UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-14036
DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
Delaware 43-1581814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 435-1000
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ]
Number of shares outstanding of the Company's common
stock as of March 31, 2000:
Common Stock $.01 par value - 62,758,160
DST Systems, Inc.
Form 10-Q
March 31, 2000
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
The Company's service marks and trademarks include without limitation DST(R),
Automated Work Distributor(TM), AWD(R), FAST(TM) referred to in this Report.
2
DST Systems, Inc.
Form 10-Q
March 31, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and note disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to enable a reasonable understanding of the
information presented. These Condensed Consolidated Financial Statements should
be read in conjunction with the audited financial statements and the notes
thereto for the year ended December 31, 1999. Additionally, the Condensed
Consolidated Financial Statements should be read in conjunction with Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q.
The results of operations for the three months ended March 31,
2000, are not necessarily indicative of the results to be
expected for the full year 2000.
3
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
March 31, December 31,
2000 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 72.8 $ 89.0
Accounts receivable 328.0 320.6
Other current assets 51.3 54.9
--------------- ---------------
452.1 464.5
Investments 1,520.1 1,477.7
Properties 343.7 338.7
Intangibles and other assets 42.6 45.4
--------------- ---------------
Total assets $ 2,358.5 $ 2,326.3
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 13.1 $ 18.4
Accounts payable 74.4 93.7
Accrued compensation and benefits 35.1 57.9
Deferred revenues and gains 42.1 44.1
Other liabilities 94.4 71.7
--------------- ---------------
259.1 285.8
Long-term debt 52.5 44.4
Deferred income taxes 460.2 452.2
Other liabilities 84.3 80.3
--------------- ---------------
856.1 862.7
--------------- ---------------
Commitments and contingencies
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares authorized,
63,816,639 shares issued 0.6 0.6
Additional paid-in capital 450.3 454.2
Retained earnings 572.4 516.2
Treasury stock (1,058,479 and 690,269 shares,
respectively), at cost (64.9) (40.1)
Accumulated other comprehensive income 544.0 532.7
--------------- ---------------
Total stockholders' equity 1,502.4 1,463.6
--------------- ---------------
Total liabilities and stockholders' equity $ 2,358.5 $ 2,326.3
=============== ===============
The accompanying notes are an integral part of these financial statements.
4
DST Systems, Inc.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)
For the Three Months
Ended March 31,
2000 1999
-------------- ---------------
Revenues $ 340.4 $ 298.4
Costs and expenses 245.1 221.0
Depreciation and amortization 31.6 27.5
-------------- ---------------
Income from operations 63.7 49.9
Interest expense (1.4) (1.5)
Other income, net 21.3 1.7
Equity in earnings of unconsolidated affiliates 4.1 2.2
-------------- ---------------
Income before income taxes and minority interests 87.7 52.3
Income taxes 31.5 18.8
-------------- ---------------
Income before minority interests 56.2 33.5
Minority interests (0.1)
-------------- ---------------
Net income $ 56.2 $ 33.6
============== ===============
Average common shares outstanding 62.9 63.0
Diluted shares outstanding 64.4 64.7
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
The accompanying notes are an integral part of these financial statements.
5
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
For the Three Months
Ended March 31,
2000 1999
---------------- ----------------
Cash flows -- operating activities:
Net income $ 56.2 $ 33.6
---------------- ----------------
Depreciation and amortization 31.6 27.5
Equity in earnings of unconsolidated affiliates (4.1) (2.2)
Net realized gain from sale of investments (7.6) (3.3)
Changes in accounts receivable (7.4) (6.3)
Changes in other current assets 4.6 (6.3)
Changes in accounts payable and accrued liabilities (17.3) (29.0)
Other, net (3.3) 2.2
---------------- ----------------
Total adjustments to net income (3.5) (17.4)
---------------- ----------------
Net 52.7 16.2
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of investments 15.3 9.7
Investments and advances to unconsolidated affiliates (27.1) (6.0)
Capital expenditures (32.0) (25.3)
Other, net 4.6 (0.5)
---------------- ----------------
Net (39.2) (22.1)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 3.1 3.1
Proceeds from issuance of long-term debt 11.5
Principal payments on long-term debt (3.4) (4.6)
Net increase in revolving credit
facilities and notes payable 5.1 14.8
Common stock repurchased (34.5) (2.8)
Other, net (0.7)
---------------- ----------------
Net (29.7) 21.3
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (16.2) 15.4
Cash and cash equivalents at beginning of period 89.0 28.1
---------------- ----------------
Cash and cash equivalents at end of period $ 72.8 $ 43.5
================ ================
The accompanying notes are an integral part of these financial statements.
6
DST Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Summary of Accounting Policies
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These Condensed
Consolidated Financial Statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 31, 1999.
Additionally, the Condensed Consolidated Financial Statements should be read in
conjunction with Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal interim
closing procedures) necessary to present fairly the financial position of the
Company and its subsidiaries at March 31, 2000 and December 31, 1999, and the
results of operations and cash flows for the three months ended March 31, 2000
and 1999.
The results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the full year 2000.
2. USCS Merger Integration Costs
In December 1998, DST's management approved plans which include initiatives to
integrate the operations of certain DST and USCS subsidiaries and consolidate
facilities. Total accrued integration costs of $16.9 million were recorded in
the fourth quarter of 1998, of which $0.7 million, $12.8 million and $3.4
million related to the Financial Services, Output Solutions, and Customer
Management Segments, respectively.
The Company utilized $0.1 million in the quarter ended March 31, 2000 related to
the accrued integration costs. Of the remaining accrued integration costs of
$5.2 million at March 31, 2000, $0.1 million, $3.5 million, and $1.6 million
relate to the Financial Services, Output Solutions, and Customer Management
Segments, respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 2000 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
2000 through 2003. Five locations have been closed as of March 31, 2000. The
remainder will be closed in 2000 once arrangements have been made to process
continuing business at other facilities. The costs of transitioning the
continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things, additional employee
costs, relocation and integration costs of moving to common internal systems.
Although precise estimates cannot be made, management does not believe such
costs will have a material adverse effect on the Company's consolidated results
of operations, liquidity or financial position.
7
3. Investments
Investments are as follows (in millions):
Carrying Value
-----------------------------------
Ownership March 31, December 31,
Percentage 2000 1999
-------------------- ---------------- ----------------
Available-for-sale securities:
Computer Sciences Corporation 5% $ 683.0 $ 816.8
State Street Corporation 4% 581.3 438.4
Euronet Services Inc. 12% 20.3 14.4
Other available-for-sale securities 83.7 63.3
---------------- ----------------
1,368.3 1,332.9
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 52.3 48.3
European Financial Data Services Limited 50% 10.8 8.0
Argus Health Systems, Inc. 50% 6.5 6.4
Other unconsolidated affiliates 35.2 34.8
---------------- ----------------
104.8 97.5
---------------- ----------------
Other:
Net investment in leases 13.0 16.0
Other 34.0 31.3
---------------- ----------------
47.0 47.3
---------------- ----------------
Total investments $ 1,520.1 $ 1,477.7
================ ================
Certain information related to the Company's available for sale securities is as
follows (in millions):
March 31, December 31,
2000 1999
----------------- -----------------
Cost $ 471.8 $ 456.5
Gross unrealized gains 898.3 877.9
Gross unrealized losses (1.8) (1.5)
----------------- -----------------
Market value $ 1,368.3 $ 1,332.9
================= =================
8
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
For the Three Months
Ended March 31,
2000 1999
------------ -------------
Boston Financial Data Services, Inc. $ 4.0 $ 2.7
European Financial Data Services Limited 0.3 (1.4)
Argus Health Systems, Inc. 0.2 0.9
Other (0.4)
------------ -------------
$ 4.1 $ 2.2
============ =============
4. Earnings Per Share and Comprehensive Income
Earnings per share. The computation of basic and diluted earnings per share is
as follows (in millions, except per share amounts):
For the Three Months
Ended March 31,
2000 1999
------------- -------------
Net income $ 56.2 $ 33.6
============= =============
Average common shares outstanding 62.9 63.0
Incremental shares from assumed
conversions of stock options 1.5 1.7
------------- -------------
Diluted potential common shares 64.4 64.7
============= =============
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
9
Comprehensive income. Components of comprehensive income consist of the
following (in millions):
For the Three Months
Ended March 31,
2000 1999
-------------- -------------
Net income $ 56.2 $ 33.6
-------------- -------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 27.7 (6.1)
Less reclassification adjustments for gains
included in net income (7.6) (3.3)
Foreign currency translation adjustments (0.8) 0.7
Deferred income taxes (8.0) 3.7
-------------- -------------
Other comprehensive income 11.3 (5.0)
-------------- -------------
Comprehensive income $ 67.5 $ 28.6
============== =============
5. Segment 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, certain investments in equity securities,
financial interests and real estate holdings are reflected in 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.
Effective January 1, 2000, the Output Solutions Segment began reporting certain
revenue and expense items on a gross basis rather than a net basis. The segment
information prior to January 1, 2000 has been restated to reflect these changes.
The effect of these changes increased Consolidated and Output Solutions Segment
revenues and costs and expenses by $5.6 million, $5.7 million, $5.9 million and
$7.0 million for the quarters ended March 31, 1999, June 30, 1999, September 30,
1999 and December 31, 1999, respectively. Effective July 1, 1999, certain
intersegment revenue agreements between the Output Solutions Segment and the
Customer Management Segment were revised. The segment information prior to July
1, 1999 has been restated to reflect this change. The effect of these revisions
decreased Output Solutions Segment revenues and Customer Management Segment
costs and expenses by $0.8 million for the quarter ended March 31, 1999 and
increased Output Solutions Segment revenues and Customer Management Segment
costs and expenses by $0.2 million for the quarter ended June 30, 1999.
Intersegment revenues are reflected at rates prescribed by the Company and may
not be reflective of market rates. Summarized financial information concerning
the segments is shown in the following tables (in millions):
10
Three Months Ended March 31, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 147.3 $ 141.8 $ 48.7 $ 2.6 $ $ 340.4
Intersegment revenues 0.5 13.4 5.6 (19.5)
------------- ------------- ------------- ------------- ------------- --------------
147.8 155.2 48.7 8.2 (19.5) 340.4
Costs and expenses 94.5 123.3 42.1 4.7 (19.5) 245.1
Depreciation and amortization 17.5 7.9 4.1 2.1 31.6
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 35.8 24.0 2.5 1.4 63.7
Other income, net 0.8 20.5 21.3
Equity in earnings (losses) of
unconsolidated affiliates 4.4 (0.3) 4.1
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 41.0 $ 24.0 $ 2.5 $ 21.6 $ $ 89.1
============= ============= ============= ============= ============= ==============
Three Months Ended March 31, 1999
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 134.2 $ 113.2 $ 48.2 $ 2.8 $ $ 298.4
Intersegment revenues 0.4 12.7 5.4 (18.5)
------------- ------------- ------------- ------------- ------------- --------------
134.6 125.9 48.2 8.2 (18.5) 298.4
Costs and expenses 90.5 103.1 41.6 4.3 (18.5) 221.0
Depreciation and amortization 14.9 7.1 3.6 1.9 27.5
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 29.2 15.7 3.0 2.0 49.9
Other income (loss), net 0.3 0.1 (0.1) 1.4 1.7
Equity in earnings (losses) of
unconsolidated affiliates 2.2 0.1 (0.1) 2.2
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 31.7 $ 15.9 $ 2.9 $ 3.3 $ $ 53.8
============= ============= ============= ============= ============= ==============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.4 million and
$1.5 million for the three months ended March 31, 2000 and 1999, respectively,
is equal to the Company's income before income taxes and minority interests on a
consolidated basis for the corresponding periods.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussions set forth in this Quarterly Report on Form 10-Q 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
Quarterly 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 Quarterly Report to reflect future events or
developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included in
this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
INTRODUCTION
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.
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.
Customer Management
The Customer Management Segment provides sophisticated customer management and
open billing solutions to the video/broadband, direct broadcast satellite
("DBS"), wireless, wire-line and Internet-protocol telephony, Internet and
utility markets worldwide.
Investments and Other
The Investments and Other Segment holds investments in equity securities,
certain financial interests, the Company's real estate subsidiaries and the
Company's computer hardware leasing subsidiary.
12
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
Three Months
Ended March 31,
----------------------------
Operating results 2000 1999
------------- -------------
Revenues
Financial Services $ 147.8 $ 134.6
Output Solutions 155.2 125.9
Customer Management 48.7 48.2
Investments and Other 8.2 8.2
Eliminations (19.5) (18.5)
------------- -------------
$ 340.4 $ 298.4
============= =============
% change from prior year periods 14.1% 12.2%
Income from operations
Financial Services $ 35.8 $ 29.2
Output Solutions 24.0 15.7
Customer Management 2.5 3.0
Investments and Other 1.4 2.0
------------- -------------
63.7 49.9
Interest expense (1.4) (1.5)
Other income, net 21.3 1.7
Equity in earnings of unconsolidated
affiliates, net of income taxes 4.1 2.2
------------- -------------
Income before income taxes and
minority interests 87.7 52.3
Income taxes 31.5 18.8
Minority interests (0.1)
------------- -------------
Net income $ 56.2 $ 33.6
============= =============
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
Consolidated revenues
Consolidated revenues for the three months ended March 31, 2000 increased $42.0
million, which represents an increase of 14.1%, over the comparable period in
1999. U.S. revenues for the three months ended March 31, 2000 were $302.7
million, an increase of 17.5%, over the same period in 1999. International
revenues for the three months ended March 31, 2000 were $37.7 million, a
decrease of 7.6% over the same period in 1999.
Financial Services Segment revenues for the three months ended March 31, 2000
increased $13.2 million, or 9.8% over the same period in 1999. U.S. Financial
Services Segment revenues for the three months ended March 31, 2000 increased
$16.7 million or 16.3% over the same period in 1999, primarily from an increase
in mutual fund shareowner accounts processed. International Financial Services
Segment revenues for the three months ended March 31, 2000 decreased $3.5
million or 10.9% over the same period in 1999.
13
Output Solutions Segment revenues for the three months ended March 31, 2000
increased $29.3 million, or 23.3%, over the same period in 1999. Revenue growth
resulted from increased volume of images and statements produced from U.S.
mutual fund shareowner account growth, new customers, and internal growth of
existing customers primarily in telecommunications and package delivery
industries.
Customer Management Segment revenues for the three months ended March 31, 2000
increased $0.5 million, or 1.0% over same period in 1999, as processing and
software service revenues increased primarily from subscriber growth and
increased services.
Investments and Other Segment revenues were $8.2 million for the three months
ended March 31, 2000 and 1999. Segment revenues are primarily rental income for
facilities leased to the Company's operating segments and hardware leasing
activities.
Income from operations
Consolidated income from operations for the three months ended March 31, 2000
increased $13.8 million, or 27.7%, over same period in 1999. U.S. income from
operations for the three months ended March 31, 2000 was $59.2 million, an
increase of 36.4% over the same period in 1999. International income from
operations was $4.5 million, a decrease of 29.7% compared to the same period in
1999.
Financial Services income from operations for the three months ended March 31,
2000 increased 22.6% or $6.6 million over the prior year quarter to $35.8
million, resulting in an operating margin of 24.2% compared to 21.7% for the
prior year. The increase in operating margin resulted primarily from an increase
in U.S. revenues related to mutual fund shareowner processing.
Output Solutions Segment income from operations for the three months ended March
31, 2000 increased $8.3 million, or 52.9%, over the same period in 1999. Output
Solutions Segment operating margin was 15.5% for the three months ended March
31, 2000 compared to 12.5% for the same period in 1999. The improvement in the
2000 operating margin results are primarily from increased volume of images and
statements produced.
In the first quarter 2000, Customer Management Segment income from operations
decreased $0.5 million or 16.7% compared to the prior year quarter, resulting in
an operating margin of 5.1% as compared to 6.2% for the prior year quarter. The
decreases were primarily attributable to increased costs of international
operations.
Investments and Other Segment income from operations was $1.4 million for the
three months ended March 31, 2000, as compared to $2.0 million for the three
months ended March 31, 1999.
Interest expense
Interest expense totaled $1.4 million for the three months ended March 31, 2000,
down from $1.5 million recorded in the comparable period in 1999. Average debt
balances were lower in 2000 compared to 1999.
Other income, net
Other income was $21.3 million for the three months ended March 31, 2000,
compared to $1.7 million for the comparable period in 1999. The increase is
primarily a result of 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. Other income also
includes gains from the sale of available-for-sale
14
securities of $7.6 million and interest and dividend income of $2.9 million for
the three months ended March 31, 2000.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $4.1 million for the
three months ended March 31, 2000, as compared to $2.2 million for the three
months ended March 31, 1999. Increased earnings were recorded at Boston
Financial Data Services from higher levels of mutual fund activity. The Company
recorded earnings from European Financial Data Services (EFDS) of $0.3 million
for the three months ended March 31, 2000, as compared to a recorded loss of
$1.4 million for the three months ended March 31, 1999. EFDS was positively
affected by an increase of 0.7 million accounts serviced to 2.3 million accounts
from the prior period in 1999, seasonal processing revenues related to U.K.
retirement plan funding deadlines and non-recurring overflow processing
performed for certain remote clients. EFDS continues to incur system development
and conversion costs for FAST(TM). Management believes that EFDS' results for
the first quarter 2000 are not indicative of their results for the remainder of
the year. Earnings from Argus Health Systems for the three months ended March
31, 2000 decreased from the prior year period primarily from increased data
processing costs and depreciation charges.
Income taxes
The Company's effective tax rate was 35.9% for the three months ended March 31,
2000 and 1999. The 2000 and 1999 tax rates were affected by tax benefits
relating to certain international operations and recognition of state tax
benefits associated with income apportionment rules.
Business Segment Comparisons
FINANCIAL SERVICES SEGMENT
Revenues
Financial Services Segment revenues for the three months ended March 31, 2000
increased 9.8% over the same period in 1999 to $147.8 million. U.S. Financial
Services revenue increased 16.3% to $119.2 million for the three months ended
March 31, 2000. U.S. mutual fund processing revenues for the three months ended
March 31, 2000 increased 19.2% over the prior year period as shareowner accounts
serviced increased 9.4 million from March 31, 1999 to 61.0 million at March 31,
2000. The Company has contracts with new clients to convert approximately 5.5
million new accounts to its system during 2000.
Financial Services Segment revenues from international operations for the three
months ended March 31, 2000 decreased 10.9% to $28.6 million. The decrease for
the quarter was attributable to a decline in professional service revenues and
investment management software license revenues, partially resulting from
customer Year 2000 software installation freezes that affected activity during
the first quarter 2000. This decrease was partially offset by higher Canadian
mutual fund shareowner processing revenues and an increase in international
Automated Work Distributor ("AWD") software license and maintenance revenues.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
4.4% to $94.5 million over the comparable period in 1999. Personnel costs for
the three months ended March 31, 2000 increased 4.6% over the comparable prior
year period as a result of increased staff levels to support volume growth and
increased wages for data processing professionals.
Depreciation and amortization
Segment depreciation and amortization for the three months ended March 31, 2000
increased 17.4% or $2.6 million over the comparable period in 1999. The increase
is partially attributable to the amortization of capitalized software
development costs.
15
Income from operations
The Segment's income from operations for the three months ended March 31, 2000
increased 22.6% to $35.8 million over the comparable prior year period. The
Segment's operating margin was 24.2% and 21.7% for the three months ended March
31, 2000 and 1999, respectively. The increases in Financial Services Segment
operating margins are a result of increased U.S. revenues.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three months ended March 31, 2000
increased 23.3% to $155.2 million as compared to the same period in 1999. The
growth in segment revenue was derived primarily from an increase in the volume
of images and statements produced from growth of existing customers in the
Financial Services Segment, new customers and internal growth of existing
customers, primarily in telecommunications and package delivery industries.
Output Solutions Segment images produced for the three months ended March 31,
2000 increased 17.2% to 1.8 billion and statements mailed increased 18.3% to
484.7 million, compared to the same period in 1999. In order to conform to 2000
presentation, Output Solutions Segment revenues for the first quarter 1999 were
restated to reflect an increase of $5.6 million.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
19.6% to $123.3 million over the comparable prior year period. Personnel costs
for the three months ended March 31, 2000 increased 19.6% over the comparable
prior year period as a result of increased staff levels to support volume
growth, increased product development costs and integration costs to standardize
facilities and systems.
Depreciation and amortization
Depreciation and amortization for the three months ended March 31, 2000
increased 11.3% to $7.9 million compared to the same period in 1999. The
increase is related primarily to the purchase of additional capital equipment to
support revenue growth.
Income from operations
The increase in the Segment's income from operations for the three months ended
March 31, 2000 of $8.3 million or 52.9% over the same period in 1999 is
primarily attributable to increased volumes for images and statements. The
Segment's operating margins were 15.5% and 12.5% for the three months ended
March 31, 2000 and 1999, respectively.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three months ended March 31, 2000
increased 1.0% to $48.7 million from $48.2 million for the three months ended
March 31, 1999. Processing and software service revenues increased $0.6 million
for the three months ended March 31, 2000, from $45.4 million for the three
months ended March 31, 1999.
16
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
$0.5 million or 1.2%, compared to the same period in 1999, which is primarily
attributable to increased costs of international operations.
Depreciation and amortization
Depreciation and amortization increased $0.5 million for the three months ended
March 31, 2000, or 13.9%, compared to the same period in 1999, of which $0.3
million is attributable to the amortization of capitalized software development
costs.
Income from operations
The Segment's income from operations for the three months ended March 31, 2000
decreased $0.5 million, or 16.7%, compared to the same period in 1999, resulting
in an operating margin of 5.1% for the three months ended March 31, 2000, as
compared to 6.2% for the three months ended March 31, 1999.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $8.2 million for the three months
ended March 31, 2000 and 1999. Real estate revenues of $7.0 million for the
three months ended March 31, 2000, as compared to $6.6 million for the three
months ended March 31, 1999, were primarily derived from the lease of facilities
to the Company's other business segments. Revenues of $1.2 million for the three
months ended March 31, 2000, as compared to $1.6 million for the three months
ended March 31, 1999, were derived from the Segment's hardware leasing
activities.
Costs and expenses
Investments and Other Segment costs and expenses increased $0.4 million to $4.7
million for the three months ended March 31, 2000 as compared to $4.3 million
for the three months ended March 31, 1999, primarily as a result of additional
real estate activities.
Depreciation and amortization
Investments and Other Segment depreciation and amortization totaled $2.1 million
and $1.9 million for the three months ended March 31, 2000 and 1999,
respectively.
Income from operations
The segment's income from operations totaled $1.4 million and $2.0 million for
the three months ended March 31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $52.7 million for the
three months ended March 31, 2000. Operating cash flows for the three months
ended March 31, 2000 were primarily impacted by net income of $56.2 million,
depreciation and amortization of $31.6 million, a decrease in accounts payable
and accrued liabilities of $17.3 million and a net increase in accounts
receivable and other current assets of $2.8 million.
Cash flows used in investing activities totaled $39.2 million for the three
months ended March 31, 2000. The Company expended $32.0 million during the three
months for capital additions. Investments and advances to unconsolidated
affiliates totaled $27.1 million. During the three months ended March 31, 2000,
the Company received $15.3 million from the sale of investments in
available-for-sale securities.
17
Cash flows used in financing activities totaled $29.7 million for the three
months ended March 31, 2000. The Company also received proceeds from the
exercise of stock options of $3.1 million for the three months ended March 31,
2000. The Company maintains $110 million in bank lines of credit for working
capital requirements and general corporate purposes, of which $60 million
matures May 2000 and $50 million matures March 2001. The Company also maintains
a $125 million revolving credit facility with a syndicate of U.S. and
international banks which is available through December 2001. Net borrowings
under these facilities totaled $9.3 million for the three months ended March 31,
2000, bringing total borrowings under these facilities to $30.0 million.
During the quarter ended March 31, 2000, DST announced a new share repurchase
program, which authorized the repurchase of an additional 4,000,000 shares of
DST common stock. Of the additional 4,000,000 shares to be repurchased, 960,000
shares will provide shares to meet expected additional share requirements under
various DST option, incentive and benefit plans. The balance of the additional
shares will be repurchased from time to time and will be used for general
corporate purposes. During the quarter ended March 31, 2000, no shares were
repurchased under this program.
During the quarter ended March 31, 2000, DST purchased 530,000 shares of its
common stock under its previously announced 4,175,000 share repurchase program
for $34.5 million. As of March 31, 2000, DST has purchased 1,370,000 shares
since the program commenced. The shares purchased will be utilized for DST's
stock award and stock option 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 4.0 million
shares of its common stock as a means of securing potentially favorable prices
for future purchases of its stock. During the three months ended March 31, 2000,
no shares were purchased by the Company under this agreement. As of March 31,
2000, the cost to settle the agreements would be approximately $249.3 million
for 4.0 million shares of common stock. The agreements contain provisions which
allow the Company to elect a net cash or net share settlement in lieu of
physical settlement of the shares through September 2002.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will suffice to meet the
Company's operating and debt service requirements and other current liabilities
for at least the next 12 months. Further, the Company believes that its longer
term liquidity and capital requirements will also be met through cash provided
by operating activities and bank credit facilities, as well as the Company's
$125 million revolving credit facility described above.
OTHER
Comprehensive income. The Company's comprehensive income totaled $67.5 million
and $28.6 million for the three months ended March 31, 2000 and 1999,
respectively. Comprehensive income consists of net income of $56.2 million and
$33.6 million for the three months ended March 31, 2000 and 1999, respectively,
and other comprehensive income of $11.3 million for the three months ended March
31, 2000 and other comprehensive losses of $5.0 million for the three months
ended March 31, 1999. Other comprehensive income 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.
USCS Merger Integration Costs. In December 1998, DST's management approved plans
which include initiatives to integrate the operations of certain DST and USCS
subsidiaries and consolidate certain facilities. Total accrued integration costs
of $16.9 million were recorded in the fourth quarter of 1998, of which
18
$0.7 million, $12.8 million and $3.4 million related to the Financial Services,
Output Solutions, and Customer Management Segments, respectively.
The Company utilized $0.1 million in the quarter ended March 31, 2000. Of the
remaining accrued integration costs of $5.2 million at March 31, 2000, $0.1
million, $3.5 million, and $1.6 million relate to the Financial Services, Output
Solutions, and Customer Management Segments, respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 2000 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
2000 through 2003. Location closures are planned to occur through 2000 once
arrangements have been made to process continuing business at other facilities.
Five of the locations have been closed as of March 31, 2000. The costs of
transitioning the continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things, additional employee
costs, relocation costs and integration costs of moving to common internal
systems. Although precise estimates cannot be made, management does not believe
such costs will have a materially adverse effect on the Company's consolidated
results of operations, liquidity or financial position.
Seasonality. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output 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. Software license revenues and operating results are dependent
upon the timing, size, and terms of the license.
19
Item 3. 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
March 31, 2000 was approximately $1.4 billion. The impact of a 10% change in
fair value of these investments would be approximately $89.7 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 March 31, 2000, the Company had $65.5 million of long-term debt, of which
$34.4 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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the ordinary
course of its business. Currently, there are no legal proceedings that
management believes would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
If a stockholder desires to have a proposal included in DST's Proxy Statement
for next year's annual meeting of stockholders, the Corporate Secretary of DST
must receive such proposal on or before November 30, 2000, and the proposal must
comply with the applicable SEC regulations and with the procedures set forth in
DST's by-laws.
21
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
March 31, December 31,
2000 1999
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S. 61.0 56.4
Canada 3.1 2.4
United Kingdom (1) 2.3 2.0
TRAC-2000 mutual fund accounts (millions) (2) 3.8 3.4
TRAC-2000 participants (millions) 1.3 1.3
IRA mutual fund accounts (millions) (2) 15.2 14.0
Portfolio Accounting System portfolios 2,044 1,988
Automated Work Distributor workstations 62,100 57,700
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions) 40.1 39.1
For the Three Months
Ended March 31,
2000 1999
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 1,835 1,566
Items mailed (millions) 485 410
(1) Processed by EFDS, an unconsolidated affiliate of the Company
(2) Included in U.S. mutual fund shareowner accounts processed
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Document
3.1 DST Systems, Inc. Amended Delaware
Certificate of Incorporation as of
May 9, 2000
10.30 DST Systems, Inc. 1995 Stock Option and
Performance Award Plan, amended and
restated as of May 9, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
January 28, 2000, reporting the announcement of financial results for the
quarter ended and year ended December 31, 1999.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
March 24, 2000, announcing a new Company program to repurchase shares for
use under various option and benefit plans and for general corporate
purposes.
SIGNATURES
Pursuant to the requirements 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, and in the capacities indicated, on May 15, 2000.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
23