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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 YEAR ENDED DECEMBER 31, 1999
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 no.)
of incorporation or organization)
333 WEST 11TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (816) 435-1000
Securities registered pursuant to Section 12(b) of the Act:
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
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 29, 2000:
Common Stock, $.01 par value--$3,529,205,273
Number of shares outstanding of the Company's common stock as of February 29,
2000:
Common Stock, $.01 par value--62,881,163
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:
PART OF FORM 10-K INTO WHICH
DOCUMENT INCORPORATED
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Company's Definitive Proxy Statement for the 2000 Annual Part III
Meeting of Stockholders, which will be filed no later than
120 days after December 31, 1999
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DST SYSTEMS, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
Cautionary Statement With Respect To Forward-Looking
Comments.................................................... 2
PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 20
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..................................................... 22
PART II
Item 5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 23
Item 6. Selected Consolidated Financial Data........................ 24
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 39
Item 8. Financial Statements and Supplementary Data................. 40
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 70
PART III
Item 10. Directors and Executive Officers of the Company............. 70
Item 11. Executive Compensation...................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 70
Item 13. Certain Relationships and Related Transactions.............. 70
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 71
Signatures.................................................. 78
AUTOMATED WORK DISTRIBUTOR-REGISTERED TRADEMARK-, AWD-REGISTERED TRADEMARK-,
AWD/NETSERVER-TM-, AWD/RIP-REGISTERED TRADEMARK-, AWD/ST-TM-,
AWD/VOICE-REGISTERED TRADEMARK-, CLASSROM-REGISTERED TRADEMARK-, CREATIVE DESIGN
SERVICES-TM-, CUSTIMA-TM-, CYBERCSR-REGISTERED TRADEMARK-, DDP/SQL-TM-, DIRECT
ACCESS-TM-, DST-REGISTERED TRADEMARK-, E.BILL.ANYWHERE-SM-, ELECTRONIC
FULFILLMENT-TM-, ELLITE-TM-, ENCORR-REGISTERED TRADEMARK-, EXACT VIEW-SM-,
FAIRWAY-TM-, FAN-REGISTERED TRADEMARK-, FAN MAIL-REGISTERED TRADEMARK-, FAN
INVESTMENT TRACKING-TM-, FAN WEB-TM-, FAN WEB DIRECT-TM-, FAST-TM-, FINANCIAL
ACCESS NETWORK-REGISTERED TRADEMARK-, GLOBAL PORTFOLIO SYSTEM-REGISTERED
TRADEMARK-, GPS-REGISTERED TRADEMARK-, HIPORTFOLIO/2-TM-, IMPART/UPTIX-TM-,
INFO(.)DISC-TM-, INFORMA-TM-, INTEGRATED PHARMACY NETWORK SYSTEM-TM-,
INTELECABLE-REGISTERED TRADEMARK-, IPNS-REGISTERED TRADEMARK-, MARKET
ADVISOR-TM-, MAILNET-TM-, OPENDATAWAREHOUSE-TM-, OPENFRONTOFFICE-TM-,
OPENMARKETDATAFEEDS-TM-, OPENMESSENGER-TM-, OPENORDERS-TM-,
OPENPERFORMANCE-REGISTERED TRADEMARK-, OPENPRODUCTS-TM-, OPENREPORTING-TM-,
PALADIGN-TM-, PAS-TM-, PICK AND PACK SERVICES-TM-, PORTFOLIO ACCOUNTING
SYSTEM-TM-, POWERSTORE-REGISTERED TRADEMARK-, RAPIDCONFIRM-REGISTERED
TRADEMARK-, RAPID ENROLLER-TM-, RAPID NETSALE-TM-, REPLENISHMENT PRINT
SERVICES-TM-, SECURITIES TRANSFER SYSTEM-TM-, STMS-TM-, STS-TM-, SUBSCRIBER
TRANSACTION MANAGEMENT SYSTEM-TM-, TA2000-REGISTERED TRADEMARK-,
TECHCONNECT-TM-, TRAC-2000-REGISTERED TRADEMARK-, VISION-REGISTERED TRADEMARK-,
YOURACCOUNTS.COM-SM-, referred to in this Report are included among the
Company's trademarks and service marks. AS/400-REGISTERED TRADEMARK-,
DIRECTV-TM-, FUND/SERV-TM-, NETWORKING-TM-, ORACLE, OS/2-REGISTERED TRADEMARK-,
QUICKEN, 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.
1
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/A 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. ("USCS")
completed their merger ("USCS Merger") through the issuance of .62 shares of DST
common stock for each outstanding share of USCS common stock. DST in 1998 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, DST's financial results for all periods prior to the USCS Merger
were restated in 1998 to combine the historical results of operations of DST and
USCS.
The USCS Merger positions DST as a market leader in three segments. The three
segments are mutual fund and investment recordkeeping and accounting;
presentation of bills and statements for the Company's shareowner and subscriber
customer base as well as industries such as telecommunications, rapid delivery,
insurance and brokerage; and customer management solutions for the
video/broadband/ satellite television, telecommunications and utilities
industries. Since the USCS Merger, the Company has focused on combining the
knowledge and expertise of both DST and USCS with the objective of increasing
service capabilities and product offerings, expanding into new markets, and
achieving meaningful synergies and cost savings.
2
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. (a 50% owned joint venture of DST and State Street
Corporation) and 50% owned by BankBoston Corporation.
DST is currently developing Fairway, a new securities transfer system 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, subject to approval
of the Office of the Comptroller of the Currency ("OCC"), 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 consolidation of the
securities transfer industry.
Acceptance of the initial defined components of Fairway is expected to occur in
the first part of 2000 and will result in DST receiving its initial equity
participation in EquiServe, subject to OCC approval. Acceptance of the remaining
defined components of Fairway and the transfer of DST's non-EquiServe stock
transfer business to EquiServe is expected to occur in stages through 2001.
NARRATIVE DESCRIPTION OF BUSINESS
The Company has several operating business units that offer sophisticated
information processing and software services and products. These business units
are reported as three operating segments (Financial Services, Output Solutions
and Customer Management). In addition, certain investments in equity securities,
financial interests and real estate holdings are reflected in 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, brokers and financial planners. The
Company's proprietary software systems include mutual fund shareowner and unit
trust accounting and recordkeeping systems offered in the U.S. and selected
international markets; a defined-contribution participant recordkeeping system
for the U.S. market; a variety of portfolio accounting and investment management
systems offered to U.S. and international fund accountants and investment
managers; a workflow management system offered primarily to mutual funds,
insurance companies, brokerage firms and banks; and a securities transfer system
offered to corporate trustees and transfer agents and, through affiliated
companies, to corporate clients.
The Financial Services Segment distributes its services and products on a direct
basis and through subsidiaries and joint venture affiliates in the U.S., United
Kingdom, Canada, Europe, Australia, South Africa and Asia-Pacific, and to a
lesser degree distributes such services and products through various strategic
alliances.
OUTPUT SOLUTIONS
The Output Solutions Segment provides complete bill and 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
3
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.
CUSTOMER MANAGEMENT
The Customer Management Segment provides sophisticated customer management and
open billing solutions to the video/broadband, direct broadcast satellite
("DBS"), wireless, wire-line and Internet-protocol telephony, Internet and
utility markets worldwide. The Company's software systems enable its clients to
manage their operations across all aspects of their business including order
processing, customer support, financial reporting, decision support, marketing,
field services and collections.
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.
INVESTMENTS AND OTHER
The Investments and Other Segment holds investments in equity securities,
certain financial interests, the Company's real estate subsidiaries and the
Company's computer hardware leasing subsidiary. The Company holds investments in
equity securities with a market value of approximately $1.3 billion at
December 31, 1999, including approximately 8.6 million shares of Computer
Sciences Corporation ("CSC") with a market value of $817 million and 6.0 million
shares of State Street Corporation ("State Street") with a market value of $438
million. Additionally, the Company owns and operates real estate mostly in the
U.S. which is held primarily for lease to the Company's other business segments.
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.
YEAR ENDED DECEMBER 31,
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1999 1998 1997
---------------------- ---------------------- ----------------------
(DOLLARS IN MILLIONS)
U. S. REVENUES
Mutual fund / investment
management......................... $ 491.6 40.9% $ 429.1 39.1% $374.0 39.4%
Other financial services............. 123.0 10.2% 111.6 10.2% 99.1 10.4%
Video/broadband/satellite TV......... 190.9 15.9% 214.8 19.6% 199.4 21.0%
Telecommunications and utilities..... 149.3 12.4% 127.8 11.7% 104.5 11.0%
Other................................ 82.1 6.8% 62.1 5.7% 57.2 6.0%
-------- ----- -------- ----- ------ -----
Total U.S. revenues.............. 1,036.9 86.2% 945.4 86.3% 834.2 87.8%
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INTERNATIONAL REVENUES
Mutual fund / investment
management......................... 109.2 9.1% 98.7 9.0% 67.4 7.1%
Other financial services............. 25.0 2.0% 23.6 2.1% 24.2 2.5%
Video/broadband/satellite TV......... 19.6 1.6% 18.3 1.7% 14.9 1.6%
Telecommunications and utilities..... 5.7 0.5% 3.1 0.3% 1.7 0.2%
Other................................ 6.9 0.6% 7.0 0.6% 7.6 0.8%
-------- ----- -------- ----- ------ -----
Total international revenues..... 166.4 13.8% 150.7 13.7% 115.8 12.2%
-------- ----- -------- ----- ------ -----
TOTAL REVENUES....................... $1,203.3 100.0% $1,096.1 100.0% $950.0 100.0%
======== ===== ======== ===== ====== =====
4
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 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 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.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
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FINANCIAL SERVICES OPERATING DATA
Revenues (in millions)
U.S....................................................... $ 427.0 $ 390.1 $ 338.0
International............................................. 127.9 117.5 87.0
------- ------- -------
$ 554.9 $ 507.6 $ 425.0
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Mutual fund shareowner accounts processed (millions)
U.S....................................................... 56.4 49.8 45.0
Canada.................................................... 2.4 1.6 0.9
United Kingdom (1)........................................ 2.0 1.4 1.0
TRAC-2000 mutual fund accounts (millions) (2)............... 3.4 2.5 1.9
TRAC-2000 participants (thousands).......................... 1,254 905 696
IRA mutual fund accounts (millions) (2)..................... 14.0 12.0 9.6
Portfolio Accounting System portfolios...................... 1,988 1,962 1,925
Automated Work Distributor workstations..................... 57,700 45,300 35,100
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(1) Processed by European Financial Data Services Limited, 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.
Investor 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
5
transactions and the complexity of recordkeeping. In addition, new technologies
have changed the service requirements and distribution channels of the mutual
fund market. The Company has made significant investments in computer capacities
and systems to handle the increasing volume and complexity of transactions and
distribution channels, 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
brokers 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 and wrap fee calculations. At
December 31, 1999, the Company provided shareowner accounting processing
services for approximately 56.4 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, brokers 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 or distributors. To address clients' desires to control such
interaction, the Company structured its services to allow the clients' personnel
to handle 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
Mutual funds are popular investment vehicles for individual and corporate
retirement plans. TA2000 supports Individual Retirement Accounts (IRAs)
including Roth and Educational IRAs.
The Company's TRAC-2000 system 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 is integrated with TA2000,
eliminating reconciliation problems that occur when different systems are used
for participant recordkeeping and mutual fund shareowner accounting. TRAC-2000
is offered on a full-
6
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, as well as per account fees for related
mutual fund accounts processed on TA2000.
At December 31, 1999, TA2000 services 14.0 million IRA accounts invested in
mutual funds, including 2.7 million Roth IRA and Educational IRA accounts. In
addition, TRAC-2000 provides recordkeeping for 1.3 million retirement plan
participants with 3.4 million related TA2000 mutual fund accounts.
PRODUCTS SUPPORTING MUTUAL FUND DISTRIBUTION AND MARKETING
The Company has developed products to meet the changing service requirements,
distribution channels and increasing regulatory requirements affecting the
mutual fund market.
The Company processes over 50% of the mutual fund industry's volume on Fund/Serv
and Networking, two systems developed by the Depositary Trust and Clearing
Corporation for broker distributed mutual funds. The Company has also developed
Financial Access Network ("FAN"), the technological infrastructure that
facilitates emerging channels of mutual fund sales and distribution via the
Internet. Products and services utilizing FAN include (i) FAN Web, which allows
clients to offer their investors direct inquiry to account information,
financial transaction execution and literature fulfillment through a set of
customized Internet templates that link the client's website to FAN, (ii) FAN
Web Direct, which offers clients a secure, seamless and efficient processing
capability for electronic transactions from a client's own web application
directly into FAN, (iii) FAN Investment Tracking, which enables shareholders to
download their mutual fund transaction data through Quicken for Windows Online
Investment Center, (iv) FAN Mail, which provides financial advisors and brokers
with trade confirmations, account positions and other data via public network
access, and (v) Vision, which enables brokers and financial advisors to view
fund, account and dealer information, process transactions, and establish new
accounts.
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 142 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
14.0% of the Segment's revenues in 1999.
INTERNATIONAL MUTUAL FUND / UNIT TRUST SHAREOWNER PROCESSING
DST provides international shareowner processing through DST Canada, a wholly
owned subsidiary, and European Financial Data Services, Limited ("EFDS"), a 50%
owned United Kingdom joint venture of DST and State Street Corporation.
7
DST CANADA, INC. ("DST CANADA")
DST Canada provides remote mutual fund shareowner processing in Canada and
licenses its mutual fund shareowner system to mutual fund companies in related
markets outside Canada. 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 also has installed its mutual fund system in Germany, Switzerland and
Saudi Arabia. Enhancements are being made to the system for operation in Japan
beginning in 2000. DST Canada processes 2.4 million mutual fund accounts,
including those of its largest client, 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. In addition, DST Canada's mutual
fund system processes approximately 5.8 million accounts under license
arrangements.
EUROPEAN FINANCIAL DATA SERVICES LIMITED ("EFDS")
EFDS offers full and remote service processing for unit trusts and related
products serving 2.0 million unitholder accounts at December 31, 1999, making it
the largest third party provider of such services in the U.K. EFDS has developed
FAST, a new unit trust accounting system, and has converted a significant number
of its client base to the new system as of December 31, 1999 with the remaining
clients scheduled to convert in 2000. DST believes that the successful
conversion of clients onto the new system should allow EFDS to pursue new
clients in the United Kingdom market.
PORTFOLIO ACCOUNTING AND INVESTMENT MANAGEMENT PRODUCTS
The Company offers products that support the portfolio accounting and investment
management functions of the financial services industry. DST's Portfolio
Accounting System (PAS) is offered primarily to the U.S. mutual fund industry on
a remote processing basis. HiPortfolio/2, OpenProducts and Global Portfolio
System ("GPS") are offered as licensed products both in the U.S. and
internationally. DST offers a complete solution to firms managing mutual funds,
institutional advisory accounts, or both.
PAS is an integrated multi-currency system that maintains fund 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"). The Company derives revenues generally
based on the number of mutual fund portfolios processed by PAS. Two new
components of PAS are Infoquest for Internet access and straight-through
processing supported by AWD. As of December 31, 1999, the 1,988 portfolios on
PAS had an aggregate market value of $1.4 trillion.
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 minimum customization. HiPortfolio/2
is a scalable, comprehensive front, middle and back office solution.
The range of OpenProducts include OpenFrontOffice (a front office decision
support system with a graphical user interface (GUI)), 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 that
require a customized solution. The system is a rules-based, multi-currency
transaction processing and portfolio accounting
8
system with a 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.
DST INTERNATIONAL LIMITED ("DST INTERNATIONAL")
DST International, a United Kingdom company, provides investment management and
portfolio accounting software (on a license basis) and services to over 500
installations in 40 countries worldwide, serviced by offices in the United
Kingdom, U.S., Australia, New Zealand, Hong Kong, Singapore, Thailand, Japan and
South Africa. In addition to the above licensed products, DST International's
other products are Impart/Uptix and Paladign. DST International also distributes
and supports AWD outside North America.
AUTOMATED WORKFLOW MANAGEMENT
Automated Work Distributor ("AWD") is designed to help companies improve
operating efficiency and customer satisfaction. The AWD system captures all
customer contacts (such as Internet, email, phone calls, faxes and mail),
prioritizes and assigns the work to the appropriate resource, and tracks the
contact through to completion. By coordinating all channels of customer
communication, AWD allows for seamless delivery of service, improving customer
satisfaction. The AWD product suite includes tools for character recognition,
digitized voice and process automation to automate manual processes.
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
mutual fund and other investment management firms, insurance companies,
brokerage firms 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.
AWD can be installed at the customer's site or the customer can access AWD at
the AWD Data Center using the Company's telecommunications network.
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.
9
SECURITIES TRANSFER PROCESSING
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 5.7 million accounts.
EQUISERVE
EquiServe is the largest U.S. securities transfer agent serving over 1,400
companies with 25 million shareowner accounts. EquiServe provides dividend
disbursement and reinvestment; direct stock and employee stock purchase plans
services; proxy mailing and tabulation; annual and interim report distribution;
merger and acquisition services; and stock option services. EquiServe also
offers Internet access to its clients' shareowners for inquiry and transaction
processing, Internet proxy voting and Internet access to annual reports through
Corporate Document Systems, a 50% owned affiliate of DST. See "Recent
Developments" above for further discussion of EquiServe.
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 5.7 billion instructions per second and direct access storage devices with
an aggregate storage capacity that exceeds 26 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 AWD Data Center supports the Company's AWD Image processing services. The
facility 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 5,500 AWD Image users. AWD users include
DST's Full-Service area as well as several of the Company's remote AWD customers
and other financial services companies. The AWD Data Center 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.
10
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. The AS/400 processors at the AWD Data Center 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.
The Company provides data processing, telecommunications and output solutions
services to Argus, and Argus operates IPNS at Winchester and the AWD Data
Center. Its primary clients are providers of pharmacy benefit plans including
insurance companies, health maintenance organizations, preferred provider
organizations and other pharmacy benefit managers.
CUSTOMER CONCENTRATION
The Financial Services Segment's five largest customers accounted for 32.8% of
segment revenues in 1999, including 14.0% from its largest customer.
MARKETING / DISTRIBUTION
In the U.S., Canada, and select international markets, 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
11
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 processing 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 brokerage 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 PFPC, 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 and investment management systems are SunGard Data
Systems, Inc., State Street Corporation (including Princeton Financial
Systems, Inc.), Misys plc, SS&C Technologies, Inc., Advent Software, 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.
OUTPUT SOLUTIONS SEGMENT
The Output Solutions Segment provides bill and statement processing services and
solutions, including electronic presentment, to customers of the Financial
Services and Customer Management Segments and other industries which value
customer communications and require high quality, accurate and timely statement
processing. The Company also offers a variety of complementary professional
services, including consulting, application development, fulfillment and client
training, as well as statement design and formatting services that allow clients
to use the statements as a communication and marketing tool.
12
The Company is among the largest first class mailers in the U.S., mailing over
1.6 billion items in 1999. The sources of revenue by major industry served are
listed below.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
OUTPUT SOLUTIONS OPERATING DATA
Revenues (in millions)
U.S. revenues
Mutual fund/investment management......................... $117.2 $ 94.8 $ 84.5
Other financial services.................................. 81.3 63.5 57.3
Video/broadband/satellite TV.............................. 60.1 64.7 62.2
Telecommunications and utilities.......................... 147.1 126.0 104.5
Other..................................................... 67.7 50.2 44.0
------ ------ ------
473.4 399.2 352.5
------ ------ ------
International revenues
Mutual fund/investment management......................... 1.2 1.6 0.3
Other financial services.................................. 5.5 3.2 4.4
Telecommunications and utilities.......................... 1.4 1.4 1.7
Other..................................................... 6.5 7.0 7.5
------ ------ ------
14.6 13.2 13.9
------ ------ ------
$488.0 $412.4 $366.4
====== ====== ======
Images produced (millions)
U.S....................................................... 6,251 5,017 4,171
International............................................. 68 70 50
Items mailed (millions)
U.S....................................................... 1,665 1,466 1,311
International............................................. 18 24 20
OUTPUT SOLUTIONS SERVICES
Statement processing services and solutions are provided in fully integrated and
automated production environments that rapidly and cost-effectively transform
electronic data received from our clients into informative, accurate and
customized statements. The Company's highly automated production environment
allows our clients to maximize postal savings while minimizing delivery time.
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.
The Company provides bill and statement processing services and solutions to the
video/broadband/ satellite TV, telecommunications, utilities, transportation,
rapid delivery 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 and funds
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.
13
The Company derives revenues from its bill and statement processing services
based generally on the number of images processed.
Direct Access, the Company's proprietary web-based program, enables the
Company's billing customers to have near real-time monitoring and reporting
functions. Using standard Internet browsers and entry through secured access to
the Company's 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. The Company
intends to extend this capability to its broader customer base.
The Company offers a full range of technical support for its clients. Customized
programming tools have been developed that allow electronic information streams
from a variety of client systems to be received without the need to make changes
to the customer's software. These tools enable rapid and smooth transitions when
clients outsource their statement processing and electronic functions.
ELECTRONIC DELIVERY ALTERNATIVES (YOURACCOUNTS.COM)
The Company's automated information and technology infrastructure, which
electronically prepares and monitors the statement until final printing,
provides the basis for our electronic statement presentment and payment
offerings. The YourAccounts.Com division was formed in 1999 to meet client
requirements for recurring Internet-enabled customer communication by addressing
the complexity of the Internet, providing reliability in handling large-scale
billing and statement processes, and using bills and statements as the basis for
personalized communications that improve customer relationships.
The Company believes that as electronic statements and payment solutions become
more accepted, communications service providers, utilities, financial services
and other companies will require electronic statement and bill presentment
capabilities. To fulfill this requirement, the Company introduced two product
lines: E.BILL.ANYWHERE for electronic bill presentment and payment, and INFORMA
for electronic presentment of mutual fund and brokerage statements,
confirmations, and tax documents.
The Company has also announced marketing alliances with several companies
including CheckFree, Convergys, Cybercash, Intuit, Bank of America, NetGravity
and NewRiver Investor Communications, Inc. to extend the reach and value of its
electronic solutions. Because of its existing volumes, 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.
Revenues from electronic statement and payment solutions are based generally on
the number of statements viewed or transactions processed.
ADDITIONAL PRODUCTS AND SERVICES
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, Rapid Confirm provides speed of delivery through the
United States Postal Service. With distributive print-mail sites strategically
located throughout the U.S., 90% of our mail is delivered in two days or less at
discounted presort rates. Confirmations may be consolidated, householded, and
may be printed with dynamic highlight color for greater visual impact.
RAPID ENROLLER
The Company's Rapid Enroller allows defined contribution plan providers to offer
fast, fully personalized documentation to plan participants. Utilizing
state-of-the-art print-on-demand technology, Rapid Enroller enables customized
packaging based on client and recipient information.
14
RAPID NETSALE
Designed for the rapidly growing on-line brokerage market, the Company's Rapid
NetSale "captures" a potential customer's information and triggers the mailing
of a personalized lead or welcome kit. With Rapid NetSale, online brokers are
able to immediately re-engage prospective customers that abandon their online
session and quickly respond to new prospects with customized marketing
collateral, increasing online brokers' new account acquisition rates.
ELLITE
For mutual funds and brokerage firms, the Company offers eLLite, enabling fast
access to current fund information. With electronic technology and secured
Internet access, customers can locate and download information from hundreds of
reports in just a few key strokes.
CREATIVE DESIGN SERVICES
The Company offers statement-based marketing and creative design services that
allow our clients to transform 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
statement-based marketing and creative design services, to use the paper or
electronic statement to reinforce a corporate image, advertise special offers
and features, deliver customer-specific messages and otherwise market their
services to their customers.
ARCHIVAL AND RETRIEVAL SOLUTIONS
The combined need for archival and customer service retrieval of statements are
addressed by our Info-Disc and Exact View storage solutions which provide
customer service representatives with a statement image enabling faster customer
service calls and improving first-call resolution rates. The Company also offer
sophisticated computer output microfilm (COM) capabilities for long-term
archival.
FULFILLMENT
The Company offers a variety of fulfillment services to support the literature
distribution needs of our clients; including i) Pick & Pack Services offering
dynamic package configuration and inventory management; ii) Replenishment Print
Services offering print-on-demand technology; and iii) Electronic Fulfillment.
PRODUCTION FACILITIES
The Company's primary production facilities are in Sacramento, Kansas City,
Hartford, Boston, Denver, St. Louis, New York, and Toronto. These facilities use
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 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
15
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 customers accounted for 25.8% of
segment revenues in 1999, including 8.2% from its largest customer.
MARKETING / DISTRIBUTION
The Company believes that sales of separate statement processing services to
defined vertical markets including, mutual fund, banking, brokerage, insurance,
healthcare, telecommunications, transportation, video/broadband/satellite
television, utilities and other service industries offers both increased revenue
opportunities as well as increased visibility for the Company. The Company
maintains a field operations sales staff, including client services and
technical support teams and significant design resources, to target these market
segments. The Company has begun an international statement processing marketing
effort. The Company has entered into alliances with partners such as Xerox,
Mellon Bank, Intuit, CheckFree, Bank of America and CyberCash to jointly market
its statement processing and electronic presentment capabilities.
COMPETITION
The key competitive factors in the Output Solutions Segment are quality of
services, quality of customer support, ability to handle large volumes 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., Bowne and Co. Inc., Vestcom International, Inc.,
Automatic Data Processing Inc. and CSG Systems International, Inc. The most
significant competitors for electronic presentment of bills and statements
include billserv.com Inc., Bowne and Co. Inc., Derivion, Electronic Data
Systems, Inc., International Business Machines Corporation, Moore Corporation
Ltd. and Tumbleweed Communications Corp. The Company believes that it competes
effectively in these markets.
INTELLECTUAL PROPERTY
The Company holds 26 U.S. patents covering various aspects of its statement
processing services. 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.
CUSTOMER MANAGEMENT SEGMENT
DST's Customer Management Segment provides sophisticated customer management and
open billing solutions to the video/broadband, direct broadcast satellite
("DBS"), wireless, wire-line and Internet-protocol telephony, Internet and
utility markets serving more than 45 million end-users worldwide. The Company's
proprietary software systems enable our clients to manage their operations
across all aspects of their business including order processing, customer
support, financial reporting, decision support, marketing, field services and
collections. The Company's software solutions are currently used by the largest
DBS provider in the U.S. as well as six of the top seven U.S. video/broadband
multiple service providers.
16
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.
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
CUSTOMER MANAGEMENT OPERATING DATA
Revenues (in millions)
U.S....................................................... $179.1 $200.1 $186.7
International............................................. 23.9 20.0 14.9
------ ------ ------
$203.0 $220.1 $201.6
====== ====== ======
Video/broadband/satellite TV subscribers processed
(millions)
Total before discontinued customer........................ 39.0 35.6 30.8
Discontinued customer (1)................................. 0.1 2.4 10.9
------ ------ ------
Total subscribers processed................................. 39.1 38.0 41.7
====== ====== ======
- ------------------------
(1) See discussion in Customer Management Segment--Customer Concentration
The Company's flexible, scalable and open architecture uses the latest
technologies to offer a variety of customer management services and products
that allow its customers to effectively manage their growing customer base. The
Company's products are available on a stand-alone or service bureau environment.
Stand-alone systems currently support approximately 85% of the subscriber base
and 15% are supported on a service bureau basis.
SYSTEMS AND SERVICES
INTELECABLE
This convergent billing solution is designed to support single and multi-service
providers in an array of communications markets including video/broadband,
Internet, global telecommunications (both business and residential) and DBS.
Intelecable offers an integrated rating engine that rates a variety of usage-
based services, including usage-based services on the Internet. Based on an open
architecture and a range of application program interfaces, Intelecable
streamlines integration with other information systems. With more than 115
installations, Intelecable is in use in more than 30 countries and can operate
in a variety of languages including Japanese and Chinese.
DDP/SQL
The DDP/SQL system supports the North American video/broadband market and is
used by six of the top seven U.S. video/broadband multiple service providers. As
a relational database, the DDP/SQL system serves the video/broadband market by
supporting digital services, high-speed data, electronic services, Web over TV,
and traditional cable television. 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.
17
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.
CUSTIMA
The CUSTIMA software system supports the customer management activities of
water, electric, gas, and municipal utility providers on four continents to bill
nearly seven million domestic, commercial and industrial customers. CUSTIMA
includes usage-based billing, real-time pricing, Internet integration,
scalability, and allows for platform independence.
AWD
The Company has integrated its AWD product with its customer management systems
to expand the support of customer relationship management to the
video/broadband/satellite television, telecommunications and utility industries.
ANCILLARY PRODUCTS
Ancillary products are available on all systems. These ancillary solutions
include CyberCSR, which provides cable management services directly to the home
subscriber via the Internet; TechConnect, which increases the productivity of
installers and field technicians by providing access to job and customer
information via the Internet; and Electronic Billing. Leveraging Web-based
applications across multiple functions, including enhanced online services,
customer self-care and electronic commerce, these products elevate operating
efficiency and enhance customer satisfaction, giving customers the choice of
using solutions in a home, an office or a retail environment.
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.
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., U.K., South America and
Australia as well as by alliance partners.
CUSTOMER CONCENTRATION
The Customer Management Segment's five largest customers accounted for 54.2% of
segment revenues in 1999, including 18.0% from its largest client.
18
MARKETING / DISTRIBUTION
Software and services are sold primarily to video/broadband/satellite
television, DBS, utility and multiple 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, Australia and Hong Kong. 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., CSG
Systems International, Inc. and Kenan Systems Corporation.
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.
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 $1.3 billion at December 31, 1999, including approximately 8.6
million shares of Computer Sciences Corporation with a market value of $817
million and 6.0 million shares of State Street Corporation with a market value
of $438 million.
REAL ESTATE
The Company's real estate subsidiaries own approximately 274,000 square feet of
office space and 831,000 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.
19
HARDWARE LEASING
The Company provides computer 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. The Company expended $172.4 million, $165.5 million and $135.6
million in 1999, 1998 and 1997, respectively, for software development and
maintenance and enhancements to the Company's proprietary systems and software
products of which $26.6 million, $2.5 million and $3.1 million was capitalized
in 1999, 1998 and 1997, respectively.
EMPLOYEES
As of December 31, 1999, the Company and its majority owned subsidiaries
employed approximately 9,700 employees, including approximately 4,700 in the
Financial Services Segment, 4,100 in the Output Solutions Segment and 900 in the
Customer Management Segment. In addition, 50% owned unconsolidated affiliates of
the Company and its subsidiaries employed approximately 4,400 employees,
including approximately 3,500 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.
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.
OWNED/ SQUARE
LOCATION USE (1) LEASED (2) FEET
- -------- ---------------- ---------- --------
FINANCIAL SERVICES SEGMENT (3)
Kansas City, MO......................................... Office space Leased 540,000
Kansas City, MO......................................... Data center (4) Owned 163,000
Kansas City, MO......................................... Office space Owned 132,000
Kansas City, MO......................................... Production Owned 16,000
Boston, MA.............................................. Office space Leased 24,000
Canada.................................................. Office space Leased 49,000
United Kingdom.......................................... Office space Leased 47,000
Australia............................................... Office space Leased 28,000
Ten other smaller properties............................ Office space Leased 32,000
20
OWNED/ SQUARE
LOCATION USE (1) LEASED (2) FEET
- -------- ---------------- ---------- --------
OUTPUT SOLUTIONS SEGMENT (3)
El Dorado Hills, CA..................................... Production Owned 366,000
El Dorado Hills, CA..................................... Office space Leased 29,000
Sacramento, CA.......................................... Production Leased 304,000
Kansas City, MO......................................... Production (4) Owned 299,000
Kansas City, MO......................................... Production Leased 32,000
Kansas City, MO......................................... Office space Owned 13,000
Hartford, CT............................................ Production Owned 150,000
Hartford, CT............................................ Production Leased 48,000
Westwood, MA............................................ Production Leased 128,000
Braintree, MA........................................... Production Leased 81,000
Melville, NY............................................ Production Leased 85,000
New York, NY............................................ Production Leased 30,000
Mt. Prospect, IL........................................ Production Leased 110,000
Denver, CO.............................................. Production Leased 94,000
St. Louis, MO........................................... Production Leased 40,000
Canada.................................................. Production Owned 61,000
Canada.................................................. Production Leased 34,000
Three other smaller properties.......................... Office space Leased 19,000
CUSTOMER MANAGEMENT SEGMENT (3)
Rancho Cordova, CA...................................... Office space Leased 153,000
El Dorado Hills, CA..................................... Office space Owned 48,000
Charlotte, NC........................................... Office space Leased 53,000
United Kingdom.......................................... Office space Leased 31,000
Nine other smaller properties........................... Office space Leased 64,000
INVESTMENTS AND OTHER SEGMENT
Kansas City, MO......................................... Office space Owned 81,000
Kansas City, MO......................................... Office space Leased 3,000
- ------------------------
(1) Property specified as used for production in the above table includes space
used for manufacturing operations and warehouse space.
(2) Within Kansas City, MO, the Company owns a number of surface parking lots,
various undeveloped properties, and a 515,000 square foot underground
storage facility that is primarily leased to third parties. The Company also
owns approximately 250 acres of undeveloped land adjacent to its buildings
in El Dorado Hills, CA. The Company is constructing two Output Solutions
facilities with a total of 147,000 square foot of space in El Dorado Hills,
CA. In addition to the property listed in the table and discussed above, the
Company leases space in the Netherlands, South Africa, Hong Kong, Singapore,
Thailand, Philippines, New Zealand and Brazil.
(3) Includes approximately 1,596,000 square feet of property owned or leased by
the Company's real estate subsidiaries, which are part of the Investments
and Other Segment. These properties are leased to other segments of the
Company, including approximately 688,000 sq. ft. in the Financial Services
Segment, 860,000 sq. ft. in the Output Solutions Segment, and 48,000 sq. ft.
in the Customer Management Segment.
(4) The Winchester Data Center is mortgaged with indebtedness of $19.9 million
as of December 31, 1999. Another property is mortgaged with indebtedness of
$1.4 million as of December 31, 1999.
21
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
None.
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 9, 2000.
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 54, 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., Computer Sciences Corporation, Euronet Services, Inc., and Informix
Software, Inc.
THOMAS A. MCCULLOUGH, age 57, 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,
Automated Work Distribution products, portfolio accounting, securities transfer,
product sales and marketing and DST Canada, Inc., a wholly owned subsidiary of
the Company.
JAMES C. CASTLE, Ph.D., age 63, 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 51, 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 Technology Solutions, Inc., a wholly owned subsidiary of the
Company. He has served as President of Argus Health Systems, Inc. since March
1999.
JONATHAN J. BOEHM, age 39, 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
22
joining the Company, he had been an officer of Kemper Service Company from
October 1990 through November 1997.
ROBERT C. CANFIELD, age 61, 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 49, 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 55, has served as President of Output Technology
Solutions, Inc., a wholly owned subsidiary of the Company, since March 1999. He
served from July 1995 to June 1999 as President of Output Technology Solutions
of California, Inc., a wholly owned subsidiary of the Company. 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.
JOHN W. MCBRIDE, age 58, 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 AWD Data Centers.
MICHAEL F. MCGRAIL, age 52, has served since April 1995 as President of DST
Innovis, Inc., a wholly owned subsidiary of the Company. Since December 1993, he
has been President and Managing Director of DST Innovis, Ltd., a wholly owned
subsidiary of DST Innovis, Inc.
ROBERT L. TRITT, age 44, 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 57, 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 53, 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 2, 2000, there
were approximately 28,000 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, 1999
was $76.3125.
23
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated balance sheet data as of December 31, 1999
and 1998 and the selected consolidated income statement data for the years ended
December 31, 1999, 1998 and 1997 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, 1997 and the selected consolidated income
statement data for the year ended December 31, 1996 were derived from the
Company's audited consolidated financial statements, not included herein. The
selected consolidated balance sheet data as of December 31, 1996 and 1995 and
the selected consolidated income statement data for the year ended December 31,
1995 were derived from the separate audited financial statements of DST and
USCS, as adjusted for the USCS Merger, not included herein. This selected
consolidated financial 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 of this Annual Report on Form 10-K and
the Company's audited consolidated financial statements, including the notes
thereto and the report of independent accountants thereon and the other
financial information included in Item 8 of this Form 10-K.
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues...................................... $1,203.3 $1,096.1 $ 950.0 $ 844.0 $713.4
Costs and expenses............................ 880.8 834.7 719.6 653.0 571.6
Depreciation and amortization................. 122.8 108.8 103.5 99.1 87.7
Merger charges and other expenses (1) (2)..... 33.1 13.7
-------- -------- -------- -------- ------
Income from operations (3).................... 199.7 119.5 126.9 78.2 54.1
Interest expense.............................. (5.2) (8.6) (8.5) (10.5) (26.9)
Other income, net............................. 13.2 7.4 5.8 4.5 4.9
Gains on sales of Continuum and IFTC
(2) (4)..................................... 223.4 43.6
Equity in earnings (losses) of unconsolidated
affiliates.................................. 6.6 (2.7) (1.3) (4.0) 6.4
-------- -------- -------- -------- ------
Income before income taxes and minority
interests................................... 214.3 115.6 122.9 291.6 82.1
Income taxes.................................. 76.9 44.3 42.9 113.3 49.5
-------- -------- -------- -------- ------
Income before minority interests.............. 137.4 71.3 80.0 178.3 32.6
Minority interests............................ (0.7) (0.3) 0.6 0.5
-------- -------- -------- -------- ------
Net income (1) (2) (3) (4).................... $ 138.1 $ 71.6 $ 79.4 $ 177.8 $ 32.6
======== ======== ======== ======== ======
Basic earnings per share (5).................. $ 2.19 $ 1.14 $ 1.25 $ 2.82 $ 0.71
Diluted earnings per share (5)................ 2.13 1.11 1.23 2.78 0.70
Total assets.................................. $2,326.3 $1,897.0 $1,548.5 $1,303.7 $912.8
Long-term obligations......................... 44.4 49.7 97.4 81.5 103.6
Cash dividends per common share (5)........... $ $ $ $ $
- ------------------------
(1) The Company recognized $33.1 million in merger and integration costs in
1998. See Note 3 to the consolidated financial statements.
(2) In 1996, The Continuum Company, Inc. ("Continuum") merged with Computer
Sciences Corporation ("CSC") in a tax-free share exchange and as a result
became a wholly owned subsidiary of CSC. As a result of the CSC/Continuum
merger, the Company received CSC common stock for its investment in
Continuum and recognized a one-time gain after taxes and other expenses of
$127.6 million. In conjunction with the merger, the Company elected to make
a
24
one-time $13.7 million contribution to provide funding for certain Continuum
employee withdrawals from DST's Employee Stock Ownership Plan.
(3) Effective January 1, 1999, DST adopted, as required, Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use," which requires that certain costs incurred for
the development of internal use software be capitalized. Prior to the
adoption of SOP 98-1, the Company expensed the development costs of internal
use software as incurred. For the year ended December 31, 1999, the Company
capitalized $24.0 million of costs related to such development, including
$2.4 million of capitalized costs at an unconsolidated subsidiary. If
internal use software development costs had been expensed rather than
capitalized, consolidated net income for the year ended December 31, 1999
would have been $122.7 million ($1.94 per basic share, $1.89 per diluted
share).
(4) In 1995, the Company received shares of State Street Corporation common
stock in a tax-free exchange for the Company's 50% interest in Investors
Fiduciary Trust Company. The Company recognized a one-time gain after
deferred taxes of $8.6 million from the transaction.
(5) 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 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 to KCSI in 1995, which has 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/A 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), video/broadband/satellite TV industry, communications industry, and
other service industries. In December 1998, USCS International, Inc. ("USCS")
became a wholly owned subsidiary of the Company through a merger resulting in
the issuance of approximately 13.8 million shares of DST common stock ("USCS
Merger"). The USCS Merger was accounted for under the pooling of interests
accounting method. The Company's business units are reported as three operating
segments (Financial Services, Output Solutions and Customer Management). In
addition, certain
25
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,
portfolios or transactions processed. 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 income from its pro rata
share in the earnings (losses) of certain unconsolidated affiliates, primarily
Boston Financial Data Services, Inc. ("BFDS"), Argus Health Systems, Inc.
("Argus") and European Financial Data Services Limited ("EFDS"). The Company
provides data processing services to 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's data processing contract with CSC-FSG expires in
2000 and is not expected to be renewed.
The Output Solutions Segment's revenues for presentation and delivery (either
printed or electronic) 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.
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 Investments and Other Segment's investment income (dividends, interest and
gains/losses on sale of securities) 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
The Company's December 21, 1998 merger with USCS was accounted for as a pooling
of interests. Accordingly, the Company's consolidated financial statements for
periods prior to December 21, 1998 were restated in 1998 to include the
financial position and results of operations of USCS.
In December 1998, DST's management approved plans which included 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, $12.8 million and $3.4
million related to the Financial Services, Output Solutions, and Customer
Management Segments, respectively.
1998 integration costs included $3.2 million for the severance cost of
involuntary separation benefits related to approximately 250 employees. Employee
separations affect the majority of business functions and job classifications
across the Output Solutions ($1.5 million) and Customer Management ($1.7
26
million) Segments, principally in North America. At December 31, 1999,
approximately $1.8 million of employee separation accruals remain related to
approximately 50 employees.
The 1998 integration costs included $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 Output
Solutions ($9.1 million) and Customer Management ($1.1 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 were written
down by $4.6 million to fair value. The integration costs also included $2.7
million ($0.7 million, $1.8 million, and $0.2 million for the Financial
Services, Output Solutions, and Customer Management Segments, respectively)
related to purchased software and other committed costs of
software/communications systems that will be abandoned. Additionally, $0.8
million ($0.4 million in each of the Output Solutions and Customer Management
Segments) of costs were expensed related to terminating certain contractual
obligations which had no future benefit as a result of the USCS Merger.
The cash and non-cash elements of the integration costs were approximately $9.5
million and $7.4 million, respectively. Details of the merger charge are as
follows (in millions):
BALANCE AT BALANCE AT
ORIGINAL UTILIZED DECEMBER 31, UTILIZED DECEMBER 31,
AMOUNT IN 1998 1998 IN 1999 1999
-------- -------- ------------- -------- -------------
Employee severance benefits................. $ 3.2 $0.6 $2.6 $0.8 $1.8
Other....................................... 6.3 6.3 2.8 3.5
Write down of long-lived assets............. 7.4 7.4
----- ---- ---- ---- ----
$16.9 $8.0 $8.9 $3.6 $5.3
===== ==== ==== ==== ====
Most of the remaining employee severance benefits are expected to be paid in
2000. 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 2000 through 2003. Four locations have been closed as of
December 31, 1999. The remainder will be closed in 2000 once arrangements have
been made to process continuing business at other facilities. The costs of
transitioning the continuing business have not been accrued.
During 1999, the Company expensed additional integration costs that could not be
accrued in the integration plans under current accounting rules. These amounts
did not materially impact the Company's consolidated results of operations,
liquidity or financial position. The Company 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 a
material adverse effect on the Company's consolidated results of operations,
liquidity or financial position.
27
A summary of historical results of DST and USCS for 1998 and 1997 are as follows
(in millions):
YEAR ENDING
DECEMBER 31,
-------------------
1998 1997
-------- --------
Revenues
DST Systems, Inc.......................................... $ 749.0 $650.7
USCS International, Inc................................... 347.1 299.3
-------- ------
Total revenues.......................................... $1,096.1 $950.0
======== ======
Net income
DST Systems, Inc.......................................... $ 73.9 $ 59.0
USCS International, Inc................................... 21.0 22.4
Conforming of accounting policies......................... (3.9) (2.0)
Merger costs.............................................. (19.4)
-------- ------
Total net income........................................ $ 71.6 $ 79.4
======== ======
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 and $2.0 million for the years ended
December 31, 1998 and 1997, respectively. Non-current assets decreased $33.3
million at December 31, 1998 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.
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. 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 PROGRAM
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 and for use
under various DST option and benefit programs. In August 1999, as a result of
expected additional share requirements for such programs, the Board of Directors
authorized the repurchase of an additional 3,575,000 shares for a total of
4,175,000 shares, with the then 4,000,000 remaining unpurchased shares to be
acquired during a twenty-four month period commencing September 1999. Such
purchases may be made in private or market transactions and will be made in
compliance with SEC regulations. The Company expended $52.2 million in 1999 to
purchase shares under this plan.
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 Fairway, a new securities transfer system to be used
exclusively by EquiServe to process all of its accounts. DST has also agreed
with EquiServe to provide data
28
processing services for EquiServe to use Fairway. Upon acceptance of defined
components of Fairway, DST will, subject to approval of the Office of the
Comptroller of the Currency ("OCC"), 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 consolidation of the securities transfer
industry.
Acceptance of the initial defined components of Fairway is expected to occur in
the first part of 2000 and will result in DST receiving its initial equity
participation in EquiServe, subject to OCC approval. Acceptance of the remaining
defined components of Fairway and the transfer of DST's non-EquiServe stock
transfer business to EquiServe is expected to occur in stages through 2001.
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 included 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 of $7.1 million (using the
income method discounted at 30% which did not differ significantly from the
stage of completion method) which was 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 2000.
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.
29
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (amounts in
millions, except per share amounts).
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
OPERATING RESULTS
REVENUES
Financial Services........................................ $ 554.9 $ 507.6 $425.0
Output Solutions.......................................... 488.0 412.4 366.4
Customer Management....................................... 203.0 220.1 201.6
Investments and Other..................................... 32.9 34.1 33.7
Eliminations.............................................. (75.5) (78.1) (76.7)
-------- -------- ------
$1,203.3 $1,096.1 $950.0
======== ======== ======
% change from prior year.................................. 9.8% 15.4% 12.6%
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
Financial Se