United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2003
OR
o | 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 Registrant as specified in its charter)
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| Delaware (State or other jurisdiction of incorporation or organization) |
43-1581814 (I.R.S. Employer identification no.) |
| 333 West 11th Street, Kansas City, Missouri (Address of principal executive offices) |
64105 (Zip code) |
(816) 435-1000
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class Common Stock, $0.01 Per Share Par Value |
Name of each Exchange on which registered New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
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 registrant’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. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
YES x NO o
Aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant as of
June 30, 2003: Common Stock, $0.01 par value – $4,394,515,168
Number of shares outstanding of the Registrant’s common stock as of February 27, 2004:
Common Stock, $0.01 par value – 84,074,370
Documents incorporated by reference:
Portions of the following documents are incorporated herein by reference as indicated:
| Document |
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Part of Form 10-K into |
| Company’s Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 2003 |
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Part III |
DST Systems, Inc.
2003 Form 10-K Annual Report
Table of Contents
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Cautionary Statement With Respect To Forward-Looking Comments |
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| Part I |
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| Item 1. |
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Business |
2 |
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| Item 2. |
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Properties |
29 |
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| Item 3. |
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Legal Proceedings |
30 |
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| Item 4. |
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Submission of Matters to a Vote of Security Holders |
30 |
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Executive Officers and Significant Employees of the Company |
31 |
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| Part II |
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| Item 5. |
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Market for the Company’s Common Equity, Related Stockholder Matters and Issuer |
32 |
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| Item 6. |
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Selected Consolidated Financial Data |
33 |
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| Item 7. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
36 |
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| Item 7A. |
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Quantitative and Qualitative Disclosures About Market Risk |
71 |
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| Item 8. |
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Financial Statements and Supplementary Data |
73 |
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| Item 9. |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
112 |
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| Item 9A. |
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Controls and Procedures |
112 |
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| Part III |
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| Item 10. |
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Directors and Executive Officers of the Company |
112 |
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| Item 11. |
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Executive Compensation |
113 |
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| Item 12. |
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Security Ownership of Certain Beneficial Owners and Management and Related |
113 |
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| Item 13. |
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Certain Relationships and Related Transactions |
115 |
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| Item 14. |
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Principal Accountant Fees and Services |
115 |
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| Part IV |
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| Item 15. |
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Exhibits, Financial Statement Schedules and Reports on Form 8-K |
115 |
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Signatures |
125 |
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, affiliates 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. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the annual report to shareholders and in the Company’s other filings with the Securities and Exchange Commission. 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 Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K under the heading “Company-Specific Trends and Risks”. Readers are strongly encouraged to consider those factors 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 in the first paragraph and under the headings “Introduction” and “Seasonality” in the MD&A and the segment and geographic information included in Item 8, Note 16 are incorporated herein by reference in partial response to this Item 1.
The Company was originally established in 1969. Through a reorganization in August 1995, the Company is now a corporation organized in the State of Delaware.
The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports will be made available free of charge on or through the Company’s Internet website (www.dstsystems.com) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. In addition, the Company’s corporate governance guidelines and the charters of the Audit Committee, the Corporate Governance Committee/Nominating Committee and the Compensation Committee of the DST Board of Directors is available on the Company’s Internet website. These guidelines and charters are available in print to any stockholder who requests them. Written requests may be made to the DST Corporate Secretary, 333 West 11th Street, Kansas City, Missouri 64105, and oral requests may be made by calling the DST Corporate Secretary’s Office at (816) 435-4636.
2
RECENT DEVELOPMENTS IN THE COMPANY’S BUSINESS
The recent business developments of the Company and the Company’s subsidiaries follow.
Janus Capital Group Inc. (“Janus”) Share Exchange
On December 1, 2003, pursuant to a Share Exchange Agreement (the “Exchange Agreement”) dated August 25, 2003 among the Company, Janus and the Company’s Output Solutions Segment subsidiary, DST Output Marketing Services, Inc. (“OMS”), the Company completed an exchange transaction with Janus (the “Janus Exchange”) under which DST received from Janus 32.3 million shares of the Company’s common stock (27.9% of outstanding shares) in exchange for all outstanding OMS stock. At the time of the Janus Exchange, OMS held an operating sheet-fed offset commercial printing, graphics design, laser printing and fulfillment business and additional cash to equalize the value of the OMS operating business and the Company shares being exchanged. Based on the average closing price of the Company’s common stock and Exchange Agreement terms, the exchange value used for the Company shares received in connection with the Janus Exchange was $34.50 per share. Under the terms of the Exchange Agreement, the OMS operating business had a negotiated value of $115.0 million and its assets at closing included additional cash of $999.4 million. For financial reporting purposes, 28.97 million Company shares were valued at $34.50 (representing the cash element of the Janus Exchange) while the remaining 3.33 million shares were valued at $37.97 (representing the exchange value of the OMS operating business based on the closing price of the Company’s common stock on December 1, 2003). Accordingly, for financial reporting purposes, the Company recognized a gain of $108.9 million from the Janus Exchange. The Janus Exchange was structured as a tax-free split off in accordance with Section 355 of the Internal Revenue Code and the Company has not recognized any income tax expense relating to the transaction. OMS’ operating revenues for the period January 1 through December 1, 2003 and the year ended December 31, 2002 were $61.4 million and $77.4 million, respectively. OMS’ pre-tax earnings for the period January 1 through December 1, 2003 and the year ended December 31, 2002 were $3.7 million and $4.5 million, respectively. OMS has approximately 420 employees. The Exchange Agreement subjects the Company to non-compete provisions with respect to certain business products and services of OMS for a period of five years after the December 1, 2003 closing date.
Convertible Debt Offering
In August 2003 the Company issued convertible debentures in order to partially finance the Janus Exchange. The Company issued $840 million aggregate principal amount of convertible senior debentures, consisting of $540 million of 4.125% Series A convertible senior debentures due 2023 and $300 million aggregate principal amount of 3.625% Series B convertible senior debentures due 2023. The Series A debentures and Series B debentures bear interest at a rate of 4.125% and 3.625% per annum, respectively. For a more detailed description of these debentures, see “Significant Events – Convertible Debt Offering” in MD&A under Item 7 herein.
New Syndicated Line of Credit Facility
In November 2003, the Company entered into a $650 million syndicated line of credit facility to replace its prior $315 million syndicated line of credit facility. The $650 million facility is comprised of a $400 million three-year revolving line of credit and a $250 million three-year term note and is secured by marketable securities owned by one of the Company’s subsidiaries. Interest rates are based on LIBOR plus an applicable margin with facility and utilization fees applied. Approximately $500 million was initially drawn against this facility to partially finance the Janus Exchange. For a more detailed description of the credit facility, see “Significant Events – New Syndicated Line of Credit Facility” in MD&A under Item 7 herein.
3
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, investments in equity securities and certain financial interests and the Company’s real estate subsidiaries and affiliates have been aggregated into an Investments and Other Segment. A summary of each of the Company’s Segments follows:
Financial Services
DST’s Financial Services Segment provides sophisticated information processing and computer software services and products primarily to mutual funds, investment managers, corporations, insurance companies, banks, brokers and financial planners. DST’s proprietary software systems include mutual fund shareowner and unit trust recordkeeping systems for U.S. and international mutual fund companies; a defined-contribution participant recordkeeping system for the U.S. retirement plan market; securities transfer systems offered to corporations, corporate trustees and transfer agents; investment management systems offered to U.S. and international investment managers and fund accountants; a workflow management and customer contact system offered to mutual funds, insurance companies, brokerage firms, banks, cable television operators and health care providers; and record-keeping systems to support “managed account” investment products. DST also provides design, management and transaction processing services for customized consumer equipment maintenance and debt protection programs.
The Segment distributes its services and products on a direct basis and through subsidiaries and joint venture affiliates in the U.S., United Kingdom (“U.K.”), Canada, Europe, Australia, South Africa and Asia-Pacific and, to a lesser degree, distributes such services and products through various strategic alliances.
Output Solutions
DST’s Output Solutions Segment provides single source, integrated print and electronic communications solutions. In the U.S., the Company provides customized and personalized bill and statement processing services, electronic bill payment and presentment solutions and computer output archival solutions.
The Segment also offers its services to the Canadian and U.K. markets. DST Output Canada Inc. (“DST Output Canada”), formerly known as Xebec Imaging Services, Inc., offers customer communications and document automation solutions to the Canadian market. DST International Output Limited (“DST International Output”) provides personalized paper and electronic communications principally in the U.K.
The Segment distributes its products directly in connection with the provision of certain Financial Services and Customer Management products and in connection with other providers of data processing services.
Customer Management
DST’s Customer Management Segment provides customer management, billing and marketing solutions to the video/broadband, direct broadcast satellite (“DBS”), wire-line and Internet Protocol (“IP”) telephony, Internet and utility markets. The Segment offers a comprehensive customer management and billing solution by providing core customer care products that are supplemented with the products and services offered from DST’s other operating segments.
4
The Segment distributes its services and products on a direct basis, through subsidiaries in North America, the U.K. and parts of Europe and with international alliance partners in other regions of the world.
Investments and Other
The Investments and Other Segment holds investments in equity securities and certain financial interests and the Company’s real estate subsidiaries and affiliates. The Company holds investments in equity securities with a market value of approximately $1.2 billion at December 31, 2003, including approximately 12.8 million shares of State Street Corporation (“State Street”) with a market value of $666 million and 8.6 million shares of Computer Sciences Corporation (“CSC”) with a market value of $382 million. Additionally, the Company owns and operates 2.7 million square feet of real estate, mostly in the U.S. and U.K., which is held primarily for lease to the Company’s other business segments.
Source of Revenue
The Company’s sources of revenue are presented below. The sources listed may be served by more than one of the Company’s business segments.
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Year Ended December 31, |
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2003 |
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2002 |
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2001 |
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(dollars in millions) |
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U. S. operating revenues |
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Mutual fund / investment management |
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$ |
667.7 |
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38.7 |
% |
$ |
630.9 |
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38.1 |
% |
$ |
640.7 |
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38.7 |
% |
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Securities transfer |
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244.1 |
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14.2 |
% |
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267.1 |
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16.1 |
% |
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257.7 |
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15.6 |
% |
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Other financial services |
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116.0 |
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6.7 |
% |
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135.5 |
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8.2 |
% |
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122.2 |
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7.4 |
% |
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Video/broadband/satellite TV |
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174.5 |
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10.1 |
% |
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182.6 |
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11.0 |
% |
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204.6 |
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12.4 |
% |
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Telecommunications and utilities |
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210.8 |
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12.2 |
% |
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173.1 |
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10.4 |
% |
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166.8 |
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10.1 |
% |
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Other |
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123.2 |
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7.2 |
% |
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115.3 |
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7.0 |
% |
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128.5 |
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7.6 |
% |
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Total U.S. operating revenues |
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1,536.3 |
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89.1 |
% |
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1,504.5 |
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90.8 |
% |
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1,520.5 |
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91.8 |
% |
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International operating revenues |
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Mutual fund / investment management |
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101.9 |
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5.9 |
% |
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88.4 |
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5.3 |
% |
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81.1 |
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4.9 |
% |
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Other financial services |
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52.3 |
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3.0 |
% |
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34.1 |
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2.1 |
% |
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20.9 |
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1.3 |
% |
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Video/broadband/satellite TV |
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17.3 |
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1.0 |
% |
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15.5 |
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0.9 |
% |
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18.1 |
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1.1 |
% |
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Telecommunications and utilities |
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6.5 |
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0.4 |
% |
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4.9 |
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0.3 |
% |
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4.1 |
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0.2 |
% |
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Other |
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10.6 |
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0.6 |
% |
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10.5 |
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0.6 |
% |
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11.3 |
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0.7 |
% |
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Total international operating revenues |
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188.6 |
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10.9 |
% |
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153.4 |
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9.2 |
% |
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135.5 |
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8.2 |
% |
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Total operating revenues |
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1,724.9 |
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100.0 |
% |
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1,657.9 |
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100.0 |
% |
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1,656.0 |
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100.0 |
% |
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Out-of-pocket reimbursements (1) |
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691.4 |
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725.9 |
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724.7 |
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Total revenues |
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$ |
2,416.3 |
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$ |
2,383.8 |
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$ |
2,380.7 |
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(1) Principally postage and telecommunication expenditures, which are reimbursed by the customer.
5
FINANCIAL SERVICES SEGMENT
The Financial Services Segment is the largest operating segment of the Company, providing the following products and services: mutual fund shareowner processing, corporate securities processing, business process management, investment management software and services and consumer risk transfer programs.
The following table provides key operating data for the Financial Services Segment:
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Year Ended December 31, |
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| Financial Services Operating Data |
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2003 |
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2002 |
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2001 |
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| Revenues (in millions) |
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| Operating Revenues |
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| U.S. |
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$ |
937.5 |
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$ |
870.5 |
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$ |
803.8 |
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| International |
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123.0 |
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100.3 |
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100.0 |
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| Total Operating Revenues |
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1,060.5 |
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970.8 |
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903.8 |
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| Out-of-pocket reimbursements (1) |
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126.8 |
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