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 September 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 October 31, 2001:
Common Stock $.01 par value - 120,367,433
1
DST Systems, Inc.
Form 10-Q
September 30, 2001
Table of Contents
Page
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
September 30, 2001 and December 31, 2000 4
Condensed Consolidated Statement of Income -
Three and Nine Months Ended September 30, 2001 and 2000 5
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 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 24
PART II. OTHER INFORMATION
- ----------------------------
Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURE 27
- ---------
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
September 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 nine months ended September 30,
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)
September 30, December 31,
2001 2000
------------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 121.9 $ 116.2
Transfer agency investments 94.6 54.2
Accounts receivable 397.1 358.5
Other current assets 75.7 61.8
----------- -----------
689.3 590.7
Investments 1,152.7 1,521.0
Properties 452.2 393.8
Intangibles and other assets 201.6 46.9
----------- -----------
Total assets $ 2,495.8 $ 2,552.4
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 230.7 $ 21.3
Transfer agency deposits 94.6 54.2
Accounts payable 105.0 100.3
Accrued compensation and benefits 82.6 66.3
Deferred revenues and gains 47.3 48.5
Other liabilities 144.6 65.6
----------- -----------
704.8 356.2
Long-term debt 100.4 68.7
Deferred income taxes 305.7 482.0
Other liabilities 90.7 79.7
----------- -----------
1,201.6 986.6
----------- -----------
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 404.2 425.1
Retained earnings 908.9 732.0
Treasury stock (7,303,814 and 2,902,446 shares,
respectively), at cost (279.3) (115.2)
Accumulated other comprehensive income 259.1 522.6
----------- -----------
Total stockholders' equity 1,294.2 1,565.8
----------- -----------
Total liabilities and stockholders' equity $ 2,495.8 $ 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 For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
Revenues $ 420.8 $ 335.5 $ 1,243.4 $ 1,012.9
Costs and expenses 310.7 238.0 907.6 724.3
Depreciation and amortization 39.9 31.6 110.4 94.9
--------------- --------------- --------------- --------------
Income from operations 70.2 65.9 225.4 193.7
Interest expense (1.7) (1.6) (4.8) (4.5)
Other income, net 5.9 3.4 19.5 32.2
Gain on sale of PAS 32.8
Equity in earnings of unconsolidated affiliates 0.5 2.2 1.7 9.8
--------------- --------------- --------------- --------------
Income before income taxes 74.9 69.9 274.6 231.2
Income taxes 26.3 25.1 97.7 83.0
--------------- --------------- --------------- --------------
Net income $ 48.6 $ 44.8 $ 176.9 $ 148.2
=============== =============== =============== ==============
Average common shares outstanding 123.0 125.0 123.4 125.4
Diluted shares outstanding 125.8 129.5 126.9 129.2
Basic earnings per share $ 0.40 $ 0.36 $ 1.43 $ 1.18
Diluted earnings per share $ 0.39 $ 0.35 $ 1.39 $ 1.15
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 Nine Months
Ended September 30,
2001 2000
---------------- ----------------
Cash flows -- operating activities:
Net income $ 176.9 $ 148.2
---------------- ----------------
Depreciation and amortization 110.4 94.9
Equity in earnings of unconsolidated affiliates (1.7) (9.8)
Net realized gain from sale of investments and PAS (41.2) (11.6)
Deferred taxes (15.9) 3.3
Changes in accounts receivable (4.7) 0.1
Changes in other current assets (3.3) 8.8
Changes in accounts payable and accrued liabilities 40.8 (6.0)
Other, net (10.5) 0.4
---------------- ----------------
Total adjustments to net income 73.9 80.1
---------------- ----------------
Net 250.8 228.3
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of property and equipment 3.9 5.9
Proceeds from sale of investments and PAS 57.5 30.0
Investments and advances to unconsolidated affiliates (59.2) (82.2)
Capital expenditures (138.5) (121.2)
Payment for purchase of subsidiaries, net of cash acquired (35.2)
Other, net 6.9 (7.0)
---------------- ----------------
Net (164.6) (174.5)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 22.1 30.0
Principal payments on long-term debt (4.6) (7.6)
Net increase in revolving credit facilities and notes payable 137.3 29.4
Common stock repurchased (235.3) (126.9)
Other, net 0.1
---------------- ----------------
Net (80.5) (75.0)
---------------- ----------------
Net decrease in cash and cash equivalents 5.7 (21.2)
Cash and cash equivalents at beginning of period 116.2 89.0
---------------- ----------------
Cash and cash equivalents at end of period $ 121.9 $ 67.8
================ ================
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 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.
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 September 30, 2001 and December 31, 2000, the
results of operations for the three and nine months ended September 30, 2001 and
2000, and cash flows for the nine months ended September 30, 2001 and 2000.
The results of operations for the three and nine months ended September 30,
2001, are not necessarily indicative of the results to be expected for the full
year 2001.
2. Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No.141, "Business Combinations" and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations, requiring the use
of the purchase accounting method, and is effective beginning July 1, 2001.
SFAS No. 142 addresses financial accounting and reporting for acquired goodwill
and other intangible assets and is effective for fiscal years beginning after
December 15, 2001 (January 1, 2002 for the Company). Upon the adoption of
SFAS No. 142, goodwill amortization will be discontinued and impairment
testing will begin. The Company does not expect the impact of SFAS No. 142 to
be material in relation to the consolidated financial statements.
Management estimates that the adoption of SFAS No. 142 will result in decreased
amortization of approximately $12 million to $14 million in 2002.
3. 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.
7
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
by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank
One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition of
the remaining 25%, which was owned by Boston Financial Data Services, on
essentially the same terms provided to FleetBoston and Bank One. EquiServe is
one of the nation's largest corporate transfer agency service providers,
maintaining and servicing the records of approximately 23.7 million shareholder
accounts for approximately 1,400 publicly traded companies.
The acquisitions were accounted for as a purchase, and the results of
EquiServe's operations are included in DST's 2001 consolidated financial
statements beginning March 30, 2001. The minimum purchase price of $186.7
million is to be paid in four installments. The first installments of
approximately $58.5 million were paid at the closings. The remaining three
minimum installments, which total approximately $128.2 million (discounted to
$117.8 million for accounting purposes) are payable annually in varying amounts
beginning February 28, 2002. The remaining minimum purchase price installments
can increase pursuant to a formula that provides for additional consideration to
be paid in cash if EquiServe's revenues as defined in the agreements for the
years ending 2001, 2002 and 2003 exceed certain targeted levels. The minimum
purchase price (discounted to $176.3 million for accounting purposes) will be
allocated to the net assets acquired based upon their fair values upon
completion of an independent valuation. Goodwill will be increased by the
amount of contingent consideration paid. This goodwill will not be subject to
amortization per SFAS No. 142.
Assuming the acquisition had occurred January 1, 2000, the Company's
consolidated revenues for the nine months ended September 30, 2001 would have
been $1,326.1 million 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. The 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.
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 contributed to a joint venture in
January 2001, and is now owned 50% by DST and 50% by State Street. DST
contributed its shares of DST Canada to the new 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 contribution of DST Canada to the joint
venture has not had a material impact on DST's net income or earnings per share
in 2001.
8
4. Investments
Investments are as follows (in millions):
Carrying Value
-----------------------------------
Ownership September 30, December 31,
Percentage 2001 2000
-------------------- ---------------- ----------------
Available-for-sale securities:
State Street Corporation 4% $ 582.0 $ 704.9
Computer Sciences Corporation 5% 286.3 519.0
Euronet Services Inc. 9% 21.1 9.4
Other available-for-sale securities 109.3 122.8
---------------- ----------------
998.7 1,356.1
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 64.1 60.8
European Financial Data Services Limited 50% 14.0 13.3
International Financial Data Services LP 50% 10.9
Other unconsolidated affiliates 33.1 47.4
---------------- ----------------
122.1 121.5
---------------- ----------------
Other:
Net investment in leases 7.6 14.5
Other 24.3 28.9
---------------- ----------------
31.9 43.4
---------------- ----------------
Total investments $ 1,152.7 $ 1,521.0
================ ================
Certain information related to the Company's available-for-sale securities
is as follows (in millions):
September 30, December 31,
2001 2000
--------------- --------------
Cost $ 564.3 $ 490.6
Gross unrealized gains 449.2 869.7
Gross unrealized losses (14.8) (4.2)
--------------- ---------------
Market value $ 998.7 $ 1,356.1
=============== ===============
9
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
-------------- --------------- -------------- --------------
Boston Financial Data Services, Inc. $ 0.7 $ 2.4 $ 3.3 $ 10.1
European Financial Data Services Limited 0.6 (1.0) 0.2 (0.9)
International Financial Data Services LP 1.0 3.0
Other (1.8) 0.8 (4.8) 0.6
-------------- --------------- -------------- --------------
$ 0.5 $ 2.2 $ 1.7 $ 9.8
============== =============== ============== ==============
5. 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 Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
--------------- --------------- --------------- --------------
Net income $ 48.6 $ 44.8 $ 176.9 $ 148.2
=============== =============== =============== ==============
Average common shares outstanding 123.0 125.0 123.4 125.4
Incremental shares from assumed
conversions of stock options 2.8 4.5 3.5 3.8
--------------- --------------- --------------- --------------
Diluted potential common shares 125.8 129.5 126.9 129.2
=============== =============== =============== ==============
Basic earnings per share $ 0.40 $ 0.36 $ 1.43 $ 1.18
Diluted earnings per share $ 0.39 $ 0.35 $ 1.39 $ 1.15
10
Comprehensive income. Components of comprehensive income (loss) consist of the
following (in millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Net income $ 48.6 $ 44.8 $ 176.9 $ 148.2
-------------- ------------- -------------- --------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period (73.9) 148.6 (417.9) 191.6
Less reclassification adjustments for gains
included in net income (6.5) (13.2) (11.6)
Foreign currency translation adjustments 2.0 (1.7) (0.8) (4.6)
Deferred income taxes 31.4 (58.0) 168.4 (70.3)
-------------- ------------- -------------- --------------
Other comprehensive income (loss) (47.0) 88.9 (263.5) 105.1
-------------- ------------- -------------- --------------
Comprehensive income (loss) $ 1.6 $ 133.7 $ (86.6) $ 253.3
============== ============= ============== ==============
6. 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 September 30, 2001
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 236.2 $ 132.7 $ 48.5 $ 3.4 $ $ 420.8
Intersegment revenues 1.6 15.5 7.4 (24.5)
------------- ------------- ------------- ------------- ------------- --------------
237.8 148.2 48.5 10.8 (24.5) 420.8
Costs and expenses 160.5 126.2 41.8 6.7 (24.5) 310.7
Depreciation and amortization 22.6 10.3 4.3 2.7 39.9
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 54.7 11.7 2.4 1.4 70.2
Other income, net (5.8) 2.4 9.3 5.9
Equity in earnings of
unconsolidated affiliates 0.6 (0.1) 0.5
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 49.5 $ 14.0 $ 2.4 $ 10.7 $ $ 76.6
============= ============= ============= ============= ============= ==============
Three Months Ended September 30, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 155.4 $ 130.3 $ 47.7 $ 2.1 $ $ 335.5
Intersegment revenues 0.5 13.6 5.9 (20.0)
------------- ------------- ------------- ------------- ------------- --------------
155.9 143.9 47.7 8.0 (20.0) 335.5
Costs and expenses 89.3 122.4 41.4 4.9 (20.0) 238.0
Depreciation and amortization 16.8 9.1 3.9 1.8 31.6
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 49.8 12.4 2.4 1.3 65.9
Other income, net 1.3 2.1 3.4
Equity in earnings (losses) of
unconsolidated affiliates 1.6 0.2 0.4 2.2
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 52.7 $ 12.6 $ 2.4 $ 3.8 $ $ 71.5
============= ============= ============= ============= ============= ==============
12
Nine Months Ended September 30, 2001
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ 660.5 $ 422.7 $ 151.4 $ 8.8 $ $1,243.4
Intersegment revenues 2.4 46.0 21.3 (69.7)
------------- ------------- ------------- ------------- ------------- -------------
662.9 468.7 151.4 30.1 (69.7) 1,243.4
Costs and expenses 443.7 389.0 125.7 18.9 (69.7) 907.6
Depreciation and amortization 61.5 28.5 13.0 7.4 110.4
------------- ------------- ------------- ------------- ------------- -------------
Income from operations 157.7 51.2 12.7 3.8 225.4
Other income, net (4.2) 2.4 21.3 19.5
Gain on sale of PAS 32.8 32.8
Equity in earnings (losses) of
unconsolidated affiliates 1.9 (0.2) 1.7
------------- ------------- ------------- ------------- ------------- -------------
Income before interest
and income taxes $ 188.2 $ 53.6 $ 12.7 $ 24.9 $ $ 279.4
============= ============= ============= ============= ============= =============
Nine Months Ended September 30, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 458.0 $ 400.1 $ 147.7 $ 7.1 $ $1,012.9
Intersegment revenues 1.3 40.6 17.3 (59.2)
------------- ------------- ------------- ------------- ------------- --------------
459.3 440.7 147.7 24.4 (59.2) 1,012.9
Costs and expenses 278.5 364.1 125.9 15.0 (59.2) 724.3
Depreciation and amortization 51.5 25.6 11.9 5.9 94.9
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 129.3 51.0 9.9 3.5 193.7
Other income, net 3.4 28.8 32.2
Equity in earnings of
unconsolidated affiliates 9.7 0.2 (0.1) 9.8
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 142.4 $ 51.2 $ 9.9 $ 32.2 $ $ 235.7
============= ============= ============= ============= ============= ==============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.7 million and
$4.8 million for the three and nine months ended September 30, 2001,
respectively, and $1.6 million and $4.5 million for the three and nine months
ended September 30, 2000, respectively, is equal to the Company's income before
income taxes on a consolidated basis for the corresponding periods.
13
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.
14
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- ------------------------------
2001 2000 2001 2000
-------------- ------------- -------------- --------------
Revenues
Financial Services $ 237.8 $ 155.9 $ 662.9 $ 459.3
Output Solutions 148.2 143.9 468.7 440.7
Customer Management 48.5 47.7 151.4 147.7
Investments and Other 10.8 8.0 30.1 24.4
Eliminations (24.5) (20.0) (69.7) (59.2)
-------------- ------------- -------------- --------------
$ 420.8 $ 335.5 $ 1,243.4 $ 1,012.9
============== ============= ============== ==============
% change from prior year period 25.4% 10.1% 22.8% 11.5%
Income from operations
Financial Services $ 54.7 $ 49.8 $ 157.7 $ 129.3
Output Solutions 11.7 12.4 51.2 51.0
Customer Management 2.4 2.4 12.7 9.9
Investments and Other 1.4 1.3 3.8 3.5
-------------- ------------- -------------- --------------
70.2 65.9 225.4 193.7
Interest expense (1.7) (1.6) (4.8) (4.5)
Other income, net 5.9 3.4 19.5 32.2
Gain on sale of PAS 32.8
Equity in earnings of unconsolidated
affiliates, net of income taxes 0.5 2.2 1.7 9.8
-------------- ------------- -------------- --------------
Income before income taxes 74.9 69.9 274.6 231.2
Income taxes 26.3 25.1 97.7 83.0
-------------- ------------- -------------- --------------
Net income $ 48.6 $ 44.8 $ 176.9 $ 148.2
============== ============= ============== ==============
Basic earnings per share $ 0.40 $ 0.36 $ 1.43 $ 1.18
Diluted earnings per share $ 0.39 $ 0.35 $ 1.39 $ 1.15
Adjusted diluted earnings per share (1) $ 0.38 $ 0.35 $ 1.19 $ 1.03
(1) Adjusted diluted earnings per share has been calculated by excluding the
effects of net gains on 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 nine months ended September 30, 2001
increased $85.3 million and $230.5 million, respectively, which represents an
increase of 25.4% and 22.8%, respectively, over the comparable periods in 2000.
Excluding EquiServe Limited Partnership ("EquiServe") from the current year
15
and DST Canada and DST's Portfolio Accounting Services ("PAS") business from the
prior year, consolidated revenues for the three and nine months ended September
30, 2001 would have increased $14.9 million or 4.6% and $83.5 million or 8.5%,
respectively, over the comparable periods in 2000. U.S. revenues for the three
and nine months ended September 30, 2001 were $387.5 million and $1,140.1
million, respectively, an increase of 30.2% and 27.1%, respectively, over the
same periods in 2000. International revenues for the three and nine months ended
September 30, 2001 were $33.3 million and $103.3 million, respectively, a
decrease of 11.9% and 10.8%, respectively, over the same periods in 2000.
Financial Services Segment revenues for the three and nine months ended
September 30, 2001 increased $81.9 million and $203.6 million, respectively, or
52.5% and 44.3%, respectively, over the same periods in 2000. Excluding
EquiServe from the current year and DST Canada and the PAS business from the
prior year, Financial Services revenues for the three and nine months ended
September 30, 2001 would have increased $11.5 million or 8.1% and $56.6 million
or 13.1%, respectively, over the comparable periods in 2000. U.S. Financial
Services Segment revenues for the three and nine months ended September 30, 2001
increased $86.5 million and $217.2 million, respectively, or 68.3% and 58.7%,
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 75.2 million at September 30,
2001, an increase of 0.5% for the quarter ended September 30, 2001, an increase
of 4.3% from the 72.1 million serviced at December 31, 2000 and an increase of
15.5% from the 65.1 million serviced at September 30, 2000.
Output Solutions Segment revenues for the three and nine months ended September
30, 2001 increased $4.3 million and $28.0 million, respectively, or 3.0% and
6.4%, respectively, over the same periods in 2000. Revenue growth resulted from
increased volumes from the financial service and video service industries,
partially offset by a continued decline in brokerage related marketing
fulfillment and trade confirmation volumes and the market interruptions
following the events of September 11, 2001. Output Solutions Segment images
produced for the three and nine months ended September 30, 2001 increased 10.5%
and 8.9%, respectively, to 2.1 billion and 6.1 billion, respectively, and items
mailed increased 2.9% and 2.6%, respectively, to 464 million and 1,434 million,
respectively, compared to the same periods in 2000.
Customer Management Segment revenues for the three and nine months ended
September 30, 2001 increased $0.8 million or 1.7% and $3.7 million or 2.5%,
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 $2.8 million and $5.7 million,
respectively, for the three and nine months ended September 30, 2001, an
increase of 35.0% and 23.4%, 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 nine months ended
September 30, 2001 increased $4.3 million and $31.7 million, respectively, or
6.5% and 16.4%, respectively, over the same periods in 2000. U.S. income from
operations for the three and nine months ended September 30, 2001 was $63.1
million and $200.3 million, respectively, an increase of 10.3% and 16.6%,
respectively, over the same periods in 2000. International income from
operations for the three and nine months ended September 30, 2001 was $7.1
million and $25.1 million, respectively, a decrease of 18.4% and an increase of
14.6%, respectively, compared to the same periods in 2000.
Financial Services Segment income from operations for the three and nine months
ended September 30, 2001 increased 9.8% or $4.9 million and 22.0% or $28.4
million, respectively, over the comparable prior year periods to $54.7 million
and $157.7 million, respectively. This resulted in operating margins of 23.0%
and 23.8%, respectively, for the three and nine months ended September 30, 2001,
compared to 31.9% and 28.2%
16
for the comparable prior year periods. The decrease in operating margin
resulted primarily from the acquisition of EquiServe and the absence of DST
Canada and the PAS business in 2001, partially offset by increased U.S.
revenues related to mutual fund shareowner processing. Excluding EquiServe
from the current year and DST Canada and the PAS business from the prior year,
Financial Services income from operations for the three and nine months ended
September 30, 2001 would have increased $4.2 million or 9.5% and $27.5 million
or 22.7%, 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 nine months
ended September 30, 2001 decreased $0.7 million and increased $0.2 million,
respectively, or 5.6% and 0.4%, respectively, over the same periods in 2000.
Output Solutions Segment operating margin was 7.9% and 10.9%, respectively, for
the three and nine months ended September 30, 2001 compared to 8.6% and 11.6%,
respectively, for the same periods in 2000.
Customer Management Segment income from operations totaled $2.4 million for the
three months ended September 30, 2001 and 2000. Customer Management Segment
income from operations totaled $12.7 million for the nine months ended September
30, 2001, an increase of 28.3% over the comparable prior year period. Operating
margins were 4.9% and 8.4% for the three and nine months ended September 30,
2001, respectively, compared to 5.0% and 6.7% for the comparable prior year
periods.
Investments and Other Segment income from operations was $1.4 million and $3.8
million for the three and nine months ended September 30, 2001, respectively, as
compared to $1.3 million and $3.5 million for the three and nine months ended
September 30, 2000, respectively.
Interest expense
Interest expense totaled $1.7 million and $4.8 million, respectively, for the
three and nine months ended September 30, 2001, an increase from $1.6 million
and $4.5 million recorded in the comparable periods in 2000. Average debt
balances were higher in 2001 compared to 2000, while average interest rates were
lower in 2001 compared to 2000.
Other income, net
Other income was $5.9 million for the third quarter 2001, compared to $3.4
million for the third quarter 2000. Third quarter 2001 results include $4.3
million primarily related to interest and dividend income and $1.8 million
related primarily to net gains on securities. Third quarter 2000 results include
$3.3 million primarily related to interest and dividend income and $0.1 million
related primarily to net gains on securities.
Other income was $19.5 million for the nine months ended September 30, 2001,
compared to $32.2 million for the comparable prior year period. Other income
includes $8.6 million for 2001 and $12.2 million for 2000 of net gains on
securities and $11.1 million for 2001 and $9.3 million for 2000 primarily
related to interest and dividend income. Other income for the 2000 period also
includes $10.8 million pretax relating to the settlement of a legal dispute
related to a former equity investment.
Gain on sale of PAS
On June 29, 2001, DST sold its 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
17
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 $0.5 million and $1.7
million for the three and nine months ended September 30, 2001, respectively, as
compared to $2.2 million and $9.8 million for the three and nine months ended
September 30, 2000. Decreased earnings were recorded at Boston Financial Data
Services ("BFDS") from a decline in brokerage industry transaction revenue and a
lack of mutual fund revenue growth. European Financial Data Services ("EFDS")
results reflect an increase in accounts serviced to 3.1 million at September 30,
2001, which is 0.4 million or 14.8% above year end 2000 and 0.5 million or 19.2%
over September 30, 2000 levels. International Financial Data Services ("IFDS")
results include the results of DST Canada, which was contributed to a joint
venture in January 2001. The loss reported in Other is primarily the result of
losses in exchange-America.
Income taxes
DST's effective tax rate was 35.1% for the quarter and 35.6% for the nine months
ended September 30, 2001, compared to 35.9% for both the prior year quarter and
nine month period. Excluding the taxes provided on the PAS transaction, the
effective tax rate would have been 35.1% for the nine months ended September 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 nine months ended
September 30, 2001 increased 52.5% and 44.3%, respectively, over the same
periods in 2000 to $237.8 million and $662.9 million, respectively. U.S.
Financial Services revenue increased 68.3% to $213.1 million and 58.7% to $587.3
million for the three and nine months ended September 30, 2001, respectively.
Excluding EquiServe from the current year and the PAS business from the prior
year, U.S. revenues for the three and nine months ended September 30, 2001
increased 6.3% and 13.3%, respectively, over the same periods in 2000 to $129.3
million and $413.6 million, respectively. U.S. mutual fund processing revenues
for the three and nine months ended September 30, 2001 increased 12.3% and
16.6%, respectively, over the prior year periods as shareowner accounts serviced
increased 15.5% from 65.1 million at September 30, 2000 to 75.2 million at
September 30, 2001. U.S. Automated Work Distributor ("AWD") product revenues for
the three and nine months ended September 30, 2001 decreased 8.1% and increased
33.2%, respectively, over the same periods in the prior year. U.S. AWD
workstations licensed were 55,000 at September 30, 2001, an increase of 3.4%
from June 30, 2001 and an increase of 14.8% over year end 2000 levels,
principally from workstations for Comcast Cable Communications, Inc. and
insurance industry clients.
Financial Services Segment revenues from international operations for the three
and nine months ended September 30, 2001 decreased 15.7% to $24.7 million and
15.2% to $75.6 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 DST Canada from the prior year,
revenues from
18
international operations for the three and nine months ended September 30, 2001
would have increased $3.8 million or 18.2% and $8.1 million or 12.0%,
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.
International AWD workstations licensed were 26,600 at September 30, 2001, an
increase of 1.5% from June 30, 2001 and an increase of 5.1% over year end 2000
levels.
Costs and expenses
Segment costs and expenses for the three and nine months ended September 30,
2001 increased 79.7% to $160.5 million and 59.3% to $443.7 million,
respectively, over the comparable periods in 2000. Personnel costs for the three
and nine months ended September 30, 2001, increased 64.1% and 49.9%,
respectively, over the comparable prior year periods as a result of the addition
of EquiServe and increased staff levels to support revenue growth. Excluding
EquiServe from the current year and DST Canada and the PAS business from the
prior year, costs and expenses increased 8.0% and 11.2% and personnel costs
increased 8.6% and 12.4%, for the three and nine months ended September 30,
2001, respectively, over the comparable periods in 2000.
Depreciation and amortization
Segment depreciation and amortization increased 34.5% or $5.8 million and 19.4%
or $10.0 million for the three and nine months ended September 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 nine months ended September 30,
2001 increased 9.8% to $54.7 million and 22.0% to $157.7 million, respectively,
over the comparable prior year periods. The Segment's operating margins were
23.0% and 23.8% for the three and nine months ended September 30, 2001,
respectively, as compared to 31.9% and 28.2% for the three and nine months ended
September 30, 2000, respectively. The decrease in operating margin resulted
primarily from the acquisition of EquiServe and the absence of DST Canada and
the PAS business, partially offset by increased U.S. revenues. Excluding
EquiServe from the current year and DST Canada and the PAS business from the
prior year, income from operations for the three and nine months ended September
30, 2001 increased 9.5% and 27.2%, respectively over the comparable periods in
2000.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three and nine months ended September
30, 2001 increased 3.0% to $148.2 million and 6.4% to $468.7 million,
respectively, as compared to the same periods in 2000. The growth in Segment
revenue was derived primarily from increased volumes from the financial service
and video industries, partially offset by a continued decline in brokerage
related marketing fulfillment and trade confirmation volumes and the market
interruptions following the events of September 11, 2001.
Costs and expenses
Segment costs and expenses for the three and nine months ended September 30,
2001 increased 3.1% to $126.2 million and 6.8% to $389.0 million, respectively,
over the comparable periods in 2000. Personnel costs for the three and nine
months ended September 30, 2001, increased 2.6% and 10.8%, respectively, over
the comparable prior year periods. Costs and expenses increased primarily due to
increased staff levels and purchased material costs to support volume growth and
higher Internet-based electronic bill and statement product development and
selling costs.
19
Depreciation and amortization
Segment depreciation and amortization increased 13.2% or $1.2 million and 11.3%
or $2.9 million for the three and nine months ended September 30, 2001,
respectively, over the comparable periods in 2000 related to additional capital
equipment to support volume growth.
Income from operations
The Segment's income from operations for the three and nine months ended
September 30, 2001 decreased $0.7 million or 5.6% and increased $0.2 million or
0.4%, respectively, over the same periods in 2000. The Segment's operating
margins were 7.9% and 10.9% for the three and nine months ended September 30,
2001, respectively, as compared to 8.6% and 11.6% for the three and nine months
ended September 30, 2000, respectively.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three and nine months ended
September 30, 2001 increased 1.7% to $48.5 million and 2.5% to $151.4 million,
respectively, as compared to the three and nine months ended September 30, 2000.
Processing and software service revenues increased to $47.4 million and $144.9
million for the three and nine months ended September 30, 2001, respectively,
from $43.0 million and $136.3 million for the three and nine months ended
September 30, 2000, respectively. Equipment sales decreased to $1.1 million and
$6.5 million for the three and nine months ended September 30, 2001,
respectively, from $4.7 million and $11.4 million for the three and nine months
ended September 30, 2000, respectively. AWD software license revenues were
recognized from the previously announced AWD license agreement with Comcast
Cable Communications, Inc. Total cable and satellite subscribers serviced were
43.8 million at September 30, 2001, an increase of 0.9% compared to year end
2000 levels, principally from higher U.S. satellite and international cable
subscribers serviced.
As previously reported, MediaOne, which was acquired by AT&T, plans to
discontinue its processing agreement with DST. Remaining MediaOne subscribers
processed at September 30, 2001 were 2.5 million, and DST expects that those
subscribers will be removed during the fourth quarter 2001.
Costs and expenses
Segment costs and expenses for the three and nine months ended September 30,
2001 increased $0.4 million or 1.0% and decreased $0.2 million or 0.2%,
respectively, compared to the same periods in 2000.
Depreciation and amortization
Segment depreciation and amortization for the three and nine months ended
September 30, 2001 increased 10.3% and 9.2%, 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 months ended September 30, 2001 of
$2.4 million was unchanged compared to third quarter 2000. Segment income from
operations for the nine months ended September 30, 2001 increased $2.8 million
or 28.3% compared to the prior year period. The Segment's operating margins were
4.9% and 8.4% for the three and nine months ended September 30, 2001,
respectively, compared to 5.0% and 6.7% for the three and nine months ended
September 30, 2000, respectively.
20
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $10.8 million and $30.1 million
for the three and nine months ended September 30, 2001, respectively, an
increase of $2.8 million and $5.7 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 $1.8 million and $3.9
million for the three and nine months ended September 30, 2001, respectively, as
compared to the three and nine months ended September 30, 2000, respectively,
primarily as a result of additional real estate activities.
Depreciation and amortization
Depreciation and amortization increased $0.9 million and $1.5 million for the
three and nine months ended September 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 $1.4 million and $3.8 million for
the three and nine months ended September 30, 2001, respectively, as compared to
$1.3 million and $3.5 million for the three and nine months ended September 30,
2000, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $250.8 million for the
nine months ended September 30, 2001. Operating cash flows for the nine months
ended September 30, 2001 were primarily impacted by net income of $176.9
million, depreciation and amortization of $110.4 million and net realized gain
from sale of investments and PAS of $41.2 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 $164.6 million for the nine
months ended September 30, 2001. The Company expended $138.5 million during the
nine months ended September 30, 2001 for capital additions. Investments and
advances to unconsolidated affiliates totaled $59.2 million. During the nine
months ended September 30, 2001, the Company received $56.5 million from the
sale of investments in available-for-sale securities.
Cash flows used in financing activities totaled $80.5 million for the nine
months ended September 30, 2001. The Company received proceeds from the issuance
of common stock of $22.1 million for the nine months ended September 30, 2001.
The Company maintains $170 million in bank lines of credit for working capital
requirements and general corporate purposes which mature in 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 $128.5 million for the nine months
ended September 30, 2001, bringing total net borrowings under these facilities
to $178.5 million at September 30, 2001.
On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe
by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank
One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition
of the remaining 25%, which was owned by BFDS, on essentially the same terms
21
provided to FleetBoston and Bank One. EquiServe is one of the nation's largest
corporate transfer agency service providers, maintaining and servicing the
records of approximately 23.7 million shareholder accounts for approximately
1,400 publicly traded companies.
The acquisitions were accounted for as a purchase, and the results of
EquiServe's operations are included in DST's 2001 consolidated financial
statements beginning March 30, 2001. The minimum purchase price of $186.7
million is to be paid in four installments. The first installments of
approximately $58.5 million were paid at the closings. The remaining three
minimum installments, which total approximately $128.2 million (discounted to
$117.8 million for accounting purposes) are payable annually in varying amounts
beginning February 28, 2002. The remaining minimum purchase price installments
can increase pursuant to a formula that provides for additional consideration to
be paid in cash if EquiServe's revenues as defined in the agreements for the
years ending 2001, 2002 and 2003 exceed certain targeted levels. The minimum
purchase price (discounted to $176.3 million for accounting purposes) will be
allocated to the net assets acquired based upon their fair values upon
completion of an independent valuation. Goodwill will be increased by the amount
of contingent consideration paid. This goodwill will not be subject to
amortization per Statement of Financial Accounting Standard ("SFAS") No. 142.
Assuming the acquisition had occurred January 1, 2000, consolidated revenues
would have been $1,326.1 million for the nine months ended September 30, 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. The 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 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 contributed to a joint venture in January
2001, and is now owned 50% by DST and 50% by State Street. DST contributed its
shares of DST Canada to the new 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 contribution of DST Canada to the joint venture has
not had a material impact on DST's net income or earnings per share in
2001.
During the third quarter and nine months ended September 30, 2001, the Company
purchased 3,230,029 and 5,903,029 shares, respectively, of its common stock
under previously announced share repurchase programs for $115.4 million and
$209.2 million, respectively. 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 September 30, 2001, DST has purchased 12,563,029
shares since the programs commenced.
The Company has entered into forward stock purchase agreements for the
repurchase of its common stock as a means of securing potentially favorable
prices for future purchases of its stock. During the nine months ended September
30, 2001, the Company purchased 2,691,500 shares under these agreements for
$89.4 million. As of September 30, 2001, the cost to settle the remaining
agreement would be approximately $24.1 million for approximately 0.6 million
shares of common stock. The remaining agreement which expires in September 2002,
allows 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
22
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.
OTHER
Comprehensive income. The Company's comprehensive income totaled $1.6 million
and a loss of $86.6 million for the three and nine months ended September 30,
2001, respectively, as compared to income of $133.7 million and $253.3 million,
respectively, for the three and nine months ended September 30, 2000.
Comprehensive income consists of net income of $48.6 million and $176.9 million,
respectively, and other comprehensive loss of $47.0 million and $263.5 million
for the three and nine months ended September 30, 2001, respectively, and net
income of $44.8 million and $148.2 million, respectively, and other
comprehensive income of $88.9 million and $105.1 million, respectively, for the
three and nine months ended September 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.
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board issued SFAS No.141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 addresses financial accounting and reporting for business
combinations, requiring the use of the purchase accounting method, and is
effective beginning July 1, 2001. SFAS No. 142 addresses financial accounting
and reporting for acquired goodwill and other intangible assets and is effective
for fiscal years beginning after December 15, 2001 (January 1, 2002 for the
Company). Upon the adoption of SFAS No. 142, goodwill amortization will be
discontinued and impairment testing will begin. The Company does not expect the
impact of SFAS No. 142 to be material in relation to the consolidated financial
statements. Management estimates that the adoption of SFAS No. 142 will result
in decreased amortization of approximately $12 million to $14 million in 2002.
23
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
September 30, 2001 was approximately $998.7 million. The impact of a 10% change
in fair value of these investments would be approximately $64.3 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 September 30, 2001, the Company had $333.1 million of debt, of which $181.9
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.
24
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.
25
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
September 30, December 31,
2001 2000
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S.
Non-retirement accounts 48.8 48.3
IRA mutual fund accounts 19.4 17.9
TRAC-2000 mutual fund accounts 7.0 5.9
--------------- ---------------
75.2 72.1
=============== ===============
International
United Kingdom (1) 3.1 2.7
Canada (2) 1.2 1.5
Corporate shareowner accounts (3) 23.7
TRAC-2000 participants (millions) 2.4 1.9
Automated Work Distributor workstations (thousands) 81.6 73.2
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions)
U.S. 34.1 33.8
International 9.7 9.6
For the Nine Months
Ended September 30,
2001 2000
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 6,086 5,453
Items mailed (millions) 1,434 1,381
(1) Processed by EFDS, an unconsolidated affiliate of the Company.
(2) Processed by IFDS, a former wholly owned subsidiary which became an
unconsolidated affiliate of the Company in January 2001.
(3) Processed by EquiServe. The Company acquired a 75% interest in EquiServe
on March 30, 2001 and the remaining 25% interest on July 31, 2001.
26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.10 The Company's Officers Incentive Plan as amended and restated as
of September 25, 2001, is attached hereto as Exhibit 10.10.
10.13 The Company's Directors' Deferred Fee Plan as amended and restated
as of August 20, 2001, is attached hereto as Exhibit 10.13.
10.26 The Company's 1995 Stock Option and Performance Award Plan as
amended and restated as of September 25, 2001, 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
July 25, 2001, reporting the announcement of financial results for the
quarter and six months ended June 30, 2001.
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 November 14,
2001.
DST Systems, Inc.
/s/ Kenneth V. Hager
- ---------------------------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
27