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 June 30, 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 June 30, 2000:
Common Stock $.01 par value - 62,733,156
1
DST Systems, Inc.
Form 10-Q
June 30, 2000
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
June 30, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Income -
Three and Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 25
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
June 30, 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 and six months ended June 30, 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)
June 30, December 31,
2000 1999
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 87.0 $ 89.0
Accounts receivable 333.1 320.6
Other current assets 53.5 54.9
--------------- ---------------
473.6 464.5
Investments 1,557.0 1,477.7
Properties 349.4 338.7
Intangibles and other assets 45.6 45.4
--------------- ---------------
Total assets $ 2,425.6 $ 2,326.3
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 22.1 $ 18.4
Accounts payable 91.1 93.7
Accrued compensation and benefits 52.3 57.9
Deferred revenues and gains 38.0 44.1
Other liabilities 64.5 71.7
--------------- ---------------
268.0 285.8
Long-term debt 58.1 44.4
Deferred income taxes 469.1 452.2
Other liabilities 81.6 80.3
--------------- ---------------
876.8 862.7
--------------- ---------------
Commitments and contingencies
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par; 300,000,000 shares authorized,
63,816,639 shares issued 0.6 0.6
Additional paid-in capital 448.6 454.2
Retained earnings 619.6 516.2
Treasury stock (1,083,483 and 690,269 shares,
respectively), at cost (68.9) (40.1)
Accumulated other comprehensive income 548.9 532.7
--------------- ---------------
Total stockholders' equity 1,548.8 1,463.6
--------------- ---------------
Total liabilities and stockholders' equity $ 2,425.6 $ 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 For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------------- --------------- --------------- ---------------
Revenues $ 337.0 $ 305.3 $ 677.4 $ 603.7
Costs and expenses 241.2 226.1 486.3 447.1
Depreciation and amortization 31.7 27.8 63.3 55.3
-------------- --------------- --------------- ---------------
Income from operations 64.1 51.4 127.8 101.3
Interest expense (1.5) (1.2) (2.9) (2.7)
Other income, net 7.5 (0.9) 28.8 0.8
Equity in earnings of unconsolidated affiliates 3.5 2.6 7.6 4.8
-------------- --------------- --------------- ---------------
Income before income taxes and minority interests 73.6 51.9 161.3 104.2
Income taxes 26.4 18.6 57.9 37.4
-------------- --------------- --------------- ---------------
Income before minority interests 47.2 33.3 103.4 66.8
Minority interests (0.1) (0.2)
-------------- --------------- --------------- ---------------
Net income $ 47.2 $ 33.4 $ 103.4 $ 67.0
============== =============== =============== ===============
Average common shares outstanding 62.8 63.1 62.8 63.1
Diluted shares outstanding 64.6 64.8 64.5 64.7
Basic earnings per share $ 0.75 $ 0.53 $ 1.65 $ 1.06
Diluted earnings per share $ 0.73 $ 0.52 $ 1.60 $ 1.04
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 Six Months
Ended June 30,
2000 1999
----------------- -----------------
Cash flows -- operating activities:
Net income $ 103.4 $ 67.0
----------------- -----------------
Depreciation and amortization 63.3 55.3
Equity in earnings of unconsolidated affiliates (7.6) (4.8)
Net realized gain from sale of investments (11.6) (3.9)
Deferred taxes 2.2 1.4
Changes in accounts receivable (12.0) 6.7
Changes in other current assets 4.0 2.2
Changes in accounts payable and accrued liabilities 2.6 (33.0)
Other, net 0.6 (4.1)
----------------- -----------------
Total adjustments to net income 41.5 19.8
----------------- -----------------
Net 144.9 86.8
----------------- -----------------
Cash flows -- investing activities:
Proceeds from sale of investments 30.0 11.3
Investments and advances to unconsolidated affiliates (57.6) (11.7)
Capital expenditures (76.2) (55.6)
Other, net (1.7) 7.9
----------------- -----------------
Net (105.5) (48.1)
----------------- -----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 19.4 8.6
Proceeds from issuance of long-term debt 11.5
Principal payments on long-term debt (5.8) (7.9)
Net increase (decrease) in revolving credit
facilities and notes payable 22.1 (12.4)
Common stock repurchased (77.1) (7.2)
Other, net (0.6)
----------------- -----------------
Net (41.4) (8.0)
----------------- -----------------
Net increase (decrease) in cash and cash equivalents (2.0) 30.7
Cash and cash equivalents at beginning of period 89.0 28.1
----------------- -----------------
Cash and cash equivalents at end of period $ 87.0 $ 58.8
================= =================
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 June 30, 2000 and December 31, 1999, and the
results of operations for the three and six months ended June 30, 2000 and 1999,
and cash flows for the six months ended June 30, 2000 and 1999.
The results of operations for the three and six months ended June 30, 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 $3.4 million and $3.5 million in the three and six months
ended June 30, 2000, respectively, related to the accrued integration costs. Of
the remaining accrued integration costs of $1.4 million at June 30, 2000, $0.7
million and $0.7 million relate to the 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 June 30, 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 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 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 June 30, December 31,
Percentage 2000 1999
-------------------- ---------------- ----------------
Available-for-sale securities:
Computer Sciences Corporation 5% $ 644.7 $ 816.8
State Street Corporation 4% 636.4 438.4
Euronet Services Inc. 12% 16.7 14.4
Other available-for-sale securities 90.3 63.3
---------------- ----------------
1,388.1 1,332.9
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 56.0 48.3
European Financial Data Services Limited 50% 11.0 8.0
Argus Health Systems, Inc. 50% 6.8 6.4
Other unconsolidated affiliates 45.1 34.8
---------------- ----------------
118.9 97.5
---------------- ----------------
Other:
Net investment in leases 17.7 16.0
Other 32.3 31.3
---------------- ----------------
50.0 47.3
---------------- ----------------
Total investments $ 1,557.0 $ 1,477.7
================ ================
Certain information related to the Company's available-for-sale securities is as
follows (in millions):
June 30, December 31,
2000 1999
----------------- -----------------
Cost $ 480.4 $ 456.5
Gross unrealized gains 911.6 877.9
Gross unrealized losses (3.9) (1.5)
----------------- -----------------
Market value $ 1,388.1 $ 1,332.9
================= =================
8
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------------ ------------- ------------- -------------
Boston Financial Data Services, Inc. $ 3.7 $ 2.3 $ 7.7 $ 5.0
European Financial Data Services Limited (0.2) (0.5) 0.1 (1.9)
Argus Health Systems, Inc. 0.2 0.8 0.4 1.7
Other (0.2) (0.6)
------------ ------------- ------------- -------------
$ 3.5 $ 2.6 $ 7.6 $ 4.8
============ ============= ============= =============
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 For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
Net income $ 47.2 $ 33.4 $ 103.4 $ 67.0
============= ============= ============= =============
Average common shares outstanding 62.8 63.1 62.8 63.1
Incremental shares from assumed
conversions of stock options 1.8 1.7 1.7 1.6
------------- ------------- ------------- -------------
Diluted potential common shares 64.6 64.8 64.5 64.7
============= ============= ============= =============
Basic earnings per share $ 0.75 $ 0.53 $ 1.65 $ 1.06
Diluted earnings per share $ 0.73 $ 0.52 $ 1.60 $ 1.04
9
Comprehensive income. Components of comprehensive income consist of the
following (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
-------------- ------------- -------------- --------------
Net income $ 47.2 $ 33.4 $ 103.4 $ 67.0
-------------- ------------- -------------- --------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 15.3 140.4 43.0 134.3
Less reclassification adjustments for gains
included in net income (4.0) (0.6) (11.6) (3.9)
Foreign currency translation adjustments (2.1) (2.4) (2.9) (1.7)
Deferred income taxes (4.3) (54.6) (12.3) (50.9)
-------------- ------------- -------------- --------------
Other comprehensive income 4.9 82.8 16.2 77.8
-------------- ------------- -------------- --------------
Comprehensive income $ 52.1 $ 116.2 $ 119.6 $ 144.8
============== ============= ============== ==============
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.
Summarized financial information concerning the segments is shown in the
following tables (in millions):
10
Three Months Ended June 30, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 155.2 $ 128.1 $ 51.3 $ 2.4 $ $ 337.0
Intersegment revenues 0.4 13.5 5.8 (19.7)
------------- ------------- ------------- ------------- ------------- --------------
155.6 141.6 51.3 8.2 (19.7) 337.0
Costs and expenses 94.7 118.4 42.4 5.4 (19.7) 241.2
Depreciation and amortization 17.2 8.6 3.9 2.0 31.7
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 43.7 14.6 5.0 0.8 64.1
Other income, net 1.3 6.2 7.5
Equity in earnings (losses) of
unconsolidated affiliates 3.7 (0.2) 3.5
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 48.7 $ 14.6 $ 5.0 $ 6.8 $ $ 75.1
============= ============= ============= ============= ============= ==============
Three Months Ended June 30, 1999
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 138.0 $ 111.8 $ 52.3 $ 3.2 $ $ 305.3
Intersegment revenues 0.3 13.1 5.3 (18.7)
------------- ------------- ------------- ------------- ------------- --------------
138.3 124.9 52.3 8.5 (18.7) 305.3
Costs and expenses 91.1 104.7 44.9 4.1 (18.7) 226.1
Depreciation and amortization 14.6 7.9 3.4 1.9 27.8
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 32.6 12.3 4.0 2.5 51.4
Other income, net (2.7) 0.2 (0.1) 1.7 (0.9)
Equity in earnings of
unconsolidated affiliates 2.6 2.6
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 32.5 $ 12.5 $ 3.9 $ 4.2 $ $ 53.1
============= ============= ============= ============= ============= ==============
11
Six Months Ended June 30, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 302.5 $ 269.9 $ 100.0 $ 5.0 $ $ 677.4
Intersegment revenues 0.9 26.9 11.4 (39.2)
------------- ------------- ------------- ------------- ------------- --------------
303.4 296.8 100.0 16.4 (39.2) 677.4
Costs and expenses 189.2 241.7 84.5 10.1 (39.2) 486.3
Depreciation and amortization 34.7 16.5 8.0 4.1 63.3
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 79.5 38.6 7.5 2.2 127.8
Other income, net 2.1 26.7 28.8
Equity in earnings (losses) of
unconsolidated affiliates 8.1 (0.5) 7.6
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 89.7 $ 38.6 $ 7.5 $ 28.4 $ $ 164.2
============= ============= ============= ============= ============= ==============
Six Months Ended June 30, 1999
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 272.2 $ 225.0 $ 100.5 $ 6.0 $ $ 603.7
Intersegment revenues 0.7 25.8 10.7 (37.2)
------------- ------------- ------------- ------------- ------------- --------------
272.9 250.8 100.5 16.7 (37.2) 603.7
Costs and expenses 181.6 207.8 86.5 8.4 (37.2) 447.1
Depreciation and amortization 29.5 15.0 7.0 3.8 55.3
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 61.8 28.0 7.0 4.5 101.3
Other income, net (2.4) 0.3 (0.2) 3.1 0.8
Equity in earnings (losses) of
unconsolidated affiliates 4.8 0.1 (0.1) 4.8
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 64.2 $ 28.4 $ 6.8 $ 7.5 $ $ 106.9
============= ============= ============= ============= ============= ==============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.5 million and
$2.9 million for the three and six months ended June 30, 2000, respectively, and
$1.2 million and $2.7 million for the three and six months ended June 30, 1999,
respectively, is equal to the Company's income before income taxes and minority
interests on a consolidated basis for the corresponding periods.
12
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.
13
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- -----------------------------
Operating results 2000 1999 2000 1999
------------- ------------- ------------- --------------
Revenues
Financial Services $ 155.6 $ 138.3 $ 303.4 $ 272.9
Output Solutions 141.6 124.9 296.8 250.8
Customer Management 51.3 52.3 100.0 100.5
Investments and Other 8.2 8.5 16.4 16.7
Eliminations (19.7) (18.7) (39.2) (37.2)
------------- ------------- ------------- --------------
$ 337.0 $ 305.3 $ 677.4 $ 603.7
============= ============= ============= ==============
% change from prior year periods 10.4% 13.2% 12.2% 12.7%
Income from operations
Financial Services $ 43.7 $ 32.6 $ 79.5 $ 61.8
Output Solutions 14.6 12.3 38.6 28.0
Customer Management 5.0 4.0 7.5 7.0
Investments and Other 0.8 2.5 2.2 4.5
------------- ------------- ------------- --------------
64.1 51.4 127.8 101.3
Interest expense (1.5) (1.2) (2.9) (2.7)
Other income, net 7.5 (0.9) 28.8 0.8
Equity in earnings of unconsolidated
affiliates, net of income taxes 3.5 2.6 7.6 4.8
------------- ------------- ------------- --------------
Income before income taxes and
minority interests 73.6 51.9 161.3 104.2
Income taxes 26.4 18.6 57.9 37.4
Minority interests (0.1) (0.2)
------------- ------------- ------------- --------------
Net income $ 47.2 $ 33.4 $ 103.4 $ 67.0
============= ============= ============= ==============
Basic earnings per share $ 0.75 $ 0.53 $ 1.65 $ 1.06
Diluted earnings per share $ 0.73 $ 0.52 $ 1.60 $ 1.04
Consolidated revenues
Consolidated revenues for the three and six months ended June 30, 2000 increased
$31.7 million and $73.7 million, respectively, which represents an increase of
10.4% and 12.2%, respectively, over the comparable periods in 1999. U.S.
revenues for the three and six months ended June 30, 2000 were $296.6 million
and $599.3 million, respectively, an increase of 12.9% and 15.1%, respectively,
over the same periods in 1999. International revenues for the three and six
months ended June 30, 2000 were $40.4 million and $78.1 million, respectively, a
decrease of 4.9% and 6.1%, respectively, over the same periods in 1999.
Financial Services Segment revenues for the three and six months ended June 30,
2000 increased $17.3 million and $30.5 million, respectively, or 12.5% and
11.2%, respectively, over the same periods in 1999. U.S. Financial Services
Segment revenues for the three and six months ended June 30, 2000 increased
$18.9 million and $35.7 million, respectively, or 17.9% and 17.2%, respectively,
over the same periods in 1999, primarily from an increase in mutual fund
shareowner accounts processed. U.S. mutual fund shareowner accounts serviced
totaled 63.9 million at June 30, 2000, an increase of 13.3% from the 56.4
million serviced at December 31, 1999 and an increase of 19.9% from the 53.3
million serviced at June 30, 1999.
14
Output Solutions Segment revenues for the three and six months ended June 30,
2000 increased $16.7 million and $46.0 million, respectively, or 13.4% and
18.3%, respectively, over the same periods in 1999. Revenue growth resulted from
increased volume of images and statements produced from U.S. mutual fund
shareowner account growth, and internal growth of existing customers primarily
in telecommunications. Output Solutions Segment images produced for the three
and six months ended June 30, 2000 increased 17.3% and 17.2%, respectively, to
1.8 billion and 3.6 billion, respectively, and statements mailed increased 15.2%
and 16.8%, respectively, to 450.2 million and 934.9 million, respectively,
compared to the same periods in 1999.
Customer Management Segment revenues for the three and six months ended June 30,
2000 decreased $1.0 million or 1.9% and $0.5 million or 0.5%, respectively, over
the same periods in 1999, as processing and software service revenues and
equipment sales decreased.
Investments and Other Segment revenues decreased $0.3 million for the three and
six months ended June 30, 2000, a decline of 3.5% and 1.8%, respectively, as
compared to the same periods in 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 and six months ended June 30,
2000 increased $12.7 million and $26.5 million, respectively, or 24.7% and
26.2%, respectively, over same periods in 1999. U.S. income from operations for
the three and six months ended June 30, 2000 was $55.4 million and $114.6
million, respectively, an increase of 27.6% and 32.0%, respectively, over the
same periods in 1999. International income from operations for the three and six
months ended June 30, 2000 was $8.7 million and $13.2 million, respectively, an
increase of 8.7% and a decrease of 9.0%, respectively, compared to the same
periods in 1999.
Financial Services Segment income from operations for the three and six months
ended June 30, 2000 increased 34.0% or $11.1 million and 28.6% or $17.7 million,
respectively, over the comparable prior year periods to $43.7 million and $79.5
million, respectively. This resulted in operating margins of 28.1% and 26.2%,
respectively, for the three and six months ended June 30, 2000, compared to
23.6% and 22.6% for the comparable prior year periods. The increase in operating
margin resulted primarily from increases in U.S. revenues related to mutual fund
shareowner processing.
Output Solutions Segment income from operations for the three and six months
ended June 30, 2000 increased $2.3 million and $10.6 million, respectively, or
18.7% and 37.9%, respectively, over the same periods in 1999. Output Solutions
Segment operating margin was 10.3% and 13.0%, respectively, for the three and
six months ended June 30, 2000 compared to 9.8% and 11.2%, respectively, for the
same periods in 1999. The improvement in the 2000 operating margin results are
primarily from increased volume of images and statements produced.
Customer Management Segment income from operations totaled $5.0 million and $7.5
million for the three and six months ended June 30, 2000, respectively, an
increase of 25.0% and 7.1% over the comparable prior year periods. Operating
margins were 9.7% and 7.5% for the three and six months ended June 30, 2000,
respectively, compared to 7.6% and 7.0% for the comparable prior year periods.
Investments and Other Segment income from operations was $0.8 million and $2.2
million for the three and six months ended June 30, 2000, respectively, as
compared to $2.5 million and $4.5 million for the three and six months ended
June 30, 1999, respectively.
15
Interest expense
Interest expense totaled $1.5 million and $2.9 million, respectively, for the
three and six months ended June 30, 2000, an increase from $1.2 million and $2.7
million recorded in the comparable periods in 1999. Average interest rates and
borrowings were higher in 2000 compared to 1999.
Other income, net
Other income was $7.5 million and $28.8 million for the three and six months
ended June 30, 2000, respectively, an increase of $8.4 million and $28.0 million
over the comparable periods in 1999. The increases are principally from $4.4
million and $12.0 million in pre-tax gains on sales of available-for-sale
securities during the three and six months ended June 30, 2000, respectively,
higher levels of interest and dividend income, and a $10.8 million pretax
settlement of a legal dispute related to a former equity investment that was
received during the first quarter of 2000. The settlement agreement resolves all
outstanding issues related to this former equity investment. Included in the
1999 results were $2.9 million of losses on equipment dispositions.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $3.5 million and $7.6
million for the three and six months ended June 30, 2000, respectively, as
compared to $2.6 million and $4.8 million for the three and six months ended
June 30, 1999. Increased earnings were recorded at Boston Financial Data
Services from higher levels of mutual fund activity. The Company recorded losses
from European Financial Data Services (EFDS) of $0.2 million for the three
months ended June 30, 2000, a reduction from $0.5 million of losses for the
three months ended June 30, 1999. The Company recorded earnings from EFDS of
$0.1 million for the six months ended June 30, 2000, as compared to a recorded
loss of $1.9 million for the six months ended June 30, 1999. EFDS earnings were
positively affected by higher levels of accounts serviced, offset by continued
system development and conversion costs for FAST(TM), both of which will
continue throughout the remainder of 2000. Earnings from Argus Health Systems
for the three and six months ended June 30, 2000 decreased from the prior year
periods primarily from increased data processing costs and depreciation charges.
Income taxes
The Company's effective tax rates were essentially unchanged from prior year
rates. 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 and six months ended June 30,
2000 increased 12.5% and 11.2%, respectively, over the same periods in 1999 to
$155.6 million and $303.4 million, respectively. U.S. Financial Services revenue
increased 17.9% to $124.3 million and 17.2% to $243.5 million for the three and
six months ended June 30, 2000, respectively. U.S. mutual fund processing
revenues for the three and six months ended June 30, 2000 increased 16.4% and
17.7%, respectively, over the prior year periods as shareowner accounts serviced
increased 19.9% from 53.3 million at June 30, 1999 to 63.9 million at June 30,
2000. U.S. Automated Work Distributor ("AWD") product revenues for the three and
six months ended June 30, 2000 increased 32.9% and 17.8%, respectively, over the
same periods in the prior year primarily due to an increase in the number of AWD
workstations licensed.
16
Financial Services Segment revenues from international operations for the three
and six months ended June 30, 2000 decreased 4.9% to $31.3 million and 8.0% to
$59.9 million, respectively. The revenue decrease resulted primarily from lower
professional service revenues partially offset by increased software license
revenues, Canadian mutual fund shareowner processing revenues and international
AWD software maintenance revenues.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2000
increased 4.2% to $94.7 million and 4.2% to $189.2 million, respectively, over
the comparable periods in 1999. Personnel costs for the three and six months
ended June 30, 2000, increased 5.0% and 4.7%, respectively, over the comparable
prior year periods as a result of increased staff levels to support volume
growth.
Depreciation and amortization
Segment depreciation and amortization increased 17.8% or $2.6 million and 17.6%
or $5.2 million for the three and six months ended June 30, 2000, respectively,
over the comparable periods in 1999. The increase is primarily attributable to
amortization of capitalized software development costs.
Income from operations
Segment income from operations for the three and six months ended June 30, 2000
increased 34.0% to $43.7 million and 28.6% to $79.5 million, respectively, over
the comparable prior year periods. The Segment's operating margins were 28.1%
and 26.2% for the three and six months ended June 30, 2000, respectively, as
compared to 23.6% and 22.6% for the three and six months ended June 30, 1999,
respectively. The increases in Financial Services Segment operating margins are
primarily a result of increased U.S. revenues.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three and six months ended June 30,
2000 increased 13.4% to $141.6 million and 18.3% to $296.8 million,
respectively, as compared to the same periods in 1999. The growth in segment
revenue was derived primarily from an increase in the volume of statements and
images produced from U.S. mutual fund shareowner growth and internal growth of
existing customers, primarily in telecommunications.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2000
increased 13.1% to $118.4 million and 16.3% to $241.7 million, respectively,
over the comparable prior year periods. Personnel costs for the three and six
months ended June 30, 2000 increased 15.7% and 16.1%, respectively, over the
comparable prior year periods as a result of increased staff levels to support
volume growth and costs relating primarily to ongoing product development and
integration costs to standardize facilities and systems.
Depreciation and amortization
Segment depreciation and amortization for the three and six months ended June
30, 2000 increased 8.9% to $8.6 million and 10.0% to $16.5 million,
respectively, as compared to the same periods in 1999 related to increased
capital costs to support revenue growth.
Income from operations
The increase in the Segment's income from operations for the three and six
months ended June 30, 2000 of $2.3 million or 18.7% and $10.6 million or 37.9%,
respectively, over the same periods in 1999 is primarily attributable to
increased volumes for images and statements. The Segment's operating margins
were 10.3% and 13.0% for the three and six months ended June 30, 2000,
respectively, as compared to 9.8% and 11.2% for the three and six months ended
June 30, 1999, respectively.
17
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three and six months ended June 30,
2000 decreased 1.9% to $51.3 million and 0.5% to $100.0 million, respectively,
as compared to the three and six months ended June 30, 1999. Processing and
software service revenues decreased to $47.2 million and increased to $93.3
million for the three and six months ended June 30, 2000, respectively, from
$47.5 million and $92.4 million for the three and six months ended June 30,
1999, respectively. Equipment sales decreased to $4.1 million and $6.7 million
for the three and six months ended June 30, 2000, respectively, from $4.8
million and $8.1 million for the three and six months ended June 30, 1999,
respectively.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2000
decreased $2.5 million or 5.6%, and $2.0 million or 2.3%, respectively,
primarily attributable to management of personnel costs and lower equipment
costs related to sales to customers offset by increased international
operations.
Depreciation and amortization
Segment depreciation and amortization for the three and six months ended June
30, 2000 increased 14.7% and 14.3%, respectively, compared to the same period in
1999. The increase is related primarily to product development.
Income from operations
Segment income from operations for the three and six months ended June 30, 2000
increased $1.0 million and $0.5 million, respectively, or 25.0% and 7.1%,
respectively, compared to the prior year periods, resulting in an operating
margin of 9.7% and 7.5% for the three and six months ended June 30, 2000,
respectively, as compared to 7.6% and 7.0% for the three and six months ended
June 30, 1999, respectively.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $8.2 million and $16.4 million
for the three and six months ended June 30, 2000, respectively, a decline of
$0.3 million as compared to prior year periods. The decrease is primarily
attributable to a decline in the Company's hardware leasing activities partially
offset by an increase in real estate revenues.
Costs and expenses
Investments and Other Segment costs and expenses increased in the three and six
months ended June 30, 2000, respectively, as compared to the three and six
months ended June 30, 1999, respectively, primarily as a result of additional
real estate activities.
Depreciation and amortization
Depreciation and amortization increased $0.1 million and $0.3 million for the
three and six months ended June 30, 2000, respectively, over the same periods in
1999, as a result of increased depreciation related to additional real estate
activities.
Income from operations
The segment's income from operations totaled $0.8 million and $2.2 million for
the three and six months ended June 30, 2000, respectively, as compared to $2.5
million and $4.5 million for the three and six months ended June 30, 1999,
respectively.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $144.9 million for the
six months ended June 30, 2000. Operating cash flows for the six months ended
June 30, 2000 were primarily impacted by net income of $103.4 million and
depreciation and amortization of $63.3 million.
Cash flows used in investing activities totaled $105.5 million for the six
months ended June 30, 2000. The Company expended $76.2 million during the six
months ended June 30, 2000 for capital additions. Investments and advances to
unconsolidated affiliates totaled $57.6 million. During the six months ended
June 30, 2000, the Company received $30.0 million from the sale of investments
in available-for-sale securities.
Cash flows used in financing activities totaled $41.4 million for the six months
ended June 30, 2000. The Company also received proceeds from the exercise of
stock options of $19.4 million for the six months ended June 30, 2000. The
Company maintains $110 million in bank lines of credit for working capital
requirements and general corporate purposes, of which $50 million matures March
2001 and $60 million matures May 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 $16.3 million for the six months ended June 30, 2000, bringing total
borrowings under these facilities to $37.0 million.
During the six months ended June 30, 2000, DST purchased 1,195,000 shares of its
common stock under its previously announced share repurchase programs for $77.1
million. The shares purchased will be utilized for DST's stock award and stock
option programs and general corporate purposes. As of June 30, 2000, DST has
purchased 2,035,000 shares since the programs commenced.
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 six months ended June 30, 2000,
457,500 shares were purchased by the Company under these agreements for $28.3
million. As of June 30, 2000, the cost to settle the agreements would be
approximately $221 million for 3.5 million shares of common stock. The
agreements allow the Company to elect 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 $52.1 million
and $119.6 million for the three and six months ended June 30, 2000,
respectively, as compared to $116.2 million and $144.8 million, respectively,
for the three and six months ended June 30, 1999. Comprehensive income consists
of net income of $47.2 million and $103.4 million, respectively, and other
comprehensive income of $4.9 million and $16.2 million, respectively, for the
three and six months ended June 30, 2000, and net income of $33.4 million and
$67.0 million, respectively, and other comprehensive income of $82.8 million and
$77.8 million, respectively, for the three and six months ended June 30, 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.
19
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 $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 $3.4 million and $3.5 million in the three and six months
ended June 30, 2000, respectively, related to the accrued integration costs. Of
the remaining accrued integration costs of $1.4 million at June 30, 2000, $0.7
million and $0.7 million relate to the 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 June 30, 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 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 material 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.
20
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
June 30, 2000 was approximately $1.4 billion. The impact of a 10% change in fair
value of these investments would be approximately $89.0 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 June 30, 2000, the Company had $80.2 million of long-term debt, of which
$51.1 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. Currency
exchange rate fluctuations have 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.
21
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
The Company held its Annual Meeting of Stockholders on May 9, 2000. Proxies for
the meeting were solicited pursuant to Regulation 14A; there was no solicitation
in opposition to management's nominees for directors as listed in such Proxy
Statement and all such nominees were elected. Listed below is each matter voted
on at the Company's Annual Meeting. Each of these matters is fully described in
the Company's Definitive Proxy Statement dated March 30, 2000. A total of
58,960,371 shares of Common Stock, or 94.0% of the shares of Common Stock
outstanding on the record date, were present in person or by proxy at the annual
meeting. These shares were voted on the following matters as follows:
1) Election of three directors for terms ending in 2003:
James C. Castle Thomas A. William C.
McCullough Nelson
---------------- ---------------- ----------------
For 57,192,728 58,644,194 58,662,309
Withheld 1,767,643 316,177 298,062
---------------- ---------------- ----------------
Total 58,960,371 58,960,371 58,960,371
================ ================ ================
The terms of office of Directors A. Edward Allinson, George L. Argyros and
Michael G. Fitt will continue until the Annual Meeting of Stockholders in 2001.
The terms of office of Directors Thomas A. McDonnell and M. Jeannine Strandjord
will continue until the Annual Meeting of Stockholders in 2002.
2) Approval of DST Employee Stock Purchase Plan:
For 53,071,719
Against 245,200
Withheld 59,090
Broker Non-votes 5,584,362
----------------
Total 58,960,371
================
22
3) Amendment of Certificate of Incorporation to increase Authorized Capital
Stock:
For 47,691,634
Against 5,767,368
Withheld 5,501,369
----------------
Total 58,960,371
================
4) Approval of amendment of DST Stock Option Plan to increase Authorized
Shares:
For 37,713,543
Against 10,344,976
Withheld 5,252,255
Broker Non-votes 5,649,597
----------------
Total 58,960,371
================
Based upon votes required for approval, each of these matters passed.
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.
23
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
June 30, December 31,
2000 1999
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S. 63.9 56.4
Canada 3.3 2.4
United Kingdom (1) 2.5 2.0
TRAC-2000 mutual fund accounts (millions) (2) 4.4 3.4
TRAC-2000 participants (millions) 1.4 1.3
IRA mutual fund accounts (millions) (2) 15.9 14.0
Portfolio Accounting System portfolios 1,991 1,988
Automated Work Distributor workstations 65,600 57,700
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions) 41.5 39.1
For the Six Months
Ended June 30,
2000 1999
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 1,771 1,510
Items mailed (millions) 450 391
(1) Processed by EFDS, an unconsolidated affiliate of the Company
(2) Included in U.S. mutual fund shareowner accounts processed
24
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Document
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
April 20, 2000, reporting the announcement of financial results for the
quarter ended March 31, 2000.
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 August 14, 2000.
DST Systems, Inc.
/s/ Kenneth V. Hager
- ---------------------------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
25