting between annual and cumulative Targeted Earnings Per Share
goals for the first three Plan Years shall be as follows:
1997 Plan Year: 100% on 1997 Targeted EPS.
1998 Plan Year: 67% on 1998 Targeted EPS; 33% on cumulative 1997 and
1998 Targeted EPS.
1999 Plan Year: 50% on 1999 Targeted EPS; 50% on cumulative 1997, 1998,
and 1999 Targeted EPS.
5
<PAGE>
SECTION 5. PAYMENT OF EARNED INCENTIVE AWARDS
As soon as practical after the end of the Plan Year and upon the compilation of
the necessary information, the Committee shall determine the degree of
attainment of the performance measures and the awards payable in accordance with
Section 4 and this Section 5. The Committee shall certify, in writing, prior to
the payment of incentive awards that the performance goals and other material
terms of the Plan have been satisfied.
The aggregate incentive award determined for a Plan Year (annual and cumulative)
shall be paid to the Participant in a combination of cash and Restricted Common
Stock, depending on the level of incentive award earned, as follows:
(a) 100% cash for that portion of a Participant's incentive award up to
and including his or her Threshold incentive opportunity level;
(b) 60% cash and 40% Restricted Common Stock for that portion of a
Participant's incentive award above his or her Threshold incentive
opportunity levels up to and including his or her Target incentive
opportunity level; and
(c) 50% cash and 50% Restricted Common Stock for that portion of a
Participant's incentive award above his or her Target incentive
opportunity levels up to and including his or her Maximum incentive
opportunity level.
Upon the Committee's written certification, the Company shall pay the cash
portion of the incentive award earned, less any amounts required to be withheld
for federal, state and local taxes, as soon as practicable and shall grant the
6
<PAGE>
Restricted Common Stock portion in accordance with the procedures and
restrictions set forth in Section 7.
SECTION 6. LIMITATIONS ON INCENTIVE AWARDS
The aggregate value of all incentive awards for a Plan Year shall not exceed ten
percent (10%) of the Company's pre-tax income for such Plan Year. If incentive
awards generated in a Plan Year exceed this amount, the incentive awards for all
Participants shall be reduced pro-rata.
SECTION 7. RESTRICTED COMMON STOCK
(a) ISSUANCE OF RESTRICTED COMMON STOCK Each Participant receiving an award
of Restricted Common Stock shall have issued in his or her name a
number of full shares of Restricted Common Stock equal to the whole
number of the quotient obtained by dividing the dollar amount of the
incentive award to be settled in Restricted Common Stock, as determined
in Section 5, by the Market Price on the "date of grant." The date that
the Committee approves the incentive awards for the Plan Year shall be
deemed to be the date of grant. If the amount of the award is not
evenly divisible by such Market Price, then the remainder shall be paid
to the Participant in cash.
(b) RIGHTS AND OBLIGATIONS ON RESTRICTED COMMON STOCK A certificate
for all shares of Restricted Common Stock registered in the name of a
Participant shall be delivered to the office of the corporate secretary
for safekeeping. The Participant shall thereupon be a stockholder and
have all the rights of a stockholder with respect to such shares,
including the right to vote and receive all dividends or other
distributions made or paid with respect to such shares; provided, that,
in the discretion of the Compensation Committee, all such distributions
that are not capital stock
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<PAGE>
of the employer of the Participant shall be converted to capital stock
of such employer, and provided further, that such shares of Restricted
Common Stock, and any new, additional or different securities the
Participant may become entitled to receive with respect to such shares
by virtue of a stock split or stock dividend or any other change in the
corporate or capital structure of the Company, shall be subject to the
restrictions described in Section 7 (c).
(c) RESTRICTIONS ON RESTRICTED COMMON STOCK Prior to their release as
provided in Section 7(d), the shares of Restricted Common Stock may not
be sold, exchanged, transferred, pledged, hypothecated, or otherwise
disposed of by the Participant. However, nothing herein shall preclude
a Participant from making a gift of any shares of Restricted Common
Stock to a spouse, child, step-child, grandchild, parent or sibling, or
legal dependent of the Participant or to a trust of which the
beneficiary or beneficiaries of the corpus and the income shall be
either such a person or the Participant; provided that, the Restricted
Common Stock so given shall remain subject to the restrictions,
obligations and conditions described in this Section.
(d) RELEASE OF RESTRICTIONS AND DELIVERY OF SHARES All restrictions on
Restricted Common Stock shall lapse on the last day of the third fiscal
year following the Plan Year for which the Restricted Common Stock was
awarded (the "Release of Restriction Date"); provided, however that in
the event of termination of employment with the Company, Subsidiary, or
Affiliate for any reason other than the Participant's (i) retirement on
or after 60, (ii) Disability, (iii) death, or (iv) termination by the
Company without cause, all rights to any shares of Restricted Common
Stock with respect to such award shall be forfeited to the Company and
certificates for such shares shall be cancelled and of no further
effect.
8
<PAGE>
Any shares of Restricted Common Stock then held by the office of the
corporate secretary shall be delivered, free and clear of all
restrictions, to (i) the Participant upon the Release of Restriction
Date; his or her retirement on or after 60; Disability; or termination
without cause; or (ii) his or her Beneficiary upon his or her death
before retirement.
SECTION 8. CHANGE IN CONTROL
(a) RELEASE OF RESTRICTIONS In the event of a Change in Control (as defined
below), all time periods and requirements necessary to cause a release
of restrictions as set forth in Section 7(d) shall be deemed to have
been met; and, the Release of Restrictions Date will be deemed to be
upon such Change in Control. Any shares of Restricted Common Stock then
held by the office of the corporate secretary shall be delivered to the
Participant upon such Release of Restrictions, free and clear of all
restrictions.
(b) SHORT PLAN YEAR Notwithstanding anything in the Plan to the contrary,
in the event of a Change in Control:
(i) the Plan Year will end as of the Change in Control;
(ii) the attained level of performance with respect to any and all
performance goals and weighting and the resulting incentive
award earned for the Plan Year shall be deemed to be at
Maximum, without reduction for a short Plan Year; and
(iii) the incentive award for the Plan Year shall be paid promptly
in cash.
9
<PAGE>
(c) CHANGE IN CONTROL DEFINED For purposes of this Plan, a "Change in
Control" shall be deemed to have occurred if the conditions in (i),
(ii), or (iii) are met:
(i) for any reason at any time less than seventy-five percent
(75%) of the members of the Board shall be individuals who
fall into any of the following categories:
(A) individuals who were members of such Board on
September 1, 1995;
(B) individuals whose election, or nomination for
election by the Company's stockholders, was approved
by a vote of at least seventy-five percent (75%) of
the members of the Board then still in office who
were members of such Board on September 1, 1995; or
(C) individuals whose election, or nomination for
election by the Company's stockholders, was approved
by a vote of at least seventy-five percent (75%) of
the members of the Board then still in office who
were elected in the manner described in (A) or (B)
above.
(ii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) shall have become, according to
a public announcement or filing, without the prior approval of
the Board, the "beneficial owner" (as defined in Rule 13(d)-3
under the Exchange Act) directly or indirectly, of securities
of the Company representing twenty percent (20%) or more
(calculated in accordance with Rule 13(d)-3) of the combined
voting power of the Company's then outstanding voting
securities (such "person" hereafter referred to as
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<PAGE>
a "Major Stockholder"). For purposes of the Plan, Kansas City
Southern Industries, Inc. shall not be deemed to be a Major
Stockholder unless its ownership of voting securities of the
Company, directly or indirectly, falls below twenty percent
(20%) and subsequently increases to represent twenty percent
(20%) or more of the Company's then outstanding voting
securities.
(iii) the stockholders of the Company shall have approved a merger,
consolidation or dissolution of the Company or a sale, lease,
exchange or disposition of all or substantially all of the
Company's assets, or a Major Stockholder shall have proposed
any such transaction, unless such merger, consolidation,
dissolution, sale, lease, exchange or disposition shall have
been approved by at least seventy-five percent (75%) of the
members of the Board who are individuals falling into any
combination of the following categories:
(A) individuals who were members of such Board on
September 1, 1995;
(B) individuals whose election or nomination for election
by the Company's stockholders was approved by at
least seventy-five percent (75%) of the members of
the Board then still in office who are members of the
Board on September 1, 1995; or
(C) individuals whose election, or nomination for
election by the Company's stockholders was approved
by a vote of at least seventy-five percent (75%) of
the members of the Board then still in office who
were elected in the manner described in (A) or (B)
above.
11
<PAGE>
SECTION 9. PLAN ADMINISTRATION
The Plan shall be administered by the Committee which is authorized to establish
such rules and procedures necessary to carry out its tasks. The Committee shall
have sole discretion in interpreting and in exercising its authority under the
Plan. Any action of the Committee with respect to the Plan shall be final,
conclusive and binding on all persons including the Company, Subsidiaries,
Affiliates, Participants, and any person claiming any rights under the Plan from
or through any Participant.
Except for those functions that must be performed by the Committee pursuant to
Section 16 of the Securities Exchange Act of 1934 and other applicable law, the
Committee may delegate to officers of the Company the authority, subject to such
terms as the Committee shall determine, to perform administrative functions.
Notwithstanding anything herein to the contrary, the Committee shall be solely
responsible for certifying, in writing, prior to payment of any incentive awards
that the performance goals and other material terms were satisfied.
SECTION 10. NO RIGHT TO CONTINUED EMPLOYMENT
Neither the establishment of the Plan, the participation by an individual in the
Plan nor the payment of any award hereunder or any other action pursuant to the
Plan shall be held or construed to confer upon any Participant the right to
continue in the employ of the Company, a Subsidiary, or Affiliate or affect any
right which the Company or its Subsidiaries have to terminate at will the
employment of any such Participant.
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<PAGE>
SECTION 11. NON-TRANSFERABILITY OF AWARDS
Except as otherwise provided in this Plan, no amount payable at any time under
the Plan shall be subject to alienation by anticipation, sale, transfer,
assignment, bankruptcy, pledge, attachment, charge, or encumbrance of any kind
nor in any manner be subject to the debts or liabilities of any person, and any
attempt to so alienate or subject any such amount shall be void.
SECTION 12. AMENDMENT AND TERMINATION OF THE PLAN
The Committee may amend or terminate this Plan in whole or in part at any time
without the consent of or prior notice to any Participant including, but not
limited to modifying (a) the Targeted EPS, (b) the incentive award opportunity
levels for any or all Participants, (c) the weighting between annual and
cumulative Targeted EPS, (d) the percentages of cash, restricted stock (or other
equity components such as options) to be paid to a Participant as an incentive
award. No such amendment or termination shall adversely affect the right of a
Participant to receive any amount to which he has become entitled by achieving
goals prior to such amendment or termination. In the event of a termination of
the Plan or an amendment which adversely affects the computation of an award to
a Participant which occurs during a Plan Year, the Participant shall be entitled
to receive (i) a prorata award to the effective date of such termination or
amendment, calculated under the terms and conditions of the Plan immediately
prior to such effective date and (ii) any award provided by such amended Plan
for the balance of such Plan Year. Upon termination of this Plan, any Restricted
Common Stock held by the office of the corporate secretary shall remain subject
to the restrictions, obligations, rights and conditions described in Sections 7
and 8 as though the Plan had not terminated.
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SECTION 13. INDEMNIFICATION
The Company shall indemnify and hold harmless the Committee and each Committee
member against any and all claims, loss, damage, expense or liability arising
from any good faith action or failure to act with respect to this Plan.
SECTION 14. INCAPACITY
If the Committee determines that any person entitled to payments under the Plan
is unable to care for his or her affairs because of illness or accident, or has
died without naming a Beneficiary, unless a prior claim has been made by a duly
appointed legal representative, any payment due to such person or his or her
estate may, if the Committee so directs, be paid to the person's spouse, child,
a relative, an institution maintaining or having custody of such person, or any
other person the Committee deems to be a proper recipient on behalf of the
person entitled to the payment.
SECTION 15. GOVERNING LAW
The provisions of the Plan shall be construed and interpreted according to the
laws of the State of Missouri without reference to its principles of conflicts
of law.
SECTION 16. SEVERABILITY
If any provision of the Plan is held invalid or unenforceable, such invalidity
or unenforceability shall not affect any other provision of the Plan, and the
Plan shall be construed and enforced as if such provision had not been included.
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<PAGE>
SECTION 17. HEADINGS
The headings of sections of the Plan are for convenience of reference. In case
of any conflict, the text of the Plan, rather than such headings, shall control.
* * * * *
This Plan adopted by the Compensation Committee this 27th day of February, 1997.
By: /s/ M. Jeannine Strandjord
--------------------------------------------------
M. Jeannine Strandjord
Chair, DST Systems, Inc. Compensation Committee
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<PAGE>
Exhibit 10.11
DST SYSTEMS, INC.
DEFERRED COMPENSATION PLAN
SECTION 1
INTRODUCTION
1.1 THE PLAN AND ITS EFFECTIVE DATE. The DST Systems, Inc. Deferred
Compensation Plan ("Plan") is established as of May 12, 1998 (the "Effective
Date").
1.2 PURPOSE. DST Systems, Inc. (the "Company") has established the Plan
for a select group of management and highly compensated employees of the Company
or any subsidiary or affiliate that adopts the Plan in accordance with Section 6
(together with the Company, an "Employer) to attract and retain highly qualified
personnel by offering the benefits of a non-qualified, unfunded plan of deferred
compensation. The Plan is intended to be a top-hat plan described in Sections
201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA").
1.3 ADMINISTRATION. The Plan shall be administered by a committee (the
"Committee") appointed by the Board of Directors of the Company (the "Board").
The Committee shall have the powers set forth in the Plan and the power to
interpret its provisions. Any decisions of the Committee shall be final and
binding on all persons with regard to the Plan. The Committee may delegate its
authority hereunder to one or more officers or directors of the Company. The
members of the Committee shall serve at the pleasure of the Board and may be
removed, with or without cause, by the Board.
SECTION 2
PARTICIPATION DEFERRAL ELECTIONS AND DEFERRAL AWARDS
2.1 ELIGIBILITY AND PARTICIPATION. Subject to the terms, conditions and
limitations of the Plan, such employees of the Company or other Employer who are
identified as eligible by the Committee shall be eligible to participate in the
Plan ("Eligible Employees"). Any Eligible Employee who makes a Deferral Election
as described in Section 2.2 below, or with respect to whom the Committee makes a
Deferral Award as described in Section 2.3 below, shall become a participant in
the Plan ("Participant") and shall remain a Participant until the entire balance
of his Deferral Account (defined in Section 3.1 below) is either forfeited or
distributed.
2.2 RULES FOR DEFERRAL ELECTIONS. To the extent permitted by the
Committee, and subject to any terms, conditions or limitations that the
Committee may prescribe, an Eligible Employee may make an irrevocable election
("Deferral Election") to defer receipt of compensation from the Company or other
Employer in accordance with the rules set forth below:
<PAGE>
(a) An individual shall be eligible to make a Deferral Election
only if he is an Eligible Employee on the date such election
is made.
(b) All Deferral Elections must be made in writing on such forms
as the Committee may prescribe and must be received by the
Committee no later than the date specified by the Committee.
In no event will the date specified by the Committee be later
than the end of the month that precedes the earliest date that
the amount being deferred is made available to such Eligible
Employee.
(c) Deferred amounts will be deferred to the date specified by the
Eligible Employee at the time of the Eligible Employee's
initial Deferral Election (the "Distribution Date"). Except as
provided in subsection (f) below, the Distribution Date
specified at the time of the Eligible Employee's initial
Deferral Election is irrevocable.
(d) The Distribution Date specified by the Participant at the time
of his initial Deferral Election may be either (i) a specified
date not earlier than the January 1 coincident with or
immediately following the first anniversary of the date on
which the Eligible Employee files his initial Deferral
Election, (ii) the Eligible Employee's Termination of
Employment (as defined in subsection (e), below) or a
specified date coinciding with or next following the Eligible
Employee's Termination of Employment (e.g., January 1
coinciding with or next following the Eligible Employee's
Termination of Employment), (iii) the earlier of (i) or (ii)
above, or (iv) such other date permitted by the Committee, as
may be elected by the Eligible Employee at the time of his
initial Deferral Election.
(e) For purposes of this Plan, a "Termination of Employment"
occurs when a person leaves the employ of the Company
(including all subsidiaries and affiliates) by reason of a
resignation, discharge, retirement, or death; provided that in
the event a person receives periodic severance payments after
he leaves the employ of the Company (or any subsidiary or
affiliate), then unless otherwise provided by the Committee,
such person's Termination of Employment shall occur on the
date on which the final periodic severance payment is made.
(f) To the extent permitted by the Committee, and subject to any
terms, conditions or limitations that the Committee may
prescribe, a participant may make one or more Deferral
Elections after the Participant's initial Deferral Election to
extend the Distribution Date to a later date described in
subsection (d) above; provided that any such subsequent
Deferral Election shall not be effective unless the Committee
receives the election at least one year and one day (or such
other period as may be specified by the Committee) before the
Distribution Date elected by the Participant at the time of
his most recent Deferral Election.
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<PAGE>
(g) At the time of the Participant's initial Deferral Election,
the Participant shall elect, in writing on such form as the
Committee may prescribe, the form of payment of the
Participant's Deferral Account.
(h) If the Committee determines that a Participant has an
Unforeseeable Financial Emergency (as defined in Section 4.6
below), then the Participant's Deferral Election in effect at
the time of the Unforeseeable Financial Emergency shall be
revoked with respect to all amounts not previously deferred;
and if a Participant receives a distribution on account of
hardship under any qualified plan that is described in Section
401(k) of the Internal Revenue Code of 1986, as amended (the
"Code") and which is maintained by the Company, other Employer
or a commonly controlled entity (as defined in Code Sections
414(b) and (c)) of the Company or other Employer (a "401(k)
Plan"), then no amounts may be deferred under the Plan for a
period of 12 months following the date the Participant
receives the distribution on account of hardship from the
401(k) Plan.
2.3 DEFERRAL AWARDS. Subject to the terms and provisions of the Plan,
the Committee may in its discretion make an award of deferred compensation
("Deferral Award") to any Eligible Employee at any time and from time to time,
subject to any terms, conditions or limitations (including, without limitation,
vesting requirements) as the Committee may determine.
SECTION 3
DEFERRAL ACCOUNTS
3.1 DEFERRAL ACCOUNTS. All amounts deferred pursuant to one or more
Deferral Elections or Deferral Awards under this Plan, together with any
adjustments for income, gains, losses, expenses or distributions, shall be
allocated to a bookkeeping account in the name of the Participant (the "Deferral
Account").
3.2 INVESTMENT CREDITS. All amounts deferred pursuant to the Plan shall
be credited with interest during the deferral period at such rates of interest
as may be determined from time to time by the Committee in its sole discretion.
If the Committee, in its sole discretion, shall so determine, such rates of
interest shall be equal to the rates of return (gain or loss) that would have
been credited or charged had the Participant's Deferral Account been invested in
one or more Investment Funds (as defined below) selected by the Participant in
accordance with such procedures as may be prescribed by the Committee. The
"Investment Funds" may consist of such investment media, including indexed or
other mutual funds, as are designated from time to time by the Committee, in its
sole discretion, for Participants' investment elections. The Committee may, in
its sole discretion, designate additional Investment Funds or terminate existing
Investment Funds.
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3.3 VESTING. A Participant shall be fully vested at all times in that
portion of the balance of his Deferral Account that is attributable to such
Participant's Deferral Elections. A Participant shall vest in that portion of
the balance of his Deferral Account that is attributable to Deferral Awards in
accordance with such vesting schedule, and subject to such terms and conditions,
as shall be determined by the Committee. The Committee may, in its sole
discretion, accelerate or waive any term or condition with respect to a
Participant's right to the balance of his Deferral Account.
SECTION 4
PAYMENT OF BENEFITS
4.1 TIME AND METHOD OF PAYMENT. Unless otherwise determined by the
Committee, payment of a Participant's Deferral Account shall be made in the form
of a single lump sum or shall commence in the form of installments as elected by
the Participant in accordance with procedures prescribed by the Committee.
If a Participant's Deferral Account is payable in a single lump sum,
the payment shall be made as soon as is administratively feasible after the
Participant's Distribution Date. If a Participant's Deferral Account is payable
in the form of installment payments, then, unless the Committee determines
otherwise, the Participant's Deferral Account shall be paid in substantially
equal annual installments commencing as soon as is administratively feasible
after the Participant's Distribution Date.
4.2 PAYMENT UPON DISABILITY. Unless otherwise determined by the
Committee, if a Participant becomes Disabled (as defined below) before his
Distribution Date, the Participant's balance in his Deferral Account shall
become fully vested and payment of the Participant's Deferral Account shall be
made or shall commence (in the manner of payment determined in accordance with
Section 4.1) as soon as is administratively feasible after the date the
Committee determines that the Participant is Disabled.
For purposes of this Section 4.2, a Participant shall be "Disabled" if
he has a physical or mental condition resulting from a bodily injury, disease,
or mental disorder, which is expected to be permanent and which renders the
Participant incapable of performing his normal employment duties. Such
determination shall be made by the Committee on the basis of such medical and
other competent evidence as the Committee shall deem relevant.
4.3 PAYMENT UPON DEATH OF A PARTICIPANT. Unless otherwise determined by
the Committee, a Participant's Deferral Account shall become fully vested and
shall be paid to the Participant's Beneficiary (designated in accordance with
Section 4.4) in a single lump sum as soon as is administratively feasible
following the Participant's death.
4.4 BENEFICIARY. If a Participant is married on the date of his death,
then his
4
<PAGE>
Beneficiary shall be the Participant's spouse, unless the Participant names a
Beneficiary or Beneficiaries (other than the Participant's spouse) to receive
the balance of the Participant's Deferral Account in the event of the
Participant's death prior to the payment of his entire Deferral Account. To be
effective, any Beneficiary designation shall be in writing and must be filed
with the Committee. A Participant may revoke an existing Beneficiary designation
by filing another written Beneficiary designation with the Committee. The latest
written Beneficiary designation received by the Committee shall be controlling.
If no Beneficiary is named by a Participant or if he survives all of
his named Beneficiaries, the Deferral Account shall be paid in the following
order of precedence:
(1) the Participant's spouse;
(2) the Participant's children (including adopted
children), per stirpes; or
(3) the Participant's estate.
4.5 FORM OF PAYMENT. Except as otherwise provided by the Committee, all
payments shall be made in cash.
4.6 UNFORESEEABLE FINANCIAL EMERGENCY. If the Committee determines that
a Participant has incurred an Unforeseeable Financial Emergency (as defined
below), the Participant may withdraw in cash the portion of the balance of his
Deferral Account needed to satisfy the Unforeseeable Financial Emergency, to the
extent that the Unforeseeable Financial Emergency may not be relieved:
(1) Through reimbursement or compensation by insurance
or otherwise; or
(2) By liquidation of the Participant's assets, to the
extent the liquidation of such assets would not
itself cause severe financial hardship.
An "Unforeseeable Financial Emergency" is a severe financial hardship
to the Participant resulting from:
(1) A sudden and unexpected illness or accident of the
Participant or of a dependent of the Participant;
(2) Loss of the Participant's property due to casualty;
or
(3) Such other similar extraordinary and unforeseeable
circumstances arising as a result of events beyond
the control of the participant as determined by the
Committee.
A withdrawal on account of an Unforeseeable Financial Emergency shall
be paid
5
<PAGE>
as soon as possible after the date on which the Committee approves the
withdrawal.
In the event a Participant is entitled to a withdrawal from the Plan on
account of an Unforeseeable Financial Emergency and at the same time is entitled
to a distribution on account of hardship from a 401(k) Plan (as defined in
Section 2.2(h)), the Participant must withdraw his entire Deferral Account under
the Plan on account of the Unforeseeable Financial Emergency before he may
receive any distribution on account of hardship under the 401(k) Plan.
4.7 CHANGE IN CONTROL. Unless otherwise determined by the Committee,
immediately upon the consummation of a transaction resulting in a Change in
Control (as defined below) the entire balance of a Participant's Deferral
Account shall become fully vested and each Participant shall be paid the entire
balance of his Deferral Account in a single lump sum as soon as is
administratively feasible.
For purposes of this Section 4.7, a "Change in Control" shall be deemed
to have occurred if (i) for any reason at any time less than seventy-five
percent (75%) of the members of the Board shall be individuals who fall into any
of the following categories: (A) individuals who were members of the Board on
September 1, 1995; or (B) individuals whose election or nomination for election
by the Company's stockholders, was approved by a vote of at least seventy-five
percent (75%) of the members of the Board then still in office who were members
of the Board on September 1, 1995; or (C) individuals whose election or
nomination for election by the Company's stockholders, was approved by a vote of
at least seventy-five percent (75%) of the members of the Board then still in
office who were elected in the manner described in (A) or (B) above, or (ii) any
"person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) shall have become
according to a public announcement or filing, without the prior approval of the
Board, the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange
Act) directly or indirectly, of securities of the Company representing forty
percent (40%) or more (calculated in accordance with Rule 13(d)-3) of the
combined voting power of the Company's then outstanding voting securities (such
"person" hereafter referred to as a "Major Stockholder"); or (iii) the
stockholders of the Company shall have approved a merger, consolidation or
dissolution of the Company or a sale, lease, exchange or disposition of all or
substantially all of the Company's assets, or a Major Stockholder shall have
proposed any such transaction, unless such merger, consolidation, dissolution,
sale, lease, exchange or disposition shall have been approved by at least
seventy-five percent (75%) of the members of the Board who are individuals
falling into any combination of the following categories: (A) individuals who
were members of the Board on September 1, 1995, or (B) individuals whose
election or nomination for election by the Company's stockholders was approved
by at least seventy-five percent (75%) of the members of the Board then still in
office who are members of the Board on September 1, 1995, or (C) individuals
whose election, or nomination for election by the Company's stockholders was
approved by a vote of a least seventy-five percent (75%) of the members of the
Board then still in office who were elected in the manner described in (A) or
(B) above.
6
<PAGE>
4.8 WITHHOLDING OF TAXES. The Company or the Participant's Employer
shall withhold any applicable Federal, state or local income tax from payments
due under the Plan. The Company or the Participant's Employer shall also
withhold Social Security taxes, including the Medicare portion of such taxes,
and any other employment taxes as necessary to comply with applicable laws.
4.9. SECTION 162(m) LIMITATIONS. Unless otherwise determined by the
Committee, in the event that any amount to be paid pursuant to Section 4.1, 4.2,
4.3 or 4.6 would, in the Committee's judgment, result in non-deductibility,
under Section 162(m) of the Code, of any portion of such Participant's income
payable by or attributable to the Company or the Participant's Employer for the
year in which such amount is to be paid, such amount shall be payable in the
following calendar year, if applicable, subject to the provisions of this
Section 4.9.
SECTION 5
MISCELLANEOUS
5.1 FUNDING. Benefits payable under the Plan to any Participant shall
be paid directly by the Participant's Employer (including the Company if the
Participant is employed by the Company). The Company and other Employers shall
not be required to fund, or otherwise segregate assets to be used for payment of
benefits under the Plan. While the Company and other Employers may, in the
discretion of the Committee, make investments in the investment media designated
by the Committee as Investment Funds in amounts equal or unequal to
Participants' investment elections hereunder, the Company and other Employers
shall not be under any obligation to make such investments and any such
investment shall remain an asset of the Company or other Employer subject to the
claims of its general creditors. Notwithstanding the foregoing, the Company and
other Employers, in the discretion of the Committee, may maintain one or more
grantor trusts ("Trust") to hold assets to be used for payment of benefits under
the Plan. The assets of the Trust with respect to benefits payable to the
employees of each Employer shall remain the assets of such Employer subject to
the claims of its general creditors. Any payments by a Trust of benefits
provided to a Participant under the Plan shall be considered payment by the
Company or other Employer and shall discharge the Company or other Employer of
any further liability under the Plan for such payments.
5.2 BENEFIT STATEMENTS. As soon as practical after the end of each
calendar year (or after such additional date or dates as the Committee, in its
sole discretion, may designate), the Committee shall provide each Participant
with a statement of the balance of his Deferral Account hereunder as of the last
day of such calendar year (or as of such other dates as the Committee, in its
discretion, may designate).
5.3 EMPLOYMENT RIGHTS. Establishment of the Plan shall not be construed
to give
7
<PAGE>
any Eligible Employee the right to be retained in the Company's or other
Employer's service or to any benefits not specifically provided by the Plan.
5.4 INTERESTS NOT TRANSFERABLE. Except as to withholding of any tax
under the laws of the United States or any state or locality and the provisions
of Section 4.4, no benefit payable at any time under the Plan shall be subject
in any manner to alienation, sale, transfer, assignment, pledge, attachment, or
other legal process, or encumbrance of any kind. Any attempt to alienate, sell,
transfer, assign, pledge or otherwise encumber any such benefits, whether
currently or thereafter payable, shall be void. No person shall, in any manner,
be liable for or subject to the debts or liabilities of any person entitled to
such benefits. If any person shall attempt to, or shall alienate, sell,
transfer, assign, pledge or otherwise encumber his benefits under the Plan, or
if by any reason of his bankruptcy or other event happening at any time, such
benefits would devolve upon any other person or would not be enjoyed by the
person entitled thereto under the Plan, then the Committee, in its discretion,
may terminate the interest in any such benefits of the person entitled thereto
under the Plan and hold or apply them for or to the benefit of such person
entitled thereto under the Plan or his spouse, children or other dependents, or
any of them, in such manner as the Committee may deem proper.
5.5 FORFEITURE OF UNCLAIMED AMOUNTS. Unclaimed amounts shall consist of
the amounts of the Deferral Account of a Participant that cannot be distributed
because of the Committee's inability, after a reasonable search, to locate a
Participant or his Beneficiary, as applicable, within a period of two (2) years
after the Distribution Date upon which the payment of benefits become due.
Unclaimed amounts shall be forfeited at the end of such two-year period. These
forfeitures will reduce the obligations of the Company or other Employer under
the Plan. After an unclaimed amount has been forfeited, the Participant or
Beneficiary, as applicable, shall have no further right to his Deferral Account.
5.6 CONTROLLING LAW. The law of Missouri, except its law with respect
to choice of law, shall be controlling in all matters relating to the Plan to
the extent not preempted by ERISA.
5.7 GENDER AND NUMBER. Words in the masculine gender shall include the
feminine, and the plural shall include the singular and the singular shall
include the plural.
5.8 ACTION BY THE COMPANY. Except as otherwise specifically provided
herein, any action required of or permitted by the Company under the Plan shall
be by resolution of the Board of Directors of the Company or by action of the
Committee or by any person(s) authorized by resolution of the Board of Directors
of the Company or by the Committee.
5.9 PARTICIPANTS BOUND. Any action with respect to the Plan taken by
the Board or the Committee or any action authorized by or taken at the direction
of the Board or the Committee shall be conclusive upon all Participants and
Beneficiaries entitled to benefits under this Plan.
8
<PAGE>
5.10 RECEIPT AND RELEASE. Any payment to any Participant or Beneficiary
in accordance with the provisions of this Plan shall, to the extent thereof, be
in satisfaction of claims against the Company or other Employer under the Plan,
and the Committee may require such Participant or Beneficiary, as a condition
precedent to such payment, to execute a receipt and release to such effect. If
any Participant or Beneficiary is determined by the Committee to be incompetent
by reason of physical or mental disability, including minority, to give a valid
receipt and release, the Committee may cause the payment or payments becoming
due to such person to be made to another person for his or her benefit without
responsibility on the part of the Company or other Employer or the Committee to
follow the application of such funds.
SECTION 6
EMPLOYER PARTICIPATION
6.1 ADOPTION OF PLAN. Any subsidiary or affiliate of the Company
(together with the Company, an "Employer") may, with the approval of the
Committee and under such terms and conditions as the Committee may prescribe,
adopt the Plan by resolution of its board of directors. The Committee may amend
the Plan as necessary or desirable to reflect the adoption of the Plan by an
Employer, provided however, that an adopting Employer (other than the Company)
shall not have the authority to amend or terminate the Plan under Section 7.
6.2 WITHDRAWAL FROM THE PLAN BY EMPLOYER. Any Employer other than the
Company shall have the right, at any time, upon the approval of and under such
conditions as may be provided by the Committee, to withdraw from the Plan by
delivering to the Committee written notice of its election so to withdraw.
SECTION 7
AMENDMENT AND TERMINATION
The Company reserves the right at any time by action of the Board to
modify, amend or terminate the Plan, provided, however, that any amendment or
termination of the Plan shall not reduce or eliminate any Deferral Account
accrued through the date of such amendment or termination, increased by any
income and gain credited to the Participant's Deferral Account and reduced by
any losses, expenses and distributions charged to the Participant's Deferral
Account.
Executed as of the 12th day of May, 1998.
9
<PAGE>
DST SYSTEMS, INC.
By: /s/ M. Jeannine Strandjord
10
<PAGE>
Exhibit 10.13
1999 USCS EXECUTIVE BONUS PLAN
[THE PORTIONS OF THIS EXHIBIT MARKED BY AN ASTERISK ARE SUBJECT TO A REQUEST FOR
CONFIDENTIAL TREATMENT.]
Under the 1999 Bonus Plan, eligible executives can earn a bonus of up to 60%,
and eligible directors can earn a bonus of up to 20%. The matrix, as illustrated
below, is comprised of four tiers.
<TABLE>
<CAPTION>
Position Salary Bonus
Level Grade Target
- ------------------- --------- -------------
<S> <C> <C>
CEO 99 60%
</TABLE>
The pool will be funded as follows:
USCS Plan
<TABLE>
<CAPTION>
Consolidated Pretax Profit VPs & Directors Mgmt Bonus Pool *
- -------------------------- ----------------------------------
<S> <C>
less than [*] 0%
[*] (budget) 100%
[*] 150%
</TABLE>
* The pool, at 100%, is calculated as follows:
The sum of (eligible salary x target bonus %). Eligible salary is defined as the
actual base salary earned during the plan year.
The final pool size may be scaled or allocated by action of the Board of
Directors based exclusively on its judgment of management's performance. In the
event the pretax profit exceeds 120 percent of the budget, the Board of
Directors will, in its sole discretion, determine any additions to the bonus
pool based on the source and the nature of the additional profit.
a. The Bonus Pool may be increased for such things as exceeding target gross
margins, underspending the overhead budget, or exceeding budgeted revenues.
b. The Bonus Pool may be decreased for cuts below budget that unfavorably
impact the programs of Marketing, Sales and Product Development programs.
c. Performance against operational objectives will also be considered.
CORPORATE - OPERATIONAL OBJECTIVES
USCS CONSOLIDATED (INCLUDING CABLEDATA, IBS AND CORPORATE)
FINANCIAL GOALS
<TABLE>
<CAPTION>
Consolidated
(millions)
----------------------------------------------------------------------
<S> <C>
Revenues [*]
Profit before taxes [*]
Capital Expenditures [*]
</TABLE>
1
<PAGE>
PLAN ADMINISTRATION
Pool determination
Upon completion of the annual audit in March 2000, the Board of Directors will
establish the size of the pool based upon the audited financial results.
Bonus eligibility
To be eligible to receive a bonus, a person must be employed by USCS
International or an affiliate in an executive capacity at the time the bonus is
paid. Any executive who leaves the Company prior to actual award, or is demoted
to a non-executive position (and therefore removed from eligibility) prior to
year end is not eligible for a bonus. The foregoing notwithstanding, if an
executive dies prior to the actual award, any award to which the executive
otherwise would have been entitled shall be made to his or her estate. An
employee who is promoted to an executive during the plan year, or a new employee
who is hired into an executive position during the plan year, will be eligible
for a prorated bonus as determined by the Board of Directors. In any event,
executives must be employed in a bonus eligible position with USCS or an
affiliate for a minimum of 60 days prior to fiscal year end in order to be
eligible to participate in the management bonus plan. Eligibility is effective
the first day of the month following their date of hire.
Determination of individual awards
Individual bonuses to be awarded from the bonus pool shall be approved by the
Board of Directors based upon corporate, company, department and individual
performance in attaining financial goal and non-financial objectives. The Board
of Directors shall approve, disapprove or modify the recommended individual
bonus awards.
Bonus payment
Individual bonus awards will be paid prior to March 15, 2000.
2
<PAGE>
Exhibit 10.16.1
EIGHTH AMENDMENT OF TRUST AGREEMENT
THIS EIGHTH AMENDMENT executed this 31st of December, 1998, by DST
Systems, Inc., as Settlor.
WITNESSETH:
WHEREAS, DST Systems, Inc., as Settlor, and United Missouri Bank of
Kansas City, N.A., as Trustee, executed a Trust Agreement, TUA DST - Incentive
Compensation, #25-368-03, on December 31, 1987, which has been amended from time
to time, the most recent amendment being the Seventh Amendment of Trust
Amendment dated October 20, 1995 (the Trust Agreement, as amended by such
amendments, is herein referred to as the "Amended Trust Agreement");
WHEREAS, under Section 12(a) of said Amended Trust Agreement, Settlor
reserved the right as any time prior to a Control Change Date, as defined in
Section 1(f) of said Amended Trust Agreement, to amend or revoke the same, in
whole or in part, which right Settlor now desires to exercise;
WHEREAS, as of this date, no Control Change Date has occurred;
NOW, THEREFORE, pursuant to the right reserved to Settlor under Section
12(a) thereof, Settlor does hereby further amend said Amended Trust Agreement as
follows, such amendment to be effective on the date hereof:
1. Section 1(e) shall be deleted in its entirety and a new Section
1(e) added to read as follows:
(e) [RESERVED]
2. Section 1(f) shall be deleted in its entirety and a new Section
1(f) added to read as follows:
<PAGE>
(f) "Control Change Date" shall be the date on which a Change in
Control of Company occurs;
3. Section 1(i) shall be deleted in its entirety and a new Section 1(i)
added to read as follows:
(i) [RESERVED]
4. Section 1(l) shall be deleted in its entirety and a new Section 1(l)
added to read as follows:
(l) "Solicitation Date" shall mean the date on which a
Solicitation of a Change in Control of Company occurs.
5. The first sentence of Section 7 shall be deleted and a new first
sentence added to Section 7 to read as follows:
Prior to a Control Change Date, Trustee shall invest the trust
estate as Company prescribes, other than in securities or
obligations of Company.
6. Section 12(b)(2) shall be deleted in its entirety and a new Section
12(b)(2) added to read as follows:
(2) If there has been a Change in Control of Company, the date
on which no Beneficiary is entitled to any Benefits pursuant to the
Incentive Compensation Determination;
7. Section 12(b)(4) shall be deleted in its entirety and a new Section
12(b)(4) added to read as follows:
(4) December 31, 2001, if there has been neither a Control
Change Date nor a Solicitation Date;
IN WITNESS WHEREOF, the Settlor, DST Systems, Inc., has hereunto caused
this Eighth Amendment of Trust Agreement to be executed the day and year first
above written.
DST SYSTEMS, INC.
By: /s/ Thomas A. McDonnell
-----------------------------
2
<PAGE>
ACKNOWLEDGMENT OF AMENDMENT
UMB Bank, N.A., does hereby acknowledge that it is the duly qualified
and acting Trustee under the aforesaid Amended Trust Agreement, that it has
received the foregoing executed by DST Systems, Inc., as Settlor, and that it
does hereby acknowledge amendment of said Amended Trust Agreement.
IN WITNESS WHEREOF, the Trustee, UMB Bank, N.A., has caused these
presents to be executed as of the day and year first above written.
UMB BANK N.A.
By: /s/Mark P. Herman
---------------------
3
<PAGE>
Exhibit 10.17.1
FIRST AMENDMENT OF TRUST AGREEMENT
THIS FIRST AMENDMENT executed this 31st of December, 1998, by DST
Systems, Inc. as Settlor.
WITNESSETH:
WHEREAS, DST Systems, Inc. as Settlor, and United Missouri Bank of
Kansas City, N.A., as Trustee, executed a Trust Agreement, TUA DST--Horan
Agreement, on June 30, 1989;
WHEREAS, United Missouri Bank of Kansas City, N. A. has changed its
name to UMB Bank, N.A.;
WHEREAS, under Section 12(a) of said Trust Agreement, Settlor and James
P. Horan ("Employee"), acting together, reserved the right at any time to amend
or revoke the same, in whole or in part, which right Settlor and Employee now
desires to exercise;
NOW, THEREFORE, pursuant to the right reserved to Settlor and Employee
under Section 12(a), Settlor and Employee hereby amend said Trust Agreement as
follows, such amendment to be effective on the date hereof:
1. Section 1(e) shall be deleted in its entirety and a new Section 1(e)
added to read as follows:
(e) "Change in Control" shall be deemed to have occurred if (i) for
any reason at any time less than seventy-five percent (75%) of
the members of the Board of Directors of the Company shall be
individuals who fall into any of the following categories: (A)
individuals who were members of such Board on September 1, 1995;
(B) individuals whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least
seventy-five percent (75%) of the members of the Board then still
in office who were members of the Board on September 1, 1995; or
(C) individuals whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least
seventy-five percent (75%) of the members of the Board then still
in office who were elected in the manner described in (A) or (B)
above, or (ii) any "person" (as
<PAGE>
such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934 (the "Exchange Act")) shall have
become, according to a public announcement or filing without the
prior approval of the Board, the "beneficial owner" (as defined
in Rule 13d-3) under the Exchange Act), directly or indirectly,
of securities of the Company representing thirty percent (30%) or
more (calculated in accordance with Rule 13d-3) of the combined
voting power of the Company's then outstanding voting securities
(such "person" hereinafter referred to as a "major Stockholder");
or (iii) the stockholders of the Company shall have approved a
merger, consolidation or dissolution of the Company or a sale,
lease, exchange or disposition of all or substantially all of the
Company's assets, or a Major Stockholder shall have proposed any
such transaction, unless any such merger, consolidation,
dissolution, sale, lease, exchange or disposition shall have been
approved by at least seventy-five percent (75%) of the members of
the Board of Directors of the Company who are individuals falling
into any combination of the following categories: (A) individuals
who were members of such Board of Directors on September 1, 1995;
(B) individuals whose election or nomination for election by the
Company's stockholders was approved by at least seventy-five
percent (75%) of the members of the Board of Directors of the
Company then still in office who were members of the Board on
September 1, 1995, or (C) individuals whose election, or
nomination for election by the Company's stockholders was
approved by a vote of at least seventy-five percent (75%) of the
members of the Board then still in office who were elected in the
manner described in (A) or (B) above. Company shall promptly
inform Trustee of a Change in Control;
2. Section 1(f) shall be deleted in its entirety and a new Section 1(f)
added to read as follows:
(f) "Control Change Date" shall be the date on which a Change
in Control occurs;
3. The first sentence of Section 7 shall be deleted in its entirety and
a new first sentence added to Section 7 to read as follows:
Prior to a Control Change Date, Trustee shall invest the trust
estate as Company prescribes, other than in securities or
obligations issued by Company.
IN WITNESS WHEREOF, the Settlor, DST Systems, Inc. and the Employee,
James P. Horan, have hereunto caused this First Amendment of Trust Agreement to
be executed the day and year first above written.
<PAGE>
DST SYSTEMS, INC.
By: /s/Thomas A. McDonnell
------------------------------
EMPLOYEE
/s/ James P. Horan
-----------------------------
James P. Horan
ACKNOWLEDGEMENT OF AMENDMENT
UMB Bank, N.A., does hereby acknowledge that it is the duly qualified
and acting Trustee under the aforesaid Trust Agreement, that it has received the
foregoing executed by DST Systems, Inc. and James P. Horan, and that it does
hereby acknowledge amendment of said Trust Agreement.
IN WITNESS WHEREOF, the Trustee, UMB Bank, N. A., has caused these
presents to be executed as of the day and year first above written.
UMB BANK, N.A.
By: /s/ Mark P. Herman
-----------------------------
3
<PAGE>
Exhibit 10.18
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of January
1999, by and between DST Systems, Inc., a Delaware corporation ("DST") and
Thomas A. McDonnell, an individual ("Executive").
WHEREAS, Executive is now employed by DST, and DST and Executive desire
for DST to continue to employ Executive on the terms and conditions set forth in
this Agreement and to provide an incentive to Executive to remain in the employ
of DST hereafter, particularly in the event of any Change in Control of DST (as
herein defined), thereby establishing and preserving continuity of management of
DST;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between DST and Executive as follows:
1. EMPLOYMENT. DST hereby continues the employment of Executive as its
President and Chief Executive Officer to serve at the pleasure of the Board of
Directors of DST (the "DST Board") and to have such duties, powers and
responsibilities as may be prescribed by the Certificate of Incorporation and
By-Laws of DST, subject to the powers vested in the DST Board and in the
stockholders of DST. Executive shall faithfully perform his duties under this
Agreement to the best of his ability and shall devote substantially all of his
working time and efforts to the business and affairs of DST and its affiliates.
2. COMPENSATION.
(a) BASE COMPENSATION. DST shall pay Executive as compensation
for his services hereunder an annual base salary at the rate in effect at the
time of execution of this Agreement, subject to adjustment from time to time as
agreed by the parties.
1
<PAGE>
(b) INCENTIVE COMPENSATION. DST shall include Executive as a
participant in the DST Incentive Compensation Plan under such terms as are
determined from time to time by the DST Board or the Compensation Committee or
other appropriate committee of the DST Board (the "Compensation Committee") and
for such time as such plan shall continue in existence. DST reserves the right
to change, revoke or terminate such plan at any time.
3. BENEFITS. During the period of his employment hereunder, DST shall
provide Executive with coverage under such benefit plans and programs as are
made generally available to executive officers, provided (A) DST shall have no
obligation with respect to any plan or program if Executive is not eligible for
coverage thereunder, and (B) Executive acknowledges that stock options and other
stock and equity participation awards are granted in the discretion of the DST
Board or Compensation Committee and that Executive has no right to receive stock
options or other equity participation awards or any particular number or level
of stock options or other awards. Executive acknowledges that all rights and
benefits under benefit plans and programs shall be governed by the official text
of each such plan or program and not by any summary or description thereof or
any provision of this Agreement and that DST is under no obligation to continue
in effect or to fund any such plan or program, except as provided in paragraph 7
hereof. DST also shall continue to reimburse Executive for ordinary and
necessary travel and other business expenses in accordance with policies and
procedures established by DST.
4. TERMINATION.
(a) TERMINATION BY EXECUTIVE. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to DST, except that in the event of any material breach of this
Agreement by DST, Executive may terminate this Agreement and his employment
hereunder immediately upon notice to DST.
2
<PAGE>
(b) DEATH OR DISABILITY. This Agreement and Executive's
employment hereunder shall terminate automatically on the death or disability of
Executive. For purposes of this Agreement, Executive shall be deemed to be
disabled if he is unable to engage in a significant portion of his normal duties
for DST by reason of any physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a continuous
period of not less than six (6) months.
(c) TERMINATION BY DST FOR CAUSE. DST may terminate this
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement, termination "for cause" shall mean
termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving DST or any subsidiary
of DST;
(iii) Gross negligence or willful misconduct in the
performance of Executive's duties as determined in good
faith by the DST Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom
Executive reports concerning the operations or business
of DST or any subsidiary of DST;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
3
<PAGE>
(d) TERMINATION BY DST OTHER THAN FOR CAUSE.
(i) DST may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive,
and in such event, DST shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) In the event of termination of Executive's
employment under Paragraph 4(d)(i), DST shall continue, for a period of
twenty-four (24) months following such termination, (A) to pay to
Executive as severance pay a monthly amount equal to one-twenty-fourth
(1/24th) of the annual base salary referenced in Paragraph 2(a) above
at the rate in effect immediately prior to termination, and, (B) to
reimburse Executive for the cost (including state and federal income
taxes payable with respect to this reimbursement) of obtaining coverage
comparable to the health and life insurance provided pursuant to this
Agreement, unless Executive is provided comparable coverage in
connection with other employment. The foregoing obligations of DST
shall continue until the end of the said twenty-four (24) month period
notwithstanding the death or disability of Executive during said period
(except, in the event of death, the obligation to reimburse Executive
for the cost of life insurance shall not continue). After termination
of employment, Executive shall not be entitled to accrue or receive
benefits under the DST Officers Incentive Plan or similar plan with
respect to the severance pay provided herein, notwithstanding that
benefits under such plans then are still generally available to
executive employees of DST; contributions and benefits under such plans
with respect to the year of termination shall be based solely upon
compensation paid to Executive for periods prior to termination. In the
year of termination, Executive shall be entitled to
4
<PAGE>
participate in the DST Profit Sharing Plan and the DST Employee Stock
Ownership Plan only if the Executive meets all requirements of such
plans for participation in such year.
5. NON-DISCLOSURE. During the term of this Agreement and at all times
after any termination of this Agreement, Executive shall not, either directly or
indirectly, use or disclose any DST trade secret, except to the extent necessary
for Executive to perform his duties for DST while an employee. For purposes of
this Agreement, the term "DST trade secret" shall mean any information regarding
the business or activities of DST or any subsidiary or affiliate, including any
formula, pattern, compilation, program, device, method, technique, process,
customer list, technical information or other confidential or proprietary
information, that (a) derives independent economic value, actual or potential,
from not being generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its disclosure or
use, and (b) is the subject of efforts of DST or its subsidiary or affiliate
that are reasonable under the circumstance to maintain its secrecy. In the event
of any breach of this Paragraph 5 by Executive, DST shall be entitled to
terminate any and all remaining severance benefits under Paragraph 4(d)(ii)
above and shall be entitled to pursue such other legal and equitable remedies as
may be available.
6. DUTIES UPON TERMINATION; SURVIVAL.
(a) DUTIES. Upon termination of this Agreement by DST or
Executive for any reason, Executive shall immediately return to DST all DST
trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of DST and all direct and indirect subsidiaries and
affiliates of DST as may be requested by DST and shall sign such other documents
and papers relating to Executive's employment, benefits and benefit plans as DST
may reasonably request.
5
<PAGE>
(b) SURVIVAL. The provisions of Paragraphs 5 and 6(a) of this
Agreement shall survive any termination of this Agreement by DST or Executive,
and the provisions of Paragraph 4(d)(ii) shall survive any termination of this
Agreement by DST under Paragraph 4(d)(i).
7. CONTINUATION OF EMPLOYMENT UPON CHANGE IN CONTROL.
(a) CONTINUATION OF EMPLOYMENT. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control of DST (as
defined in Paragraph 7(d)) at any time during the term of this Agreement,
Executive will remain in the employ of DST for a period of an additional three
years from the date of such Change in Control of DST (the "Control Change
Date"). In the event of a Change in Control of DST, subject to the terms and
conditions of this Paragraph 7, DST shall, for the three year period (the
"Three-Year Period") immediately following the Control Change Date, continue to
employ Executive at not less than the executive capacity Executive held
immediately prior to the Change in Control of DST. During the Three-Year Period,
DST shall continue to pay Executive salary on the same basis, at the same
intervals, and at a rate not less than that, paid to Executive at the Control
Change Date.
(b) BENEFITS. During the Three-year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of the
following plans (together, the "Specified Benefits") in existence, and in
accordance with the terms thereof, at the Control Change Date:
(i) any incentive compensation plan;
(ii) any benefit plan, and trust fund associated
therewith, related to (A) life, health, dental, disability, or
accidental death and dismemberment insurance, (B) profit sharing,
thrift or deferred savings (including deferred compensation, such as
6
<PAGE>
under Sec. 401(k) plans), (C) retirement or pension benefits, (D) ERISA
excess benefits, and (E) tax favored employee stock ownership (such as
under ESOP, TRASOP, TCESO or PAYSOP programs); and
(iii) any other benefit plans hereafter made
generally available to executives of Executive's level or to the
employees of DST generally.
In addition, all outstanding options held by Executive under any stock option
plan of DST or its affiliates shall become immediately exercisable (except that
no stock option under any stock option plan of DST shall become exercisable
before the first anniversary date of the granting of the option) on the Control
Change Date.
(c) PAYMENT. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits as a general obligation of DST which has not been separately funded
(including specifically, but not limited to, those referred to under Paragraphs
7(b)(i) and 7(b)(ii)(D) above), Executive shall receive within five (5) days
after such date full payment in cash (discounted to then present value on the
basis of a rate of 7.5 percent per annum) of all amounts to which he is then
entitled thereunder.
(d) CHANGE IN CONTROL OF DST. For purposes of this Agreement,
a "Change in Control of DST" shall be deemed to have occurred if (a) for any
reason at any time less than seventh-five percent (75%) of the members of the
DST Board shall be individuals who were members of the DST Board on the date of
this Agreement or individuals whose election, or nomination for election by
DST's stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the DST Board then still in office who were members of
the DST Board on the date of this Agreement, or (b) any "person" (as such term
is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934
(the "Exchange Act")) shall have
7
<PAGE>
become, according to a public announcement or filing, without the prior approval
of the DST Board, the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act), directly or indirectly, of securities of DST representing thirty
percent (30%) (forty percent (40%) with respect to Paragraph 7(c) hereof) or
more (calculated in accordance with Rule 13d-3) of the combined voting power of
DST's then outstanding voting securities (such "person" hereafter referred to as
a "Major Stockholder"); or (c) the stockholders of DST shall have approved a
merger, consolidation or dissolution of DST or a sale, lease, exchange or
disposition of all or substantially all of DST's assets, or a Major Stockholder
shall have proposed any such transaction, unless any such merger, consolidation,
dissolution, sale, lease, exchange or disposition shall have been approved by at
least seventy-five percent (75%) of the members of the DST Board who were either
(i) members of the DST Board on the date of this Agreement or (ii) elected or
nominated by at least seventy-five percent (75%) of the members of the DST Board
then still in office who were members of the DST Board on the date of this
Agreement.
(e) TERMINATION AFTER CONTROL CHANGE DATE. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change Date,
DST may, through its Board, terminate the employment of Executive (the
"Termination"), but within five (5) days of the Termination it shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to then present value on the basis of a rate of 7.5%
per annum) of his annual base salary specified in Paragraph 7(a) hereof
multiplied by the number of years and any portion thereof remaining in the
Three-Year Period (or if the balance of the Three-year Period after Termination
is less than one year, for one year, [hereinafter called the "Extended
Period"]). Specified Benefits to which Executive was entitled immediately prior
to Termination shall
8
<PAGE>
continue until the end of the Three-Year Period (or the Extended Period, if
applicable); provided that: (a) if any plan pursuant to which Specified Benefits
are provided immediately prior to Termination would not permit continued
participation by Executive after Termination, then DST shall pay to Executive
within five (5) days after Termination a lump sum payment equal to the amount of
Specified Benefits Executive would have received if Executive had been fully
vested and a continuing participant in such plan to the end of the Three-Year
Period or the Extended Period, if applicable; and (b) if Executive obtains new
employment following Termination, then following any waiting period applicable
to participation in any plan of the new employer, Executive shall continue to be
entitled to receive benefits pursuant to this sentence only to the extent such
benefits would exceed those available to Executive under comparable plans of the
Executive's new employer (but Executive shall not be required to repay any
amounts then already received by him).
(f) RESIGNATION AFTER CONTROL CHANGE DATE. In the event of a
Change in Control of DST, thereafter, upon good reason (as defined below)
Executive may, at any time during the Three-Year Period or the Extended Period,
in his sole discretion, on not less than thirty (30) days' written notice to the
Secretary of DST and effective at the end of such notice period, resign his
employment with DST (the "Resignation"). Within five (5) days of such a
Resignation, DST shall pay to Executive his full base salary through the
effective date of such Resignation, to the extent not theretofore paid, plus a
lump sum amount equal to the Special Severance Payment (computed as provided in
the first sentence of Paragraph 7(e), except that for purposes of such
computation all references to "Termination" shall be deemed to be references to
"Resignation"). Upon Resignation of Executive, Specified Benefits to which
Executive was entitled immediately prior to Resignation shall continue on the
same terms and conditions as
9
<PAGE>
provided in Paragraph 7(e) in the case of Termination (including equivalent
payments provided for therein). For purposes of this Agreement, Executive shall
have "good reason" if there occurs without his consent (a) a reduction in the
character of the duties assigned to Executive or in Executive's level of work
responsibility or conditions; (b) a reduction in Executive's base salary as in
effect immediately prior to the Control Change Date or as the same may have been
increased thereafter; (c) a failure by DST or its successor to (i) continue any
of the plans of the type referred to in Paragraph 7(b) which shall have been in
effect at the Control Change Date (including those providing for Specified
Benefits) or to continue Executive as a participant in any of such plans on at
least the basis in effect immediately prior to the Control Change Date; or (ii)
provide other plans under which at least equivalent compensation and benefits
are available and in which Executive continues to participate on a basis at
least equivalent to his participation in the DST plans in effect immediately
prior to the Control Change Date; or (iii) to make the payment required under
Paragraph 7(c); (d) the relocation of the principal executive offices of DST or
its successor to a location outside the metropolitan area of Kansas City,
Missouri or requiring Executive to be based anywhere other than DST's principal
executive office, except for required travel on DST's business to an extent
substantially consistent with Executive's obligations immediately prior to the
Control Change Date; or (e) any breach by DST of this Agreement to the extent
not previously specified.
(g) TERMINATION FOR CAUSE AFTER CONTROL CHANGE DATE.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by DST "for cause" without
notice and without any payment hereunder only if such termination is for an act
of dishonesty by Executive constituting a felony under the laws of the
10
<PAGE>
State of Missouri which resulted or was intended to result in gain or personal
enrichment of Executive at DST's expense.
(h) GROSS-UP PROVISION. If any portion of any payments
received by Executive from DST on or after the Control Change Date (whether
payable pursuant to the terms of this Agreement or any other plan, agreement or
arrangement with DST, its successors or any person whose actions result in a
Change of Control of DST), shall be subject to the tax imposed by Section 4999
of the Internal Revenue Code of 1986, as amended, or any successor statutory
provision ("Parachute Payments"), DST shall pay to Executive, within five (5)
days of Executive's Termination or Resignation such additional amounts as are
necessary so that, after taking into account any tax imposed by such Section
4999 or any successor statutory provision on any such Parachute Payments (as
well as any income tax or Section 4999 tax on payments made pursuant to this
sentence), Executive is in the same after-tax position that Executive would have
been in if such Section 4999 or any successor statutory provision did not apply
and no payments were made pursuant to this sentence.
(i) MITIGATION AND EXPENSES.
(i) OTHER EMPLOYMENT. After the Control Change Date,
Executive shall not be required to mitigate the amount of any payment
provided for in this Agreement by seeking other employment or otherwise
and except as expressly set forth herein no such other employment, if
obtained, or compensation or benefits payable in connection therewith
shall reduce any amounts or benefits to which Executive is entitled
hereunder.
(ii) EXPENSES. If any dispute should arise under this
Agreement after the Control Change Date involving an effort by
Executive to protect, enforce or secure
11
<PAGE>
rights or benefits claimed by Executive hereunder, DST shall pay
(promptly upon demand by Executive accompanied by reasonable evidence
of incurrence) all reasonable expenses (including attorneys' fees)
incurred by Executive in connection with such dispute, without regard
to whether Executive prevails in such dispute except that Executive
shall repay DST any amounts so received if a court having jurisdiction
shall make a final, nonappealable determination that Executive acted
frivolously or in bad faith by such dispute. To assure Executive that
adequate funds will be make available to discharge DST's obligations
set forth in the preceding sentence, DST has established a trust and
upon the occurrence of a Change in Control of DST shall promptly
deliver to the trustee of such trust to hold in accordance with the
terms and conditions thereof that sum which the Board shall have
determined is reasonably sufficient for such purpose.
(j) SUCCESSORS IN INTEREST. The rights and obligations of
Executive and DST under this Paragraph 7 shall inure to the benefit of and be
binding in each and every respect upon the direct and indirect successors and
assigns of DST and Executive, regardless of the manner in which such successors
or assigns shall succeed to the interest of DST or Executive hereunder, and this
Paragraph 7 shall not be terminated by the voluntary or involuntary dissolution
of DST or any merger or consolidation or acquisition involving DST, or upon any
transfer of all or substantially all of DST's assets, or terminated otherwise
than in accordance with its terms. In the event of any such merger or
consolidation or transfer of assets, the provisions of this Paragraph 7 shall be
binding upon and shall inure to the benefit of the surviving corporation or the
corporation or other person to which such assets shall be transferred.
(k) PREVAILING PROVISIONS. On and after the Control Change
Date, the provisions of this Paragraph 7 shall control and take precedence over
any other provisions of this
12
<PAGE>
Agreement which are in conflict with or address the same or a similar subject
matter as the provisions of this Paragraph 7.
8. NOTICE. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have been
given when personally delivered, delivered by telecopy or deposited in the
United States mail by certified or registered mail, postage prepaid, addressed,
in the case of DST, to DST, 333 West 11th Street, Kansas City, Missouri 64105,
Attention: Secretary, or, in the case of the Executive, to him at 310 West 49th
Street, #1005, Kansas City, Missouri 64112, or to such other address as a party
shall designate by notice to the other party.
9. AMENDMENT. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the Executive Vice President of
DST. No waiver by either party hereto at any time of any breach by the other
party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the time or at any prior or
subsequent time.
10. SUCCESSORS AND ASSIGNS; ASSIGNMENT BY EXECUTIVE PROHIBITED. The
rights and obligations of DST under this Agreement shall inure to the benefit of
and shall be binding upon the successors and assigns of DST. Except as provided
in Paragraph 7(j), neither this Agreement nor any of the payments or benefits
hereunder may be pledged, assigned or transferred by Executive either in whole
or in part in any manner, without the prior written consent of DST.
11. SEVERABILITY. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13
<PAGE>
12. CONTROLLING LAW AND JURISDICTION. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
13. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and supersedes all
other prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter hereof, except this Agreement does
not superseded any Officer Indemnification Agreement between DST and Executive.
IN WITNESS WHEREOF, the parties have executed this Amendment the day
and year first above written. DST SYSTEMS, INC.
By /s/ Thomas A. McCullough
----------------------------------------------
Thomas A. McCullough, Executive Vice President
/s/ Thomas A. McCDonnell
----------------------------------------------
Thomas A. McDonnell
14
<PAGE>
Exhibit 21.1
SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF ENTITY STATE OF INCORPORATION / JURISDICTION & DATE DOING BUSINESS AS
- -------------- -------------------------------------------- -----------------
<S> <C> <C>
DST International Limited United Kingdom- 8/21/92
Output Technologies, Inc. Missouri - 12/28/90
USCS International, Inc. Delaware - 4/10/95
West Side Investments, Inc. Nevada - 2/11/98
</TABLE>
Note: Significant subsidiaries as calculated under Rule 1-02(w) of Regulation
S-X, listed in alphabetical order. Output Technologies, Inc. is not a
significant subsidiary under Rule 1-02(w) of Regulation S-X as of December 31,
1998.
DST International, Limited. represents the consolidation of nine international
subsidiaries, each of which is engaged in the Company's Financial Services
Segment.
Output Technologies, Inc. represents the consolidation of eight U.S. and four
international subsidiaries, each of which is engaged in the Company's Output
Solutions Segment.
USCS International, Inc. represents the consolidation of six U.S. and two
international subsidiaries, primarily engaged in the Company's Output Solutions
and Customer Management Segments.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-04197, 333-69377, 333-69393, 333-69611,
333-73241) of DST Systems, Inc. of our report dated February 25, 1999 appearing
in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Kansas City, Missouri
March 26, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-K, CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND
STATEMENT OF INCOME OF DST SYSTEMS, INC. COMMISSION FILE NO. 1-14036 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000714603
<NAME> DST SYSTEMS, INC.
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 28
<SECURITIES> 0
<RECEIVABLES> 282
<ALLOWANCES> 0
<INVENTORY> 16
<CURRENT-ASSETS> 376
<PP&E> 844
<DEPRECIATION> 516
<TOTAL-ASSETS> 1,897
<CURRENT-LIABILITIES> 269
<BONDS> 50
0
0
<COMMON> 1
<OTHER-SE> 1,165
<TOTAL-LIABILITY-AND-EQUITY> 1,897
<SALES> 0
<TOTAL-REVENUES> 1,096
<CGS> 0
<TOTAL-COSTS> 976
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9
<INCOME-PRETAX> 116
<INCOME-TAX> 44
<INCOME-CONTINUING> 72
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 72
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.11
</TABLE>
