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, 2001
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 April 30, 2001:
Common Stock $.01 par value - 122,609,489
1
DST Systems, Inc.
Form 10-Q
March 31, 2001
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
March 31, 2001 and December 31, 2000 4
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 2001 and 2000 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURE 24
The Company's service marks and trademarks include without limitation DST(R),
Automated Work Distributor(TM) and AWD(R) referred to in this Report.
2
DST Systems, Inc.
Form 10-Q
March 31, 2001
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 of America 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, 2000. 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, 2001, are not
necessarily indicative of the results to be expected for the full year 2001.
3
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
March 31, December 31,
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 81.5 $ 116.2
Transfer agency investments 25.9 54.2
Accounts receivable 400.8 358.5
Other current assets 71.9 61.8
----------- -----------
580.1 590.7
Investments 1,109.6 1,521.0
Properties 454.0 393.8
Intangibles and other assets 156.0 46.9
----------- -----------
Total assets $ 2,299.7 $ 2,552.4
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 108.8 $ 21.3
Transfer agency deposits 25.9 54.2
Accounts payable 133.7 100.3
Accrued compensation and benefits 53.2 66.3
Deferred revenues and gains 51.7 48.5
Other liabilities 102.3 65.6
----------- -----------
475.6 356.2
Long-term debt 125.2 68.7
Deferred income taxes 316.2 482.0
Other liabilities 92.0 79.7
----------- -----------
1,009.0 986.6
----------- -----------
Commitments and contingencies
----------- -----------
Minority interest 10.3
----------- -----------
Stockholders' equity
Common stock, $0.01 par; 300,000,000 shares
authorized, 127,633,278 shares issued 1.3 1.3
Additional paid-in capital 419.9 425.1
Retained earnings 786.5 732.0
Treasury stock (5,059,130 and 2,902,446
shares, respectively), at cost (190.8) (115.2)
Accumulated other comprehensive income 263.5 522.6
----------- -----------
Total stockholders' equity 1,280.4 1,565.8
----------- -----------
Total liabilities and stockholders' equity $ 2,299.7 $ 2,552.4
=========== ===========
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,
2001 2000
-------------- ---------------
Revenues $ 371.0 $ 340.4
Costs and expenses 262.0 245.1
Depreciation and amortization 31.3 31.6
-------------- ---------------
Income from operations 77.7 63.7
Interest expense (1.2) (1.4)
Other income, net 6.6 21.3
Equity in earnings of unconsolidated affiliates 0.9 4.1
-------------- ---------------
Income before income taxes 84.0 87.7
Income taxes 29.5 31.5
-------------- ---------------
Net income $ 54.5 $ 56.2
============== ===============
Average common shares outstanding 124.2 125.8
Diluted shares outstanding 128.5 128.8
Basic earnings per share $ 0.44 $ 0.45
Diluted earnings per share $ 0.42 $ 0.44
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,
2001 2000
---------------- ----------------
Cash flows -- operating activities:
Net income $ 54.5 $ 56.2
---------------- ----------------
Depreciation and amortization 31.3 31.6
Equity in earnings of unconsolidated affiliates (0.9) (4.1)
Net realized gain from sale of investments (3.2) (7.6)
Deferred taxes (3.2) (0.9)
Changes in accounts receivable 14.7 (7.4)
Changes in other current assets (7.5) 4.6
Changes in accounts payable and accrued liabilities (13.3) (17.3)
Other, net (1.3) (2.4)
---------------- ----------------
Total adjustments to net income 16.6 (3.5)
---------------- ----------------
Net 71.1 52.7
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of investments 12.5 15.3
Investments and advances to unconsolidated affiliates (27.6) (27.1)
Capital expenditures (50.7) (32.0)
Payment for purchase of subsidiaries, net of cash acquired (20.6)
Other, net 1.2 4.6
---------------- ----------------
Net (85.2) (39.2)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 10.3 3.1
Principal payments on long-term debt (1.6) (3.4)
Net increase in revolving credit facilities and notes payable 64.5 5.1
Common stock repurchased (93.8) (34.5)
---------------- ----------------
Net (20.6) (29.7)
---------------- ----------------
Net decrease in cash and cash equivalents (34.7) (16.2)
Cash and cash equivalents at beginning of period 116.2 89.0
---------------- ----------------
Cash and cash equivalents at end of period $ 81.5 $ 72.8
================ ================
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 of America 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, 2000. 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, 2001 and December 31, 2000, and the
results of operations and cash flows for the three months ended March 31, 2001
and 2000.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results to be expected for the full year 2001.
2. Acquisitions and Dispositions
EquiServe Limited Partnership
On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe
Limited Partnership ("EquiServe"). EquiServe is one the nation's largest
corporate transfer agency service providers, maintaining and servicing the
records of approximately 24 million shareholder accounts for approximately
1,400 publicly traded companies. EquiServe employs approximately 2,600
associates and recorded revenues of approximately $325 million for the year
2000.
The acquisition was accounted for as a purchase and the results of EquiServe's
operations have been included in DST's 2001 consolidated financial statements
from the date of acquisition. The minimum purchase price of $140.0 million is to
be paid in four installments. The first installment of approximately $43.9
million was paid at closing. The remaining three installments, which total
approximately $96.1 million (discounted to $87.6 million for accounting
purposes) are payable annually in varying amounts beginning February 28, 2002.
The minimum consideration (discounted to $131.5 million for accounting purposes)
has been preliminarily allocated based upon estimated fair values at the date of
acquisition and is subject to adjustment when additional information concerning
asset and liability valuation is finalized.
The remaining minimum purchase price installments are subject to increase
pursuant to a formula that provides for additional consideration to be paid in
cash if EquiServe's revenues for the years ended 2001, 2002 and 2003 exceed
certain targeted levels. Goodwill will be increased by the amount of contingent
consideration paid.
Assuming the acquisition had occurred January 1, 2000, consolidated revenues
would have been $453.7 million for the quarter ended March 31, 2001, and
$1,671.5 million for the year ended December 31, 2000. Consolidated proforma net
income and earnings per share would not have been materially different from the
reported amounts for 2001 and 2000. Such unaudited proforma amounts are not
indicative of what actual
7
consolidated results of operations might have been if the acquisition had been
effective at the beginning of 2000.
DST is developing a new securities transfer system, called Fairway, which is
designed to meet the changing regulatory and processing requirements of the
corporate stock transfer industry. Under an existing agreement, DST will receive
additional equity in EquiServe upon delivery of the Fairway system.
DST Canada Joint Venture
DST Canada had been a wholly owned subsidiary of the Company since June 1993. To
align the ownership of the international mutual fund/unit trust shareowner
processing businesses, DST Canada was converted to a joint venture in January
2001, and is now owned 50% by DST and 50% by State Street Corporation ("State
Street"). The joint venture was formed by DST contributing its shares of DST
Canada to a newly formed joint venture while State Street contributed $43.5
million. The Company has accounted for the formation of the joint venture as a
non-cash, non-taxable exchange. Accordingly, no gain was recognized from the
transaction. Effective January 2001, DST Canada's results of operations are no
longer consolidated with the Company and the earnings of the joint venture are
included in the Company's results on the equity basis. On a proforma basis, the
formation of the joint venture has not had a material impact on DST's net
income or earnings per share in 2001.
exchange-america, LLC
The Company completed the acquisition of a 50% interest in exchange-america, LLC
in February 2001 for $15 million. Exchange-america is a developer of a
web-enabled process to submit new insurance and annuities business applications
online.
8
3. Investments
Investments are as follows (in millions):
Carrying Value
-----------------------------------
Ownership March 31, December 31,
Percentage 2001 2000
-------------------- ---------------- ----------------
Available-for-sale securities:
State Street Corporation 4% $ 530.0 $ 704.9
Computer Sciences Corporation 5% 279.3 519.0
Euronet Services Inc. 11% 12.4 9.4
Other available-for-sale securities 115.3 122.8
---------------- ----------------
937.0 1,356.1
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 62.4 60.8
European Financial Data Services Limited 50% 12.8 13.3
International Financial Data Services LP 50% 8.8
Argus Health Systems, Inc. 50% 7.2 7.1
exchange-america, LLC 50% 10.9 5.0
Other unconsolidated affiliates 32.8 35.3
---------------- ----------------
134.9 121.5
---------------- ----------------
Other:
Net investment in leases 11.8 14.5
Other 25.9 28.9
---------------- ----------------
37.7 43.4
---------------- ----------------
Total investments $ 1,109.6 $ 1,521.0
================ ================
Certain information related to the Company's available-for-sale securities is as
follows (in millions):
March 31, December 31,
2001 2000
----------------- -----------------
Cost $ 489.2 $ 490.6
Gross unrealized gains 466.2 869.7
Gross unrealized losses (18.4) (4.2)
----------------- -----------------
Market value $ 937.0 $ 1,356.1
================= =================
9
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
For the Three Months
Ended March 31,
2001 2000
-------------- ---------------
Boston Financial Data Services, Inc. $ 1.6 $ 4.0
European Financial Data Services Limited (0.2) 0.3
International Financial Data Services LP 0.9
Argus Health Systems, Inc. 0.1 0.2
exchange-america, LLC (1.1)
Other (0.4) (0.4)
-------------- ---------------
$ 0.9 $ 4.1
============== ===============
4. Stockholders' Equity
Stock split. On September 26, 2000, the Company's Board of Directors approved a
2-for-1 split of the Company's common stock, in the form of a dividend of one
share for each share held of record at the close of business on October 6, 2000.
The distribution occurred on October 19, 2000. All references to stockholders'
equity, shares outstanding and earnings per share amounts have been restated to
reflect this stock split.
Earnings per share. The computation of basic and diluted earnings per share is
as follows (in millions, except per share amounts):
For the Three Months
Ended March 31,
2001 2000
--------------- ---------------
Net income $ 54.5 $ 56.2
=============== ===============
Average common shares outstanding 124.2 125.8
Incremental shares from assumed
conversions of stock options 4.3 3.0
--------------- ---------------
Diluted potential common shares 128.5 128.8
=============== ===============
Basic earnings per share $ 0.44 $ 0.45
Diluted earnings per share $ 0.42 $ 0.44
10
Comprehensive income. Components of comprehensive income consist of the
following (in millions):
For the Three Months
Ended March 31,
2001 2000
-------------- -------------
Net income $ 54.5 $ 56.2
-------------- -------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period (414.5) 27.7
Less reclassification adjustments for gains
included in net income (3.2) (7.6)
Foreign currency translation adjustments (4.6) (0.8)
Deferred income taxes 163.2 (8.0)
-------------- -------------
Other comprehensive (loss) income (259.1) 11.3
-------------- -------------
Comprehensive (loss) income $ (204.6) $ 67.5
============== =============
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, investments in certain equity securities
and financial interests and the Company's real estate, captive insurance and
computer hardware leasing subsidiaries and affiliates have been aggregated into
an Investments and Other Segment. The Company evaluates the performance of its
segments based on income before income taxes, non-recurring items and interest
expense.
Summarized financial information concerning the segments is shown in the
following tables (in millions):
11
Three Months Ended March 31, 2001
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 167.1 $ 152.8 $ 48.5 $ 2.6 $ $ 371.0
Intersegment revenues 0.4 14.1 6.5 (21.0)
------------- ------------- ------------- ------------- ------------- --------------
167.5 166.9 48.5 9.1 (21.0) 371.0
Costs and expenses 103.6 133.3 40.6 5.5 (21.0) 262.0
Depreciation and amortization 16.2 8.9 4.2 2.0 31.3
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 47.7 24.7 3.7 1.6 77.7
Other income, net 0.8 5.8 6.6
Equity in earnings (losses) of
unconsolidated affiliates 1.1 (0.2) 0.9
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 49.6 $ 24.7 $ 3.7 $ 7.2 $ $ 85.2
============= ============= ============= ============= ============= ==============
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
============= ============= ============= ============= ============= ==============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.2 million and
$1.4 million for the three months ended March 31, 2001 and 2000, 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, 2000.
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, investments in certain equity securities
and financial interests and the Company's real estate, captive insurance and
computer hardware leasing subsidiaries and affiliates have been aggregated into
an Investments and Other Segment.
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"), wire-line and Internet-protocol telephony, Internet and utility markets
worldwide.
Investments and Other
The Investments and Other Segment holds investments in certain equity securities
and financial interests and the Company's real estate, captive insurance and
computer hardware leasing subsidiaries and affiliates.
13
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 2001 2000
------------- -------------
Revenues
Financial Services $ 167.5 $ 147.8
Output Solutions 166.9 155.2
Customer Management 48.5 48.7
Investments and Other 9.1 8.2
Eliminations (21.0) (19.5)
------------- -------------
$ 371.0 $ 340.4
============= =============
% change from prior year period 9.0% 14.1%
Income from operations
Financial Services $ 47.7 $ 35.8
Output Solutions 24.7 24.0
Customer Management 3.7 2.5
Investments and Other 1.6 1.4
------------- -------------
77.7 63.7
Interest expense (1.2) (1.4)
Other income, net 6.6 21.3
Equity in earnings of unconsolidated
affiliates, net of income taxes 0.9 4.1
------------- -------------
Income before income taxes 84.0 87.7
Income taxes 29.5 31.5
------------- -------------
Net income $ 54.5 $ 56.2
============= =============
Basic earnings per share $ 0.44 $ 0.45
Diluted earnings per share $ 0.42 $ 0.44
Adjusted diluted earnings per share (1) $ 0.41 $ 0.34
(1) Adjusted diluted earnings per share has been calculated by excluding the
effects of net gains related to available-for-sale securities and the gain
from a legal settlement in 2000.
Consolidated revenues
Consolidated revenues for the three months ended March 31, 2001 increased $30.6
million or 9.0% over the prior year quarter. U.S. revenues for the three months
ended March 31, 2001 were $335.9 million, an increase of 11.0% over the same
period in 2000. International revenues for the three months ended March 31, 2001
were $35.1 million, a decrease of 6.9% over the same period in 2000.
14
DST Canada, a former wholly owned subsidiary, was contributed to International
Financial Data Services, a newly formed joint venture with State Street
Corporation in January 2001. As a result, DST Canada's results of operations are
no longer consolidated and the earnings of the joint venture are included as
equity in earnings of unconsolidated affiliates in DST's results. For the three
months ended March 31, 2000, DST Canada recorded revenues of $6.8 million. For
comparative purposes, if DST Canada were excluded from first quarter 2000
operating results, DST's first quarter 2001 consolidated revenues compared to
first quarter 2000 would have increased $37.4 million or 11.2% over the prior
year quarter.
Financial Services Segment revenues for the three months ended March 31, 2001
increased $19.7 million or 13.3% over the same period in 2000. U.S. Financial
Services Segment revenues for the three months ended March 31, 2001 increased
$22.9 million or 19.2% over the same period in 2000, primarily from an increase
in mutual fund shareowner accounts processed. U.S. mutual fund shareowner
accounts serviced totaled 73.5 million at March 31, 2001, an increase of 1.9%
from the 72.1 million serviced at December 31, 2000 and an increase of 20.5%
from the 61.0 million serviced at March 31, 2000.
Output Solutions Segment revenues for the three months ended March 31, 2001
increased $11.7 million or 7.5% over the same period in 2000. Revenue growth
resulted from increased volume of images and statements produced from the U.S.
mutual fund, telecommunications and healthcare industries. Output Solutions
Segment images produced for the three months ended March 31, 2001 increased
11.1% to 2.0 billion and statements mailed increased 3.0% to 508 million
compared to the same period in 2000.
Customer Management Segment revenues for the three months ended March 31, 2001
decreased $0.2 million or 0.4% over the same period in 2000, as equipment sales
decreased partially offset by an increase in processing and software service
revenues.
Investments and Other Segment revenues increased $0.9 million for the three
months ended March 31, 2001 compared to the same period in 2000. Segment
revenues are primarily rental income for facilities leased to the Company's
operating segments.
Income from operations
Consolidated income from operations for the three months ended March 31, 2001
increased $14.0 million or 22.0% over the same period in 2000. U.S. income from
operations for the three months ended March 31, 2001 was $67.8 million, an
increase of 14.5% over the same period in 2000. International income from
operations for the three months ended March 31, 2001 was $9.9 million, an
increase of $5.4 million compared to the same period in 2000. Excluding DST
Canada from the prior year quarter, income from operations for the first quarter
2001 increased $14.7 million or 23.3% over the prior year quarter.
Financial Services Segment income from operations for the three months ended
March 31, 2001 increased 33.2% or $11.9 million over the comparable prior year
period to $47.7 million. This resulted in operating margin of 28.5% for the
three months ended March 31, 2001, compared to 24.2% for the three months ended
March 31, 2000. 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 months ended March
31, 2001 increased $0.7 million or 2.9% over the same period in 2000. Output
Solutions Segment operating margin was 14.8% for the three months ended March
31, 2001 compared to 15.5% for the same period in 2000. Segment operating margin
for the three months ended March 31, 2001 was affected by higher Internet-based
electronic bill and statement product development costs and selling costs.
15
Customer Management Segment income from operations totaled $3.7 million for the
three months ended March 31, 2001, an increase of 48.0% over the comparable
prior year period. Operating margins were 7.6% for the three months ended March
31, 2001, compared to 5.1% for the comparable prior year period.
Investments and Other Segment income from operations totaled $1.6 million for
the three months ended March 31, 2001 as compared to $1.4 million for the three
months ended March 31, 2000.
Interest expense
Interest expense totaled $1.2 million for the three months ended March 31, 2001,
a decrease from $1.4 million recorded in the comparable period in 2000. Average
borrowings were lower in 2001 compared to 2000.
Other income, net
Other income was $6.6 million for the three months ended March 31, 2001,
compared to $21.3 million for the first quarter 2000. First quarter 2001 results
include $3.3 million primarily related to interest and dividend income and $3.3
million related primarily to gains on sales of marketable equity securities.
First quarter 2000 results include $2.9 million primarily related to interest
and dividend income, $10.8 million pretax settlement of a legal dispute related
to a former equity investment and $7.6 million of gains on sales of marketable
equity securities.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $0.9 million for the
three months ended March 31, 2001 as compared to $4.1 million for the three
months ended March 31, 2000. Decreased earnings were recorded at Boston
Financial Data Services from a decline in transaction revenue from services
provided to the brokerage industry, a slowing in mutual fund revenue growth and
an increase in costs, and the loss of a significant Canadian client at its
subsidiary CFDS. European Financial Data Services ("EFDS") results reflect an
increase in accounts serviced to 2.8 million at March 31, 2001, which is 0.1
million or 3.7% above year end 2000 and 0.5 million or 21.7% over March 31, 2000
levels. EFDS was adversely affected by a significant decline in seasonal
processing revenues related to U.K. retirement plan transactions. U.K. product
pricing is more sensitive to transaction volumes than in the U.S.
Exchange-america is a new joint venture of the Company which is developing and
marketing a web-enabled process to submit insurance and annuities applications
online. Exchange-america results reflect development and marketing expenses for
its products. Exchange-america initiated operations of its system for four new
customers in the first quarter of 2001. Argus' earnings decreased from the prior
year quarter primarily from increased depreciation charges.
Income taxes
The Company's effective tax rate was 35.1% for the quarter ended March 31, 2001,
compared to 35.9% for the quarter ended March 31, 2000. The 2001 and 2000 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, 2001
increased 13.3% over the same period in 2000 to $167.5 million. U.S. Financial
Services revenue increased 19.2% to $142.1 million for the three months ended
March 31, 2001. U.S. mutual fund processing revenues for the three months
16
ended March 31, 2001 increased 20.4% over the prior year period as shareowner
accounts serviced increased 20.5% from 61.0 million at March 31, 2000 to 73.5
million at March 31, 2001.
Financial Services Segment revenues from international operations for the three
months ended March 31, 2001 decreased 11.2% to $25.4 million. The revenue
decrease resulted primarily from DST Canada's results of operations no longer
being consolidated with the Company's operating results. Excluding DST Canada
from the 2000 quarter, international revenues for the first quarter of 2001
increased $3.6 million or 16.5% over the prior year period. The increase is
primarily a result of an increase in investment management software license
revenues and investment management and AWD software maintenance revenues.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2001 increased
9.6% to $103.6 million over the comparable quarter in 2000. Personnel costs for
the three months ended March 31, 2001 increased 7.6% over the comparable prior
year period as a result of increased staff levels to support volume growth.
Excluding DST Canada from the prior year quarter, costs and expenses increased
16.4% and personnel costs increased 14.8% in the first quarter 2001 compared to
the first quarter 2000.
Depreciation and amortization
Segment depreciation and amortization decreased 7.4% or $1.3 million for the
three months ended March 31, 2001 over the comparable period in 2000. The
decrease is primarily attributable to the deconsolidation of DST Canada.
Income from operations
Segment income from operations for the three months ended March 31, 2001
increased 33.2% to $47.7 million over the comparable prior year period. The
Segment's operating margins were 28.5% for the three months ended March 31, 2001
as compared to 24.2% for the three months ended March 31, 2000. The increase in
Financial Services Segment operating margins are primarily a result of increased
U.S. revenues. Excluding DST Canada from the prior year quarter, income from
operations for the first quarter 2001 increased 35.9% over the prior year
quarter.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three months ended March 31, 2001
increased 7.5% to $166.9 million as compared to the same period in 2000. The
growth in segment revenue was derived primarily from an increase in the volume
of statements and images produced from U.S. mutual fund, telecommunications and
healthcare industries. This growth was partially offset by decreases in volumes
from the brokerage, banking and transportation industries.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2001 increased
8.1% to $133.3 million over the comparable prior year period. Personnel costs
for the three months ended March 31, 2001 increased 18.2% over the comparable
prior year period as a result of increased staff levels to support volume growth
and higher Internet-based electronic bill and statement product development and
selling costs.
Depreciation and amortization
Segment depreciation and amortization for the three months ended March 31, 2001
increased 12.7% to $8.9 million, as compared to the same period in 2000 related
to increased capital costs to support revenue growth.
Income from operations
The increase in the Segment's income from operations for the three months ended
March 31, 2001 of $0.7 million or 2.9% over the same period in 2000 is primarily
attributable to increased volumes for images
17
and statements. The Segment's operating margins were 14.8% for the three months
ended March 31, 2001 as compared to 15.5% for the three months ended March 31,
2000.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three months ended March 31, 2001
decreased 0.4% to $48.5 million as compared to the three months ended March 31,
2000. Processing and software service revenues increased to $46.9 million for
the three months ended March 31, 2001 from $46.0 million for the three months
ended March 31, 2000. Equipment sales decreased to $1.6 million for the three
months ended March 31, 2001 from $2.7 million for the three months ended March
31, 2000.
The Company has not recognized any AWD software license revenues during the
first quarter 2001 from the previously announced AWD license agreement with
Comcast Cable Communications, Inc. The Company expects to recognize these
revenues in 2001.
The Company has been advised that a customer, MediaOne Group Inc. (MediaOne),
plans to discontinue its processing agreement as a result of MediaOne's
acquisition by AT&T. It is expected that a substantial portion of MediaOne's
subscribers will be removed during 2001. At March 31, 2001, the Company serviced
approximately 4.0 million MediaOne subscribers.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2001 decreased
$1.5 million or 3.6% as a result of decreased costs of equipment sales.
Personnel costs for the three months ended March 31, 2001 increased 2.9% over
the comparable prior year period.
Depreciation and amortization
Segment depreciation and amortization for the three months ended March 31, 2001
increased 2.4% compared to the same period in 2000. The increase is related
primarily to the amortization of capitalized software development costs.
Income from operations
Segment income from operations for the three months ended March 31, 2001
increased $1.2 million or 48.0% compared to the prior year period, resulting in
an operating margin of 7.6% for the three months ended March 31, 2001 as
compared to 5.1% for the three months ended March 31, 2000.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $9.1 million for the three months
ended March 31, 2001, an increase of $0.9 million compared to the three months
ended March 31, 2000. The increase is primarily attributable to an increase in
real estate revenues partially offset by a decline in the Company's hardware
leasing activities.
Costs and expenses
Investments and Other Segment costs and expenses increased in the three months
ended March 31, 2001 as compared to the three months ended March 31, 2000
primarily as a result of additional real estate activities.
Depreciation and amortization
Segment depreciation and amortization decreased $0.1 million for the three
months ended March 31, 2001 over the same period in 2000.
18
Income from operations
The Segment's income from operations totaled $1.6 million for the three months
ended March 31, 2001 as compared to $1.4 million for the three months ended
March 31, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $71.1 million for the
three months ended March 31, 2001. Operating cash flows for the three months
ended March 31, 2001 were primarily impacted by net income of $54.5 million and
depreciation and amortization of $31.3 million.
During the fourth quarter 2000, the Company initiated a cash management service
for transfer agency clients, whereby end of day available client bank balances
are invested overnight by and in the name of the Company into credit-quality
money market funds. All invested balances are returned to the transfer agency
client accounts the following business day.
Cash flows used in investing activities totaled $85.2 million for the three
months ended March 31, 2001. The Company expended $50.7 million during the three
months ended March 31, 2001 for capital additions related to infrastructure and
equipment. Investments and advances to unconsolidated affiliates totaled $27.6
million and cash flows from acquisition of subsidiaries, net of cash acquired,
totaled $20.6 million. During the three months ended March 31, 2001, the Company
received $12.5 million from the sale of investments in available-for-sale
securities.
Cash flows used in financing activities totaled $20.6 million for the three
months ended March 31, 2001. The Company also received proceeds from the
exercise of stock options of $10.3 million for the three months ended March 31,
2001. The Company maintains $110 million in bank lines of credit for working
capital requirements and general corporate purposes, of which $50 million
matures May 2002 and $60 million matures May 2001. The $60 million line of
credit is expected to be renewed for a one year period. 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 $63.0 million for the three months ended March
31, 2001, bringing total borrowings under these facilities to $113.0 million.
On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe
Limited Partnership ("EquiServe"). EquiServe is one the nation's largest
corporate transfer agency service providers, maintaining and servicing the
records of approximately 24 million shareholder accounts for approximately
1,400 publicly traded companies. EquiServe employs approximately 2,600
associates and recorded revenues of approximately $325 million for the year
2000.
The acquisition was accounted for as a purchase and the results of EquiServe's
operations have been included in DST's 2001 consolidated financial statements
from the date of acquisition. The minimum purchase price of $140.0 million is to
be paid in four installments. The first installment of approximately $43.9
million was paid at closing. The remaining three installments, which total
approximately $96.1 million (discounted to $87.6 million for accounting
purposes) are payable annually in varying amounts beginning February 28, 2002.
The minimum consideration (discounted to $131.5 million for accounting purposes)
has been preliminarily allocated based upon estimated fair values at the date of
acquisition and is subject to adjustment when additional information concerning
asset and liability valuation is finalized.
The remaining minimum purchase price installments are subject to increase
pursuant to a formula that provides for additional consideration to be paid in
cash if EquiServe's revenues for the years ended 2001, 2002 and 2003 exceed
certain targeted levels. Goodwill will be increased by the amount of contingent
consideration paid.
19
Assuming the acquisition had occurred January 1, 2000, consolidated revenues
would have been $453.7 million for the quarter ended March 31, 2001, and
$1,671.5 million for the year ended December 31, 2000. Consolidated proforma net
income and earnings per share would not have been materially different from the
reported amounts for 2001 and 2000. Such unaudited proforma amounts are not
indicative of what actual consolidated results of operations might have been if
the acquisition had been effective at the beginning of 2000.
DST is developing a new securities transfer system, called Fairway, which is
designed to meet the changing regulatory and processing requirements of the
corporate stock transfer industry. Under an existing agreement, DST will receive
additional equity in EquiServe upon delivery of the Fairway system.
DST Canada had been a wholly owned subsidiary of the Company since June 1993. To
align the ownership of the international mutual fund/unit trust shareowner
processing businesses, DST Canada was converted to a joint venture in January
2001, and is now owned 50% by DST and 50% by State Street Corporation ("State
Street"). The joint venture was formed by DST contributing its shares of DST
Canada to a newly formed joint venture while State Street contributed $43.5
million. The Company has accounted for the formation of the joint venture as a
non-cash, non-taxable exchange. Accordingly, no gain was recognized from the
transaction. Effective January 2001, DST Canada's results of operations are no
longer consolidated with the Company and the earnings of the joint venture are
included in the Company's results on the equity basis. On a proforma basis,
the formation of the joint venture has not had a material impact on DST's net
income or earnings per share in 2001.
The Company completed the acquisition of a 50% interest in exchange-america, LLC
in February 2001 for $15 million. Exchange-america is a developer of a
web-enabled process to submit new insurance and annuities business applications
online.
During the three months ended March 31, 2001, the Company purchased 2,673,000
shares of its common stock under previously announced share repurchase programs
for $93.8 million. The shares purchased will be utilized for DST's stock award,
employee stock purchase and stock option programs and for general corporate
purposes. As of March 31, 2001, DST has purchased 9,333,000 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 8.0 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, 2001,
and included in the numbers set forth in the preceding paragraph, the Company
purchased 2,665,000 shares under these agreements for $93.4 million. As of March
31, 2001, the cost to settle the remaining agreement would be approximately
$88.2 million for approximately 2.7 million shares of common stock. The
agreements, which expire in September 2002, allow the Company to elect net cash
or net share settlement in lieu of physical settlement of the shares.
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 loss for the three months
ended March 31, 2001 totaled $204.6 million as compared to comprehensive income
of $67.5 million for the three months ended
20
March 31, 2000. Comprehensive income consists of net income of $54.5 million and
other comprehensive losses of $259.1 million for the three months ended March
31, 2001 and net income of $56.2 million and other comprehensive income of
$11.3 million for the three months ended March 31, 2000. Other comprehensive
income or loss consists of unrealized gains and losses on available-for-sale
securities, net of deferred taxes, reclassifications for gains included in net
income and foreign currency translation adjustments.
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.
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, 2001 was approximately $937 million. The impact of a 10% change in
fair value of these investments would be approximately $60.8 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, 2001, the Company had $234.0 million of long-term debt, of which
$122.2 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 and Use of Proceeds
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 the annual meeting of stockholders to be held in 2002, the Corporate
Secretary of DST must receive such proposal on or before December 1, 2001, and
the proposal must comply with the applicable SEC laws and rules and the
procedures set forth in the DST by-laws.
22
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
March 31, December 31,
2001 2000
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S.
Non-retirement accounts 48.4 48.3
IRA mutual fund accounts 18.6 17.9
TRAC-2000 mutual fund accounts 6.5 5.9
--------------- ---------------
73.5 72.1
=============== ===============
International
United Kingdom (1) 2.8 2.7
Canada (2) 1.6 1.5
TRAC-2000 participants (millions) 2.3 1.9
Automated Work Distributor workstations (thousands) 75.1 73.2
Portfolio Accounting System portfolios (thousands) 1.8 2.0
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions)
U.S. 34.4 33.8
International 9.8 9.6
For the Three Months
Ended March 31,
2001 2000
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 2,027 1,835
Items mailed (millions) 508 485
(1) Processed by EFDS, an unconsolidated affiliate of the Company.
(2) Processed by DST Canada, Inc., a former wholly owned subsidiary which
became an unconsolidated affiliate of the Company in January 2001.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K:
The Company filed under Item 9 of Form 8-K, the Company's Form 8-K
dated January 10, 2001, reporting information pursuant to Regulation
FD.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K
dated January 26, 2001, reporting the announcement of financial results
for the quarter and year ended December 31, 2000.
SIGNATURE
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 14, 2001.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
24