FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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.)
1055 Broadway, 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 [ ]
As of October 31, 1996, there were 49,701,770 shares of the Company's $.01 par
value Common Stock outstanding.
1
DST SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
December 31, 1995 and September 30, 1996 4
Condensed Consolidated Statement of Income -
Three and Nine Months Ended September 30, 1995 and 1996 5
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended September 30, 1995 and 1996 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition 9-14
and Results of Operations
PART II. OTHER INFORMATION 15
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 16
2
DST SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 1996
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 Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles 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, 1995. 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, 1996 are not necessarily indicative of the results to be expected
for the full year 1996.
3
DST SYSTEMS, INC.
Condensed Consolidated Balance Sheet
(In thousands)
(unaudited)
December 31, September 30,
1995 1996
____________________________
ASSETS
Current assets
Cash and cash equivalents $ 13,057 $ 9,051
Accounts receivable 136,314 142,669
Inventories 10,647 11,233
Other assets 28,500 37,693
_________ _________
Total current assets 188,518 200,646
Investments 251,677 565,966
Properties 247,014 229,395
Intangibles and other assets 62,311 64,384
_________ _________
Total assets $ 749,520 $ 1,060,391
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 31,822 $ 41,765
Accounts payable 47,208 34,526
Deferred revenues and gains 12,219 11,987
Accrued compensation and benefits 30,017 31,664
Other liabilities 11,937 15,596
_________ _________
Total current liabilities 133,203 135,538
Long-term debt 52,477 58,646
Deferred income taxes 50,734 162,843
Other liabilities 46,272 41,552
_________ _________
282,686 398,579
Commitments and contingencies
Minority interest 476 664
Stockholders' equity
Common stock 500 500
Additional paid-in capital 408,807 408,807
Retained earnings 34,988 191,551
Treasury stock, at cost (7,342)
Net unrealized gain on investments 22,063 67,632
_________ _________
Total stockholders' equity 466,358 661,148
_________ _________
Total liabilities and stockholders' equity $ 749,520 $ 1,060,391
========= =========
The accompanying notes are an integral part of these financial statements.
4
DST SYSTEMS, INC.
Condensed Consolidated Statement of Income
(In thousands, except earnings per share)
(unaudited)
For the Three Month For the Nine Months
Ended September 30, Ended September 30,
1995 1996 1995 1996
___________________ ___________________
Revenues $ 121,740 $ 139,569 $ 351,679 $ 427,047
Costs and expenses 93,486 104,343 270,960 317,297
Depreciation and amortization 18,568 19,804 49,340 57,684
Other expenses 13,700 13,700
________ ________ ________ ________
Income from operations 9,686 1,722 31,379 38,366
Interest expense (7,351) (1,356) (17,992) (5,110)
Other income 1,092 912 2,671 2,824
Gains on sale of equity investments 1,285 223,438 44,895 223,438
Equity in earnings (losses) of
unconsolidated affiliates 3,057 (45) 10,808 (4,547)
________ ________ ________ ________
Income before income taxes and
minority interest 7,769 224,671 71,761 254,971
Income taxes 3,162 85,897 44,374 99,409
________ ________ ________ ________
Income before minority interest 4,607 138,774 27,387 155,562
Minority interest (24) 144 (163) 188
________ ________ ________ ________
Net income $ 4,631 $ 138,630 $ 27,550 $ 155,374
======== ======== ======== ========
Weighted average common shares outstanding 49,841 49,935
Earnings per share $ 2.78 $ 3.11
The accompanying notes are an integral part of these financial statements.
5
DST SYSTEMS, INC.
Condensed Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
For the Nine Months
Ended September 30,
1995 1996
___________________
Cash flows -- operating activities:
Net income $ 27,550 $ 155,374
__________ __________
Depreciation and amortization 49,340 57,684
(Undistributed earnings) losses of
unconsolidated affiliates (10,808) 4,547
Gains on sale of equity investments (44,895) (223,438)
Deferred taxes on gains on sale of
equity investments 35,028 87,254
Changes in accounts receivable (18,005) (5,570)
Changes in inventories (2,418) (1,018)
Changes in other current assets (1,734) (1,310)
Changes in accounts payable and accrued liabilities (5,777) (9,108)
Other, net 6,179 (4,829)
__________ __________
Total adjustments to net income 6,910 (95,788)
__________ __________
Net 34,460 59,586
__________ __________
Cash flows -- investing activities:
Investment in and advances to unconsolidated affiliates (4,723) (8,187)
Capital expenditures (51,322) (44,810)
Payment for purchases of subsidiaries, net
of cash acquired (51,090) (3,183)
Other, net 6,479 (4,683)
__________ __________
Net (100,656) (60,863)
__________ __________
Cash flows -- financing activities:
Proceeds from issuance of long-term debt 24,000
Principal payments on long-term debt (22,038) (15,792)
Net increase in credit facilities and notes payable 224,634 30,149
Dividends to KCSI (150,000)
Stock repurchased (7,342)
Other, net (6,987) (9,744)
__________ __________
Net 69,609 (2,729)
__________ __________
Net increase (decrease) in cash and cash equivalents 3,413 (4,006)
Cash and cash equivalents at beginning of period 3,971 13,057
__________ __________
Cash and cash equivalents at end of period $ 7,384 $ 9,051
========== ==========
The accompanying notes are an integral part of these financial statements.
6
DST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Accounting Policies
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST"
or the "Company") included herein have been prepared by the Company, without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles 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, 1995. 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 DST Systems, Inc. and its subsidiaries at December 31, 1995 and
September 30, 1996, the results of operations for the three and nine months
ended September 30, 1995 and 1996 and cash flows for the nine months ended
September 30, 1995 and 1996.
The results of operations for the three and nine months ended September 30,
1996 are not necessarily indicative of the results to be expected for the
full year 1996.
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform with the current year's presentation.
2. Earnings per share and stock repurchases
Earnings per share for the three and nine months ended September 30, 1996 is
based on the weighted average number of common shares outstanding during the
period. Because the initial public offering of the Company's common stock
on October 31, 1995 and use of proceeds therefrom have substantially changed
the Company's capital structure, earnings per share data for the three and
nine months ended September 30, 1995 have not been presented.
During the three months ended September 30, 1996, the Company repurchased
141,100 shares of its common stock. A total of 239,330 shares were held in
treasury at September 30, 1996.
3. Acquisitions and Dispositions
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged
with Computer Sciences Corporation ("CSC") in a tax-free share exchange
accounted for as a pooling-of-interests. Under the merger, CSC common
stock was exchanged for the common stock of Continuum at an exchange
rate of 0.79 shares for each share of Continuum stock. DST, which prior
to the merger owned approximately 23% of Continuum, received in the
exchange approximately 4.3 million shares of CSC common stock with an
approximate market value of $295 million based upon the closing price of
CSC common stock on the New York Stock Exchange on August 1, 1996. DST
recognized a one-time gain after taxes and other expenses of $127.6
million in the third quarter 1996. DST's shares of CSC represent an
approximate 6% interest in the combined company. As a result, Continuum
will cease to be an unconsolidated equity affiliate of DST and under
generally accepted accounting principles, no part of Continuum or CSC
earnings will be recognized by DST. DST recognized equity in earnings
of Continuum of $0.5 million and $5.0 million in 1993 and 1994,
respectively and equity in losses of Continuum of $1.1 million in 1995
and $4.9 million for the first six months of 1996. The Company's
investment in CSC is accounted for as available-for-sale securities in
accordance with Statement of Financial Accounting Standards No. 115.
Although CSC does not currently pay cash dividends, DST will recognize
dividend income on any cash dividends received from CSC.
DST currently provides all of the North American and United Kingdom data
processing operations for Continuum through DST's Winchester Data
Center. The Company has agreed with CSC to negotiate an agreement that
will allow Continuum to transfer data processing operations from the
Winchester Data Center to facilities of CSC. The Company does not
believe that such transfer will occur in 1996 nor that any such transfer
of data processing will have a material impact on the Company's results
of operations or financial position. The merger is not expected to
affect Continuum's existing agreements with DST for distribution of
DST's Automated Work Distributor (AWD(r)) work flow management software
to the insurance and banking industries.
Although DST has limited registration rights with respect to the sale of
CSC stock, any dispositions of such stock may be restricted by
securities laws. DST has no present intention to dispose of such stock.
4. Other
During the third quarter, the Company replaced its $30 million bank line of
credit to finance working capital requirements and $15 million bank line of
credit to finance certain construction activities of the Company with a
single $50 million bank line of credit. Borrowings under the facility are
available on a daily basis at rates pegged to the Eurodollar or federal
funds rates.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussions set forth in this Form 10-Q may contain forward-looking
comments. Such comments are based upon the information currently available
to management of the Company and management's understanding thereof as of the
date of this report. Actual results of the Company's operations could
materially differ from those indicated in the forward-looking comments. The
difference could be caused by a number of factors including, but not limited
to, those discussed in a Current Report on Form 8-K dated March 22, 1996,
which has been filed with the United States Securities and Exchange
Commission (the "Commission"). That Current Report may be obtained by
contacting the Commission's public reference office. Readers are strongly
encouraged to obtain and consider the factors listed in the March 22, 1996
Current Report and any amendments or modifications thereof when evaluating
any forward-looking comments concerning the Company.
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 incorporated by reference in the Company's Annual Report on Form 10-K
for the year ended December 31, 1995.
INTRODUCTION
The Company provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance
providers, banks and other financial services organizations.
The following table presents the sources of the Company's revenues:
Sources of Revenue
Nine Months Ended September 30,
(dollars in thousands)
1995 1996
____ ____
U.S. Mutual Fund
Processing $ 160,221 45.6% $ 190,582 44.6%
Output Services 52,809 15.0% 63,945 15.0%
_______ _______ _______ _______
Total U.S. Mutual Fund 213,030 60.6% 254,527 59.6%
Insurance
Processing 20,997 6.0% 21,910 5.1%
Output services 6,312 1.8% 8,593 2.0%
_______ _______ _______ _______
Total Insurance 27,309 7.8% 30,503 7.1%
International 39,281 11.1% 61,518 14.4%
Other output services 45,699 13.0% 53,599 12.6%
Other 26,360 7.5% 26,900 6.3%
_______ _______ _______ _______
Total revenues $ 351,679 100.0% $ 427,047 100.0%
======= ======= ======= =======
9
RECENT EVENTS
On August 1, 1996, The Continuum Company, Inc. ("Continuum") merged
with Computer Sciences Corporation ("CSC") in a tax-free share exchange
accounted for as a pooling-of-interests. Under the merger, CSC common
stock was exchanged for the common stock of Continuum at an exchange
rate of 0.79 shares for each share of Continuum stock. DST, which prior
to the merger owned approximately 23% of Continuum, received in the
exchange approximately 4.3 million shares of CSC common stock with an
approximate market value of $295 million based upon the closing price of
CSC common stock on the New York Stock Exchange on August 1, 1996. DST
recognized a one-time gain after taxes and other expenses of $127.6
million in the third quarter 1996. DST's shares of CSC represent an
approximate 6% interest in the combined company. As a result, Continuum
will cease to be an unconsolidated equity affiliate of DST and under
generally accepted accounting principles, no part of Continuum or CSC
earnings will be recognized by DST. DST recognized equity in earnings
of Continuum of $0.5 million and $5.0 million in 1993 and 1994,
respectively and equity in losses of Continuum of $1.1 million in 1995
and $4.9 million for the first six months of 1996. The Company's
investment in CSC is accounted for as available-for-sale securities in
accordance with Statement of Financial Accounting Standards No. 115.
Although CSC does not currently pay cash dividends, DST will recognize
dividend income on any cash dividends received from CSC.
DST currently provides all of the North American and United Kingdom data
processing operations for Continuum through DST's Winchester Data
Center. The Company has agreed with CSC to negotiate an agreement that
will allow Continuum to transfer data processing operations from the
Winchester Data Center to facilities of CSC. The Company does not
believe that such transfer will occur in 1996 nor that any such transfer
of data processing will have a material impact on the Company's results
of operations or financial position. The merger is not expected to
affect Continuum's existing agreements with DST for distribution of
DST's Automated Work Distributor (AWD(r)) work flow management software
to the insurance and banking industries.
Although DST has limited registration rights with respect to the sale of
CSC stock, any dispositions of such stock may be restricted by
securities laws. DST has no present intention to dispose of such stock.
During the third quarter, the Company replaced its $30 million bank line of
credit to finance working capital requirements and $15 million bank line of
credit to finance certain construction activities of the Company with a single
$50 million bank line of credit. Borrowings under the facility are available
on a daily basis at rates pegged to the Eurodollar or federal funds rates.
10
RESULTS OF OPERATIONS
Third Quarter and Year-to-Date 1995 versus Third Quarter and Year-to-Date 1996
For the quarter ended September 30, 1996, DST consolidated net income was
$138.6 million, or $2.78 per share, as compared to $4.6 million for the quarter
ended September 30, 1995. Because the initial public offering of the Company's
common stock on October 31, 1995 and use of proceeds therefrom have
substantially changed the Company's capital structure, earnings per share data
for third quarter 1995 have not been presented. The 1996 results include a net
after tax gain of $127.6 million resulting from the completion of the merger of
Continuum and CSC. In connection with the merger, DST elected to make a one
time $13.7 million ESOP contribution to provide funding for certain Continuum
employee withdrawals from the ESOP. Excluding the effects of the merger and
ESOP contribution, DST's net income for the quarter was $11.0 million, or $.22
per share.
For the nine months ended September 30, 1996, net income was $155.4 million, or
$3.11 per share, as compared to $27.5 million for the prior year nine months.
First quarter 1995 and 1996 net income were affected by certain non-recurring
items. First quarter 1995 net income reflects an $8.6 million after-tax gain
on the sale of Investors Fiduciary Trust Company. First quarter 1996 net
income includes the Company's $9.4 million share of a non-recurring charge by
Continuum related to Continuum's March 1996 acquisition of Hogan Systems, Inc.
(the "Hogan Merger"). If all Continuum related equity in earnings, gains and
charges in 1995 and 1996, and the gain on the sale of IFTC in 1995 were
eliminated, net income would have been $32.2 million, or $.65 per share for the
nine months ended September 30, 1996, as compared to $14.4 million for 1995.
International operations incurred a pretax loss for the three and nine months
ended September 30, 1996. While the Company anticipates an improvement in the
performance of international results in the fourth quarter 1996, total year
international operations are expected to result in a pretax loss.
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
Geographic information ____________________ ____________________
(in thousands) 1995 1996 1995 1996
Domestic revenues $106,005 $ 119,483 $ 312,398 $ 365,530
Domestic income from operations 9,494 3,419 32,726 40,493
International revenues 15,735 20,086 39,281 61,517
International income (losses)
from operations 251 (1,697) (1,333) (2,127)
Revenues
Consolidated revenues increased 15% to $139.6 million in the third quarter
1996 and 21% to $427.0 million year-to-date 1996 primarily due to increased
mutual fund processing, higher volumes at Output Technologies and growth in
international businesses.
Domestic revenues increased 13% to $119.5 million for the quarter and 17% to
365.5 million year-to-date primarily due to increased mutual fund
processing, higher volumes at Output Technologies and increased satellite
television subscriber management revenues. United States mutual fund
processing revenues increased 12% for the quarter and 15% year-to-date as
11
shareowner accounts serviced increased from 35.9 million at September 30,
1995 to 40.0 million at September 30, 1996. The growth is due to increases
in the number of shareowner accounts at existing clients and the addition of
approximately one million accounts from the addition of a new client in
September 1995. The Company anticipates that in early 1997 a client of Boston
Financial Data Services ("BFDS") will convert its shareowner processing to
in-house processing, thereby reducing accounts serviced by the Company by
approximately one million accounts. Management believes the loss of these
accounts will be offset by a conversion of a new client in the fourth quarter
of 1996 with approximtely 500,000 accounts and by growth in accounts from
existing clients. Domestic Output Technologies revenues increased 13% for
the quarter and 20% year-to-date on 14% and 25% increases in domestic pages
printed for the quarter and year-to-date, respectively, due in part to an
increase in services provided for BFDS and its affiliate, Boston Equiserv.
Satellite television subscriber management revenues increased 226% for the
quarter and 139% year-to-date due to an increased number of subscribers and
continuing systems development activities.
International revenues for the third quarter increased 28% to $20.1 million
from increased license and development revenues at DST International and
$3.5 million from Xebec Imaging Services ("Xebec") , a Canadian acquisition
by Output Technologies in January 1996. Year-to-date, international
revenues have increased 57% to $61.5 million, including $10.7 million from
Xebec.
Costs and expenses
Consolidated costs and expenses increased 12% to $104.3 million for the
third quarter and 17% to $317.3 million year-to-date, primarily as a result
of higher operating volumes and increased growth of international
operations.
Domestic costs and expenses increased 7% to $84.5 million for the third
quarter and 11% to $259.1 million year-to-date. Domestic compensation and
benefit expenses (exclusive of the one-time ESOP charge described below)
increased 7%, or $2.9 million for the third quarter and 13%, or $17.3
million year-to-date primarily due to increased staffing levels to support
mutual fund and Output Technologies operations.
Costs and expenses from international business increased $5.5 million, or
38%, for the quarter and $20.6 million, or 55%, year-to-date because of the
continued development of software systems and the addition of $2.9 million
and $8.8 million of expenses from the operations of Xebec for the third
quarter and year-to-date, respectively.
Depreciation and amortization
Depreciation and amortization increased 8% to $19.8 million for the quarter
primarily because of increased operating capacities at the Winchester Data
Center and Output Technologies. Depreciation and amortization increased 17%
to $57.7 million year-to-date because of the increased operating *capacities
and increased amortization expense related to the April 1995 purchases of
substantially all of the assets and business operations of Supervised
Service Company, Inc. and mutual fund shareowner servicing system software
both owned by Kemper Services Company.
Other expenses
In connection with the merger of Continuum with CSC, DST elected to make a
one-time $13.7 million ESOP contribution to provide funding for certain
Continuum employee withdrawals from DST's ESOP.
12
Interest expense
Interest expense decreased $6.0 million, or 82%, for the quarter, and $12.9
million, or 72%, year-to-date, resulting primarily from the retirement of
debt with proceeds from the Company's initial public offering in the fourth
quarter of 1995.
Other income
Other income consists primarily of dividend income on shares of State Street
Boston Corporation common stock held by DST and amortization of deferred
gains.
Equity in earnings (losses) of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates decreased $3.1 million for
the quarter and $15.4 million year-to-date. Excluding equity in earnings of
Continuum, equity in earnings of unconsolidated affiliates decreased $1.4
million for the quarter and $5.5 million on a year-to-date basis. Argus
Health Systems has recorded lower earnings for both the quarter and year-to-
date periods as a result of increased development costs for a new claims
processing system and a slight decline in claims processed. Increased costs
were also incurred at the Company's international transfer agent joint
venture resulting from increased business development costs and an
acceleration of the delivery timetable for the FAST2000 unit trust product
which is currently expected to be completed in 1997. 1995 also included $0.2
million for the third quarter and $1.1 million year-to-date of equity in
earnings of Midland joint ventures which were sold in August 1995. The
following table summarizes equity in earnings (losses) of unconsolidated
affiliates:
For the Three Months For the Nine Months
(in thousands) Ended September 30, Ended September 30,
____________________ ____________________
1995 1996 1995 1996
The Continuum Company $ 1,713 $ 0 $ 4,988 $ (4,890)
Boston Financal Data Services 1,061 1,489 3,974 3,927
Argus Health Systems 928 223 3,168 1,263
European Financial Data Services (720) (1,728) (2,203) (4,552)
Other 75 (29) 881 (295)
________ ________ ________ ________
Total $ 3,057 $ (45) $ 10,808 $ (4,547)
======== ======== ======== ========
Income taxes
Income tax expense increased $82.7 million for the quarter and $55.0 million
year-to-date primarily because of the gain on the Continuum/CSC merger. The
Company recorded $82.1 million of income tax expense in the third quarter
1996 as a result of the Continuum/CSC merger to recognize the deferred tax
liability on the difference between the value of CSC stock received and the
Company's tax basis in Continuum less previous deferred taxes provided
respecting Continuum and less the current tax benefit of the ESOP
contribution to provide funding for certain Continuum employee withdrawals
from DST's retirement plans. The Company recorded $35.0 million of deferred
income tax expense in the first quarter 1995 as a result of the IFTC
transaction to recognize the deferred tax liability on the difference
between the value of State Street stock received and the Company's tax basis
in IFTC less previous deferred taxes provided.
Excluding the effects of the Continuum/CSC merger, ESOP contribution and the
effect of the one-time charge taken by Continuum in connection with the
Hogan Merger in the first quarter 1996, the Company's effective tax rate for
the third quarter and year-to-date 1996 was approximately 25% and 33%,
13
respectively. The primary difference between the Company's effective tax
rate and the combined federal and state statutory rates is the result of
deferred taxes being provided for unremitted earnings of domestic
unconsolidated affiliates net of the 80% dividends received deduction
provided under current tax law and certain tax credits recognized by the
Company in conjunction with the rehabilitation of historic property that
will be used as office space.
LIQUIDITY AND CAPITAL RESOURCES
The Company's net cash flows from operating activities totaled $59.6 million
during the first nine months of 1996. Cash flows from operating activities
for the first nine months of 1996 were significantly impacted by payments
related to incentive compensation programs, including a final, non-recurring
$10.1 million payment for a multi-year performance based incentive
compensation program at an Output Technologies subsidiary that concluded at
December 31, 1995, and an increase in accounts receivable of approximately
$5.6 million related to revenue growth. The Company uses internally
generated funds and borrowings from third parties to fund operating and
investing activities.
The Company's net cash used in investing activities totaled $60.9 million
for the first nine months of 1996. The Company has expended $3.2 million in
1996 for purchase of Xebec and $44.8 million for capital additions.
Investments and advances to unconsolidated affiliates totaled $8.2 million
for the first nine months of 1996, primarily as a result of funding the
development of the FAST2000 unit trust system at EFDS. Other investing
activities include $7.7 million in short-term advances to an affiliate and
proceeds of approximately $3.0 million from the sale of assets. The Company
anticipates that future investing activities will be funded primarily by
cash flows from operating activities, secured term notes, or bank lines of
credit as required.
Net cash used in financing activities totaled $2.7 million for the first
nine months of 1996. Net short and long-term borrowings in 1996 totaled
$14.4 million, which were used to finance advances to EFDS, capital
additions and payments related to incentive compensation programs as
described above. Other financing activities include $7.2 million in
payments to vendors relating to third-party software licenses capitalized in
prior years and $2.5 million in payments relating to the acquisition of
HiPortfolio by DST International. The Company has also repurchased $7.3
million of its common stock during the first nine months of 1996.
As discussed under "Recent Events", the Company now maintains a $50.0
million of bank line of credit facility to finance short-term working
capital requirements, of which total borrowings of $26.9 million are
outstanding at September 30, 1996. Additionally, the Company maintains a
revolving credit facility of $150.0 million available through May 1998 with
a syndicate of U.S. and international banks. Total borrowings of $15.0
million are outstanding on this facility at September 30, 1996.
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 credit facilities, will be sufficient to meet the
Company's operating and debt service requirements and other current
liabilities for at least the next twelve months. Further, the Company
believes that its longer-term liquidity and capital requirements will be met
through cash from operations and short-term bank lines of credit, as well as
the Company's $150.0 million revolving credit facility described above.
14
OTHER INFORMATION
The following summarizes certain key operating and financial data for the
periods indicated:
December 31, September 30,
1995 1996
__________________________
Investment Market Values (1) (in thousands)
Computer Sciences Corp. (2) $ 0 $ 332,430
The Continuum Company (2) 219,010 0
State Street Boston Corporation 134,375 171,313
First of Michigan Capital Corporation 4,803 5,235
Other Operating Data
U.S. mutual fund accounts serviced 36.5 40.0
by TA2000 (millions)
U.S. defined contribution retirement
plans serviced by TRAC2000:
Number of plans 42,372 49,550
Number of participants 588,078 507,310
U.S. securities transfer accounts 6.2 5.9
serviced by STS (millions)
U.S. mutual fund portfolios serviced by PAS 1,785 1,988
Automated work distributor workstations 10,700 16,593
licensed worldwide
Nine Months Ended September 30,
1995 1996
_______________________________
Output Technologies pages printed (millions) 680.8 872.2
Pharmaceutical claims processed (millions) 97.2 94.0
1) Represents the market value of the Company's common stock interest based
upon the closing price on the last trading day of the applicable period
at the exchange where principally traded.
2) As discussed under "Recent Events" in Management's Discussion and
Analysis of Financial Condition and Results of Operations, The Continuum
Company merged with Computer Sciences Corporation on August 1, 1996 in a
share exchange accounted for as a pooling-of-interests.
15
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 claims outstanding
that management expects would have a material adverse effect upon the
consolidated results of operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K:
The Company filed a Form 8-K dated July 18, 1996 under Item 5 of such form,
reporting the announcement of financial results for the quarter ended June
30, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, and in the capacities indicated on
November 8, 1996.
DST Systems, Inc.
/s/ Kenneth V. Hager____________
Kenneth V. Hager
Vice President and Chief Financial Officer
(Principal Financial Officer)
16