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, 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 July 31, 2001:
Common Stock $.01 par value - 123,000,500
DST Systems, Inc.
Form 10-Q
June 30, 2001
Table of Contents
Page
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
June 30, 2001 and December 31, 2000 4
Condensed Consolidated Statement of Income -
Three and Six Months Ended June 30, 2001 and 2000 5
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 2001 and 2000 6
Notes to Condensed Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-23
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24-25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURE 26
- ---------
The Company's service marks and trademarks include without limitation DST(R),
Automated Work Distributor(TM) and AWD(R) referred to in this Report.
DST Systems, Inc.
Form 10-Q
June 30, 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 and six months ended June 30, 2001, are
not necessarily indicative of the results to be expected for the full year 2001.
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
June 30, December 31,
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 101.4 $ 116.2
Transfer agency investments 98.0 54.2
Accounts receivable 392.0 358.5
Other current assets 71.6 61.8
----------- -----------
663.0 590.7
Investments 1,242.2 1,521.0
Properties 458.0 393.8
Intangibles and other assets 164.6 46.9
----------- -----------
Total assets $ 2,527.8 $ 2,552.4
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 79.6 $ 21.3
Transfer agency deposits 98.0 54.2
Accounts payable 126.7 100.3
Accrued compensation and benefits 61.8 66.3
Deferred revenues and gains 51.3 48.5
Other liabilities 132.8 65.6
----------- -----------
550.2 356.2
Long-term debt 130.3 68.7
Deferred income taxes 331.2 482.0
Other liabilities 111.6 79.7
----------- -----------
1,123.3 986.6
----------- -----------
Commitments and contingencies
----------- -----------
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 406.0 425.1
Retained earnings 860.3 732.0
Treasury stock (4,237,515 and 2,902,446
shares, respectively), at cost (169.2) (115.2)
Accumulated other comprehensive income 306.1 522.6
----------- -----------
Total stockholders' equity 1,404.5 1,565.8
----------- -----------
Total liabilities and stockholders' equity $ 2,527.8 $ 2,552.4
=========== ===========
The accompanying notes are an integral part of these financial statements.
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,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
Revenues $ 451.6 $ 337.0 $ 822.6 $ 677.4
Costs and expenses 334.9 241.2 596.9 486.3
Depreciation and amortization 39.2 31.7 70.5 63.3
--------------- --------------- --------------- --------------
Income from operations 77.5 64.1 155.2 127.8
Interest expense (1.9) (1.5) (3.1) (2.9)
Other income, net 7.0 7.5 13.6 28.8
Gain on sale of PAS 32.8 32.8
Equity in earnings of unconsolidated affiliates 0.3 3.5 1.2 7.6
--------------- --------------- --------------- --------------
Income before income taxes 115.7 73.6 199.7 161.3
Income taxes 41.9 26.4 71.4 57.9
--------------- --------------- --------------- --------------
Net income $ 73.8 $ 47.2 $ 128.3 $ 103.4
=============== =============== =============== ==============
Average common shares outstanding 123.0 125.5 123.6 125.7
Diluted shares outstanding 126.3 129.3 127.4 129.1
Basic earnings per share $ 0.60 $ 0.38 $ 1.04 $ 0.82
Diluted earnings per share $ 0.58 $ 0.37 $ 1.01 $ 0.80
The accompanying notes are an integral part of these financial statements.
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
For the Six Months
Ended June 30,
2001 2000
---------------- ----------------
Cash flows -- operating activities:
Net income $ 128.3 $ 103.4
---------------- ----------------
Depreciation and amortization 70.5 63.3
Equity in earnings of unconsolidated affiliates (1.2) (7.6)
Net realized gain from sale of investments and PAS (39.4) (11.6)
Deferred taxes (16.9) 2.2
Changes in accounts receivable 4.0 (12.0)
Changes in other current assets (4.0) 4.0
Changes in accounts payable and accrued liabilities 10.8 2.6
Other, net (7.9) 0.6
---------------- ----------------
Total adjustments to net income 15.9 41.5
---------------- ----------------
Net 144.2 144.9
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of property and equipment 3.9
Proceeds from sale of investments and PAS 32.0 30.0
Investments and advances to unconsolidated affiliates (41.8) (57.6)
Capital expenditures (106.2) (76.2)
Payment for purchase of subsidiaries, net of cash acquired (20.6)
Other, net 4.8 (1.7)
---------------- ----------------
Net (127.9) (105.5)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 19.7 19.4
Principal payments on long-term debt (3.2) (5.8)
Net increase in revolving credit facilities and notes payable 46.2 22.1
Common stock repurchased (93.8) (77.1)
---------------- ----------------
Net (31.1) (41.4)
---------------- ----------------
Net decrease in cash and cash equivalents (14.8) (2.0)
Cash and cash equivalents at beginning of period 116.2 89.0
---------------- ----------------
Cash and cash equivalents at end of period $ 101.4 $ 87.0
================ ================
The accompanying notes are an integral part of these financial statements.
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 June 30, 2001 and December 31, 2000, the results
of operations for the three and six months ended June 30, 2001 and 2000, and
cash flows for the six months ended June 30, 2001 and 2000.
The results of operations for the three and six months ended June 30, 2001, are
not necessarily indicative of the results to be expected for the full year 2001.
2. Acquisitions and Dispositions
Portfolio Accounting Systems
On June 29, 2001, DST sold its Portfolio Accounting Systems ("PAS") business to
State Street Corporation ("State Street"). DST offered PAS services primarily to
the U.S. mutual fund industry on a remote processing basis. DST received, in a
taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5
million shares of State Street common stock and cash. In conjunction with the
transaction, DST agreed to provide data processing services for PAS and agreed
to a non-compete agreement for a period of five years, for which elements a
portion of the purchase price has been deferred. DST recognized a one-time gain
of $20.0 million after taxes, deferrals and other expenses.
DST recorded revenue related to PAS of $9.8 million for the six months ended
June 30, 2001 and $19.5 million for the year ended December 31, 2000. The PAS
business unit had approximately 80 associates who transferred to State Street
with the transaction. DST estimates that removing the PAS business from DST's
financial results will reduce diluted earnings per share by approximately $0.01
per share per quarter.
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 22 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, the Company's
consolidated revenues for the three and six months ended June 30, 2001 would
have been $451.6 million and $905.3 million, respectively, 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 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. 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.
3. Investments
Investments are as follows (in millions):
Carrying Value
-----------------------------------
Ownership June 30, December 31,
Percentage 2001 2000
-------------------- ---------------- ----------------
Available-for-sale securities:
State Street Corporation 4% $ 633.1 $ 704.9
Computer Sciences Corporation 5% 298.7 519.0
Euronet Services Inc. 11% 17.1 9.4
Other available-for-sale securities 122.7 122.8
---------------- ----------------
1,071.6 1,356.1
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 63.4 60.8
European Financial Data Services Limited 50% 12.7 13.3
International Financial Data Services LP 50% 10.0
Argus Health Systems, Inc. 50% 7.4 7.1
exchange-america, LLC 50% 9.1 5.0
Other unconsolidated affiliates 30.6 35.3
---------------- ----------------
133.2 121.5
---------------- ----------------
Other:
Net investment in leases 10.1 14.5
Other 27.3 28.9
---------------- ----------------
37.4 43.4
---------------- ----------------
Total investments $ 1,242.2 $ 1,521.0
================ ================
Certain information related to the Company's available-for-sale securities is as
follows (in millions):
June 30, December 31,
2001 2000
----------------- -----------------
Cost $ 556.8 $ 490.6
Gross unrealized gains 516.9 869.7
Gross unrealized losses (2.1) (4.2)
----------------- -----------------
Market value $ 1,071.6 $ 1,356.1
================= =================
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,
2001 2000 2001 2000
-------------- --------------- -------------- --------------
Boston Financial Data Services, Inc. $ 1.0 $ 3.7 $ 2.6 $ 7.7
European Financial Data Services Limited (0.2) (0.2) (0.4) 0.1
International Financial Data Services LP 1.1 2.0
Argus Health Systems, Inc. 0.2 0.2 0.3 0.4
exchange-america, LLC (1.9) (3.0)
Other 0.1 (0.2) (0.3) (0.6)
-------------- --------------- -------------- --------------
$ 0.3 $ 3.5 $ 1.2 $ 7.6
============== =============== ============== ==============
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 For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
Net income $ 73.8 $ 47.2 $ 128.3 $ 103.4
=============== =============== =============== ==============
Average common shares outstanding 123.0 125.5 123.6 125.7
Incremental shares from assumed
conversions of stock options 3.3 3.8 3.8 3.4
--------------- --------------- --------------- --------------
Diluted potential common shares 126.3 129.3 127.4 129.1
=============== =============== =============== ==============
Basic earnings per share $ 0.60 $ 0.38 $ 1.04 $ 0.82
Diluted earnings per share $ 0.58 $ 0.37 $ 1.01 $ 0.80
Comprehensive income. Components of comprehensive income (loss) consist of the
following (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Net income $ 73.8 $ 47.2 $ 128.3 $ 103.4
-------------- ------------- -------------- --------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 70.5 15.3 (344.0) 43.0
Less reclassification adjustments for gains
included in net income (3.5) (4.0) (6.7) (11.6)
Foreign currency translation adjustments 1.8 (2.1) (2.8) (2.9)
Deferred income taxes (26.2) (4.3) 137.0 (12.3)
-------------- ------------- -------------- --------------
Other comprehensive income (loss) 42.6 4.9 (216.5) 16.2
-------------- ------------- -------------- --------------
Comprehensive income (loss) $ 116.4 $ 52.1 $ (88.2) $ 119.6
============== ============= ============== ==============
5. Segment Information
The Company has several operating business units that offer sophisticated
information processing and software services and products. These business units
are reported as three operating segments (Financial Services, Output Solutions
and Customer Management). In addition, 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):
Three Months Ended June 30, 2001
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 257.2 $ 137.2 $ 54.4 $ 2.8 $ $ 451.6
Intersegment revenues 0.4 16.4 7.4 (24.2)
------------- ------------- ------------- ------------- ------------- --------------
257.6 153.6 54.4 10.2 (24.2) 451.6
Costs and expenses 179.6 129.5 43.3 6.7 (24.2) 334.9
Depreciation and amortization 22.7 9.3 4.5 2.7 39.2
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 55.3 14.8 6.6 0.8 77.5
Other income, net 0.8 6.2 7.0
Gain on sale of PAS 32.8 32.8
Equity in earnings of
unconsolidated affiliates 0.2 0.1 0.3
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 89.1 $ 14.9 $ 6.6 $ 7.0 $ $ 117.6
============= ============= ============= ============= ============= ==============
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
============= ============= ============= ============= ============= ==============
Six Months Ended June 30, 2001
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 424.3 $ 290.0 $ 102.9 $ 5.4 $ $ 822.6
Intersegment revenues 0.8 30.5 13.9 (45.2)
------------- ------------- ------------- ------------- ------------- --------------
425.1 320.5 102.9 19.3 (45.2) 822.6
Costs and expenses 283.2 262.8 83.9 12.2 (45.2) 596.9
Depreciation and amortization 38.9 18.2 8.7 4.7 70.5
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 103.0 39.5 10.3 2.4 155.2
Other income, net 1.6 12.0 13.6
Gain on sale of PAS 32.8 32.8
Equity in earnings (losses) of
unconsolidated affiliates 1.3 0.1 (0.2) 1.2
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 138.7 $ 39.6 $ 10.3 $ 14.2 $ $ 202.8
============= ============= ============= ============= ============= ==============
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 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
============= ============= ============= ============= ============= ==============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.9 million and
$3.1 million for the three and six months ended June 30, 2001, respectively, and
$1.5 million and $2.9 million for the three and six months ended June 30, 2000,
respectively, is equal to the Company's income before income taxes on a
consolidated basis for the corresponding periods.
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.
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,
----------------------------- ------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Revenues
Financial Services $ 257.6 $ 155.6 $ 425.1 $ 303.4
Output Solutions 153.6 141.6 320.5 296.8
Customer Management 54.4 51.3 102.9 100.0
Investments and Other 10.2 8.2 19.3 16.4
Eliminations (24.2) (19.7) (45.2) (39.2)
-------------- ------------- -------------- --------------
$ 451.6 $ 337.0 $ 822.6 $ 677.4
============== ============= ============== ==============
% change from prior year period 34.0% 10.4% 21.4% 12.2%
Income from operations
Financial Services $ 55.3 $ 43.7 $ 103.0 $ 79.5
Output Solutions 14.8 14.6 39.5 38.6
Customer Management 6.6 5.0 10.3 7.5
Investments and Other 0.8 0.8 2.4 2.2
-------------- ------------- -------------- --------------
77.5 64.1 155.2 127.8
Interest expense (1.9) (1.5) (3.1) (2.9)
Other income, net 7.0 7.5 13.6 28.8
Gain on sale of PAS 32.8 32.8
Equity in earnings of unconsolidated
affiliates, net of income taxes 0.3 3.5 1.2 7.6
-------------- ------------- -------------- --------------
Income before income taxes 115.7 73.6 199.7 161.3
Income taxes 41.9 26.4 71.4 57.9
-------------- ------------- -------------- --------------
Net income $ 73.8 $ 47.2 $ 128.3 $ 103.4
============== ============= ============== ==============
Basic earnings per share $ 0.60 $ 0.38 $ 1.04 $ 0.82
Diluted earnings per share $ 0.58 $ 0.37 $ 1.00 $ 0.80
Adjusted diluted earnings per share (1) $ 0.41 $ 0.34 $ 0.82 $ 0.69
(1) Adjusted diluted earnings per share has been calculated by excluding the
effects of net gains related to available-for-sale securities, the gain
related to the sale of PAS in 2001 and the gain from a legal settlement in
2000.
Consolidated revenues
Consolidated revenues for the three and six months ended June 30, 2001 increased
$114.6 million and $145.2 million, respectively, which represents an increase of
34.0% and 21.4%, respectively, over the comparable periods in 2000. Excluding
EquiServe from the current year and DST Canada from the prior year, consolidated
revenues for the three and six months ended June 30, 2001 would have increased
$31.3 million or 9.5% and $68.6 million or 10.3%, respectively, over the
comparable periods in 2000. U.S. revenues for the three and six months ended
June 30, 2001 were $416.7 million and $752.5 million, respectively, an increase
of 40.5% and 25.6%, respectively, over the same periods in 2000. International
revenues for the three and six months ended June 30, 2001 were $34.9 million and
$70.1 million, respectively, a decrease of 13.6% and 10.2%, respectively, over
the same periods in 2000.
Financial Services Segment revenues for the three and six months ended June 30,
2001 increased $102.0 million and $121.7 million, respectively, or 65.6% and
40.1%, respectively, over the same periods in 2000. Excluding EquiServe from the
current year and DST Canada from the prior year, Financial Services revenues for
the three and six months ended June 30, 2001 would have increased $18.6 million
or 12.5% and $45.1 million or 15.5%, respectively, over the comparable periods
in 2000. U.S. Financial Services Segment revenues for the three and six months
ended June 30, 2001 increased $107.8 million and $130.7 million, respectively,
or 86.7% and 53.7%, respectively, over the same periods in 2000, primarily from
inclusion of EquiServe and increases in mutual fund shareowner accounts
processed. U.S. mutual fund shareowner accounts serviced totaled 74.8 million at
June 30, 2001, an increase of 1.8% for the quarter ended June 30, 2001, an
increase of 3.7% from the 72.1 million serviced at December 31, 2000 and an
increase of 17.1% from the 63.9 million serviced at June 30, 2000.
Output Solutions Segment revenues for the three and six months ended June 30,
2001 increased $12.0 million and $23.7 million, respectively, or 8.5% and 8.0%,
respectively, over the same periods in 2000. Revenue growth resulted from
increased volumes from the U.S. mutual fund and telecommunications, partially
offset by a continued decline in brokerage related marketing fulfillment and
trade confirmation volumes. Output Solutions Segment images produced for the
three and six months ended June 30, 2001 increased 11.1% and 10.2%,
respectively, to 2.0 billion and 4.0 billion, respectively, and statements
mailed increased 1.8% and 2.5%, respectively, to 462 million and 970 million,
respectively, compared to the same periods in 2000.
Customer Management Segment revenues for the three and six months ended June 30,
2001 increased $3.1 million or 6.0% and $2.9 million or 2.9%, respectively, over
the same periods in 2000, due to increased processing and software service
revenues, partially offset by lower equipment sales.
Investments and Other Segment revenues increased $2.0 million and $2.9 million,
respectively, for the three and six months ended June 30, 2001, an increase of
24.4% and 17.7%, respectively, as compared to the same periods in 2000. 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,
2001 increased $13.4 million and $27.4 million, respectively, or 20.9% and
21.4%, respectively, over the same periods in 2000. U.S. income from operations
for the three and six months ended June 30, 2001 was $69.5 million and $137.3
million, respectively, an increase of 25.5% and 19.8%, respectively, over the
same periods in 2000. International income from operations for the three and six
months ended June 30, 2001 was $8.0 million and $17.9 million, respectively, a
decrease of 8.0% and an increase of 35.6%, respectively, compared to the same
periods in 2000.
Financial Services Segment income from operations for the three and six months
ended June 30, 2001 increased 26.5% or $11.6 million and 29.6% or $23.5 million,
respectively, over the comparable prior year periods to $55.3 million and $103.0
million, respectively. This resulted in operating margins of 21.5% and 24.2%,
respectively, for the three and six months ended June 30, 2001, compared to
28.1% and 26.2% for the comparable prior year periods. The decrease in operating
margin resulted primarily from the acquisition of EquiServe partially offset by
increased U.S. revenues related to mutual fund shareowner processing. Excluding
EquiServe from the current year and DST Canada from the prior year, Financial
Services income from operations for the three and six months ended June 30, 2001
would have increased $10.6 million or 25.1% and $23.2 million or 30.0%,
respectively, over the comparable periods in 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 and six months
ended June 30, 2001 increased $0.2 million and $0.9 million, respectively, or
1.4% and 2.3%, respectively, over the same periods in 2000. Output Solutions
Segment operating margin was 9.6% and 12.3%, respectively, for the three and six
months ended June 30, 2001 compared to 10.3% and 13.0%, respectively, for the
same periods in 2000.
Customer Management Segment income from operations totaled $6.6 million and
$10.3 million for the three and six months ended June 30, 2001, respectively, an
increase of 32.0% and 37.3% over the comparable prior year periods. Operating
margins were 12.1% and 10.0% for the three and six months ended June 30, 2001,
respectively, compared to 9.7% and 7.5% for the comparable prior year periods.
Investments and Other Segment income from operations was $0.8 million and $2.4
million for the three and six months ended June 30, 2001, respectively, as
compared to $0.8 million and $2.2 million for the three and six months ended
June 30, 2000, respectively.
Interest expense
Interest expense totaled $1.9 million and $3.1 million, respectively, for the
three and six months ended June 30, 2001, an increase from $1.5 million and $2.9
million recorded in the comparable periods in 2000. Average debt balances were
higher in 2001 compared to 2000.
Other income, net
Other income was $7.0 million for the second quarter 2001, compared to $7.5
million for the second quarter 2000. Second quarter 2001 results include $3.5
million primarily related to interest and dividend income and $3.5 million
related primarily to gains on sales of marketable equity securities. Second
quarter 2000 results include $3.1 million primarily related to interest and
dividend income and $4.4 million related primarily to gains on sales of
marketable equity securities.
Other income was $13.6 million for the six months ended June 30, 2001, compared
to $28.8 million for the prior year. Year to date 2000 Other income includes
$10.8 million pretax relating to the settlement of a legal dispute related to a
former equity investment. Other income also includes $6.7 million for 2001 and
$12.0 million for 2000 of gains on sales of equity investments and $6.8 million
for 2001 and $6.0 million for 2000 primarily related to interest and dividend
income.
Gain on sale of PAS
On June 29, 2001, DST sold its Portfolio Accounting Systems ("PAS") business to
State Street Corporation ("State Street"). DST offered PAS services primarily to
the U.S. mutual fund industry on a remote processing basis. DST received, in a
taxable transaction, proceeds of $75.0 million, comprised of approximately 1.5
million shares of State Street common stock and cash. In conjunction with the
transaction, DST agreed to provide data processing services for PAS and agreed
to a non-compete agreement for a period of five years, for which elements a
portion of the purchase price has been deferred. DST recognized a one-time gain
of $20.0 million after taxes, deferrals and other expenses.
DST recorded revenue related to PAS of $9.8 million for the six months ended
June 30, 2001 and $19.5 million for the year ended December 31, 2000. The PAS
business unit had approximately 80 associates who transferred to State Street
with the transaction. DST estimates that removing the PAS business from DST's
financial results will reduce diluted earnings per share by approximately $0.01
per share per quarter.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $0.3 million and $1.2
million for the three and six months ended June 30, 2001, respectively, as
compared to $3.5 million and $7.6 million for the three and six months ended
June 30, 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 2.9 million at June 30, 2001, which is 0.2 million or 7.4%
above year end 2000 and 0.4 million or 16.0% over June 30, 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. IFDS results
include the results of DST Canada, which as previously mentioned was contributed
to a joint venture in 2001. Exchange-America results reflect development and
marketing expenses for its products. Argus' earnings decreased from the prior
year quarter primarily from increased depreciation charges.
Income taxes
DST's effective tax rate was 36.2% for the quarter and 35.8% for the six months
ended June 30, 2001, compared to 35.9% for both the prior year quarter and six
month period. Excluding the taxes provided on the PAS transaction, the effective
tax rate would have been 35.1% for the quarter and six months ended June 30,
2001. 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 and six months ended June 30,
2001 increased 65.6% and 40.1%, respectively, over the same periods in 2000 to
$257.6 million and $425.1 million, respectively. U.S. Financial Services revenue
increased 86.7% to $232.1 million and 53.7% to $374.2 million for the three and
six months ended June 30, 2001, respectively. Excluding EquiServe from the
current year, U.S. revenues for the three and six months ended June 30, 2001
increased 14.4% and 16.8%, respectively, over the same periods in 2000 to $142.2
million and $284.3 million, respectively. U.S. mutual fund processing revenues
for the three and six months ended June 30, 2001 increased 17.2% and 18.8%,
respectively, over the prior year periods as shareowner accounts serviced
increased 17.1% from 63.9 million at June 30, 2000 to 74.8 million at June 30,
2001. U.S. Automated Work Distributor ("AWD") product revenues for the three and
six months ended June 30, 2001 increased 52.6% and 58.1%, respectively, over the
same periods in the prior year primarily due to an increase in the number of AWD
workstations licensed.
Financial Services Segment revenues from international operations for the three
and six months ended June 30, 2001 decreased 18.5% to $25.5 million and 15.0% to
$50.9 million, respectively. The revenue decrease resulted primarily from DST
Canada's results of operations no longer being consolidated with the Company's
operating results. Excluding Canada from the prior year, revenues from
international operations for the three and six months ended June 30, 2001 would
have increased $0.7 million or 2.8% and $4.3 million or 9.2%, respectively, over
the comparable periods in 2000. The increase is primarily a result of an
increase in investment management software license revenues and higher
investment management and AWD software maintenance revenues.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2001
increased 89.7% to $179.6 million and 49.7% to $283.2 million, respectively,
over the comparable periods in 2000. Personnel costs for the three and six
months ended June 30, 2001, increased 78.8% and 43.1%, respectively, over the
comparable prior year periods as a result of the addition of EquiServe and
increased staff levels to support volume growth. Excluding EquiServe from the
current year and DST Canada from the prior year, costs and expenses increased
9.1% or 12.8% and personnel costs increased 13.9% or 14.4%, for the three and
six months ended June 30, 2001, respectively, over the comparable periods in
2000.
Depreciation and amortization
Segment depreciation and amortization increased 32.0% or $5.5 million and 12.1%
or $4.2 million for the three and six months ended June 30, 2001, respectively,
over the comparable periods in 2000. The increase is primarily attributable to
EquiServe.
Income from operations
Segment income from operations for the three and six months ended June 30, 2001
increased 26.5% to $55.3 million and 29.6% to $103.0 million, respectively, over
the comparable prior year periods. The Segment's operating margins were 21.5%
and 24.2% for the three and six months ended June 30, 2001, respectively, as
compared to 28.1% and 26.2% for the three and six months ended June 30, 2000,
respectively. The decrease in operating margin resulted primarily from the
acquisition of EquiServe partially offset by increased U.S. revenues. Excluding
EquiServe from the current year and DST Canada from the prior year, income from
operations for the three and six months ended June 30, 2001 increased 25.1% and
30.0%, respectively over the comparable periods in 2000.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three and six months ended June 30,
2001 increased 8.5% to $153.6 million and 8.0% to $320.5 million, respectively,
as compared to the same periods 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 and telecommunications industries. This growth
was partially offset by a continued decline in brokerage related marketing
fulfillment and trade confirmation volumes.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2001
increased 9.4% to $129.5 million and 8.7% to $262.8 million, respectively, over
the comparable periods in 2000. Personnel costs for the three and six months
ended June 30, 2001, increased 12.2% and 15.1%, respectively, over the
comparable prior year periods 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 increased 8.1% or $0.7 million and 10.3%
or $1.7 million for the three and six months ended June 30, 2001, respectively,
over the comparable periods 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 and six
months ended June 30, 2001 of $0.2 million or 1.4% and $0.9 million or 2.3%,
respectively, over the same periods in 2000 is primarily attributable to
increased volumes for images and statements. The Segment's operating margins
were 9.6% and 12.3% for the three and six months ended June 30, 2001,
respectively, as compared to 10.3% and 13.0% for the three and six months ended
June 30, 2000, respectively.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three and six months ended June 30,
2001 increased 6.0% to $54.4 million and 2.9% to $102.9 million, respectively,
as compared to the three and six months ended June 30, 2000. Processing and
software service revenues increased to $50.8 million and increased to $97.7
million for the three and six months ended June 30, 2001, respectively, from
$47.2 million and $93.3 million for the three and six months ended June 30,
2000, respectively. Equipment sales decreased to $3.6 million and $5.2 million
for the three and six months ended June 30, 2001, respectively, from $4.1
million and $6.7 million for the three and six months ended June 30, 2000,
respectively. AWD software license revenues were recognized during the second
quarter of 2001 from the previously announced AWD license agreement with Comcast
Cable Communications, Inc.
As previously reported, MediaOne, which was acquired by AT&T, plans to
discontinue its processing agreement with DST. MediaOne subscribers processed at
June 30, 2001 were 3.1 million, and DST expects that a substantial portion of
those subscribers will be removed during the remainder of 2001.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2001
increased $0.9 million or 2.1%, and decreased $0.6 million or 0.7%,
respectively, compared to the same periods in 2000.
Depreciation and amortization
Segment depreciation and amortization for the three and six months ended June
30, 2001 increased 15.4% and 8.7%, respectively, compared to the same periods in
2000. The increase is related primarily to amortization of capitalized software
development costs.
Income from operations
Segment income from operations for the three and six months ended June 30, 2001
increased $1.6 million and $2.8 million, respectively, or 32.0% and 37.3%,
respectively, compared to the prior year periods, resulting in an operating
margin of 12.1% and 10.0% for the three and six months ended June 30, 2001,
respectively, as compared to 9.7% and 7.5% for the three and six months ended
June 30, 2000, respectively.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $10.2 million and $19.3 million
for the three and six months ended June 30, 2001, respectively, an increase of
$2.0 million and $2.9 million, respectively, as compared to prior year periods.
The increase is primarily attributable to increased real estate activity.
Costs and expenses
Investments and Other Segment costs and expenses increased $1.3 million and $2.1
million for the three and six months ended June 30, 2001, respectively, as
compared to the three and six months ended June 30, 2000, respectively,
primarily as a result of additional real estate activities.
Depreciation and amortization
Depreciation and amortization increased $0.7 million and $0.6 million for the
three and six months ended June 30, 2001, respectively over the same periods in
2000, 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 $2.4 million for
the three and six months ended June 30, 2001, respectively, as compared to $0.8
million and $2.2 million for the three and six months ended June 30, 2000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $144.2 million for the
six months ended June 30, 2001. Operating cash flows for the six months ended
June 30, 2001 were primarily impacted by net income of $128.3 million and
depreciation and amortization of $70.5 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 $127.9 million for the six
months ended June 30, 2001. The Company expended $106.2 million during the six
months ended June 30, 2001 for capital additions. Investments and advances to
unconsolidated affiliates totaled $41.8 million. During the six months ended
June 30, 2001, the Company received $33.5 million from the sale of investments
in available-for-sale securities.
Cash flows used in financing activities totaled $31.1 million for the six months
ended June 30, 2001. The Company also received proceeds from the exercise of
stock options of $19.7 million for the six months ended June 30, 2001. The
Company maintains $110 million in bank lines of credit for working capital
requirements and general corporate purposes which mature May 2002. 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 $40 million for the six months ended June 30,
2001, bringing total borrowings under these facilities to $90 million at June
30, 2001.
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 22 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 or $905.3 million for the three and six months
ended June 30, 2001, respectively, 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 six months ended June 30, 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 June 30, 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 six months ended June 30, 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 June
30, 2001, the cost to settle the remaining agreement would be approximately
$88.9 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 income totaled $116.4 million
and a loss of $88.2 million for the three and six months ended June 30, 2001,
respectively, as compared to income of $52.1 million and $119.6 million,
respectively, for the three and six months ended June 30, 2000. Comprehensive
income consists of net income of $73.8 million and $128.3 million, respectively,
and other comprehensive income of $42.6 million and a loss of $216.5 million for
the three and six months ended June 30, 2001, respectively, and 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. 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. The principal difference between net income and
comprehensive net income is the net change in unrealized gains (losses) on
available-for-sale securities.
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
June 30, 2001 was approximately $1.1 billion. The impact of a 10% change in fair
value of these investments would be approximately $68.4 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, 2001, the Company had $209.9 million of debt, of which $91.7 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.
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
The Company held its Annual Meeting of Stockholders on May 8, 2001. 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, 2001. A total of
115,096,617 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 2004:
A. Edward George L. Michael G. Fitt
Allinson Argyros
---------------- ---------------- ----------------
For 114,490,660 107,609,603 114,527,230
Withheld 605,957 7,487,014 569,387
---------------- ---------------- ----------------
Total 115,096,617 115,096,617 115,096,617
================ ================ ================
The terms of office of Directors Thomas A. McDonnell and M. Jeannine Strandjord
will continue until the Annual Meeting of Stockholders in 2002. The terms of
office of Directors James C. Castle, Thomas A. McCullough and William C. Nelson
will continue until the Annual Meeting of Stockholders in 2003.
2) Approval of amendment of DST Systems, Inc. 1995 Stock Option and
Performance Award Plan:
For 80,564,225
Against 34,283,041
Withheld 243,699
Broker Non-votes 5,652
----------------
Total 115,096,617
================
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 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.
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
June 30, December 31,
2001 2000
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S.
Non-retirement accounts 49.4 48.3
IRA mutual fund accounts 19.0 17.9
TRAC-2000 mutual fund accounts 6.4 5.9
--------------- ---------------
74.8 72.1
=============== ===============
International
United Kingdom (1) 2.9 2.7
Canada (2) 1.3 1.5
TRAC-2000 participants (millions) 2.2 1.9
Automated Work Distributor workstations (thousands) 79.4 73.2
Portfolio Accounting System portfolios (thousands) 1.9 2.0
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions)
U.S. 33.8 33.8
International 10.7 9.6
For the Six Months
Ended June 30,
2001 2000
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 3,989 3,619
Items mailed (millions) 970 947
(1) Processed by EFDS, an unconsolidated affiliate of the Company.
(2) Processed by International Financial Data Services Ltd., a former
wholly owned subsidiary which became an unconsolidated affiliate of the
Company in January 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.26 The Company's 1995 Stock Option and Performance Award Plan, restated
as of May 8, 2001 to allow flexibility in awards to Outside
Directors and expand the definition of Eligible Employees, is
attached hereto as Exhibit 10.26.
(b) Reports on Form 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
April 2, 2001, reporting the announcement that the Company has completed
the acquisition of a controlling equity position in EquiServe Limited
Partnership.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
April 24, 2001, reporting the announcement of financial results for the
quarter ended March 31, 2001.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
May 23, 2001, reporting the announcement of an agreement between State
Street Corporation and the Company for State Street Corporation to acquire
the Company's portfolio accounting service business.
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 August 14, 2001.
DST Systems, Inc.
/s/ Kenneth V. Hager
- ---------------------------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)