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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 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
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DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
DELAWARE 43-1581814
(State or other jurisdiction (I.R.S. Employer identification no.)
of incorporation or organization)
333 WEST 11TH STREET, KANSAS CITY, MISSOURI 64105
(Address of principal executive offices) (Zip code)
Company's telephone number, including area code (816) 435-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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COMMON STOCK, $0.01 PER SHARE PAR VALUE NEW YORK STOCK EXCHANGE
CHICAGO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in a definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
Aggregate market value of the voting and non-voting stock held by non-affiliates
of the Company as of 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
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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
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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,
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2000 1999 1998
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(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%
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Total U.S. revenues...................... 1,209.1 88.8% 1,061.1 86.5% 968.5 86.5%
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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%
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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,
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2000 1999 1998
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FINANCIAL SERVICES OPERATING DATA
Revenues (in millions)
U.S....................................................... $503.1 $427.0 $390.1
International............................................. 117.9 127.9 117.5
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$621.0 $554.9 $507.6
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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
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72.1 56.4 49.8
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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
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(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 FROM OPERATIONS BEFORE MERGER CHARGES
Consolidated income from operations before merger charges increased
$64.9 million or 32.5% in 2000 and $47.1 million or 30.9% in 1999. The operating
margin before merger charges was 19.4%, 16.3% and 13.6% in 2000, 1999 and 1998,
respectively. The growth in 2000 was primarily a result of a $56.5 million or
46.0% increase in the Financial Services Segment which resulted in an operating
margin of 28.9% in 2000 compared to 22.1% in 1999. The increase in 2000
Financial Services Segment operating margin resulted from increased U.S.
revenues. The improvement in 1999 Financial Services operating margin resulted
from increased U.S. revenues, significant improvement in international
operations and the capitalization of $18.1 million of internal use software
development costs.
Output Solutions Segment income from operations before merger charges increased
$16.0 million or 32.7% in 2000 and $15.1 million or 44.5% in 1999. Output
Solutions Segment operating margin was 11.0%, 9.6% and 7.8% in 2000, 1999 and
1998, respectively. The improvement in the 2000 operating margin results are
primarily from an increased volume of images and statements produced, which were
partially offset by the increased spending in Internet-based product development
costs. The improvement in the 1999 operating margin percentage resulted from
increased revenues and the capitalization of $3.5 million of internal use
software development costs.
In 2000, Customer Management Segment income from operations decreased
$6.2 million or 29.1%, primarily attributable to a decline in processing and
software services revenues. In 1999, Customer Management Segment income from
operations before merger charges, decreased $3.2 million or 13.1% from a decline
in processing and software services revenues and a decrease in equipment
revenues mostly related to transitioning a discontinued customer off of the
Company's services.
Investments and Other Segment income from operations before merger charges, was
$5.2 million, $6.6 million, and $8.8 million in 2000, 1999 and 1998,
respectively. The 2000 amount declined primarily due to lower leasing revenues
partially offset by higher real estate revenues. The 1999 amount declined
primarily due to a one-time charge related to certain equipment leased to third
parties.
MERGER CHARGES
The 1998 results include recognition of $26.0 million of merger charges related
to the USCS Merger and $7.1 million of merger charges related to the Custima
Acquisition.
INTEREST EXPENSE
Interest expense was $5.6 million in 2000 compared to $5.2 million in 1999.
Average debt balances and interest rates were higher for 2000 compared to 1999.
Interest expense for 1999 decreased $3.4 million or 39.5% compared to 1998.
Average debt balances were lower for 1999 compared to 1998.
OTHER INCOME, NET
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 investments principally from the
Investments and Other Segment, 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
30
investments. During the fourth quarter of 2000, 325,000 shares of State Street
Corporation ("State Street") common stock were liquidated primarily in
conjunction with the formation and capitalization of a wholly owned captive
insurance company that will principally manage the Company's self-insured risks.
The captive insurance company intends to invest its capital in a high grade
fixed income portfolio. 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 gains were offset by net losses on equipment
dispositions of $3.5 million in 1999.
EQUITY IN EARNINGS AND LOSSES OF UNCONSOLIDATED AFFILIATES
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization, is
as follows (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Boston Financial Data Services, Inc......................... $12.5 $ 8.9 $ 7.2
European Financial Data Services Limited.................... (2.1) (5.3) (11.1)
Argus Health Systems, Inc................................... 0.8 2.6 2.7
Other....................................................... 0.2 0.4 (1.5)
----- ----- ------
$11.4 $ 6.6 $ (2.7)
===== ===== ======
Equity in earnings of unconsolidated affiliates increased $4.8 million in 2000
as a result of increased levels of mutual fund activity at BFDS and decreased
losses at EFDS, reflecting an increase in accounts serviced at EFDS to
2.7 million at December 31, 2000 as compared to 2.0 million accounts at
December 31, 1999 and 1.4 million accounts at December 31, 1998.
DST recorded losses from EFDS of $2.1 million, $5.3 million and $11.1 million in
2000, 1999 and 1998, respectively. The losses at EFDS were the result of the
continued development of the new FAST software and conversion activity
associated with adding new clients and converting existing clients from the old
system to FAST. Substantially all accounts are now processed on the FAST system.
The Company's share of internal use software development costs capitalized by
EFDS, net of amortization, was $0.2 million and $2.4 million in 2000 and 1999,
respectively.
INCOME TAXES
The Company's effective tax rate was 35.9%, 35.9% and 38.4% for the years ended
December 31, 2000, 1999 and 1998, respectively. Excluding the impact of the
previously discussed 1998 merger charges, the Company's effective tax rate would
have been 35.9%, 35.9% and 34.5% for 2000, 1999 and 1998, respectively. The
primary difference between the Company's effective tax rate and the combined
federal and state statutory rates is the result of deferred taxes being provided
for unremitted earnings of U.S. unconsolidated affiliates net of the dividends
received deduction provided under current tax law, increased tax benefits
associated with 1998 international operations, and the benefits associated with
Missouri income apportionment rules designed to attract and retain mutual fund
service companies.
NET INCOME
The Company's net income (and earnings per share) for 2000, 1999 and 1998 was
$215.8 million ($1.72 basic earnings per share and $1.67 diluted earnings per
share), $138.1 million ($1.09 basic earnings per share and $1.06 diluted
earnings per share), and $71.6 million ($0.57 basic earnings per share and $0.56
diluted earnings per share), respectively. Excluding the impact of net gains on
sale of available-for-sale securities in 2000, 1999 and 1998, the previously
discussed litigation settlement in 2000 and the previously discussed 1998 merger
charges, the Company's net income and earnings per share for 2000,
31
1999 and 1998 would have been $181.5 million ($1.45 basic earnings per share and
$1.40 diluted earnings per share), $131.9 million ($1.04 basic earnings per
share and $1.02 diluted earnings per share) and $96.5 million ($0.77 basic
earnings per share and $0.75 diluted earnings per share), respectively.
YEAR TO YEAR BUSINESS SEGMENT COMPARISONS
FINANCIAL SERVICES SEGMENT
REVENUES
Financial Services Segment revenues for 2000 increased 11.9% over 1999 to
$621.0 million. U.S. Financial Services revenues increased 17.8% to
$503.1 million in 2000. U.S. mutual fund processing revenues for 2000 increased
19.3% over the prior year as shareowner accounts serviced increased 27.8% from
56.4 million at December 31, 1999 to 72.1 million at December 31, 2000.
Financial Services Segment revenues from international operations for 2000
decreased 7.8% to $117.9 million. The revenue decrease resulted primarily from
lower revenues from professional service and Canadian mutual fund processing
partially offset by higher AWD software maintenance revenues. Canadian
shareowner accounts serviced decreased 37.5% from 2.4 million at December 31,
1999 to 1.5 million at December 31, 2000 primarily from the loss of a client
associated with an acquisition.
Segment revenues for the year ended December 31, 1999 increased 9.3% over 1998
to $554.9 million. U.S. revenues increased 9.5% to $427.0 million in 1999. U.S.
mutual fund processing revenues for 1999 increased 12.0% over the prior year as
shareowner accounts serviced increased 13.3% from 49.8 million at December 31,
1998 to 56.4 million at December 31, 1999.
Segment revenues from international operations for 1999 increased 8.9% to
$127.9 million. The revenue increase resulted primarily from increased
investment accounting software licenses and services and growth in Canadian
mutual fund shareowner processing revenues. Canadian shareowner accounts
serviced increased 50.0% from 1.6 million at December 31, 1998 to 2.4 million at
December 31, 1999.
COSTS AND EXPENSES
Segment costs and expenses for 2000 and 1999 increased 1.9% to $372.6 million
and 1.4% to $365.6 million, respectively, over the comparable prior year
periods. Costs and expenses for 2000 and 1999 were reduced by $24.3 million and
$18.1 million, respectively, as a result of capitalizing costs of internal use
software as required under SOP 98-1, which was partially offset by the increase
in personnel costs to support revenue growth and volumes. In addition, costs and
expenses in 2000 included a $3.9 million recovery of costs previously expensed
in 1999 associated with a terminated international software development
contract.
DEPRECIATION AND AMORTIZATION
Segment depreciation and amortization for 2000 increased 3.9% or $2.6 million.
The increase was primarily attributable to increased capital additions during
2000 and amortization of capitalized internal use software costs. Segment
depreciation and amortization for 1999 increased 7.8% or $4.8 million. The
increase was primarily attributable to increased capital additions during 1999
and a one-time $3.7 million asset impairment charge during 1999 for certain
international securities processing systems.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
The Segment's income from operations before merger charges for 2000 and 1999
increased 46.0% to $179.3 million and 43.8% to $122.8 million, respectively,
over the comparable prior year periods. The Segment's operating margins,
excluding merger charges, were 28.9%, 22.1%, and 16.8% in 2000, 1999 and 1998,
respectively. The increases in Financial Services Segment operating margins were
a result of
32
increased U.S. revenue and capitalization of costs of software developed for
internal use in 2000 and 1999.
OUTPUT SOLUTIONS SEGMENT
REVENUES
Output Solutions Segment revenues for 2000 increased 15.6% to $592.2 million
compared to 1999. Output Solutions Segment revenues for 1999 increased by 17.6%
to $512.2 million from $435.5 million in 1998. The growth in segment revenue was
derived from an increase in the volume of statements and images produced which
was partially related to the growth of existing customers in the Financial
Services and Customer Management Segments and new customers, primarily in
telecommunications and other high-volume markets.
COSTS AND EXPENSES
Segment costs and expenses for 2000 and 1999 increased 14.2% to $491.5 million
and 15.1% to $430.2 million, respectively, over the comparable prior year
periods. Personnel costs for 2000 and 1999 increased 21.1% and 15.6%,
respectively, over the comparable prior year periods as a result of increased
staff levels to support volume growth and research and development costs
relating primarily to ongoing product development. In addition, 2000 and 1999
costs included integration costs to combine the output related businesses and
higher Internet-based electronic bill and statement product development and
selling costs which were partially offset by the effect of capitalizing
$8.8 million and $3.5 million, respectively, of internal use software
development costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased 8.2% to $35.7 million in 2000 and
increased 19.1% to $33.0 million in 1999. The increase in depreciation and
amortization in 2000 and 1999 as compared to prior years was attributable to
increased print/mail capital additions, including capitalized internal software
development costs, to support revenue growth.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
The Segment's income from operations before merger charges for 2000 and 1999
increased $16.0 million or 32.7% and $15.1 million or 44.5% principally from
increased volumes for images and statements and the effect of capitalized
internal use software development costs. The Segment's operating margins,
excluding merger charges, were 11.0%, 9.6% and 7.8% in 2000, 1999 and 1998,
respectively.
CUSTOMER MANAGEMENT SEGMENT
REVENUES
Customer Management Segment revenues for 2000 decreased 3.9% from 1999 to
$195.0 million. Processing and software revenues decreased 6.2% in 2000 to
$178.8 million which were partially offset by an increase in equipment sales of
30.6% to $16.2 million in 2000. During 1999, segment revenues decreased 7.8%
from 1998 to $203.0 million. Processing and software revenues decreased 1.3% to
$190.6 million in 1999 from $193.1 million in 1998. Equipment sales and services
decreased 54.1% to $12.4 million in 1999 from $27.0 million in 1998. 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.
The Company recently announced that it has signed an agreement with Comcast
Cable Communications, Inc. to provide the Company's customer relationship
management and workflow business solution, AWD. This is the first Customer
Management client to contract for AWD. No
33
Comcast AWD software license revenues were recognized during 2000. The Company
expects to recognize such revenues in 2001.
The Company has been advised that a customer, MediaOne Group Inc. (MediaOne),
plans to discontinue its processing agreement as a result of MediaOne's
acquisition by AT&T. It is expected that a substantial portion of MediaOne's
subscribers will be removed during 2001. At December 31, 2000, the Company
serviced 3.6 million MediaOne subscribers.
COSTS AND EXPENSES
Segment costs and expenses for 2000 and 1999 decreased 2.0% to $163.9 million
and 9.1% to $167.3 million, respectively, over the comparable prior year
periods. The decrease in segment costs and expenses in 2000 was primarily
attributable to decreased costs associated with lower processing and service
revenues and to the management of personnel costs. Segment costs and expenses in
1999 decreased primarily due to a decrease in equipment related costs related to
sales to customers.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for 2000 and 1999 increased 11.1% to
$16.0 million and 24.1% to $14.4 million, respectively, over the comparable
prior year periods. The increase in 2000 and 1999 was primarily attributable to
increased amortization of capitalized software development costs. Amortization
also increased in 1999 due to goodwill amortization relating to the Custima
Acquisition in August 1998.
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
Segment income from operations for 2000 decreased $6.2 million as compared to
1999. The decrease was attributable to decreased processing and service
revenues. The Segment's income from operations before merger charges for 1999
decreased $3.2 million as compared to 1998. The 1999 decrease was attributable
to decreased equipment sales for the year, increased amortization of capitalized
software development costs, increased intangible amortization relating to the
Custima Acquisition and transitioning a discontinued customer off of the
Company's services. The Segment's operating margin before merger charges was
7.7%, 10.5% and 11.2% in 2000, 1999 and 1998, respectively.
INVESTMENTS AND OTHER SEGMENT
REVENUES
Investments and Other Segment revenues totaled $33.2 million, $32.9 million, and
$34.1 million in 2000, 1999 and 1998, respectively. Real estate revenues of
$29.5 million, $26.7 million and $27.8 million in 2000, 1999 and 1998,
respectively, were primarily derived from the lease of facilities to the
Company's other business segments. Revenues of $3.7 million, $6.2 million and
$6.3 million in 2000, 1999 and 1998, respectively, were derived from the
Segment's hardware leasing activities.
COSTS AND EXPENSES
Investments and Other Segment costs and expenses increased in 2000 primarily as
a result of changes in real estate related costs. Costs and expenses for 1999
were essentially unchanged from 1998.
DEPRECIATION AND AMORTIZATION
Investments and Other Segment depreciation and amortization decreased
$1.1 million in 2000 and increased $1.1 million in 1999 as a result of a
one-time charge in 1999 related to certain equipment leased to third parties.
34
INCOME FROM OPERATIONS BEFORE MERGER CHARGES
The segment's income from operations before merger charges totaled
$5.2 million, $6.6 million and $8.8 million in 2000, 1999 and 1998,
respectively. The decrease in 2000 income from operations before merger charges
as compared to 1999 is primarily related to decreased revenues from hardware
leasing activities. The decrease in 1999 income from operations before merger
charges as compared to 1998 was primarily related to the one-time charge related
to certain leased equipment to third parties.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $333.8 million,
$252.3 million and $274.8 million in 2000, 1999 and 1998, respectively.
Operating cash flows in 2000 were primarily impacted by net income of
$215.8 million, the impact of depreciation and amortization of $128.6 million,
deferred taxes of $22.0 million, increases in accounts receivable of
$40.8 million and increases in accounts payable and other accrued liabilities of
$56.5 million. The Company utilized its 2000 operating cash flow to reinvest in
its existing business, fund investments and advances to unconsolidated
affiliates and fund treasury stock purchases. The Company had $116.2 million of
cash and cash equivalents at December 31, 2000.
During the fourth quarter 2000, the Company initiated a cash management service
for transfer agency clients, whereby end of day available client bank balances
are invested overnight by and in the name of the Company into credit-quality
money market funds. All invested balances are returned to the transfer agency
client accounts the following business day.
Accounts receivable increased in 2000 by approximately $40.8 million or 12.7%
from 1999 primarily from increases in revenue. The Company collects from its
clients and remits to the U.S. Postal Service a significant amount of postage. A
significant number of contracts allow the Company to pre-bill and/or require
deposits from its clients to mitigate the effect on cash flow.
The Company's research and development efforts are focused on introducing new
products and services as well as on enhancing 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.
The Company continues to make significant investments in capital equipment and
facilities. During the years ended December 31, 2000, 1999 and 1998, the Company
expended approximately $176.0 million, $139.0 million and $132.7 million,
respectively, in capital expenditures for equipment and facilities which
includes amounts directly paid by third-party lenders. Capital expenditures for
2000 and 1999 include $1.2 million and $9.6 million for assets placed in service
in 1999 and 1998, respectively. Capitalized costs of software developed for
internal use totaled $33.8 million and $21.6 million in 2000 and 1999,
respectively. Capitalized development costs for systems to be sold or licensed
to third parties were $9.8 million, $5.0 million and $2.5 million for 2000, 1999
and 1998, respectively. Future capital expenditures are expected to be funded
primarily by cash flows from operating activities, secured term notes or bank
lines of credit as required.
The Company expended approximately $89.8 million, $60.8 million and
$48.0 million primarily for investments and advances to unconsolidated
affiliates during 2000, 1999 and 1998, respectively, including $14.3 million,
$16.9 million and $15.5 million of advances to greater than 20% owned
unconsolidated affiliates and $75.5 million, $43.9 million and $32.5 million of
investments in available-for-sale securities and other investments. In addition,
the Company expended $4.9 million and $14.2 million during 2000 and 1998,
respectively, for acquisitions of subsidiaries, net of cash acquired. The
Company received proceeds from the sale of investments of $83.2 million,
$24.8 million and $7.0 million in 2000, 1999 and 1998, respectively.
The Company maintains $110 million in bank lines of credit for working capital
requirements and general corporate purposes which are scheduled to mature in
May 2001. The Company also maintains a
35
$125 million revolving credit facility with a syndicate of banks which is
available through December 2001. Borrowings under these facilities totaled
$50.0 million at December 31, 2000.
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 shares outstanding
and earnings per share amounts have been restated to reflect this stock split.
In May 1996, the Board of Directors determined it was necessary for the Company
to have common stock available to provide to employees under its stock award
program and to provide to option holders who exercise options. The Board of
Directors authorized the purchase of up to 2.4 million shares during a
twenty-four month period in approximately equal monthly amounts subject to such
variations as management deemed appropriate. The Company expended $10.0 million
in 1998 to complete the purchases under this plan.
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.
During the fourth quarter 1999 and the first quarter 2000, the Company entered
into forward stock purchase agreements for the repurchase of up to 8.0 million
shares of its common stock as a means of securing potentially favorable prices
for future purchases of its stock. During 2000, and included in the numbers set
forth in the preceding paragraph, the Company purchased 2.6 million shares under
these agreements for $81.4 million. As of December 31, 2000, the cost to settle
the agreements would be approximately $179.3 million for approximately
5.4 million shares of common stock. The agreements, which expire in March 2001
and September 2002, allow the Company to elect net cash or net share settlement
in lieu of physical settlement of the shares.
USCS, prior to the USCS Merger, expended approximately $6.2 million in 1998 for
the repurchase of common stock in order to meet obligations under stock option
plans, employee stock purchase plans and 401(k) retirement plans. Substantially
all these shares were reissued under the plans, prior to the consummation of the
USCS Merger.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will suffice to meet the
Company's operating and debt service requirements and other current liabilities
for at least the next 12 months. Further, the Company believes that its longer
term liquidity and capital requirements will also be met through cash provided
by operating activities and bank credit facilities, the Company's $125 million
revolving credit facility described above as well as the Company's $1.4 billion
of investments in available-for-sale securities at December 31, 2000.
36
INTERNAL USE SOFTWARE
Effective January 1, 1999, the Company adopted, as required, Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Prior to the adoption of SOP 98-1, the Company
expensed the costs of internally developed proprietary software as it was
incurred. SOP 98-1, effective for fiscal periods beginning after December 15,
1998, required that certain costs for the development of internal use software
be capitalized, including the costs of coding, software configuration, upgrades
and enhancements. 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. These costs will be amortized under the Company's
current policy on a straight-line basis, depending on the nature of the project,
generally over a three year period beginning on the date such software is
complete.
SEASONALITY
Generally, the Company does not have significant seasonal fluctuations in its
business operations. Processing and output solutions volumes for mutual fund
customers are usually highest during the quarter ended March 31 due primarily to
processing year-end transactions and printing and mailing of year-end statements
and tax forms during January. The Company has historically added operating
equipment in the last half of the year in preparation for processing year-end
transactions which has the effect of increasing costs for the second half of the
year. Revenues and operating results from individual license sales depend
heavily on the timing and size of the contract.
COMPREHENSIVE INCOME
The Company's comprehensive income totaled $205.7 million, $311.5 million and
$232.8 million in 2000, 1999 and 1998, respectively. Comprehensive income
consists of net income of $215.8 million, $138.1 million and $71.6 million in
2000, 1999 and 1998, respectively, and other comprehensive losses of
$10.1 million in 2000 and other comprehensive income of $173.4 million and
$161.2 million in 1999 and 1998, respectively. Other comprehensive income (loss)
consists of unrealized gains (losses) on available-for-sale securities, net of
deferred taxes, reclassifications for gains included in net income and foreign
currency translation adjustments. The Company had a net unrealized loss on
available-for-sale securities of $6.6 million in 2000 and net unrealized gains
on available-for-sale securities of $174.1 million and $161.2 million in 1999
and 1998, respectively. The Company's net unrealized losses and gains on
available-for-sale securities results primarily from changes in the market value
of the Company's investments in approximately 5.7 million shares of State Street
common stock and approximately 8.6 million shares of CSC common stock. At
December 31, 2000, these two investments had an aggregate pre-tax unrealized
gain of $835.7 million. The amounts of foreign currency translation adjustments
included in other comprehensive income are immaterial.
DERIVATIVE AND HEDGING ACTIVITIES
Financial Accounting Standards Board Statement No. 133 established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value and that the changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. This
statement, as amended, became effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). The
implementation of the new standard has not had a material effect on the
consolidated results of operations of the Company.
37
REVENUE RECOGNITION
Securities and Exchange Commission Staff Accounting Bulletin Nos. 101, 101A and
101B summarize the application of generally accepted accounting principles to
revenue recognition in financial statements. Based on these guidelines, revenue
should be recognized when it is realized or realizable and it is earned. These
guidelines became effective in the fourth quarter 2000 for the Company's year
ended December 31, 2000. The implementation of the new guidelines did not have a
material effect on the consolidated results of operations of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the operations of its businesses, the Company's financial results can be
affected by changes in equity pricing, interest rates and currency exchange
rates. Changes in interest rates and exchange rates have not materially impacted
the consolidated financial position, results of operations or cash flows of the
Company. Changes in equity values of the Company's investments have had a
material effect on the Company's comprehensive income and financial position.
AVAILABLE-FOR-SALE EQUITY PRICE RISK
The Company's investments in available-for-sale equity securities are subject to
price risk. The fair value of the Company's available-for-sale investments as of
December 31, 2000 was approximately $1.4 billion. The impact of a 10% change in
fair value of these investments would be approximately $87 million to
comprehensive income. As discussed under "Comprehensive Income" above, net
unrealized gains on the Company's investments in available-for-sale securities
have had a material effect on the Company's comprehensive income and financial
position.
INTEREST RATE RISK
At December 31, 2000, the Company had $90.0 million of long-term debt, of which
$64.4 million was subject to variable interest rates (Federal Funds rates, LIBOR
rates, Prime rates). The Company estimates that a 10% increase in interest rates
would not be material to the Company's consolidated pretax earnings or to the
fair value of its debt.
FOREIGN CURRENCY EXCHANGE RATE RISK
The operation of the Company's subsidiaries in international markets results in
exposure to movements in currency exchange rates. The principal currencies
involved are the British pound, Canadian dollar, and Australian dollar. As
currency exchange rates change, translation of the financial results of
international operations into U.S. dollars does not now materially affect, and
has not historically materially affected, the consolidated financial results of
the Company.
The Company's international subsidiaries use the local currency as the
functional currency. The Company translates all assets and liabilities at
year-end exchange rates and income and expense accounts at average rates during
the year. While it is generally not the Company's practice to enter into
derivative contracts, from time to time the Company and its subsidiaries do
utilize forward foreign currency exchange contracts to minimize the impact of
currency movements.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF MANAGEMENT
To the Stockholders of DST Systems, Inc.
The accompanying consolidated financial statements of DST Systems, Inc. and its
subsidiaries were prepared by management in conformity with accounting
principles generally accepted in the United States of America. In preparing the
financial statements, management has made judgments and estimates based on
currently available information. Other financial information included in this
annual report is consistent with that in the consolidated financial statements.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that its assets are safeguarded and that its
financial records are reliable. Management monitors the system for compliance,
and the Company's internal auditors measure its effectiveness and recommend
possible improvements thereto.
Independent accountants provide an objective assessment of the degree to which
management meets its responsibility for fairness of financial reporting. They
regularly evaluate the system of internal accounting controls and perform such
tests and other procedures as they deem necessary to express an opinion on the
fairness of the consolidated financial statements.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting controls through its Audit Committee which is
composed solely of directors who are not officers or employees of the Company.
This committee meets regularly with the independent accountants, management and
internal auditors to discuss the scope and results of their work and their
comments on the adequacy of internal accounting controls and the quality of
external financial reporting.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
of DST Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
DST Systems, Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
February 28, 2001
39
DST SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 116.2 $ 89.0
Transfer agency investments............................... 54.2
Accounts receivable (includes related party receivables of
$16.7 and $12.0)........................................ 358.5 320.6
Inventories............................................... 13.3 15.6
Deferred income taxes..................................... 22.3 10.3
Other assets.............................................. 26.2 29.0
-------- --------
590.7 464.5
Investments................................................. 1,521.0 1,477.7
Properties.................................................. 393.8 338.7
Intangibles and other assets................................ 46.9 45.4
-------- --------
Total assets.............................................. $2,552.4 $2,326.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year.................................. $ 21.3 $ 18.4
Transfer agency deposits.................................. 54.2
Accounts payable.......................................... 100.3 93.7
Accrued compensation and benefits......................... 66.3 57.9
Deferred revenues and gains............................... 48.5 44.1
Other liabilities......................................... 65.6 71.7
-------- --------
356.2 285.8
Long-term debt.............................................. 68.7 44.4
Deferred income taxes....................................... 482.0 452.2
Other liabilities........................................... 79.7 80.3
-------- --------
986.6 862.7
-------- --------
Commitments and contingencies (Note 12).....................
-------- --------
Stockholders' equity
Preferred stock, $0.01 par, 10,000,000 shares authorized
and unissued
Common stock, $0.01 par, 300,000,000 shares authorized,
127,633,278 shares issued............................... 1.3 1.3
Additional paid-in capital................................ 425.1 453.5
Retained earnings......................................... 732.0 516.2
Treasury stock, at cost................................... (115.2) (40.1)
Accumulated other comprehensive income.................... 522.6 532.7
-------- --------
Total stockholders' equity.............................. 1,565.8 1,463.6
-------- --------
Total liabilities and stockholders' equity............ $2,552.4 $2,326.3
======== ========
The accompanying notes are an integral part of these financial statements.
40
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues (includes related parties revenues of $150.6,
$120.4 and $105.0)........................................ $1,362.1 $1,227.5 $1,119.2
Costs and expenses.......................................... 968.9 905.0 857.8
Depreciation and amortization............................... 128.6 122.8 108.8
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
-------- -------- --------
Income before minority interests............................ 215.8 137.4 71.3
Minority interests.......................................... (0.7) (0.3)
-------- -------- --------
Net income.................................................. $ 215.8 $ 138.1 $ 71.6
======== ======== ========
Average common shares outstanding........................... 125.3 126.4 125.5
Diluted shares outstanding.................................. 129.4 129.7 128.6
Basic earnings per share.................................... $ 1.72 $ 1.09 $ 0.57
Diluted earnings per share.................................. $ 1.67 $ 1.06 $ 0.56
The accompanying notes are an integral part of these financial statements.
41
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN MILLIONS)
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL OTHER TOTAL
SHARES PAR PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
OUTSTANDING VALUE CAPITAL EARNINGS STOCK INCOME EQUITY
----------- -------- ---------- -------- -------- ------------- -------------
DECEMBER 31, 1997.............. 125.2 $1.3 $465.4 $306.5 $ (40.4) $198.1 $ 930.9
Comprehensive income:
Net income................... 71.6
Other comprehensive income... 161.2
Comprehensive income....... 232.8
Issuance of common stock....... 1.4 (2.9) 21.6 18.7
Repurchase of common stock..... (0.8) (0.9) (15.3) (16.2)
----- ---- ------ ------ ------- ------ --------
DECEMBER 31, 1998.............. 125.8 1.3 461.6 378.1 (34.1) 359.3 1,166.2
Comprehensive income:
Net income................... 138.1
Other comprehensive income... 173.4
Comprehensive income....... 311.5
Issuance of common stock....... 2.2 (8.1) 46.2 38.1
Repurchase of common stock..... (1.8) (52.2) (52.2)
----- ---- ------ ------ ------- ------ --------
DECEMBER 31, 1999.............. 126.2 1.3 453.5 516.2 (40.1) 532.7 1,463.6
Comprehensive income:
Net income................... 215.8
Other comprehensive loss..... (10.1)
Comprehensive income....... 205.7
Issuance of common stock....... 3.5 (28.4) 102.1 73.7
Repurchase of common stock..... (5.0) (177.2) (177.2)
----- ---- ------ ------ ------- ------ --------
DECEMBER 31, 2000.............. 124.7 $1.3 $425.1 $732.0 $(115.2) $522.6 $1,565.8
===== ==== ====== ====== ======= ====== ========
The accompanying notes are an integral part of these financial statements.
42
DST SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
CASH FLOWS--OPERATING ACTIVITIES:
Net income.................................................. $ 215.8 $ 138.1 $ 71.6
------- ------- -------
Depreciation and amortization............................... 128.6 122.8 108.8
Non-cash merger charges..................................... 13.5
Equity in (earnings) losses of unconsolidated affiliates.... (11.4) (6.6) 2.7
Cash dividends received from unconsolidated affiliates...... 0.1 0.5 9.9
Net realized gains on investments........................... (41.8) (8.9) (1.9)
Deferred taxes.............................................. 22.0 8.4 (10.0)
Increase in accounts receivable............................. (40.8) (38.2) (13.0)
Decrease (increase) in inventories and other current
assets.................................................... 5.1 (0.8) 6.6
Increase in transfer agency investments..................... (54.2)
Increase in transfer agency deposits........................ 54.2
Increase in accounts payable and accrued liabilities........ 56.5 33.1 82.0
Other, net.................................................. (0.3) 3.9 4.6
------- ------- -------
Total adjustments to net income............................. 118.0 114.2 203.2
------- ------- -------
Net..................................................... 333.8 252.3 274.8
------- ------- -------
CASH FLOWS--INVESTING ACTIVITIES:
Proceeds from sale of investments........................... 83.2 24.8 7.0
Investments and advances to unconsolidated affiliates....... (89.8) (60.8) (48.0)
Capital expenditures........................................ (176.0) (139.0) (132.7)
Net investment in leases.................................... (11.7) (9.5) (11.9)
Principal collections on leases............................. 13.2 9.8 6.4
Payment for purchases of subsidiaries, net of cash
acquired.................................................. (4.9) (14.2)
Other, net.................................................. 6.3 11.6 2.3
------- ------- -------
Net..................................................... (179.7) (163.1) (191.1)
------- ------- -------
CASH FLOWS--FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 24.1 24.2 7.9
Proceeds from issuance of long-term debt.................... 0.6 11.5 7.4
Principal payments on long-term debt........................ (9.5) (13.7) (23.4)
Net increase (decrease) in revolving credit facilities...... 35.2 3.2 (37.5)
Common stock repurchased.................................... (177.2) (52.2) (16.2)
Other, net.................................................. (0.1) (1.3) (12.4)
------- ------- -------
Net..................................................... (126.9) (28.3) (74.2)
------- ------- -------
Net increase in cash and cash equivalents................... 27.2 60.9 9.5
Cash and cash equivalents, beginning of year................ 89.0 28.1 18.6
------- ------- -------
Cash and cash equivalents, end of year...................... $ 116.2 $ 89.0 $ 28.1
======= ======= =======
The accompanying notes are an integral part of these financial statements.
43
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
DST Systems, Inc. (the "Company" or "DST") provides sophisticated information
processing and computer software services and products to the financial services
industry (primarily mutual funds and investment managers), communications
industry, video/broadband/satellite TV industry, and other service industries.
In December 1998, the Company completed its merger ("USCS Merger") with USCS
International, Inc. ("USCS"), through the issuance of approximately
27.6 million shares of common stock. The USCS Merger was accounted for under the
pooling of interests accounting method. Accordingly, the DST financial results
for all periods prior to the merger were restated in 1998 to combine the
historical results of operations of DST and USCS, adjusted for conformity of
accounting policies relating primarily to USCS' depreciation and amortization
policies and accounting for the costs of software developed for internal USCS
use.
The Company has several operating business units that offer sophisticated
information processing and software services and products. These 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. 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.
44
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 equity securities,
certain 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.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include all majority-owned subsidiaries of
DST. All significant intercompany balances and transactions have been
eliminated. Certain amounts in the prior year's consolidated financial
statements have been reclassified to conform to the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Computer processing and services revenues are recognized upon completion of the
services provided. Revenues under bundled service agreements are recognized over
the life of the agreement based on usage and as the bundled services are
provided. Software license fees, maintenance fees and other ancillary fees are
recognized as services are provided or delivered and all customer obligations
have been met. The Company generally does not have customer obligations that
extend past one year. Revenue from equipment sales and sales-type leases is
recognized as equipment is shipped. Income from financing leases is recognized
as revenue at a constant periodic rate of return on the net investment in the
lease. Revenue from rentals and operating leases is recognized monthly as the
rent accrues. Billing for services in advance of performance is recorded as
deferred revenue. Allowances for
45
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
billing adjustments are determined as revenues are recognized and are recorded
as reductions in revenues. Doubtful account expense for the Company is
immaterial.
The Company has entered into various agreements with related parties,
principally unconsolidated affiliates, to utilize the Company's data processing
facilities and computer software systems. The Company believes that the terms of
its contracts with related parties are fair to the Company and are no less
favorable to the Company than those obtained from unaffiliated parties.
Securities and Exchange Commission Staff Accounting Bulletin Nos. 101, 101A and
101B summarize the application of generally accepted accounting principles to
revenue recognition in financial statements. Based on these guidelines, revenue
should be recognized when it is realized or realizable and it is earned. These
guidelines became effective during the fourth quarter 2000 for the Company's
year ended December 31, 2000. The implementation of the new guidelines did not
have a material effect on the consolidated results of operations of the Company.
COSTS AND EXPENSES
Costs and expenses include all costs, excluding depreciation and amortization,
incurred by the Company to produce revenues. The Company believes that the
nature of its business as well as its organizational structure, in which
virtually all officers and associates have operational responsibilities, does
not allow for a meaningful segregation of selling, general and administrative
costs. These costs, which the Company believes to be immaterial, are also
included in costs and expenses. Substantially all depreciation and amortization
are directly associated with the production of revenues.
SOFTWARE DEVELOPMENT AND MAINTENANCE
Purchased software is recorded at cost and is amortized over the estimated
economic lives of three to five years. Effective January 1, 1999, the Company
adopted, as required, Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" issued by the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants. SOP 98-1, effective for periods beginning after
December 15, 1998, requires that certain costs for the development of internal
use software, including coding and software configuration costs, and costs of
upgrades and enhancements be capitalized. These costs will be amortized under
the Company's current policy on a straight-line basis, depending on the nature
of the project, generally over a three year period. Prior to the adoption of SOP
98-1, costs of software developed for internal use were expensed as incurred.
For the years ended December 31, 2000 and 1999, the Company capitalized
$28.5 million and $24.0 million, respectively, of costs (net of related
amortization) related to such development, including $0.2 million and
$2.4 million, respectively, of capitalized costs at an unconsolidated
subsidiary. If internal use software development costs had 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.
Research and development costs for software that will be sold or licensed to
third parties are expensed as incurred and consist primarily of software
development costs incurred prior to the achievement of technological
feasibility. The Company capitalizes software development costs for software
that will be sold or licensed to third parties after the products reach
technological feasibility, it has been determined that the software will result
in probable future economic benefits and management has committed to funding the
project. These capitalized development costs are amortized on a
product-by-product basis using the greater of the amount computed by taking the
ratio of current year's net revenue to current year's net revenue plus estimated
future net revenues or the amount computed
46
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by the straight-line method over the estimated useful life of the product,
generally three to five years. The Company evaluates the net realizable value of
capitalized software development costs on a product-by-product basis. The cost
of custom development that is required and funded by a specific client is
charged to costs and expenses as incurred.
A portion of the Company's development costs are funded by customers through
various programs, including product support and shared-cost arrangements.
Amounts received under the arrangements reduce the amount of development costs
either expensed or capitalized, depending on the terms of the agreement and the
nature of the software being developed.
Operating costs include non-capitalizable software development and maintenance
costs relating to internal proprietary systems and non-capitalizable costs for
systems to be sold or licensed to third parties of approximately
$160.1 million, $145.8 million and $163.0 million for the years ended
December 31, 2000, 1999 and 1998, respectively. The Company capitalized
$33.8 million and $21.6 million of costs related to the development of internal
use software for the years ended December 31, 2000 and 1999, respectively.
Capitalized development costs for systems to be sold or licensed to third
parties were $9.8 million, $5.0 million and $2.5 million for the years ended
December 31, 2000, 1999 and 1998, respectively. Amortization expense related to
capitalized development costs totaled $8.1 million, $1.8 million and
$0.4 million for the years ended December 31, 2000, 1999 and 1998, respectively.
CASH EQUIVALENTS
Short-term liquid investments with a maturity of three months or less are
considered cash equivalents. Due to the short-term nature of these investments,
carrying value approximates market value.
TRANSFER AGENCY INVESTMENTS AND DEPOSITS
During the fourth quarter 2000, the Company initiated a cash management service
for transfer agency clients, whereby end of day available client bank balances
are invested by and in the name of the Company into credit-quality money market
funds. All invested balances are returned to the transfer agency client accounts
the following business day.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined on the
specific identification or first-in, first-out basis. Inventories are comprised
primarily of paper and envelope stocks.
INVESTMENTS IN SECURITIES
The equity method of accounting is used for all entities in which the Company or
its subsidiaries have at least a 20% voting interest and significant influence
but do not control; the cost method of accounting is used for investments of
less than 20% voting interest. Investments classified as available-for-sale
securities are reported at fair value with unrealized gains and losses excluded
from earnings and recorded net of deferred taxes directly to stockholders'
equity as accumulated other comprehensive income.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost with major additions and
improvements capitalized. Cost includes the amount of interest cost associated
with significant capital additions. Depreciation of buildings is recorded using
the straight-line method over 15 to 40 years. Data processing equipment,
47
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
data processing software, furniture, fixtures and other equipment are
depreciated using straight-line and accelerated methods over the estimated
useful lives, principally three to five years. Leasehold improvements are
depreciated using the straight-line method over the lesser of the term of the
lease or life of the improvements. The Company reviews, on a quarterly basis,
its property and equipment for possible impairment. In management's opinion, no
such impairment exists at December 31, 2000.
INTANGIBLES
Goodwill resulting from the cost of investments in excess of the underlying fair
value of identifiable net assets acquired is amortized over periods ranging from
3 to 20 years. On a quarterly basis, the Company reviews the recoverability of
goodwill. The measurement of possible impairment is based primarily on the
ability to recover the balance of the goodwill from expected future operating
cash flows on an undiscounted basis. These analyses are performed on an
individual investment basis with the primary focus of the analyses being the
expected future cash flows from significant products of each of the investments.
In management's opinion, no such impairment exists at December 31, 2000.
INCOME TAXES
Deferred income tax effects of transactions reported in different periods for
financial reporting and income tax return purposes are recorded by the liability
method. This method gives consideration to the future tax consequences of
deferred income or expense items and immediately recognizes changes in income
tax laws upon enactment. The income statement effect is generally derived from
changes in deferred income taxes on the balance sheet.
CUSTOMER DEPOSITS
The Company requires postage deposits from certain of its clients based on
long-term contractual arrangements. The Company does not anticipate repaying in
the next year amounts classified as non-current.
FOREIGN CURRENCY TRANSLATION
The Company's international subsidiaries use the local currency as the
functional currency. The Company translates all assets and liabilities at period
end exchange rates and income and expense accounts at average rates during the
period. Translation adjustments are recorded in stockholders' equity and were
not material at December 31, 2000 and 1999. While it is generally not the
Company's practice to enter into derivative contracts, from time to time the
Company and its subsidiaries do utilize forward foreign currency exchange
contracts to minimize the impact of currency movements.
EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the weighted
average number of common shares outstanding during the year. Dilutive earnings
per share is determined by including the dilutive effect of all potential common
shares outstanding during the year.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations, and has presented the required SFAS No. 123,
"Accounting for Stock-Based Compensation," pro forma disclosures in Note 9.
48
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DERIVATIVE AND HEDGING ACTIVITIES
Financial Accounting Standards Board Statement No. 133 established accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value and that the changes
in the fair value of derivatives are recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction. This
statement, as amended, became effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000 (January 1, 2001 for the Company). The
implementation of the new standard has not had a material effect on the
consolidated results of operations of the Company.
COMPREHENSIVE INCOME
The Company's comprehensive income consists of net income, unrealized gains
(losses) on available-for-sale securities, net of deferred income taxes, and
foreign currency translation adjustments and is presented in the Consolidated
Statement of Changes in Stockholders' Equity.
3. ACQUISITIONS AND DISPOSITIONS
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 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.
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
49
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
EXCHANGE-AMERICA, LLC
The Company completed the acquisition of a 50% interest in exchange-america, LLC
in February 2001 for $15 million. exchange-america is a developer of a
web-enabled process to submit new insurance and annuities business applications
online.
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 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 totaled $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
50
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
CUSTIMA
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's purchase and consolidation
of Custima. Intangible assets (other than IPR&D) are being amortized on a
straight-line basis over periods ranging from 3 to 10 years. On a pro forma
basis, the acquisition did not have a material impact on the Company's
historical results of operations or financial position.
4. PROPERTIES
Properties and related accumulated depreciation are as follows (in millions):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Land........................................................ $ 28.1 $ 25.9
Buildings................................................... 145.7 128.5
Data processing equipment................................... 262.2 264.1
Data processing software.................................... 190.5 151.1
Furniture, fixtures and other equipment..................... 220.9 233.1
Leasehold improvements...................................... 55.5 46.3
Construction-in-progress.................................... 46.4 24.1
------ ------
949.3 873.1
Less accumulated depreciation and amortization.............. 555.5 534.4
------ ------
Net properties.............................................. $393.8 $338.7
====== ======
Depreciation expense for the years ended December 31, 2000, 1999 and 1998, was
$117.2 million, $108.2 million and $92.9 million, respectively.
51
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
Investments are as follows (in millions):
CARRYING VALUE
-------------------
2000 DECEMBER 31,
OWNERSHIP -------------------
PERCENTAGE 2000 1999
---------- -------- --------
Available-for-sale securities:
State Street Corporation............................. 4% $ 704.9 $ 438.4
Computer Sciences Corporation........................ 5% 519.0 816.8
Euronet Services Inc................................. 12% 9.4 14.4
Other available-for-sale securities.................. 122.8 63.3
-------- --------
1,356.1 1,332.9
-------- --------
Unconsolidated affiliates:
Boston Financial Data Services, Inc.................. 50% 60.8 48.3
European Financial Data Services Limited............. 50% 13.3 8.0
Argus Health Systems, Inc............................ 50% 7.1 6.4
Other unconsolidated affiliates...................... 40.3 34.8
-------- --------
121.5 97.5
-------- --------
Other:
Net investment in leases............................. 14.5 16.0
Other................................................ 28.9 31.3
-------- --------
43.4 47.3
-------- --------
Total investments.................................. $1,521.0 $1,477.7
======== ========
State Street Corporation ("State Street") is a financial services corporation
that provides banking, trust, investment management, global custody,
administration and securities processing services to both U.S. and non-U.S.
customers. The aggregate market value of the Company's investment in State
Street's common stock presented above was based on the closing price on the New
York Stock Exchange. The Company received $4.0 million, $3.5 million and
$3.0 million in dividends from State Street in 2000, 1999 and 1998,
respectively, which have been recorded in other income.
Computer Sciences Corporation ("CSC") is a provider of outsourcing, system
integration, information technology, management consulting and other
professional services to industry and government. The aggregate market value of
the Company's investment in CSC's common stock presented above was based on the
closing price on the New York Stock Exchange.
Euronet Services Inc. ("Euronet") operates an independent, non-bank owned
automatic teller machine network as a service provider to banks and other
financial institutions in certain Central European countries. The aggregate
market value of the Company's investment in Euronet's common stock presented
above was based on the closing price on the NASDAQ.
The Company's investments in available-for-sale securities had an aggregate
market value of $1,356.1 million and $1,332.9 million and an aggregate cost
basis of $490.6 million and $456.5 million at December 31, 2000 and 1999,
respectively. Proceeds of $83.2 million and $24.8 million and gross realized
gains of $48.1 million and $12.4 million were recorded in 2000 and 1999,
respectively, from the
52
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
sale of available-for-sale securities. Gross realized losses of $5.6 million
were recorded in 2000. There were no gross realized losses in 1999 or 1998.
Gross unrealized holding gains totaled $869.7 million, $877.9 million and
$591.2 million at December 31, 2000, 1999 and 1998, respectively. Gross
unrealized holding losses totaled $4.2 million, $1.5 million and $0.5 million at
December 31, 2000, 1999 and 1998, respectively.
Boston Financial Data Services, Inc. ("BFDS") is a corporate joint venture of
the Company and State Street. BFDS performs shareowner accounting services for
mutual fund companies using the Company's proprietary application system for
mutual fund shareowner recordkeeping, TA2000, and retirement plan recordkeeping
services using TRAC2000. BFDS also performs remittance and proxy processing,
teleservicing and class action administration services.
European Financial Data Services Limited ("EFDS") is a United Kingdom joint
venture of DST and State Street. EFDS provides full and remote processing for
United Kingdom unit trusts and related products.
Argus Health Systems, Inc. ("Argus") is a corporate joint venture of the Company
and a privately held life insurance holding company. Argus provides pharmacy
benefit plan processing services to the health care industry. Argus utilizes the
Company's data processing facility for its claims processing services. The
Company received a $9.5 million cash dividend from Argus in 1998.
Equity in earnings (losses) of unconsolidated affiliates, net of income taxes
provided by the unconsolidated affiliates and related goodwill amortization is
as follows (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
BFDS.................................................. $12.5 $ 8.9 $ 7.2
EFDS.................................................. (2.1) (5.3) (11.1)
Argus................................................. 0.8 2.6 2.7
Other................................................. 0.2 0.4 (1.5)
----- ----- ------
$11.4 $ 6.6 $ (2.7)
===== ===== ======
Certain condensed financial information of the unconsolidated affiliates follows
(in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues............................................ $542.1 $439.3 $411.1
Costs and expenses.................................. 500.4 412.6 418.9
Net income (loss)................................... 41.7 26.7 (7.8)
Current assets...................................... 169.2 123.8
Noncurrent assets................................... 284.8 286.5
Current liabilities................................. 64.3 50.3
Noncurrent liabilities.............................. 182.7 186.2
Partners' and stockholders' equity.................. 207.0 173.8
Net investment in leases of $14.5 million and $16.0 million at December 31, 2000
and 1999, respectively, reflects the gross lease receivable from sales-type
leases and the estimated residual value of the leased equipment less unearned
income.
53
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INTANGIBLES AND OTHER ASSETS
Intangibles and other assets include the following items (in millions):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Intangibles................................................. $ 97.7 $96.3
Less accumulated amortization............................... 52.2 52.3
------ -----
Net....................................................... 45.5 44.0
Other assets................................................ 1.4 1.4
------ -----
Total..................................................... $ 46.9 $45.4
====== =====
Intangibles exclude goodwill of $3.6 million and $4.2 million at December 31,
2000 and 1999, respectively, related to unconsolidated affiliates which is
classified as part of the investments in the unconsolidated affiliates.
Amortization expense, including amortization related to goodwill recorded in
investments, totaled $11.7 million, $14.9 million and $13.8 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
7. LONG-TERM DEBT
The Company is obligated under notes and other indebtedness as follows (in
millions):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Secured notes payable....................................... $ 4.1 $12.2
Mortgage notes.............................................. 20.6 21.3
Revolving credit facilities................................. 62.5 27.4
Other....................................................... 2.8 1.9
----- -----
90.0 62.8
Less debt due within one year............................... 21.3 18.4
----- -----
Long-term debt.............................................. $68.7 $44.4
===== =====
The secured notes payable primarily represent notes which are secured by data
processing and production equipment and minimum rental receivables. These notes
are generally payable over 12 to 24 month periods with interest rates of 7.59%
at December 31, 2000.
The mortgage notes represent real estate borrowings due in installments with the
balance due at the end of the term. Interest rates are fixed and range from 8.0%
to 10.0% at December 31, 2000.
In December 1996, the Company entered into an amended and restated five-year
revolving credit facility of $105 million (increased to $125 million in
February 1997) with a syndicate of U.S. and international banks. Borrowings
under the facility are available at rates based on the Eurodollar, Prime, Base
CD, or Federal Funds rates. A commitment fee of 0.085% per annum is required on
the total amount of the facility. An additional utilization fee of .050% is
required if the principal amount outstanding is greater than 50% of the total
facility. Among other provisions, the agreement limits subsidiary indebtedness
and sales of assets and requires the Company to maintain certain coverage and
leverage ratios. No borrowings were outstanding at December 31, 2000 or 1999.
54
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company and its subsidiaries maintain additional lines of credit totaling
$110 million for working capital requirements and general corporate purposes
which are scheduled to mature May 2001. Borrowings under the facilities are
available at rates tied to the Eurodollar, federal funds rates or LIBOR rates.
Commitment fees of 0.105% to 0.50% per annum are required on the unused
portions. Borrowings of $50.0 million and $20.7 million were outstanding under
these additional lines of credit at December 31, 2000 and 1999, respectively.
Future principal payments of indebtedness at December 31, 2000 are as follows
(in millions):
2001........................................................ $21.3
2002........................................................ 52.0
2003........................................................ 2.2
2004........................................................ 2.5
2005........................................................ 2.4
Thereafter.................................................. 9.6
-----
Total....................................................... $90.0
=====
Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
carrying value of long-term debt is considered to approximate fair value at
December 31, 2000 and 1999.
8. INCOME TAXES
As a result of the USCS Merger, USCS was included with the Company and its
consolidated U.S. subsidiaries in filing a consolidated federal income tax
return after December 21, 1998. Prior to the USCS Merger, USCS and its
consolidated U.S. subsidiaries filed a separate consolidated federal income tax
return.
Deferred tax assets and liabilities are determined based on the differences
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense (benefit) is generally the result of changes in
the assets or liabilities for deferred taxes.
The following summarizes pretax income (loss) (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
U.S................................................. $308.2 $187.4 $108.9
International....................................... 28.5 26.9 6.7
------ ------ ------
Total............................................... $336.7 $214.3 $115.6
====== ====== ======
55
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax expense consists of the following components (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Current
Federal................................................... $ 77.7 $55.1 $ 43.3
State and local........................................... 8.7 5.2 5.0
International............................................. 12.5 8.2 6.0
------ ----- ------
Total current........................................... 98.9 68.5 54.3
------ ----- ------
Deferred
Federal................................................... 17.3 7.2 (5.0)
State and local........................................... 2.5 (0.1) (2.8)
International............................................. 2.2 1.3 (2.2)
------ ----- ------
Total deferred.......................................... 22.0 8.4 (10.0)
------ ----- ------
Total income tax expense.................................... $120.9 $76.9 $ 44.3
====== ===== ======
Differences between the Company's effective income tax rate and the U.S. federal
income tax statutory rate are as follows (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Income tax expense using the statutory rate in effect....... $117.8 $75.0 $ 40.5
Tax effect of:
State and local income taxes, net......................... 7.3 3.3 1.4
International income taxes, net........................... 4.7 1.1 (0.6)
Earnings of U.S. unconsolidated affiliates................ (4.0) (3.4) (2.8)
Transaction costs for USCS Merger......................... 3.2
Acquired in-process research and development costs........ 2.1
Other..................................................... (4.9) 0.9 0.5
------ ----- ------
Total income tax expense.................................... $120.9 $76.9 $ 44.3
====== ===== ======
Effective tax rate.......................................... 35.9% 35.9% 38.4%
Statutory federal tax rate.................................. 35.0% 35.0% 35.0%
56
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The federal and state deferred tax assets (liabilities) recorded on the
Consolidated Balance Sheet are as follows (in millions):
DECEMBER 31,
-------------------
2000 1999
-------- --------
Liabilities:
Investments in available for sale securities............ $(496.1) $(483.4)
Unconsolidated affiliates and investments............... (1.8) (0.5)
Accumulated depreciation and amortization............... (2.2)
Other................................................... (1.9) (3.1)
------- -------
Gross deferred tax liabilities.......................... (502.0) (487.0)
------- -------
Assets:
Book accruals not currently deductible for tax.......... 20.9 12.1
Accumulated depreciation and amortization............... 13.5
Deferred compensation and other employee benefits....... 15.7 16.5
Other................................................... 5.7 3.0
------- -------
Gross deferred tax assets............................... 42.3 45.1
------- -------
Net deferred tax liability................................ $(459.7) $(441.9)
======= =======
Prior to 1993, the Company generally did not provide deferred income taxes for
unremitted earnings of certain investees accounted for under the equity method
because those earnings have been and will continue to be reinvested. Beginning
in 1993, pursuant to the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109, the Company began providing deferred taxes for
unremitted earnings of U.S. unconsolidated affiliates net of the 80% dividends
received deduction provided for under current tax law. Through December 31,
2000, the cumulative amount of such unremitted earnings was $64.6 million. These
amounts would become taxable to the Company if distributed by the affiliates as
dividends, in which case the Company would be entitled to the dividends received
deduction for 80% of the dividends; alternatively, these earnings could be
realized by the sale of the affiliates' stock, which would give rise to tax at
federal capital gains rates and state ordinary income tax rates, to the extent
the stock sale proceeds exceeded the Company's tax basis. Deferred taxes
provided on unremitted earnings through December 31, 2000 and 1999 were
$4.5 million and $3.5 million, respectively. Determination of the amount of the
unrecognized deferred tax liability related to investments in international
subsidiaries, including but not limited to unremitted earnings and cumulative
translation adjustments, is not practicable.
57
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY
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.
EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as follows (in
millions, except per share amounts):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net income.......................................... $215.8 $138.1 $ 71.6
====== ====== ======
Average common shares outstanding................... 125.3 126.4 125.5
Incremental shares from assumed conversions of stock
options........................................... 4.1 3.3 3.1
------ ------ ------
Diluted shares outstanding.......................... 129.4 129.7 128.6
====== ====== ======
Basic earnings per share............................ $ 1.72 $ 1.09 $ 0.57
Diluted earnings per share.......................... $ 1.67 $ 1.06 $ 0.56
COMPREHENSIVE INCOME
Components of other comprehensive income consist of the following (in millions):
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Unrealized gains on investments:
Unrealized holding gains arising during the
period......................................... $ 30.1 $298.1 $ 266.4
Less reclassification adjustment for gains
included in net income......................... (41.0) (12.4) (1.9)
Foreign currency translation adjustments........... (3.4) (0.7)
Deferred income taxes.............................. 4.2 (111.6) (103.3)
------ ------ -------
Other comprehensive income......................... $(10.1) $173.4 $ 161.2
====== ====== =======
58
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of the related tax provision of other comprehensive income consists
of the following (in millions):
YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Unrealized gains on investments:
Unrealized holding gains arising during the
period.......................................... $ 11.8 $116.4 $104.0
Less reclassification adjustment for gains
included in net income.......................... (16.0) (4.8) (0.7)
------ ------ ------
Deferred income taxes............................... $ (4.2) $111.6 $103.3
====== ====== ======
STOCK ISSUANCE AND REPURCHASES
In May 1996, the Board of Directors determined it was necessary for the Company
to have common stock available to provide to employees under its stock award
program and to provide to option holders who exercise options. The Board of
Directors authorized the purchase of up to 2.4 million shares during a
twenty-four month period in approximately equal monthly amounts. The Company
expended $10.0 million in 1998 to complete the purchases under this plan.
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.
During the fourth quarter 1999 and the first quarter 2000, the Company entered
into forward stock purchase agreements for the repurchase of up to 8.0 million
shares of its common stock as a means of securing potentially favorable prices
for future purchases of its stock. During 2000, and included in the numbers set
forth in the preceding paragraph, the Company purchased 2.6 million shares under
these agreements for $81.4 million. As of December 31, 2000, the cost to settle
the agreements would be approximately $179.3 million for approximately
5.4 million shares of common stock. The agreements, which expire in March 2001
and September 2002, allow the Company to elect net cash or net share settlement
in lieu of physical settlement of the shares.
59
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
USCS, prior to the USCS Merger, expended approximately $6.2 million in 1998 for
the repurchase of common stock in order to meet obligations under stock option
plans, employee stock purchase plans and 401(k) retirement plans. Substantially
all these shares were reissued prior to the USCS Merger.
The Company had 2.9 million and 1.4 million shares of common stock held in
treasury at December 31, 2000 and 1999, respectively.
STOCK BASED COMPENSATION
At December 31, 2000, the Company had several stock based compensation plans,
which are described separately below. The Company applies Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for its plans, and accordingly, no compensation
cost has been recognized for the Company's fixed stock based compensation. Had
compensation cost been determined consistent with SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income would have been reduced to
the following pro forma amounts:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Net income (millions): As reported $215.8 $138.1 $71.6
Pro forma 192.3 120.0 58.0
Basic earnings per share: As reported 1.72 1.09 0.57
Pro forma 1.54 0.95 0.46
Diluted earnings per share: As reported 1.67 1.06 0.56
Pro forma 1.49 0.93 0.45
STOCK OPTION PLANS
The weighted average fair value of options granted was $10.18, $10.01 and $8.65
for 2000, 1999 and 1998, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing model with
the following weighted average assumptions used for grants in 2000, 1999 and
1998, respectively: expected option term of 2.3, 5.0 and 5.3 years, volatility
of 38.5%, 29.4% and 28.4%, dividend yield of 0% and risk-free interest rate of
6.4%, 5.3% and 5.4%.
In September 1995, the Company established the 1995 Stock Option and Performance
Award Plan, which now provides for the availability of 24,000,000 shares of the
Company's common stock for the grant of awards to officers, directors and other
designated employees. The awards may take the form of an option, stock
appreciation right, limited right, performance share or unit, dividend
equivalent, or any other right, interest or option relating to shares of common
stock granted under the plan. The option prices must be at least equal to the
fair market value of the underlying shares on the date of grant. Options become
exercisable and expire as determined by the Compensation Committee of the Board
of Directors at the date of grant.
USCS, prior to its merger with DST, issued stock options under five stock option
plans to directors, officers and key employees of USCS. Under the 1988, 1990,
1993 and 1996 USCS Stock Option Plans, options were granted at prices and with
terms and conditions established by the USCS Board of Directors at the date of
grant. Options under these plans vest over periods of up to sixty months and
expire ten years after the date of grant. Under the USCS Director's Stock Option
Plan, options were granted at fair market value and vested annually over three
years and expire five years after the date of
60
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
grant. Upon completion of the USCS Merger, each outstanding option to purchase
USCS common stock issued pursuant to USCS' stock option plans was assumed by
DST. Each such option now constitutes an option to acquire, on the same terms
and conditions as were applicable under such assumed option, the number of
shares of DST common stock equal to the product of the merger exchange ratio of
0.62 and the number of shares of USCS common stock subject to such option
rounded down to the nearest whole share. The exercise price per share of DST
common stock is equal to the exercise price per share of such option before the
USCS Merger divided by the merger exchange ratio of 0.62, rounded up to the
nearest whole cent. Pursuant to certain change in control provisions in the USCS
Option Plans, approximately 50% of the unvested portions of the options
accelerated and became exercisable at the completion of the USCS Merger.
Summary stock option activity is presented in the table below (shares in
millions):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
Outstanding at January 1............ 11.0 $18.43 10.6 $14.64 9.2 $11.51
Granted............................. 5.7 33.62 3.0 27.72 2.6 23.85
Exercised........................... (3.8) 16.20 (2.2) 12.10 (0.9) 8.17
Forfeited........................... (0.6) 24.33 (0.4) 21.66 (0.3) 15.65
---- ---- ----
Outstanding at December 31.......... 12.3 $25.91 11.0 $18.43 10.6 $14.64
==== ==== ====
Exercisable at December 31.......... 6.2 $19.33 7.0 $14.51 7.1 $11.72
Summary information concerning outstanding and exercisable stock options as of
December 31, 2000 follows:
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE PRICE PER OPTIONS PRICE PER
PER SHARE (IN MILLIONS) (IN YEARS) SHARE (IN MILLIONS) SHARE
- --------------------------- ------------- ---------------- --------- ------------- ---------
$3.01 -- $4.08............. 0.1 3.9 $ 3.35 0.1 $ 3.35
10.09 -- 10.76............. 1.9 4.9 10.43 1.8 10.45
13.11 -- 20.87............. 1.6 6.4 15.97 1.3 15.93
23.90 -- 29.70............. 7.3 8.6 28.11 2.9 27.05
31.17 -- 40.11............. 0.6 9.3 37.18 0.1 33.72
46.56 -- 59.63............. 0.7 9.8 55.90
74.06 -- 74.06............. 0.1 9.9 74.06
---- --- ------ --- ------
$3.01 -- $74.06............ 12.3 7.8 $25.91 6.2 $19.33
STOCK PURCHASE PLANS
The 2000 DST Systems, Inc. Employee Stock Purchase Plan provides the right to
subscribe to 1.0 million shares of common stock to substantially all employees
of the Company and participating subsidiaries, except those whose customary
employment is less than 20 hours per week or is five months or less per calendar
year, or those who are 5% or greater stockholders of DST. The purchase price for
shares under any stock offering is to be 85% of the average market price on
either the
61
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exercise date or the offering date, whichever is lower. Approximately
0.2 million shares were issued under the Plan in 2000. At December 31, 2000,
there were approximately 0.8 million shares available for future offerings. The
fair value of purchase rights granted in 2000 was $8.05. The fair value of
purchase rights granted is estimated on the date of grant using the
Black-Scholes option pricing model assuming expected option term of 0.64 year,
volatility of 38.7%, dividend yield of 0% and risk-free interest rate of 6.8%.
Prior to the USCS Merger, shares were issued under the USCS Employee Stock
Purchase Plan ("Plan"). Common stock purchases under the Plan totaled
approximately 64,000 shares in 1998. The weighted average fair value of the
employee purchase rights and compensation expense was not material.
RIGHTS PLAN
The Company is party to a Stockholders' Rights Agreement (the "Rights Plan")
dated as of October 6, 1995, and amended as of July 9, 1998 and September 10,
1999. Each share of the Company's common stock held of record on October 18,
1995 (when Kansas City Southern Industries, Inc. ("KCSI") was then the sole
stockholder of the Company) and all shares of common stock issued in and
subsequent to the Company's initial public offering has received one Right. Each
Right entitles its holder to purchase 1/1000th share of preferred stock of the
Company, or in some circumstances, other securities of the Company. In certain
circumstances, the Rights entitle their holders to purchase shares in a
surviving entity or its affiliates resulting from transactions in which the
Company is not the surviving entity or disposes of more than 50% of the
Company's assets or earnings power.
The Rights, which are automatically attached to common stock, are not
exercisable or transferable separately from shares of common stock until ten
days following the earlier of an announcement that a person or group (an
"Acquiring Person"), has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of the Company's common
stock, or ten days following the commencement or announcement of any person's
intention to make a tender offer or exchange offer that would result in
ownership of 15% or more of the outstanding common stock, unless the Board of
Directors sets a later date in either event. The Rights attached to the stock of
an Acquiring Person become void. Stilwell Management, Inc. ("Stilwell"), which
holds approximately 32.6% of the outstanding shares of the Company's common
stock, and certain entities affiliated with Stilwell are in certain
circumstances excluded from the definition of an "Acquiring Person" under the
Rights Plan.
The Rights Plan is intended to encourage a potential acquiring person to
negotiate directly with the Board of Directors, but may have certain
anti-takeover effects. The Rights Plan could significantly dilute the interests
in the Company of an acquiring person. The Rights Plan may therefore have the
effect of delaying, deterring or preventing a change in control of the Company.
10. BENEFITS PLANS
The Company sponsors defined contribution plans that cover domestic and
non-domestic employees following the completion of an eligibility period. The
total expense under these plans was $13.4 million, $15.5 million and
$12.5 million in 2000, 1999 and 1998, respectively.
Prior to 1998, DST participated in a multi-employer ESOP. In January 1998, the
Company formed The DST Systems, Inc. Employee Stock Ownership Plan ("DST ESOP")
and transferred all balances from DST's portion of the multi-employer ESOP to
the DST ESOP. This plan provides for employer contributions made at the
discretion of the Board of Directors, and based primarily upon employee
62
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
participation. The total expense under this plan was $1.0 million in both 1999
and 1998. On January 1, 2000, all active DST ESOP participants became fully
vested, and no future contributions to the plan are anticipated.
The Company has active and non-active non-qualified deferred compensation plans
for senior management, certain highly compensated employees and directors. The
active plans permit participants to defer a portion of their compensation and
may provide additional life insurance benefits until termination of their
employment, at which time payment of amounts deferred is made in a lump sum or
annual installments. Deferred amounts earn interest at a rate determined by the
Board of Directors or are credited with deemed gains or losses of the underlying
hypothetical investments. Amounts deferred under the plans totaled approximately
$27.1 million and $31.5 million at December 31, 2000 and 1999, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information (in millions):
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Interest paid during the year........................ $ 5.3 $ 5.0 $ 11.4
Income taxes paid during the year.................... 77.5 55.2 40.7
In 2000 the Company acquired the remaining 50% of Corporate Document
Systems, Inc. ("CDS") through a stock for stock exchange. The value of the DST
stock on the acquisition date was $5.5 million.
12. COMMITMENTS AND CONTINGENCIES
The Company has future obligations under certain software license agreements and
operating leases. The operating leases, which include facilities, data
processing and other equipment have lease terms ranging from 1 to 14 years
excluding options to extend the leases for various lengths of time. Rental
expense from operating leases was $91.0 million, $59.7 million and
$40.9 million for the years ended December 31, 2000, 1999 and 1998,
respectively. Future minimum rentals for the non-cancelable term of all
operating leases and obligations under software license agreements are as
follows (in millions):
SOFTWARE
NON-CANCELABLE LICENSE
LEASES AGREEMENTS TOTAL
-------------- ---------- --------
2001........................................ $ 55.3 $ 9.3 $ 64.6
2002........................................ 85.1 10.5 95.6
2003........................................ 42.7 11.4 54.1
2004........................................ 28.6 13.4 42.0
2005........................................ 13.5 16.0 29.5
Thereafter.................................. 48.1 0.8 48.9
------ ----- ------
Total....................................... $273.3 $61.4 $334.7
====== ===== ======
Certain leases have clauses that call for the annual rents to be increased
during the term of the lease. Such lease payments are expensed on a
straight-line basis.
63
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company leases certain facilities from unconsolidated real estate affiliates
and incurred occupancy expenses of $8.8 million, $8.3 million and $6.8 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
The Company has also entered into agreements with co-participants in certain
joint venture subsidiaries whereby upon defined circumstances constituting a
change in control of either party to the venture, the other party has the right
to acquire, at a specified price, the entire interest in the joint venture.
The Company has entered into agreements with certain officers whereby upon
defined circumstances constituting a change in control of the Company, certain
benefit entitlements are automatically funded and such officers are entitled to
specific cash payments upon termination of employment.
The Company has also established trusts to provide for the funding of corporate
commitments and entitlements of Company officers, directors, employees and
others in the event of a change in control of the Company. Assets held in such
trusts at December 31, 2000 were not significant.
The Company and its subsidiaries are involved in various legal proceedings
arising in the normal course of their businesses. While the ultimate outcome of
these legal proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with legal counsel, that the final outcome in
such proceedings, in the aggregate, would not have a material adverse effect on
the consolidated financial condition or results of operations of the Company.
The Company has entered into an agreement to guarantee 100% of a $40 million
revolving credit facility of a 50% owned joint venture. The Company has entered
into an agreement with the other 50% partner in the joint venture, whereas the
Company can recover 50% of payments made pursuant to the guarantee on the
revolving credit facility from the joint venture partner. The joint venture
partner has also granted a security interest in its partnership interest in the
joint venture as security for the partner's obligations under the agreement. At
December 31, 2000, borrowings of $22 million were outstanding under this credit
facility.
The Company has entered into an agreement to guarantee 50% of a $3.3 million
construction loan of a 50% owned joint venture.
The Company acquired a 6% interest in Wall Street Access in January 2001 for
$7.0 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% for approximately $16.0 million.
13. SEGMENT AND GEOGRAPHIC INFORMATION
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 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. The Company evaluates the performance of its
segments based on income before income taxes, non-recurring items and interest
expense. Intersegment revenues are reflected at rates prescribed
64
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by the Company and may not be reflective of market rates. Summarized financial
information concerning the segments is shown in the following tables (in
millions):
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------------------
FINANCIAL OUTPUT CUSTOMER INVESTMENTS/ CONSOLIDATED
SERVICES SOLUTIONS MANAGEMENT OTHER ELIMINATIONS TOTAL
--------- --------- ---------- ------------ ------------ ------------
External revenues........... $619.5 $538.3 $195.0 $ 9.3 $ $1,362.1
Intersegment revenues....... 1.5 53.9 23.9 (79.3)
------ ------ ------ ----- ------ --------
Total revenues.............. 621.0 592.2 195.0 33.2 (79.3) 1,362.1
Costs and expenses.......... 372.6 491.5 163.9 20.2 (79.3) 968.9
Depreciation and
amortization.............. 69.1 35.7 16.0 7.8 128.6
------ ------ ------ ----- ------ --------
Income from operations...... 179.3 65.0 15.1 5.2 264.6
Other income, net........... 4.5 0.1 0.1 61.6 66.3
Equity in earnings (losses)
of unconsolidated
affiliates................ 11.3 0.2 (0.1) 11.4
------ ------ ------ ----- ------ --------
Earnings before interest and
income taxes.............. $195.1 $ 65.3 $ 15.2 $66.7 $ $ 342.3
====== ====== ====== ===== ====== ========
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------------
FINANCIAL OUTPUT CUSTOMER INVESTMENTS/ CONSOLIDATED
SERVICES SOLUTIONS MANAGEMENT OTHER ELIMINATIONS TOTAL
--------- --------- ---------- ------------ ------------ ------------
External revenues........... $553.3 $459.3 $203.0 $11.9 $ $1,227.5
Intersegment revenues....... 1.6 52.9 21.0 (75.5)
------ ------ ------ ----- ------ --------
Total revenues.............. 554.9 512.2 203.0 32.9 (75.5) 1,227.5
Costs and expenses.......... 365.6 430.2 167.3 17.4 (75.5) 905.0
------ ------ ------ ----- ------ --------
Depreciation and
amortization.............. 66.5 33.0 14.4 8.9 122.8
Income from operations...... 122.8 49.0 21.3 6.6 199.7
Other income (loss), net.... (1.0) 0.2 (0.6) 14.5 0.1 13.2
Equity in earnings of
unconsolidated
affiliates................ 6.1 0.2 0.3 6.6
------ ------ ------ ----- ------ --------
Earnings before interest and
income taxes.............. $127.9 $ 49.4 $ 20.7 $21.4 $ 0.1 $ 219.5
====== ====== ====== ===== ====== ========
65
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------------------------------------
FINANCIAL OUTPUT CUSTOMER INVESTMENTS/ CONSOLIDATED
SERVICES SOLUTIONS MANAGEMENT OTHER ELIMINATIONS TOTAL
--------- --------- ---------- ------------ ------------ ------------
External revenues........... $506.4 $381.6 $220.1 $11.1 $ $1,119.2
Intersegment revenues....... 1.2 53.9 23.0 (78.1)
------ ------ ------ ----- ------ --------
Total revenues.............. 507.6 435.5 220.1 34.1 (78.1) 1,119.2
Costs and expenses.......... 360.5 373.9 184.0 17.5 (78.1) 857.8
Depreciation and
amortization.............. 61.7 27.7 11.6 7.8 108.8
Merger charges.............. 33.1 33.1
------ ------ ------ ----- ------ --------
Income from operations...... 85.4 33.9 24.5 8.8 (33.1) 119.5
Other income (loss), net.... 1.5 0.5 (0.6) 5.4 0.6 7.4
Equity in losses of
unconsolidated
affiliates................ (1.4) (1.3) (2.7)
------ ------ ------ ----- ------ --------
Earnings before interest and
income taxes.............. $ 85.5 $ 34.4 $ 23.9 $12.9 $(32.5) $ 124.2
====== ====== ====== ===== ====== ========
Earnings before interest and income taxes in the segment reporting information
above less interest expense of $5.6 million, $5.2 million and $8.6 million for
the years ended December 31, 2000, 1999 and 1998, respectively, is equal to the
Company's income before income taxes and minority interests on a consolidated
basis for the corresponding year.
The Financial Services Segment derives its revenues from two primary products
and services. Revenues from shareowner accounting products and services totaled
$510.3 million, $434.5 million and $384.0 million in 2000, 1999 and 1998,
respectively. Revenues from portfolio/investment management accounting products
and services totaled $91.9 million, $96.6 million and $101.0 million in 2000,
1999 and 1998, respectively.
Information concerning principal geographic areas is as follows:
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues (millions) (1):
U. S......................................... $1,189.6 $1,047.1 $ 952.1
U. K......................................... 55.3 57.8 55.9
Canada....................................... 36.9 39.4 31.4
Australia.................................... 23.1 16.8 13.9
Netherlands.................................. 8.2 9.1 8.3
South Africa................................. 6.0 5.7 6.1
Switzerland.................................. 4.6 9.1 6.1
Germany...................................... 1.6 4.0 8.6
Others....................................... 36.8 38.5 36.8
-------- -------- --------
$1,362.1 $1,227.5 $1,119.2
======== ======== ========
66
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) Revenues are attributed to countries based on location of the client.
DECEMBER 31,
-------------------
2000 1999
-------- --------
Long-lived assets (millions):
U. S...................................................... $399.3 $344.8
Europe.................................................... 22.7 17.5
Canada.................................................... 10.3 13.0
Others.................................................... 8.4 8.8
------ ------
$440.7 $384.1
====== ======
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
(dollars in millions, except per share amounts):
YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 2000
-------- -------- -------- -------- --------
Revenues.......................................... $340.4 $337.0 $335.5 $349.2 $1,362.1
Cost and expenses................................. 245.1 241.2 238.0 244.6 968.9
Depreciation and amortization..................... 31.6 31.7 31.6 33.7 128.6
------ ------ ------ ------ --------
Income from operations............................ 63.7 64.1 65.9 70.9 264.6
Interest expense.................................. (1.4) (1.5) (1.6) (1.1) (5.6)
Other income, net................................. 21.3 7.5 3.4 34.1 66.3
Equity in earnings of unconsolidated affiliates... 4.1 3.5 2.2 1.6 11.4
------ ------ ------ ------ --------
Income before income taxes........................ 87.7 73.6 69.9 105.5 336.7
Income taxes...................................... 31.5 26.4 25.1 37.9 120.9
------ ------ ------ ------ --------
Net income........................................ $ 56.2 $ 47.2 $ 44.8 $ 67.6 $ 215.8
====== ====== ====== ====== ========
Basic average shares outstanding.................. 125.8 125.5 125.0 124.8 125.3
Basic earnings per share.......................... $ 0.45 $ 0.38 $ 0.36 $ 0.54 $ 1.72(1)
Diluted average shares outstanding................ 128.8 129.3 129.5 129.6 129.4
Diluted earnings per share........................ $ 0.44 $ 0.37 $ 0.35 $ 0.52 $ 1.67(1)
Common stock price ranges: High................... $37.50 $42.41 $59.13 $74.06 $ 74.06
Low....................... $26.69 $31.94 $38.00 $49.28 $ 26.69
- ------------------------
(1) Earnings per share are computed independently for each of the quarters
presented. Accordingly, the accumulation of 2000 quarterly earnings per
share may not equal the total computed for the year.
67
DST SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER 1999
-------- -------- -------- -------- --------
Revenues.......................................... $298.4 $305.3 $304.6 $319.2 $1,227.5
Cost and expenses................................. 221.0 226.1 227.5 230.4 905.0
Depreciation and amortization..................... 27.5 27.8 28.8 38.7 122.8
------ ------ ------ ------ --------
Income from operations............................ 49.9 51.4 48.3 50.1 199.7
Interest expense.................................. (1.5) (1.2) (1.2) (1.3) (5.2)
Other income (loss), net.......................... 1.7 (0.9) 4.2 8.2 13.2
Equity in earnings of unconsolidated affiliates... 2.2 2.6 1.5 0.3 6.6
------ ------ ------ ------ --------
Income before income taxes and minority
interests....................................... 52.3 51.9 52.8 57.3 214.3
Income taxes...................................... 18.8 18.6 19.0 20.5 76.9
------ ------ ------ ------ --------
Income before minority interests.................. 33.5 33.3 33.8 36.8 137.4
Minority interests................................ (0.1) (0.1) (0.1) (0.4) (0.7)
------ ------ ------ ------ --------
Net income........................................ $ 33.6 $ 33.4 $ 33.9 $ 37.2 $ 138.1
====== ====== ====== ====== ========
Basic average shares outstanding.................. 125.9 126.3 126.8 126.4 126.4
Basic earnings per share.......................... $ 0.27 $ 0.26 $ 0.27 $ 0.29 $ 1.09
Diluted average shares outstanding................ 129.3 129.5 130.3 129.7 129.7
Diluted earnings per share........................ $ 0.26 $ 0.26 $ 0.26 $ 0.29 $ 1.06(1)
Common stock price ranges: High................... $34.13 $32.31 $34.50 $38.16 $ 38.16
Low....................... $25.59 $25.94 $27.88 $25.84 $ 25.84
- ------------------------
(1) Earnings per share are computed independently for each of the quarters
presented. Accordingly, the accumulation of 1999 quarterly earnings per
share may not equal the total computed for the year.
68
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Company has incorporated by reference certain information in response or
partial response to the Items under this Part III of this Annual Report on
Form 10-K pursuant to General Instruction G(3) of this Form 10-K and
Rule 12b-23 under the Exchange Act. The Company's definitive proxy statement in
connection with its annual meeting of stockholders scheduled for May 8, 2001
(the "Definitive Proxy Statement"), will be filed with the Securities and
Exchange Commission no later than 120 days after December 31, 2000.
(A) DIRECTORS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
headings "Proposal-Election of Three Directors" and "The Board of Directors" in
the Company's Definitive Proxy Statement is hereby incorporated herein by
reference in partial response to this Item 10.
(B) EXECUTIVE OFFICERS OF THE COMPANY
The information set forth in response to Item 401 of Regulation S-K under the
heading "Executive Officers of the Company" in Part I of this Form 10-K is
incorporated herein by reference in partial response to this Item 10.
(C) COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information set forth in response to Item 405 of Regulation S-K under the
heading "Other Matters-Section 16(a) Beneficial Ownership Reporting Compliance"
in the Company's Definitive Proxy Statement is hereby incorporated herein by
reference in partial response to this Item 10.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in response to Item 402 of Regulation S-K under "The
Board of Directors--Compensation of Directors" and under "Executive Compensation
Matters" in the Company's Proxy Statement (other than the "DST Compensation
Committee Report on Executive Compensation" and the "Stock Performance Graph")
is hereby incorporated herein by reference in response to this Item 11.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stockholdings of Management" in the
Company's Proxy Statement is hereby incorporated herein by reference in response
to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in response to Item 404 of Regulation S-K under the
heading "Compensation Committee Interlocks and Insider Participation; Certain
Business Relationships" in the Company's Proxy Statement is incorporated herein
by reference in response to this Item 13.
69
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
(1) Consolidated Financial Statements
The consolidated financial statements and related notes, together with the
report of PricewaterhouseCoopers LLP, appear in Part II Item 8 Financial
Statements and Supplementary Data of this Form 10-K.
(2) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not applicable, are
insignificant or the required information is shown in the consolidated
financial statements or notes thereto.
(3) List of Exhibits
The Company has incorporated by reference herein certain exhibits as
specified below pursuant to Rule 12b-32 under the Exchange Act.
2. PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
2 The Company's Agreement and Plan of Merger, dated
September 2, 1998 by and among DST Systems, Inc., DST
Acquisitions, Inc. and USCS International, Inc, which is
attached as Exhibit 2 to the Company's Registration
Statement on Form S-4 dated November 20, 1998, (Commission
file no. 333-67611) ("S-4"), is hereby incorporated by
reference as Exhibit 2.
3. ARTICLES OF INCORPORATION AND BY-LAWS
3.1 The Company's Amended Delaware Certificate of Incorporation,
as restated, which is attached as Exhibit 3.1 to the
Company's Registration Statement filed on September 1, 1995,
as amended (Commission file no. 33-96526) (the "IPO
Registration Statement"), is hereby incorporated by
reference as Exhibit 3.1.
3.2 The Company's Amended and Restated By-laws as adopted
August 28, 1995 and amended and restated on December 12,
2000, are attached hereto as Exhibit 3.2.
4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
4.1. The Registration Rights Agreement dated October 24, 1995,
between the Company and Kansas City Southern
Industries, Inc. ("KCSI"), which is attached as Exhibit 4.1
to the Company's IPO Registration Statement, is hereby
incorporated by reference as Exhibit 4.1.
4.1.1. The First Amendment to the Registration Rights Agreement
dated June 30, 1999, between the Company and KCSI, which is
attached as Exhibit 4.15.1 to the Company's Form 10-Q dated
August 13, 1999, is hereby incorporated by reference as
Exhibit 4.1.1.
4.1.2. The Assignment, Consent and Acceptance to the Registration
Rights Agreement dated August 11, 1999, between the Company
and KCSI, and Stilwell Financial, Inc., which is attached as
Exhibit 4.15.2 to the Company's Form 10-Q dated August 13,
1999, is hereby incorporated by reference as Exhibit 4.1.2.
4.2. The Certificate of Designations dated October 16, 1995,
establishing the Series A Preferred Stock of the Company,
which is attached as Exhibit 4.3 to the Company's IPO
Registration Statement, is hereby incorporated by reference
as Exhibit 4.2.
70
4.3. The Summary of the preferred stock purchase rights set forth
in Form 8-A dated November 15, 1995 (Commission file
no. 1-14036), and the related Rights Agreement dated as of
October 6, 1995, between the Company and State Street Bank
and Trust Company, as rights agent, which is attached as
Exhibit 4.4 to the Company's IPO Registration Statement, are
hereby incorporated by reference as Exhibit 4.3.
4.3.1. The First Amendment dated as of July 9, 1998 to the Rights
Agreement dated as of October 6, 1995 between the Registrant
and State Street Bank and Trust Company attached as
Exhibit 99 to Amendment No. 1, dated July 30, 1998, to the
Company's Registration Statement on Form 8-A for its
Preferred Share Purchase Rights (Commission file
no. 1-14036), is hereby incorporated by reference as
Exhibit 4.3.1.
4.3.2. The Second Amendment dated as of September 10, 1999 to the
Rights Agreement dated as of October 6, 1995 and as amended
on July 9, 1998, between the Registrant and State Street
Bank and Trust Company attached as Exhibit 99 to Amendment
No. 2, dated September 27, 1999, to the Company's
Registration Statement on Form 8-A12B/A for its Preferred
Share Purchase Rights (Commission file no. 1-14036), is
hereby incorporated by reference as Exhibit 4.3.2.
4.4. The Registration Rights Agreement dated October 31, 1995,
between the Company and UMB Bank, N.A. as trustee of The
Employee Stock Ownership Plan of DST Systems, Inc. ("UMB"),
which is attached as Exhibit 4.4 to the Company's Annual
Report for the year ended December 31, 1995 (Commission file
no. 1-14036), is hereby incorporated by reference as
Exhibit 4.4.
4.5. The Stock Exchange Agreement dated October 26, 1995, between
KCSI and UMB, which is attached as Exhibit 4.6 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 4.5.
4.6. The description of the Company's common stock, par value
$0.01 per share, set forth in the Company's Registration
Statement on Form 8-A12B/A dated January 21, 1998,
(Commission file no. 1-14036), is hereby incorporated by
reference as Exhibit 4.6.
4.7. Paragraphs fourth, fifth, sixth, seventh, tenth, eleventh,
and twelfth of Exhibit 3.1 are hereby incorporated by
reference as Exhibit 4.7.
4.8. Article I, Sections 1, 2, 3, and 11 of Article II,
Article V, Article VIII, Article IX of Exhibit 3.2 are
hereby incorporated by reference as Exhibit 4.8.
4.9. The Affiliate Agreement with James C. Castle dated
October 28, 1998, which is attached as Exhibit 4.10 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 4.9.
4.10. The Affiliate Agreement with George L. Argyros, Sr., dated
September 3, 1998, is attached as Exhibit 4.11 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 4.10.
4.11. The Registration Rights Agreement with George L. Argyros,
Sr., James C. Castle and certain other individuals dated
December 21, 1998, which is attached as Exhibit 4.15 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 4.11.
The Company agrees to furnish to the Commission a copy of any long-term debt
agreements that do not exceed 10 percent of the total assets of the Company upon
request.
71
9. VOTING TRUST AGREEMENT
Not applicable.
10. MATERIAL CONTRACTS
10.1. The Tax Disaffiliation Agreement between the Company and
KCSI dated October 23, 1995, which is attached as
Exhibit 10.4 to the Company's IPO Registration Statement, is
hereby incorporated by reference as Exhibit 10.1.
10.2. The Stock Purchase, Sale of Assets, Assignment and
Assumption Agreement dated August 30, 1995, among the
Company, DST Realty, Inc., Tolmak, Inc., Mulberry Western
Company and KCSI, which is attached as Exhibit 10.5 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.2.
10.3. The Agreement between State Street Boston Financial
Corporation and Data-Sys-Tance dated June 1, 1974 ("State
Street Agreement"), which is attached as Exhibit 10.14 to
the Company's IPO Registration Statement, is hereby
incorporated by reference as Exhibit 10.3.
10.3.1. The Amendment to the State Street Agreement between the
Company and State Street, dated October 1, 1987, which is
attached as Exhibit 10.14.1 to the Company's IPO
Registration Statement, is hereby incorporated by reference
as Exhibit 10.3.1.
10.3.2. The Amendment to the State Street Agreement between the
Company and State Street, dated February 6, 1992, which is
attached as Exhibit 10.3.2 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (Commission
file no. 1-14036), is hereby incorporated by reference as
Exhibit 10.3.2. Portions of this agreement are subject to
confidential treatment.
10.4. The Data Processing Services Agreement between the Company
and The Continuum Company, Inc. dated October 1, 1993, which
is attached as Exhibit 10.15 to the Company's IPO
Registration Statement, is hereby incorporated by reference
as Exhibit 10.4.
10.5. The Agreement among the Company, Financial Holding
Corporation, KCSI and Argus Health Systems, Inc. dated
June 30, 1989, which is attached as Exhibit 10.16 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.5.
10.6. The Stock Transfer Restriction and Option Agreement between
the Company, Argus Health Systems, Inc. and Financial
Holding Corporation dated June 30, 1989, which is attached
as Exhibit 10.16.1 to the Company's IPO Registration
Statement, is hereby incorporated by reference as
Exhibit 10.6.
10.7. The Contribution Agreement between DST Systems, Inc. and
Boston EquiServe Limited Partnership dated November 30,
1998, which is attached as Exhibit 10.7 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1998 (Commission file no. 1-14036), is hereby incorporated
by reference as Exhibit 10.7.
10.8. The Fairway System Software Development Agreement dated
November 30, 1998, which is attached as Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 10.8.
10.9. The Company's Executive Plan effective as of October 31,
1995, which is attached as Exhibit 10.2 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1995 (Commission file no. 1-14036), is hereby incorporated
by reference as Exhibit 10.9.
10.10. The Company's Officers Incentive Plan as amended and
restated on February 28, 2001, is attached hereto as Exhibit
10.10.
72
10.11. The Company's Deferred Compensation Plan dated May 12, 1998,
which is attached as Exhibit 10.11 to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998
(Commission file no. 1-14036), is hereby incorporated by
reference as Exhibit 10.11.
10.12. The Company's DST Systems, Inc. Supplemental Executive
Retirement Plan effective January 1, 1999, attached as
Exhibit 10.12 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (Commission file
no. 1-14036), is hereby incorporated by reference as
Exhibit 10.12.
10.13. The Company's Directors' Deferred Fee Plan effective
September 1, 1995, which is attached as Exhibit 10.19 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.13.
10.14. The USCS International, Inc. Deferred Compensation Plan,
which is attached as Exhibit 10.7 to USCS
International, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1997 (Commission file
no. 000-28268), is hereby incorporated by reference as
Exhibit 10.14.
10.15. The USCS International, Inc. Bonus Deferral Plan, which is
attached as Exhibit 4.1 to USCS International, Inc.'s
Registration Statement on Form S-8 dated August 29, 1997
(Commission file no. 333-34801), is hereby incorporated by
reference as Exhibit 10.15.
10.16. The Trust Agreement between the Company as settlor and
United Missouri Bank of Kansas City, N.A. as Trustee dated
December 31, 1987, which is attached as Exhibit 10.20 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.16.
10.16.1. The Eighth Amendment to the Trust Agreement between the
Company as settlor and United Missouri Bank of Kansas City,
N.A. as Trustee dated December 31, 1998, which is attached
as Exhibit 10.16.1 to the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 (Commission
file no. 1-14036), is hereby incorporated by reference as
Exhibit 10.16.1.
10.17. The Employment Agreement between the Company and Thomas A.
McDonnell dated January 1, 1999, which is attached as
Exhibit 10.18 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998 (Commission file
no. 1-14036), is hereby incorporated by reference as
Exhibit 10.17.
10.18. The Employment Agreement between the Company, KCSI and
Thomas A. McCullough dated April 1, 1992, as amended
October 9, 1995, which is attached as Exhibit 10.9 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.18.
10.19. The Employment Agreement between the Company, KCSI and
Robert C. Canfield, dated April 1, 1992, as amended
October 9, 1995, which is attached as Exhibit 10.11 to the
Company's IPO Registration Statement, is hereby incorporated
by reference as Exhibit 10.19.
10.20. The Employment Agreement between the Company, KCSI and
Charles W. Schellhorn, dated April 1, 1992, as amended
October 9, 1995, which is attached as Exhibit 10.12 to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1996 (Commission file no. 1-14036), is hereby
incorporated by reference as Exhibit 10.20.
10.21. The USCS International, Inc. 1996 Directors' Stock Option
Plan (the "Directors' Plan") dated as of April 18, 1996,
which is attached as Exhibit 10.5 to USCS
International, Inc.'s Registration Statement on Form S-1
(Commission File No. 333-3842) dated May 29, 1996, is hereby
incorporated by reference as Exhibit 10.21.*
10.21.1. The First Amendment to the Directors' Plan dated
February 22, 1998, which is attached as Exhibit 4.6.2 to the
Company's Registration Statement on Form S-8 dated March 2,
1999 (Commission File No. 333-73241), is hereby incorporated
by reference as Exhibit 10.21.1.*
73
10.22. The USCS International, Inc. 1988 Incentive Stock Option
Plan ("the 1988 USCS Plan") dated July 1, 1988, as amended
and restated as of March 5, 1997, which is attached as
Exhibit 4.6.1 to the Company's Registration Statement on
Form S-8 dated December 21, 1998 (Commission File
No. 333-69393), is hereby incorporated by reference as
Exhibit 10.22.*
10.22.1. The Amendment dated January 22, 1998, to the 1988 USCS Plan,
which is attached as Exhibit 4.6.2 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.22.1.*
10.23. The USCS International, Inc. 1990 Stock Option Plan ("the
1990 USCS Plan") dated December 31, 1990, as amended and
restated as of March 5, 1997, which is attached as
Exhibit 4.7.1 to the Company's Registration Statement on
Form S-8 dated December 21, 1998 (Commission File
No. 333-69393), is hereby incorporated by reference as
Exhibit 10.23.*
10.23.1. The Amendment dated January 22, 1998, to the 1990 USCS Plan,
which is attached as Exhibit 4.7.2 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.23.1.*
10.24. The USCS International, Inc. 1993 Incentive Stock Option
Plan ("the 1993 USCS Plan") dated May 18, 1993, as amended
and restated as of March 5, 1997, which is attached as
Exhibit 4.8.1 to the Company's Registration Statement on
Form S-8 dated December 21, 1998 (Commission File
No. 333-69393), is hereby incorporated by reference as
Exhibit 10.24.*
10.24.1. The Amendment dated January 22, 1998, to the 1993 USCS Plan,
which is attached as Exhibit 4.8.2 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.24.1.*
10.25. The USCS International, Inc. 1996 Stock Option Plan ("the
1996 USCS Plan") dated April 12, 1996, which is attached as
Exhibit 4.9.1 to the Company's Registration Statement on
Form S-8 dated December 21, 1998 (Commission File
No. 333-69393), is hereby incorporated by reference as
Exhibit 10.25.*
10.25.1. The Amendment dated July 25, 1996, to the 1996 USCS Plan,
which is attached as Exhibit 4.9.2 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.25.1.*
10.25.2. The Amendment dated January 23, 1997, to the 1996 USCS Plan,
which is attached as Exhibit 4.9.3 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.25.2.*
10.25.3. The Amendment dated January 22, 1998, to the 1996 USCS Plan,
which is attached as Exhibit 4.9.4 to the Company's
Registration Statement on Form S-8 dated December 21, 1998
(Commission File No. 333-69393), is hereby incorporated by
reference as Exhibit 10.25.3.*
10.26. The Company's 1995 Stock Option and Performance Award Plan,
restated as of September 26, 2000 to reflect adjustments
under Section 4(c) related to the two-for-one split of the
Company's stock, is attached hereto as Exhibit 10.26.
10.27. The Employment Agreement between the Company and J. Michael
Winn, dated June 23, 1993, which is attached as
Exhibit 10.31 to the Company's Annual Report on Form 10-K
for the year ended December 31, 1999 (Commission file
no. 1-14036) is hereby incorporated by reference as
Exhibit 10.27.
10.28. Agreement for Purchase and Sale of Partnership Interests,
dated December 7, 2000, between the Company, Fleet National
Bank, BancBoston Services, Inc. and DST EquiServe, Inc., is
attached hereto as Exhibit 10.28.**
74
10.29. Agreement for Purchase and Sale of Partnership Interests,
dated December 7, 2000, between the Company, First Chicago
Trust Company of New York, FCTC General, Inc. and DST
EquiServe, Inc., is attached hereto as Exhibit 10.29.**
- ------------------------
* The agreements and the amendments thereto are included as exhibits only to
the extent that they are incorporated into the option agreements assumed by
the Company with its acquisition of USCS.
** Portions have been omitted pursuant to a confidential treatment request.
11. STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
Not applicable.
12. STATEMENTS RE COMPUTATION OF RATIOS
Not applicable.
13. ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR QUARTERLY REPORT TO SECURITY
HOLDERS
Not applicable.
16. LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not applicable.
18. LETTER RE CHANGE IN ACCOUNTING PRINCIPLES
Not applicable.
21. SUBSIDIARIES OF THE COMPANY
The list of the Company's significant subsidiaries, is attached hereto as
Exhibit 21.1.
22. PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO VOTE OF SECURITY HOLDERS
Not applicable.
23. CONSENTS OF EXPERTS AND COUNSEL
The consent of PricewaterhouseCoopers LLP is attached hereto as Exhibit 23.1.
24. POWER OF ATTORNEY
Not applicable.
99. ADDITIONAL EXHIBITS
Not applicable.
(B) REPORTS ON FORM 8-K DURING THE LAST CALENDAR QUARTER
The Company filed a Form 8-K dated October 20, 2000, under Item 5 of such form,
reporting the announcement of financial results for the quarter ended
September 30, 2000.
The Company filed a Form 8-K dated December 18, 2000, under Item 5 of such form,
reporting the announcement the Company's plans to acquire a controlling interest
in EquiServe.
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
DST SYSTEMS, INC.
By: /s/ Thomas A. McDonnell
-----------------------------------------
Thomas A. McDonnell
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
DIRECTOR
Dated: February 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Company and in
capacities indicated on February 28, 2001.
/s/ A. Edward Allinson /s/ Thomas A. McDonnell
------------------------------------------- -------------------------------------------
A. EDWARD ALLINSON THOMAS A. MCDONNELL
DIRECTOR PRESIDENT AND CHIEF EXECUTIVE OFFICER, DIRECTOR
/s/ George L. Argyros, Sr. /s/ Thomas A. McCullough
------------------------------------------- -------------------------------------------
GEORGE L. ARGYROS, SR. THOMAS A. MCCULLOUGH
DIRECTOR EXECUTIVE VICE PRESIDENT, DIRECTOR
/s/ Michael G. Fitt /s/ James C. Castle
------------------------------------------- -------------------------------------------
MICHAEL G. FITT JAMES C. CASTLE
DIRECTOR DIRECTOR
/s/ William C. Nelson /s/ Kenneth V. Hager
------------------------------------------- -------------------------------------------
WILLIAM C. NELSON KENNETH V. HAGER
DIRECTOR VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
/s/ M. Jeannine Standjord /s/ Gregg Wm. Givens
------------------------------------------- -------------------------------------------
M. JEANNINE STANDJORD GREGG WM. GIVENS
DIRECTOR VICE PRESIDENT AND CHIEF ACCOUNTING OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
76
DST SYSTEMS, INC.,
2000 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
The following Exhibits are attached hereto. See Part IV of this Annual Report on
Form 10-K for a complete list of exhibits.
EXHIBIT NUMBER DOCUMENT
- --------------------- --------
3.2 The Company's Amended and Restated By-laws as adopted
August 28, 1995 and amended and restated on December 12,
2000.
10.10 The Company's Officers Incentive Plan as amended and
restated on February 28, 2001.
10.26 The Company's 1995 Stock Option and Performance Award Plan,
restated as of September 26, 2000 to reflect adjustments
under Section 4(c) related to the two-for-one split of the
Company's common stock.
10.28* Agreement for Purchase and Sale of Partnership Interests,
dated December 7, 2000, between the Company, Fleet
National Bank, BancBoston Services, Inc. and DST
EquiServe, Inc.
10.29* Agreement for Purchase and Sale of Partnership Interests,
dated December 7, 2000, between the Company, First Chicago
Trust Company of New York, FCTC General, Inc. and DST
EquiServe, Inc.
21.1 Subsidiaries of the Company
23.1 Consent of Independent Accountants
- ------------------------
* Portions have been omitted pursuant to a confidential treatment request.
77