UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 [ ]
As of May 5,1997, there were 49,350,490 shares of the Company's $.01 par value
Common Stock outstanding.
DST SYSTEMS, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
December 31, 1996 and March 31, 1997 4
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 1996 and 1997 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1996 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2. Management's Discussion and Analysis of Financial Condition 9-11
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12-13
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 14
The Company's service marks and trademarks include without limitation, DST(TM),
Securities Transfer System(TM), TA2000(R), Portfolio Accounting System(TM),
Automated Work Distributor(TM), AWD(R), TRAC-2000(R), FAST2000(TM) referred to
in this Report.
DST SYSTEMS, INC.
FORM 10-Q
March 31, 1997
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, 1996.
Additionally, the Condensed Consolidated Financial Statements should be read in
conjunction with Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
The results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be expected for the full year 1997.
Condensed Consolidated Balance Sheet
(dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<S> <C> <C>
December 31, March 31,
1996 1997
ASSETS
Current assets
Cash and cash equivalents $ 8,279 $ 11,380
Accounts receivable 154,094 155,720
Other assets 38,922 39,170
--------------- ---------------
201,295 206,270
Investments 620,437 571,910
Properties 243,989 238,463
Intangibles and other assets 55,867 54,750
--------------- ---------------
Total assets $ 1,121,588 $ 1,071,393
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Debt due within one year $ 15,159 $ 14,741
Accounts payable 44,944 36,397
Accrued compensation and benefits 33,276 15,103
Deferred revenues and gains 14,553 15,205
Other liabilities 17,772 27,047
-------------- --------------
125,704 108,493
Long-term debt 75,895 92,455
Deferred income taxes 180,853 158,149
Other liabilities 42,939 42,318
-------------- --------------
425,391 401,415
-------------- --------------
Commitments and contingencies
-------------- --------------
Minority interest 972 1,129
-------------- --------------
Stockholders' equity
Common stock, $0.01 par;
125,000,000 shares authorized
50,000,000 shares issued 500 500
Additional paid-in capital 408,807 408,807
Retained earnings 203,638 218,024
Treasury stock, (396,000 and 545,310 shares,
respectively) at cost (12,345) (17,361)
Net unrealized gain on investments 94,625 58,879
-------------- --------------
Total stockholders' equity 695,225 668,849
-------------- --------------
Total liabilities and
stockholders' equity $ 1,121,588 $ 1,071,393
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
DST SYSTEMS, INC.
Condensed Consolidated Statement of Income
(in thousands, except per share amount)
(unaudited)
For the Three Months
Ended March 31,
----------------------------------
1996 1997
Revenues $ 144,262 $ 158,684
Costs and expenses 106,389 115,354
Depreciation and amortization 18,688 19,629
---------------- ----------------
Income from operations 19,185 23,701
Interest expense (2,102) (2,163)
Other income, net 931 979
Equity in earnings (losses) of (7,641) 1,044
unconsolidated affiliates ---------------- ----------------
Income before income taxes and minority interest 10,373 23,561
Income taxes 5,963 8,302
---------------- ----------------
Income before minority interest 4,410 15,259
Minority interest in income (losses) (7) 156
---------------- ----------------
Net income $ 4,417 $ 15,103
================ ================
Average common shares outstanding 50,000 49,529
Earnings per share $ 0.09 $ 0.30
The accompanying notes are an integral part of these financial statements.
DST SYSTEMS, INC.
Condensed Consolidated Statement of Cash Flows
(dollars in thousands)
(unaudited)
<TABLE>
<S> <C> <C>
For the Three Months
Ended March 31,
-------------------------------------
1996 1997
Cash flows -- operating activities:
Net income $ 4,417 $ 15,103
----------------- -----------------
Depreciation and amortization 18,688 19,629
Undistributed (earnings) losses of unconsolidated affiliates 7,641 (1,044)
Changes in accounts receivable (6,398) (1,626)
Changes in other current assets (6,605) (247)
Changes in accounts payable and accrued liabilities (19,118) (16,718)
Other, net (4,226) (2,452)
----------------- -----------------
Total adjustments to net income (10,018) (2,458)
----------------- -----------------
Net (5,601) 12,645
----------------- -----------------
Cash flows -- investing activities:
Investments in and advances to unconsolidated affiliates (2,549) (8,444)
Capital expenditures (13,837) (12,629)
Payment for purchases of subsidiaries, net of cash acquired (3,183)
Other, net 573 101
----------------- -----------------
Net (18,996) (20,972)
----------------- -----------------
Cash flows -- financing activities:
Principal payments on long-term debt (5,642) (4,077)
Net increase in credit facilities and notes payable 31,656 20,521
Common stock repurchased (5,016)
Other, net (8,411)
----------------- -----------------
Net 17,603 11,428
----------------- -----------------
Net increase (decrease) in cash (6,994) 3,101
Cash at beginning of period 13,057 8,279
----------------- -----------------
Cash at end of period $ 6,063 $ 11,380
================= =================
</TABLE>
The accompanying notes are an integral part of these financial statements.
DST SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Accounting Policies
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and 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, 1996.
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. (the "Company") and its subsidiaries at December 31, 1996, and
March 31, 1997, the results of operations and cash flows for the three months
ended March 31, 1996 and 1997.
The results of operations for the three months ended March 31, 1997, are not
necessarily indicative of the results to be expected for the full year 1997.
2. Earnings per Share
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" ("EPS") ("SFAS 128") in February 1997. SFAS 128 replaces the presentation
of "Primary EPS" and "Fully Diluted EPS" with "Basic EPS" and "Diluted EPS",
respectively. This standard requires a presentation of Basic and Diluted EPS on
the face of the income statement. Both Basic EPS and Diluted EPS computed in
accordance with SFAS 128 would have been $0.09 and $0.30 for the three months
ended March 31, 1996 and 1997, respectively.
3. Equity in earnings (losses) of unconsolidated affiliates
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates:
For the Three Months
(in thousands) Ended March 31,
------------------------------------
1996 1997
---- ----
Boston Financial Data Services, Inc. $ 1,464 $ 1,619
Argus Health Systems, Inc. 705 1,238
European Financial Data Services Limited (1,380) (1,683)
Other (375) (130)
----------------- ----------------
414 1,044
The Continuum Company, Inc. (8,055)
----------------- ----------------
$ (7,641) $ 1,044
================= ================
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussions set forth in this Form 10-Q contain forward-looking comments.
These comments contain such descriptions as "anticipated," "believes," "expects"
and similar terms and conjugations thereof. Such comments are based upon the
information currently available to management of the Company and management's
perception 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 which is hereby incorporated by reference. That Current
Report may be obtained by contacting the Commission's public reference
operations. 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 in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
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.
RECENT EVENTS
On March 6, 1997, Euronet Services, Inc. ("Euronet"), an investment of the
Company, completed its initial public offering which included issuance of an
additional 6.1 million new shares. Euronet operates independent, non-bank owned
automatic teller machine networks in Hungary and Poland as a service provider to
banks and other financial institutions. As a result of this public offering, the
Company's common stock interest in Euronet was reduced from approximately 17% to
9%. The aggregate market value of the Company's investment in Euronet's common
stock at March 31, 1997, was $15.0 million based on the closing price on the
NASDAQ. The Company's investment in Euronet is accounted for as
available-for-sale securities.
RESULTS OF OPERATIONS
First Quarter 1996 versus First Quarter 1997
For the quarter ended March 31, 1997, DST's consolidated net income was $15.1
million, or $0.30 per share, as compared to $4.4 million, or $0.09 per share for
the quarter ended March 31, 1996. Eliminating the equity in losses of its former
affiliate, The Continuum Company, Inc. (Continuum), net income for the quarter
ended March 31, 1996, would have been $11.8 million or $0.24 per share. The
increase in net income on an adjusted basis is primarily a result of increased
revenues and income from operations due to the growth of the Company's
established interrelated businesses.
Revenues
Consolidated revenues for the quarter totaled $158.7 million, an increase of 10%
from the prior year quarter primarily due to increased mutual fund, output
processing and satellite television subscriber management processing.
Domestic revenues increased 11.6% to $138.7 million primarily due to increased
mutual fund, output processing and satellite television subscriber management
revenues. United States mutual fund processing revenues increased approximately
12% as shareowner accounts serviced increased from 38.3 million at March 31,
1996, to 41.8 million at March 31, 1997. The Company anticipates the addition of
approximately 1.0 million accounts from committed new client conversions in the
latter half of 1997. Additionally, the Company expects that a client processing
approximately 1.1 million accounts will switch to in-house processing by the end
of 1997. Satellite television subscriber management revenues increased 65% for
the quarter due to an increased number of subscribers and continuing systems
development activities.
International revenues for the first quarter 1997 were essentially unchanged
from the first quarter 1996 as modest increases in service revenues from mutual
fund, investment management and Automated Work Distributor ("AWD") products
were offset by decreased revenues at Xebec Imaging Services, Inc. and a decrease
in software license revenues in the first quarter 1997.
Costs and expenses
Consolidated costs and expenses for the first quarter 1997 increased 8.4% to
$115.4 million, primarily as a result of higher operating volumes and increased
costs of international operations.
Domestic costs and expenses for the first quarter 1997 increased 8%. Domestic
compensation and benefit expenses increased 10%, or $5.1 million for the first
quarter primarily from increased staffing levels to support mutual fund,
portfolio accounting, AWD and Output Technologies products.
Costs and expenses from international businesses for the quarter increased $2.1
million, or 12%, primarily from increased development and support costs at DST
International.
Depreciation and amortization
Depreciation and amortization increased 5% to $19.6 million primarily due to
increased operating capacities at Output Technologies and depreciation on
additional facilities.
Interest expense
Interest expense for the first quarter 1997 increased 3% to $2.2 million on
slightly higher average debt balances and interest rates.
Equity in earnings (losses) of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates increased from losses of $7.6
million to earnings of $1.0 million for the quarters ended March 31, 1996 and
1997, respectively. During the first quarter 1996, the Company recorded a
non-recurring charge related to The Continuum Company, Inc.'s ("Continuum")
March 1996 acquisition of Hogan Systems, Inc. of $10.2 million. In August 1996,
Continuum merged with Computer Sciences Corporation; accordingly, Continuum
ceased to be an unconsolidated affiliate of the Company. Excluding all effects
of Continuum, equity in earnings of unconsolidated affiliates was $0.4 million
for the first quarter 1996. Higher operating earnings were recorded at Boston
Financial Data Services, Inc. and Argus Health Systems, Inc., contributing to
the adjusted $0.6 million increase in 1997. European Financial Data Services
Limited ("EFDS") continues to incur losses primarily for development costs of
FAST2000 which costs are being expensed as incurred. Initial installation of
FAST2000 unit trust system components at EFDS is expected by the end of 1997.
Income taxes
Income tax expense increased $2.3 million, or 39%, primarily as a result of an
increase in pretax income. The Company's effective tax rate for the first
quarter 1997 was approximately 35.2%. Excluding the effect of Continuum, the
Company's effective tax rate for the first quarter 1996 would have been
approximately 35.8%. The difference between the Company's effective tax rate and
the combined federal and state statutory rates is primarily 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.
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.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses internally generated funds and borrowings from third parties to
fund operating and investing activities. The Company's net positive cash flows
from operating activities totaled $12.6 million during the first quarter 1997.
Cash flows from operating activities for the quarter were reduced by the net
decrease in accounts payable and accrued liabilities of $16.7 million of which
$13.7 million funded a 1996 ESOP accrual in conjunction with the Computer
Sciences Corporation/Continuum merger.
The Company expended $12.6 million during the quarter for capital additions.
Investments and advances to unconsolidated affiliates totaled $8.4 million,
primarily as a result of funding the development of the FAST2000 at EFDS. During
the first quarter, the Company repurchased 150,000 shares of common stock for
$5.0 million, pursuant to a formal plan as previously announced.
The Company maintains a $50 million bank line of credit facility to finance
short-term working capital requirements available through May 1997, of which
total borrowings were $23.1 million as of March 31, 1997. The Company
anticipates this line to be refinanced by the end of May 1997. Additionally, the
Company maintains a five-year revolving credit facility of $125 million with a
syndicate of U.S. and international banks. Total borrowings of $30 million were
outstanding on this facility at March 31, 1997.
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 flows from operations and
existing bank credit facilities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the ordinary
course of its business. Currently, there are no legal proceedings that
management believes would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted by the Company to security holders during the quarter
ended March 31, 1997. The Company has scheduled its annual shareholder meeting
for May 13, 1997.
Item 5. Other Information
The following table presents the sources of the Company's revenues:
Sources of Revenue
Three Months Ended March 31,
1996 1997
---------------------- ----------------------
(dollars in thousands)
U.S. revenues
Mutual fund and
Investment management
Data processing services $ 63,616 44.1% $ 70,512 44.4%
Output processing 21,941 15.2% 24,572 15.5%
---------- -------- ---------- --------
85,557 59.3% 95,084 59.9%
Other output processing 24,655 17.1% 31,837 20.1%
Other 14,098 9.8% 11,788 7.4%
---------- -------- ---------- --------
Total U.S. revenues 124,310 86.2% 138,709 87.4%
International revenues 19,952 13.8% 19,975 12.6%
---------- -------- ---------- --------
Total revenues $ 144,262 100.0% $ 158,684 100.0%
========== ======== ========== ========
The following table identifies geographic operating results:
For the Three Months
Geographic information Ended March 31,
------------------------------------
(in thousands) 1996 1997
---- ----
Domestic revenues $ 124,310 $ 138,709
Domestic income from operations 19,415 26,057
International revenues 19,952 19,975
International (losses) from operations (230) (2,356)
The following summarizes certain key operating and financial data for the
periods indicated:
December 31, March 31,
1996 1997
---- ----
Investment Market Values (in thousands) (1)
State Street Corporation $ 192,992 $ 207,176
Computer Sciences Corporation 354,466 268,164
Euronet Services, Inc. (2) $ 1,167 $ 15,030
Other Operating Data
TA2000 mutual fund shareowner accounts (millions) 41.1 41.8
TRAC-2000 mutual fund accounts (millions) (3) 1.3 1.5
TRAC-2000 participants (millions) 0.6 0.6
Securities Transfer System accounts (millions) 6.1 6.2
Portfolio Accounting System portfolios 2,074 2,187
Automated Work Distributor workstations 19,700 19,969
Three Months Ended March 31,
---------------------------------
1996 1997
---- ----
Output Technologies pages printed (millions) 337.5 358.9
Argus Pharmaceutical claims processed (millions) 32.6 37.5
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2) Concurrent with Euronet Services, Inc.'s initial public offering on March
6, 1997, the investment was marked to market using the closing price listed
on the NASDAQ.
(3) Included in TA2000 mutual fund shareowner accounts.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated January 28, 1997, under Item 5 of such form,
reporting the announcement of financial results for the quarter ended December
31, 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 May 12, 1997.
DST Systems, Inc.
/s/ Kenneth V. Hager
____________________
Kenneth V. Hager
Vice President and Chief Financial Officer
(Principal Financial Officer)
