Back to GetFilings.com
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2000
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 1-14036
------------------------
DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
DELAWARE 43-1581814
(State or other jurisdiction (I.R.S. Employer 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
- ----------------------------------------------- -----------------------------------------------
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 January 31, 2001:
Common Stock, $0.01 par value--$7,403,816,455
Number of shares outstanding of the Company's common stock as of January 31,
2001:
Common Stock, $0.01 par value--124,433,890
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
DOCUMENT WHICH INCORPORATED
- -------- --------------------------------
Company's Definitive Proxy Statement for the 2001 Annual Part III
Meeting of Stockholders, which will be filed no later than
120 days after December 31, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DST SYSTEMS, INC.
2000 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........................ 23
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 25
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 38
Item 8. Financial Statements and Supplementary Data................. 39
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 69
PART III
Item 10. Directors and Executive Officers of the Company............. 69
Item 11. Executive Compensation...................................... 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 69
Item 13. Certain Relationships and Related Transactions.............. 69
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 70
Signatures.................................................. 76
AFFINITY-TM-, AUTOMATED WORK DISTRIBUTOR-TM-, AWD-REGISTERED TRADEMARK-,
AWD/CONTACT-TM-, AWD/EMAIL-REGISTERED TRADEMARK-, AWD/NETSERVER-TM-,
AWD/RIP-REGISTERED TRADEMARK-, AWD/ST-TM-, AWD/NETSERVER-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-, 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-, HIINVEST-TM-, HINET-TM-, HIPORTFOLIO/2-TM-,
HIWEALTH-TM-, IMPART/UPTIX-TM-, INFO(.)DISC-TM-, INFOQUEST DATA WAREHOUSE-TM-,
INFORMA-TM-, INTEGRATED PHARMACY NETWORK SYSTEM-TM-, INTELECABLE-TM-,
IPNS-REGISTERED TRADEMARK-, PALADIGN-TM-, PAS-TM-, PORTFOLIO ACCOUNTING
SYSTEM-TM-, POWERSTORE-REGISTERED TRADEMARK-,
RAPIDCONFIRM-REGISTERED TRADEMARK-, RAPID ENROLLER(SM), RAPID
FULFILLMENT(SM),STARGATE-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. The brand, service or product names or
marks referred to in this Report are trademarks or services marks, registered or
otherwise, of DST Systems, Inc. or its subsidiaries or of vendors to the
Company.
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 the 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.
EQUISERVE LIMITED PARTNERSHIP ("EQUISERVE")
On December 20, 2000, DST announced that it had signed definitive agreements to
acquire a controlling equity position in EquiServe by purchasing, for cash,
interests held by FleetBoston Financial Corporation and Bank One Corporation.
FleetBoston Financial and Bank One will retain nominal minority interests, and
each will continue various banking relationships with EquiServe and use
EquiServe as its transfer agent. The transaction is subject to regulatory
approval and is expected to close near the end of the first quarter 2001. The
Company has received notice of early termination of the Hart-Scott-Rodino review
and is in the process of obtaining approval by the Office of the Comptroller of
the Currency. Upon completion of the transaction, EquiServe's financial results
will be consolidated with those of DST. On a proforma basis, the acquisition is
not expected to have a material impact on DST's net income or earnings per share
for 2001. DST will fund the acquisition with operating cash flows and existing
credit facilities.
EquiServe is one of the nation's largest corporate shareholder service
providers, maintaining and servicing the records of approximately 24 million
shareholder accounts for more than 1,400 publicly
2
traded companies. EquiServe employs approximately 2,600 associates and has
estimated revenues of approximately $325 million for the year 2000.
DST is developing a new securities transfer system, called Fairway, which is
designed to meet the changing regulatory and processing requirements of the
corporate stock transfer industry. Under an existing agreement, DST will receive
additional equity in EquiServe upon delivery of the Fairway system.
STOCK SPLIT
On September 26, 2000, the Company's Board of Directors approved a 2-for-1 split
of the Company's common stock, in the form of a dividend of one share for each
share held of record at the close of business on October 6, 2000. The
distribution occurred on October 19, 2000. All references to stockholders'
equity, shares outstanding and earnings per share amounts have been restated to
reflect this stock split.
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 and customer contact 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 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 its processing services and solutions in North America to customers of
the Company's Financial Services and Customer Management Segments and to
telecommunications, utilities and other high volume industries which require
high quality, accurate and timely statement processing.
3
CUSTOMER MANAGEMENT
The Customer Management Segment provides sophisticated customer management and
open billing solutions to the video/broadband, direct broadcast satellite
("DBS"), 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. This Segment also distributes the Company's workflow
management and customer contact systems to the industries it services.
The Customer Management Segment distributes its services and products on a
direct basis, 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 certain equity securities
and financial interests and the Company's real estate, captive insurance and
computer hardware leasing subsidiaries and affiliates. The Company holds
investments in equity securities with a market value of approximately
$1.4 billion at December 31, 2000, including approximately 5.7 million shares of
State Street Corporation ("State Street") with a market value of $705 million
and 8.6 million shares of Computer Sciences Corporation ("CSC") with a market
value of $519 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,
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
(DOLLARS IN MILLIONS)
U. S. REVENUES
Mutual fund / investment management.......... $ 581.5 42.7% $ 503.6 41.0% $ 429.1 38.3%
Other financial services..................... 137.0 10.1% 130.3 10.6% 147.5 13.2%
Video/broadband/satellite TV................. 188.4 13.8% 190.9 15.6% 214.8 19.2%
Telecommunications and utilities............. 162.9 12.0% 150.6 12.3% 127.8 11.4%
Other........................................ 139.3 10.2% 85.7 7.0% 49.3 4.4%
-------- ----- -------- ----- -------- -----
Total U.S. revenues...................... 1,209.1 88.8% 1,061.1 86.5% 968.5 86.5%
-------- ----- -------- ----- -------- -----
INTERNATIONAL REVENUES
Mutual fund / investment management.......... 98.8 7.3% 109.2 8.9% 98.7 8.8%
Other financial services..................... 24.3 1.8% 25.0 1.9% 23.6 2.1%
Video/broadband/satellite TV................. 19.6 1.4% 19.6 1.6% 18.3 1.7%
Telecommunications and utilities............. 1.5 0.1% 5.7 0.5% 3.1 0.3%
Other........................................ 8.8 0.6% 6.9 0.6% 7.0 0.6%
-------- ----- -------- ----- -------- -----
Total international revenues............. 153.0 11.2% 166.4 13.5% 150.7 13.5%
-------- ----- -------- ----- -------- -----
TOTAL REVENUES............................... $1,362.1 100.0% $1,227.5 100.0% $1,119.2 100.0%
======== ===== ======== ===== ======== =====
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,
------------------------------
2000 1999 1998
-------- -------- --------
FINANCIAL SERVICES OPERATING DATA
Revenues (in millions)
U.S....................................................... $503.1 $427.0 $390.1
International............................................. 117.9 127.9 117.5
------ ------ ------
$621.0 $554.9 $507.6
====== ====== ======
Mutual fund shareowner accounts processed (millions)
U.S.
Non-retirement accounts................................. 48.3 39.0 35.3
IRA mutual fund accounts................................ 17.9 14.0 12.0
TRAC-2000 mutual fund accounts.......................... 5.9 3.4 2.5
------ ------ ------
72.1 56.4 49.8
====== ====== ======
International
United Kingdom (1)...................................... 2.7 2.0 1.4
Canada (2).............................................. 1.5 2.4 1.6
TRAC-2000 participants (millions)........................... 1.9 1.3 0.9
Automated Work Distributor workstations (thousands)......... 73.2 57.7 45.3
Portfolio Accounting System portfolios (thousands).......... 2.0 2.0 2.0
- ------------------------
(1) Processed by European Financial Data Services Limited, an unconsolidated
affiliate of the Company.
(2) Processed by DST Canada Inc., a former wholly owned subsidiary which became
an unconsolidated affiliate of the Company (see page 8).
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
5
asset value of the mutual fund 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 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,
to maintain its leadership position and to improve quality and productivity.
The Company typically enters into multi-year written agreements with its
clients. Most of the shareowner accounts serviced by the Company are at mutual
fund organizations that have been clients of the Company for more than five
years.
SHAREOWNER ACCOUNTING AND RECORDKEEPING
The proprietary applications system for U.S. mutual fund recordkeeping and
accounting is TA2000, which performs shareowner related functions for mutual
funds, including processing purchases, redemptions, exchanges and transfers of
shares; maintaining shareowner identification and share ownership records;
reconciling cash and share activity; calculating and disbursing commissions to
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, 2000, the Company provided shareowner accounting processing
services for approximately 72.1 million U.S. mutual fund shareowner accounts.
Mutual fund shareowner services are offered on full, remote and shared service
basis. 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. "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. "Shared" service processing allows client personnel
to handle telephone inquiries while the Company's or an affiliate's personnel
retain transaction processing functions. This service is facilitated by the
implementation of Automated Work Distributor ("AWD"), which creates electronic
images of transactions and makes 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.
6
The Company's TRAC-2000 system provides recordkeeping and administration for
defined contribution plans, including 401(k), 403(b), 457, 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-service and 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, 2000, TA2000 serviced 17.9 million IRA accounts invested in
mutual funds, including 4.2 million Roth IRA and Educational IRA accounts. In
addition, TRAC-2000 provided recordkeeping for 1.9 million retirement plan
participants with 5.9 million related TA2000 mutual fund accounts at
December 31, 2000.
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 55% 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/dealers and financial advisors to
view fund, account and dealer information, process transactions, and establish
new accounts.
Revenues from these 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 139 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
16.4% of the segment's revenues in 2000.
7
INTERNATIONAL MUTUAL FUND / UNIT TRUST SHAREOWNER PROCESSING
The Company provides international shareowner processing through DST
Canada Inc., a former wholly owned subsidiary which became a joint venture of
DST and State Street in January 2001, and European Financial Data Services,
Limited, a United Kingdom joint venture of DST and State Street.
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, Japan, Saudi Arabia
and Switzerland. DST Canada processes 1.5 million mutual fund accounts,
including those of 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 is used
to process approximately 7.2 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 2.7 million unitholder accounts at December 31, 2000. It is the
largest third party provider of such services in the United Kingdom. EFDS has
developed FAST, a unit trust accounting system, and EFDS has converted
substantially all accounts serviced by it to FAST as of December 31, 2000.
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. DST International Limited offers a wide range of
products both in the U.S. and internationally which used together form a
complete integrated solution for the investment management community.
PAS is an integrated multi-currency system that maintains fund accounting
records for mutual funds, separate accounts, variable annuities 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 investment
portfolios, predominantly mutual funds, processed on PAS. New components of PAS
include the InfoQuest Data Warehouse, a web-browser front-end, Internet access
and straight-through processing supported by AWD. As of December 31, 2000, the
1,989 portfolios on PAS had an aggregate market value of $1.4 trillion.
HiPortfolio/2 is designed for medium and large investment management firms that
are seeking a turnkey system for investment accounting that can meet their
global and international requirements with minimum customization. HiPortfolio/2
is a scalable, comprehensive front, middle and back office solution with over
250 clients worldwide.
HiInvest is a front and middle office solution for institutional fund managers
which includes decision support, modeling, order management, compliance
monitoring, performance measurement, performance attribution and client
reporting.
HiWealth is a front office solution for Private Wealth Managers to allow them to
manage their private clients. In addition to the same attributes as HiInvest
(but re-engineered for the retail market),
8
HiWealth includes integrated Customer Relationship Management ("CRM") and full
use of DST Systems' work management software (AWD).
HiNet is a rules-based transaction processing solution aimed at medium to large
investment management companies and has a high capacity, retail-focused variant
for on-line Internet trading and portfolio accounting using state-of-the-art
technology.
The Company derives revenues from HiPortfolio/2, HiInvest, HiWealth and HiNet,
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
clients in 40 countries worldwide, serviced by offices in the United Kingdom,
U.S., Australia, New Zealand, Hong Kong, Singapore, Thailand, Philippines, Japan
and South Africa. In addition to HiPortfolio/2, HiInvest, HiWealth and HiNet,
DST International also supports its long-established Impart/Uptix and Paladign
investment accounting systems. 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, telephone 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 financial services clients
include mutual fund and other investment management firms, insurance companies,
brokerage firms, banks and cable TV operators 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
channels for customer interaction. These products include EnCorr, which
automates the creation of print correspondence; PowerStore, which gives AWD
users optical media access; AWD/RIP, which imports work into AWD from other
computer systems and external networks; AWD/ST, which streamlines transaction
processing with straight-through technology; AWD/NetServer, which extends AWD
functionality to intranet and Internet environments; and AWD/eMail, which
supports communications with e-mail-based users. In addition, AWD/Voice
integrates call record/playback and computer-telephony integration technology
into the AWD system. AWD/Contact is used by customer service representatives in
a workflow-enabled call center environment.
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
9
Company also derives AWD revenues from fees for customized installation,
programming services and annual maintenance.
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 of its accounts.
EQUISERVE
EquiServe is one of the largest U.S. securities transfer agents serving over
1,400 companies with 24 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 and Internet proxy voting and Internet access to annual reports
through the Company's Output Solutions Segment. 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 and certain products of the
Output Solutions 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 six mainframe computers with a combined processing
capacity of over 7.1 billion instructions per second and direct access storage
devices with an aggregate storage capacity that exceeds 32 trillion bytes.
Winchester also contains over 200 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 10,000 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 networks, which serve more than 100,000 computer users,
have redundant pathing and software which provides 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 claims processing, information
services and administrative support for pharmacy program management. These
services include reporting features, reimbursements, call center, pharmacy
network management, clinical information services and rebates. Argus'
proprietary claims processing system, Integrated Pharmacy Network System
("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 can
alert 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.
exchange-america, LLC ("exchange-america")
exchange-america is a developer of a web-enabled process to submit new insurance
and annuities business applications online. Insurance Processing Service
("IPS"), a service of the Depository Trust and Clearing Corporation, and
exchange-america have signed a letter of intent to form a partnership whereby
exchange-america will provide a front-end solution to IPS member carriers and
distributors. IPS is an automated, centralized system that electronically links
insurance carriers that sell variable and fixed rate annuities. The Company
completed the acquisition of a 50% interest in exchange-america in
February 2001 for $15 million.
WALL STREET ACCESS L.L.C. ("WALL STREET ACCESS")
Wall Street Access is a provider of online brokerage services to individual
traders and professional money managers. The Company acquired a 6% interest in
Wall Street Access in January 2001 for approximately $7 million. The securities
purchase agreement with Wall Street Access contains put/call provisions whereby
the Company's interest in Wall Street Access may be increased to 20%.
CUSTOMER CONCENTRATION
The Financial Services Segment's five largest customers accounted for 35.7% of
segment revenues in 2000, including 16.4% from its largest customer.
11
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 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, 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 bundled service
providers, third-party software service providers and those companies that
license their products. Competitive factors 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
12
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, International Business Machines Corporation ("IBM"), Siebel
Systems, Inc. and Staffware plc.
OUTPUT SOLUTIONS SEGMENT
The Output Solutions Segment provides bill and statement processing services and
electronic bill payment and presentment solutions to customers of the Financial
Services and Customer Management Segments and other industries which value
customer communications and require high quality, accurate and timely bill and
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 statements as communication and marketing
tools.
The Company is among the largest first class mailers in the U.S., mailing
1.8 billion items in 2000. Sources of revenue by major industry served are
listed below.
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
OUTPUT SOLUTIONS OPERATING DATA
Revenues (in millions)
U.S. revenues
Mutual fund/investment management......................... $134.6 $129.2 $ 94.8
Other financial services.................................. 101.7 88.6 99.4
Video/broadband/satellite TV.............................. 68.3 60.1 64.7
Telecommunications and utilities.......................... 161.5 148.4 126.0
Other..................................................... 110.9 71.3 37.4
------ ------ ------
577.0 497.6 422.3
------ ------ ------
International revenues
Mutual fund/investment management......................... 1.3 1.2 1.6
Other financial services.................................. 4.7 5.5 3.2
Telecommunications and utilities.......................... 1.3 1.4 1.4
Other..................................................... 7.9 6.5 7.0
------ ------ ------
15.2 14.6 13.2
------ ------ ------
$592.2 $512.2 $435.5
====== ====== ======
Images produced (billions).................................. 7.4 6.3 5.1
Items mailed (billions)..................................... 1.9 1.7 1.5
13
OUTPUT SOLUTIONS SERVICES
STATEMENT AND BILLING SERVICES
Statement and billing services and solutions are provided in fully integrated
and automated production environments that rapidly and cost-effectively
transform electronic data into informative, accurate and customized statements.
The Company's highly automated production environment allows 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.
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, which can offer clients significant savings both
in paper and mailing costs and can also be a marketing tool for companies
seeking to establish brand name recognition and sell combined services.
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 moment of
completed transmission to the moment the data 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 the Company's electronic statement presentment and
payment offerings. The YourAccounts.Com division was formed in 1999 to meet
client requirements for recurring Internet-enabled customer communications by
addressing the complexity of the Internet, providing reliability in handling
large-scale billing and statement processing, and using bills and statements as
the basis for personalized communications that improve customer relationships.
During 2000, the Company acquired the 50% of Corporate Document Systems, Inc.
("CDS") it did not own for $5.5 million in a stock for stock exchange. CDS
creates Internet-driven products that provide communication between our clients
and their customers. Each tool is designed to enhance customer communication via
secure data transmission.
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 three product
lines: E.BILL.ANYWHERE for electronic bill presentment and payment; Informa for
14
online electronic presentment of mutual fund and brokerage statements,
confirmations, and tax documents; and e-Proxy for online electronic balloting.
The Company has also announced marketing alliances with several companies
including CheckFree, Citibank, Convergys, CyberBills, CyberCash, DoubleClick,
Intuit, NewRiver Investor Communications, Paytrust and United States Postal
Service 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 generated from
initial implementation fees and recurring revenue based on the number of
statements viewed or transactions processed. These revenues are influenced by
customer adoption rates and have not been significant to date.
COMMUNICATIONS MANAGEMENT
RAPID CONFIRM
For the brokerage industry, the Company offers Rapid Confirm, one of the fastest
ways to deliver trade confirmations. Utilizing a large domestic distributive
print network, Rapid Confirm provides speed of delivery through the United
States Postal Service. The Company also offers electronic delivery of trade
confirmations over the Internet. 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.
RAPID FULFILLMENT
The Company offers sophisticated, real time print-on-demand fulfillment through
its Rapid Fulfillment product. As a substitute for offset printing and
warehousing of documents, Rapid Fulfillment reduces the costs of fulfillment and
ensures that our clients' customers receive the most current version of
documents.
eLLITE
For mutual funds and brokerage firms, the Company offers eLLITE, an
Internet-based channel for the distribution of fund marketing and compliance
documents. eLLITE allows customers to locate and download information from
hundreds of reports in just a few keystrokes.
OTHER PRODUCTS AND SERVICES
CREATIVE DESIGN SERVICES
The Company offers statement-based marketing and creative design services that
allow clients to transform customer statements into communication tools. The
statement is a key form of regular communication between a service provider and
its customers. The Company gives clients 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.
15
ARCHIVAL AND RETRIEVAL SOLUTIONS
The combined need for archival and customer service retrieval of statements is
addressed by our viewing and storage solutions which enable customer service
representatives to view a statement image in virtually any format, from CD-ROM,
to electronic data transmission, or over the Internet. Representatives are able
to answer customer service calls quickly and improve first-call resolution
rates. The Company also offers sophisticated computer output microfilm (COM)
capabilities for long-term archival.
PRODUCTION FACILITIES
The Company's primary production facilities are in the Sacramento, Kansas City,
Hartford, Boston, Chicago, Denver, New York, St. Louis, and Toronto metropolitan
areas. 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 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 26.3% of
segment revenues in 2000, including 8.4% from its largest customer.
MARKETING / DISTRIBUTION
The Company believes its bill and statement processing services provided to its
diverse client base offer increased revenue opportunities. 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 entered into alliances with partners such as the United States
Postal Service, Citibank, 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 offer both print and
electronic solutions, the ability to handle large volumes, and the 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 national competitors such as Moore
Corporation Ltd., Bowne and Co. Inc., Automated Data Processing, Inc.,
PFPC, Inc. and CSG Systems International, Inc. The most significant competitors
for electronic presentment of bills and statements include billserv.com Inc.,
Bowne and
16
Co. Inc., Derivion Corporation, Electronic Data Systems, Inc., IBM, Moore
Corporation Ltd. and Princeton eCom. The Company believes that it competes
effectively in these markets.
INTELLECTUAL PROPERTY
The Company holds 27 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
The Company's Customer Management Segment provides sophisticated customer
management and open billing solutions to the video/broadband, direct broadcast
satellite ("DBS"), wire-line and Internet-protocol telephony and utility
markets, serving nearly 50 million customers worldwide. The Company's
proprietary software systems enable our clients to manage their operations
across many aspects of their businesses including billing, 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 by six of the top seven U.S.
video/ broadband multiple system operators.
The Segment's revenues from customer management processing and computer software
services and products are primarily 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,
------------------------------
2000 1999 1998
-------- -------- --------
CUSTOMER MANAGEMENT OPERATING DATA
Revenues (in millions)
U.S....................................................... $175.2 $179.1 $200.1
International............................................. 19.8 23.9 20.0
------ ------ ------
$195.0 $203.0 $220.1
====== ====== ======
Video/broadband/satellite TV subscribers processed
(millions)
U.S....................................................... 33.8 31.9 31.3
International............................................. 9.6 7.2 6.7
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 clients to effectively manage their growing customer bases. The
Company's products are available on a stand-alone or service bureau environment.
SYSTEMS AND SERVICES
INTELECABLE
This convergent billing solution is designed to support video, voice and data
services for video/ broadband and global telecommunications (both business and
residential) providers. Intelecable offers an integrated rating engine that
rates a variety of usage-based services, including usage-based services
17
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.
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 system operators. The
DDP/SQL system serves the video/ broadband market by supporting digital
services, high-speed data transmissions, electronic services, Web over TV
services and traditional cable television services. DDP/SQL runs on parallel
processing hardware manufactured by Tandem. The Company is a value-added
reseller of Tandem equipment and may enter into hardware maintenance agreements
with its clients.
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 other direct broadcast satellite operators that provide non-television and
interactive services and to international providers.
UTILITY BILLING SYSTEMS
The Company's utilities billing systems, Affinity and CUSTIMA, support the
customer management activities of water, electric, gas and municipal utility
providers on four continents that provide services to nearly seven million
domestic, commercial and industrial customers. Features include usage-based
billing, real-time pricing, Internet integration and scalability and allows for
platform independence.
AWD
The Company has integrated its AWD product with its customer management systems
to expand the support of CRM to the video/broadband/satellite television,
telecommunications and utility industries. By automating complex business
processes and streamlining processing, AWD ensures that the information
necessary for our clients' customer service representatives to service their
customers is readily available.
The Company has signed an agreement to provide AWD to Comcast Cable
Communications, Inc. This is the first Customer Management client to contract
for AWD.
ANCILLARY PRODUCTS
Ancillary products are available on all systems. These ancillary solutions
include CyberCSR, which allows customers to access their account information via
the Internet; TechConnect, which is designed to increase the productivity of
installers and field technicians by providing access to job and customer
information via the Internet; StarGate, which enables dynamic business
intelligence and decision support through its flexible data warehousing and
reporting capabilities; and Electronic Billing. Leveraging web-based
applications across multiple functions, including enhanced online services,
customer self-care and electronic commerce, these products can elevate operating
efficiency and enhance customer satisfaction, giving customers the choice of
using solutions in a home, office or retail environment.
18
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., United Kingdom, South
America and Australia as well as by alliance partners.
CUSTOMER CONCENTRATION
The Customer Management Segment's five largest customers accounted for 62.8% of
segment revenues in 2000, including 22.2% from its largest client.
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.,
United Kingdom, 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 Lucent Technologies through its Kenan
Systems subsidiary.
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. 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.
19
INVESTMENTS AND OTHER SEGMENT
The Investments and Other Segment is comprised of certain investments in equity
securities, certain financial interests, and the Company's real estate, captive
insurance and computer hardware leasing subsidiaries and affiliates.
INVESTMENTS
The Company holds certain investments in equity securities with a market value
of approximately $1.4 billion at December 31, 2000, including approximately
5.7 million shares of State Street with a market value of $705 million and
8.6 million shares of CSC with a market value of $519 million.
REAL ESTATE
The Company's real estate subsidiaries and affiliates own approximately 948,000
square feet of office space and 754,000 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.
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 $195.7 million, $172.4 million and
$165.5 million in 2000, 1999 and 1998, respectively, for software development
and maintenance and enhancements to the Company's proprietary systems and
software products of which $43.6 million, $26.6 million and $2.5 million was
capitalized in 2000, 1999 and 1998, respectively.
EMPLOYEES
As of December 31, 2000, the Company and its majority owned subsidiaries
employed approximately 10,100 employees, including approximately 4,900 in the
Financial Services Segment, 4,400 in the Output Solutions Segment and 700 in the
Customer Management Segment. In addition, 50% owned unconsolidated affiliates of
the Company and its subsidiaries employed approximately 4,900 employees,
including approximately 3,800 at BFDS and 700 at EFDS. 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 541,000
Kansas City, MO......................................... Office Space Owned 213,000
Kansas City, MO......................................... Data Center (4) Owned 163,000
Jefferson City, MO...................................... Office Space Leased 27,000
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
20
OWNED/ SQUARE
LOCATION USE (1) LEASED (2) FEET
- -------- ---------------- ---------- --------
Twelve other smaller properties......................... Office Space Leased 36,000
OUTPUT SOLUTIONS SEGMENT (3)
Sacramento, CA.......................................... Production Owned 361,000
Sacramento, CA.......................................... Production Leased 304,000
Sacramento, CA.......................................... Office Space Owned 122,000
Sacramento, CA.......................................... Office Space Leased 7,000
Kansas City, MO......................................... Production Owned 243,000
Kansas City, MO......................................... Office Space Owned 69,000
Kansas City, MO......................................... Production Leased 32,000
Chicago, IL............................................. Production Leased 212,000
Hartford, CT............................................ Production Owned 150,000
Hartford, CT............................................ Production Leased 48,000
Boston, MA.............................................. Production Leased 209,000
New York, NY............................................ Production Leased 95,000
New York, NY............................................ Office Space Leased 35,000
Denver, CO.............................................. Production Leased 94,000
St. Louis, MO........................................... Production Leased 40,000
Canada.................................................. Production Owned 61,000
Canada.................................................. Production Leased 34,000
CUSTOMER MANAGEMENT SEGMENT (3)
Sacramento, CA.......................................... Office Space Leased 94,000
Sacramento, CA.......................................... Office Space Owned 69,000
Charlotte, NC........................................... Office Space Leased 60,000
United Kingdom.......................................... Office Space Leased 31,000
Five other smaller properties........................... Office Space Leased 27,000
INVESTMENTS AND OTHER SEGMENT
Kansas City, MO......................................... Office space Owned 475,000
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 developed and undeveloped properties, and a 515,000 square foot
underground storage facility that is primarily leased to third parties. The
Company also owns approximately 200 acres of undeveloped land adjacent to
its buildings in Sacramento, CA. The Company is constructing two facilities
with a total of 76,000 square feet of space in Sacramento, CA. In addition
to the property listed in the table and discussed above, the Company leases
space in Chicago, Las Vegas, the Netherlands, South Africa, Hong Kong,
Singapore, Thailand, Philippines, Japan, New Zealand and Brazil.
(3) Includes approximately 1,800,000 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 754,000 sq. ft. in the Financial Services
Segment, 977,000 sq. ft. in the Output Solutions Segment, and 69,000 sq. ft.
in the Customer Management Segment.
(4) The Winchester Data Center is mortgaged with indebtedness of $18.4 million
as of December 31, 2000. Another property is mortgaged with indebtedness of
$1.2 million as of December 31, 2000.
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 8, 2001.
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 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 55, 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 is a director of BHA Group, Inc., Commerce
Bancshares, Inc., Computer Sciences Corporation, Euronet Services Inc., and
Informix Software, Inc.
THOMAS A. MCCULLOUGH, age 58, 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 Distributor products, portfolio
accounting, securities transfer, and product sales and marketing. Since
September 2000, he has served as Chairman and Chief Executive Officer of BFDS,
which is 50% owned by the Company.
JAMES C. CASTLE, PH.D., age 64, has served as director of the Company since
December 1998 and as Chairman, Chief Executive Officer and director of DST
Systems of California, Inc. (formerly USCS International, Inc.) since 1992. He
is a director of ADC Telecommunications, Inc. and The PMI Group, Inc.
CHARLES W. SCHELLHORN, age 52, has served since March 1999 as Vice Chairman of
DST Systems of California, Inc. (formerly USCS International, Inc.), a wholly
owned subsidiary of the Company. He has served since May 2000 as President and
Chief Executive Officer and since September 2000 as Chairman of the Board of
Output Technology Solutions, Inc. ("OTS"), an indirect wholly owned subsidiary
of the Company. He had previously served from 1991 to 1999 as President and
Chairman of the Board of OTS. Since March 1999, he has served as President of
Argus Health Systems, Inc., which is 50% owned by the Company.
JONATHAN J. BOEHM, age 40, 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 62, has served as Senior Vice President, General Counsel
and Secretary of the Company since August 1995. He was Senior Vice President-Law
of the Company from March 1992 to August 1995.
KENNETH V. HAGER, age 50, 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.
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 53, has served since April 1995 as President of DST
Innovis, Inc. which is an indirect wholly owned subsidiary of the Company.
ROBERT L. TRITT, age 45 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 58, has served as Group Vice President of the Company
since 1986. He is responsible for development of Fairway, business continuity
planning, and other projects.
J. MICHAEL WINN, age 54, 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 February 28, 2001, there
were approximately 29,500 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 29, 2000
was $67.00.
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, 2000
and 1999 and the selected consolidated income statement data for the years ended
December 31, 2000, 1999 and 1998 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, 1998 and 1997 and the selected
consolidated income statement data for the year ended December 31, 1997 and 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 was derived from the separate audited financial statements of
DST and USCS, as adjusted for the USCS Merger (defined hereafter), not included
herein. This selected consolidated financial data should
23
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,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues..................................... $1,362.1 $1,227.5 $1,119.2 $ 960.8 $ 858.1
Costs and expenses........................... 968.9 905.0 857.8 730.4 667.1
Depreciation and amortization................ 128.6 122.8 108.8 103.5 99.1
Merger charges and other expenses (1) (2).... 33.1 13.7
-------- -------- -------- -------- --------
Income from operations (3)................... 264.6 199.7 119.5 126.9 78.2
Interest expense............................. (5.6) (5.2) (8.6) (8.5) (10.5)
Other income, net (4)........................ 66.3 13.2 7.4 5.8 4.5
Gain on sale of Continuum (2)................ 223.4
Equity in earnings (losses) of unconsolidated
affiliates................................. 11.4 6.6 (2.7) (1.3) (4.0)
-------- -------- -------- -------- --------
Income before income taxes and minority
interests.................................. 336.7 214.3 115.6 122.9 291.6
Income taxes................................. 120.9 76.9 44.3 42.9 113.3
-------- -------- -------- -------- --------
Income before minority interests............. 215.8 137.4 71.3 80.0 178.3
Minority interests........................... (0.7) (0.3) 0.6 0.5
-------- -------- -------- -------- --------
Net income (1) (2) (3) (4)................... $ 215.8 $ 138.1 $ 71.6 $ 79.4 $ 177.8
======== ======== ======== ======== ========
Basic earnings per share (5)................. $ 1.72 $ 1.09 $ 0.57 $ 0.62 $ 1.41
Diluted earnings per share (5)............... $ 1.67 $ 1.06 $ 0.56 $ 0.61 $ 1.39
Adjusted diluted earnings per share (6)...... $ 1.40 $ 1.02 $ 0.75 $ 0.61 $ 0.39
Total assets................................. $2,552.4 $2,326.3 $1,897.0 $1,548.5 $1,303.7
Long-term obligations........................ 68.7 44.4 49.7 97.4 81.5
- ------------------------
(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 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 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. The Company capitalized $28.5 million and
$24.0 million of costs, net of related amortization, related to the
development of internal use software for the years ended December 31, 2000
and 1999, respectively, including $0.2 million and $2.4 million,
respectively, of capitalized costs at an unconsolidated subsidiary. If
internal use software development costs had
24
been expensed rather than capitalized, consolidated net income for the years
ended December 31, 2000 and 1999 would have been $197.5 million ($1.58 per
basic share, $1.53 per diluted share) and $122.7 million ($0.97 per basic
share, $0.95 per diluted share), respectively.
(4) Other income consists mainly of interest income, dividends received on
investments held by the Company (principally shares of State Street stock),
net gains on sales of available-for-sale equity securities, amortization of
deferred non-operating gains, and gains (losses) from equipment
dispositions. The 2000, 1999 and 1998 amounts include $41.8 million,
$8.9 million and $1.9 million respectively, of net gains related to
available-for-sale securities and other investments. The 2000 amount also
includes a $10.8 million pretax settlement of a legal dispute related to a
former equity investment. The settlement agreement resolves all outstanding
issues related to this former equity investment. The 1999 security gains
were offset by net losses on equipment dispositions of $3.5 million in 1999.
(5) The Company's capital structure substantially changed as a result of a
public offering of the Company's common stock in the second quarter 1996.
(6) Adjusted diluted earnings per share has been calculated by excluding the
effects of merger charges and other expenses, net gain on sale of Continuum,
net gains related to available-for-sale securities and other investments and
the gain from the 2000 legal settlement discussed in items (1), (2) and
(4) above.
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 the 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 that resulted
in the issuance of approximately 27.6 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, investments in certain equity securities and financial interests and
the Company's real estate, captive insurance and computer hardware leasing
subsidiaries and affiliates have been aggregated into an Investments and Other
Segment.
25
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, 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 to process its proprietary applications and to certain other
clients who utilize AWD. Revenues are primarily based upon data center capacity
utilized, which is significantly influenced by the volume of transactions or the
number of users.
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
consolidated subsidiaries. Income from insurance premiums is recognized as
revenue as earned, but is eliminated in consolidation for the portion that
relates to premiums from the Company's other consolidated subsidiaries. Premium
income was immaterial in 2000.
SIGNIFICANT EVENTS
EQUISERVE LIMITED PARTNERSHIP ("EQUISERVE")
On December 20, 2000, DST announced that it had signed definitive agreements to
acquire a controlling equity position in EquiServe by purchasing, for cash,
interests held by FleetBoston Financial Corporation and Bank One Corporation.
FleetBoston Financial and Bank One will retain nominal minority interests, and
each will continue various banking relationships with EquiServe and use
EquiServe as its transfer agent. The transaction is subject to regulatory
approval and is expected to close near the end of the first quarter 2001. The
Company has received notice of early termination of the Hart-Scott-Rodino review
and is in the process of obtaining approval by the Office of the Comptroller of
the Currency. Upon completion of the transaction, EquiServe's financial results
will be consolidated with those of DST. On a proforma basis, the acquisition is
not expected to have a material impact on DST's net income or earnings per share
for 2001. DST will fund the acquisition with operating cash flows and existing
credit facilities.
EquiServe is one of the nation's largest corporate shareholder service
providers, maintaining and servicing the records of approximately 24 million
shareholder accounts for more than 1,400 publicly
26
traded companies. EquiServe employs approximately 2,600 associates and has
estimated revenues of approximately $325 million for the year 2000.
DST is developing a new securities transfer system, called Fairway, which is
designed to meet the changing regulatory and processing requirements of the
corporate stock transfer industry. Under an existing agreement, DST will receive
additional equity in EquiServe upon delivery of the Fairway system.
STOCK SPLIT
On September 26, 2000, the Company's Board of Directors approved a 2-for-1 split
of the Company's common stock, in the form of a dividend of one share for each
share held of record at the close of business on October 6, 2000. The
distribution occurred on October 19, 2000. All references to stockholders'
equity, shares outstanding and earnings per share amounts have been restated to
reflect this stock split.
DST CANADA JOINT VENTURE
DST Canada has been a wholly owned subsidiary of the Company since June 1993. To
align the ownership of the international mutual fund/unit trust shareowner
processing business, DST Canada was converted to a joint venture in
January 2001, and is now owned 50% by DST and 50% by State Street. The joint
venture was formed by DST contributing its shares of DST Canada to a newly
formed joint venture while State Street contributed $43.5 million to the joint
venture. The Company has accounted for the formation of the joint venture as a
non-cash, non-taxable exchange. Accordingly, no gain will be recognized from the
transaction. Effective January 2001, DST Canada's results of operations will no
longer be consolidated with the Company and the earnings of the joint venture
will be included in the Company's results on the equity basis. On a proforma
basis, the formation of the joint venture is not expected to have a material
impact on DST's net income or earnings per share in 2001.
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.
Integration costs in 1998 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 million) Segments, principally in North America.
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 closed and the non-strategic business lines eliminated, the
tangible and intangible assets 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 were abandoned.
Additionally, $0.8 million ($0.4 million in each of the Output Solutions and
Customer Management Segments) of costs were
27
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. Cash elements included employee
severance benefits and other items of $3.2 million and $6.3 million,
respectively, of which $5.3 million, $3.6 million and $0.6 million were utilized
in 2000, 1999 and 1998. The non-cash element related to the write down of
long-lived assets was $7.4 million which was fully utilized in 1998.
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 for the year ended December 31,
1998. 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 PROGRAMS
In December 1998, the Board of Directors approved a plan for DST to repurchase
1,200,000 shares of DST common stock at the rate of approximately 50,000 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 7,150,000 shares for a total of
8,350,000 shares, with the then 8,000,000 remaining unpurchased shares to be
acquired during a twenty-four month period commencing September 1999. During the
quarter ended March 31, 2000, the Board of Directors authorized the repurchase
of an additional 8,000,000 shares of DST common stock. Of the additional
8,000,000 shares authorized to be repurchased, 1,920,000 shares will be used to
meet expected additional share requirements under various DST option, incentive
and benefit plans. The balance of the shares authorized may be purchased from
time to time and will be used for general corporate purposes. Such purchases may
be made in private or market transactions and will be made in compliance with
SEC regulations. At December 31, 2000, DST has purchased 6,660,000 shares since
the programs commenced. Of the remaining 9,690,000 shares to be repurchased,
3,840,000 shares are expected to be utilized for DST's stock award, employee
stock purchase and stock option programs and 5,850,000 shares are expected to be
used for general corporate purposes. The Company expended $177.2 million and
$52.2 million in 2000 and 1999, respectively, to purchase shares under these
programs.
CUSTIMA ACQUISITION
In August 1998, USCS purchased 100% of the stock 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.
In accordance with applicable accounting principles, the assigned value of the
in-process research and development ("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' 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.
28
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (amounts in
millions, except per share amounts).
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
REVENUES
Financial Services........................................ $ 621.0 $ 554.9 $ 507.6
Output Solutions.......................................... 592.2 512.2 435.5
Customer Management....................................... 195.0 203.0 220.1
Investments and Other..................................... 33.2 32.9 34.1
Eliminations.............................................. (79.3) (75.5) (78.1)
-------- -------- --------
$1,362.1 $1,227.5 $1,119.2
======== ======== ========
% change from prior year.................................. 11.0% 9.7% 16.5%
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
Financial Services........................................ $ 179.3 $ 122.8 $ 85.4
Output Solutions.......................................... 65.0 49.0 33.9
Customer Management....................................... 15.1 21.3 24.5
Investments and Other..................................... 5.2 6.6 8.8
-------- -------- --------
264.6 199.7 152.6
MERGER CHARGES.............................................. 33.1
-------- -------- --------
INCOME FROM OPERATIONS...................................... 264.6 199.7 119.5
Interest expense.......................................... (5.6) (5.2) (8.6)
Other income, net......................................... 66.3 13.2 7.4
Equity in earnings (losses) of unconsolidated
affiliates.............................................. 11.4 6.6 (2.7)
-------- -------- --------
INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS........... 336.7 214.3 115.6
Income taxes.............................................. 120.9 76.9 44.3
Minority interests........................................ (0.7) (0.3)
-------- -------- --------
NET INCOME.................................................. $ 215.8 $ 138.1 $ 71.6
======== ======== ========
Basic earnings per share.................................... $ 1.72 $ 1.09 $ 0.57
Diluted earnings per share.................................. $ 1.67 $ 1.06 $ 0.56
Diluted shares outstanding.................................. 129.4 129.7 128.6
CONSOLIDATED REVENUES
Consolidated revenues increased $134.6 million or 11.0% in 2000 and
$108.3 million or 9.7% in 1999. Revenue growth in 2000 was primarily a result of
higher Financial Services and Output Solutions Segments revenues. Financial
Services Segment revenues increased $66.1 million or 11.9% in 2000. This
increase in 2000 Financial Services Segment revenues resulted from increased
U.S. revenues of $76.1 million or 17.8%, primarily as a result of an increase in
mutual fund shareowner accounts processed of 27.8% to 72.1 million at
December 31, 2000, partially offset by a $10.0 million or 7.8% decrease in
international revenues from lower professional services and Canadian mutual fund
processing revenues. The 1999 Financial Services Segment revenue growth of
$47.3 million or 9.3% resulted from increased U.S. revenues of $36.9 million or
9.5%, attributable to an increase in U.S. mutual fund shareowner accounts of
13.3% to 56.4 million at December 31, 1999, and from increased international
revenues of $10.4 million or 8.9% from growth in Canadian mutual fund processing
revenues.
Output Solutions Segment revenues increased $80.0 million or 15.6% in 2000 and
$76.7 million or 17.6% in 1999. The growth was a result of an increase in volume
of statements and images produced from the growth in existing customers in the
Financial Services and Customer Management Segments and new customers, primarily
in telecommunications and other high-volume markets.
29
Customer Management Segment revenues decreased $8.0 million or 3.9% in 2000 and
$17.1 million or 7.8% in 1999. Revenues for 2000 were adversely affected by
consolidation in the U.S. cable television industry, partially offset by higher
satellite subscriber revenues, while 1999 revenues were adversely affected by
transitioning a discontinued customer off of the Company's services.
Investments and Other Segment revenues increased $0.3 million or 0.9% in 2000
and decreased $1.2 million or 3.5% in 1999. Segment revenues consist primarily
of rental income for facilities leased to the Company's other business segments.
INCOME