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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-14036
DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
Delaware 43-1581814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 435-1000
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the Company's common stock as of April 30, 1998:
Common Stock $.01 par value - 48,965,043
1
<PAGE>
DST Systems, Inc.
Form 10-Q
March 31, 1998
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
December 31, 1997 and March 31, 1998 4
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 1997 and 1998 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9-14
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15-16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
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.
2
DST Systems, Inc.
Form 10-Q
March 31, 1998
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 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, 1997.
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, 1998, are not
necessarily indicative of the results to be expected for the full year 1998.
3
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in thousands, except per share amounts)
(unaudited)
<S> <C> <C>
December 31, March 31,
1997 1998
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 15,833 $ 30,846
Accounts receivable 170,699 184,819
Other assets 44,792 38,962
--------------- ---------------
231,324 254,627
Investments 820,577 1,003,450
Properties 242,153 231,042
Intangibles and other assets 61,350 56,315
--------------- ---------------
Total assets $ 1,355,404 $ 1,545,434
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Debt due within one year $ 13,898 $ 11,804
Accounts payable 49,763 28,712
Accrued compensation and benefits 28,319 24,983
Deferred revenues and gains 22,679 24,343
Other liabilities 26,334 33,585
--------------- ---------------
140,993 123,427
Long-term debt 92,005 121,501
Deferred income taxes 241,782 312,124
Other liabilities 43,534 27,774
--------------- ---------------
518,314 584,826
--------------- ---------------
Commitments and contingencies --------------- ---------------
Minority interest 1,380 1,043
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares authorized,
50,000,000 shares issued 500 500
Additional paid-in capital 408,610 409,322
Retained earnings 261,589 280,162
Treasury stock, 956,942 and 1,053,593 shares,
respectively), at cost (31,404) (37,960)
Accumulated other comprehensive income 196,415 307,541
--------------- ---------------
Total stockholders' equity 835,710 959,565
--------------- ---------------
Total liabilities and stockholders' equity $ 1,355,404 $ 1,545,434
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Income
(in thousands, except per share amounts)
(unaudited)
For the Three Months
Ended March 31,
1997 1998
---------------- ----------------
<S> <C> <C>
Revenues $ 158,684 $ 187,423
Costs and expenses 115,354 134,421
Depreciation and amortization 19,629 21,780
---------------- ----------------
Income from operations 23,701 31,222
Interest expense (2,163) (2,301)
Other income, net 979 841
Equity in earnings (losses) of unconsolidated
affiliates, net of income taxes 1,044 (444)
---------------- ----------------
Income before income taxes and minority interest 23,561 29,318
Income taxes 8,302 10,792
---------------- ----------------
Income before minority interest 15,259 18,526
Minority interests in income (losses) 156 (47)
---------------- ----------------
Net income $ 15,103 $ 18,573
================ ================
Average common shares outstanding 49,529 49,002
Basic earnings per share $ 0.30 $ 0.38
Diluted shares outstanding 50,021 49,905
Diluted earnings per share $ 0.30 $ 0.37
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(dollars in thousands)
(unaudited)
For the Three Months
Ended March 31,
1997 1998
--------------- ---------------
<S> <C> <C>
Cash flows -- operating activities:
Net income $ 15,103 $ 18,573
--------------- ---------------
Depreciation and amortization 19,629 21,780
Undistributed (earnings) losses of unconsolidated affiliates (1,044) 444
Cash dividends received from unconsolidated affiliates 6,993
Changes in accounts receivable (1,626) (14,120)
Changes in other current assets (247) 5,515
Changes in accounts payable and accrued liabilities (16,718) (11,009)
Other, net (2,452) 528
--------------- ---------------
Total adjustments to net income (2,458) 10,131
--------------- ---------------
Net 12,645 28,704
--------------- ---------------
Cash flows -- investing activities:
Investments and advances to unconsolidated affiliates (8,444) (7,687)
Capital expenditures (12,629) (13,895)
Other, net 101 (149)
--------------- ---------------
Net (20,972) (21,731)
--------------- ---------------
Cash flows -- financing activities:
Principal payments on long-term debt (4,077) (2,315)
Net increase in credit facilities and notes payable 20,521 29,684
Common stock repurchased (5,016) (10,009)
Other, net (9,320)
--------------- ---------------
Net 11,428 8,040
--------------- ---------------
Net increase in cash 3,101 15,013
Cash at beginning of period 8,279 15,833
--------------- ---------------
Cash at end of period $ 11,380 $ 30,846
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
DST Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Summary of Accounting Policies
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with 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, 1997.
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, 1997, and
March 31, 1998, and the results of operations and cash flows for the three
months ended March 31, 1997 and 1998.
The results of operations for the three months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the full year 1998.
Earnings per share. The computation of basic and diluted earnings per share for
the three months ended March 31 is as follows (in thousands, except per share
amounts):
<TABLE>
<S> <C> <C>
1997 1998
-------------- --------------
Net income $ 15,103 $ 18,573
============== ==============
Average common shares outstanding 49,529 49,002
Incremental shares from assumed conversions of stock options 492 903
-------------- --------------
Dilutive potential common shares 50,021 49,905
============== ==============
Basic earnings per share $ 0.30 $ 0.38
Diluted earnings per share $ 0.30 $ 0.37
</TABLE>
Comprehensive income. As of January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
new statement requires that all changes in equity during a period except those
resulting from investments by and distributions to owners be reported as
"comprehensive income" in the financial statements. Upon implementation, the
Company included the net unrealized gain or loss on available-for-sale
securities and foreign currency translation adjustments together with net income
in the computation of comprehensive income. For the quarter ended March 31,
1998, comprehensive income was $129.7 million as compared to a loss of $22.4
million for the quarter ended March 31, 1997.
7
Software revenue recognition. As of January 1, 1998, the Company adopted
Statement of Position ("SOP") 97-2, "Software Revenue Recognition" which was
effective for software licensing transactions entered into beginning in 1998.
Certain of the Company's products are licensed, however revenues for licensed
software products are not material to the Company as a whole. Implementation of
the new statement did not have a material effect on the quarter and the Company
does not expect the statement to have a material effect on the future
consolidated results of operations of the Company.
2. Equity in earnings (losses) of unconsolidated affiliates
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates:
<TABLE>
<CAPTION>
For the Three Months
(in thousands) Ended March 31,
1997 1998
----------------- -----------------
<S> <C> <C>
Boston Financial Data Services, Inc. $ 1,619 $ 1,640
Argus Health Systems, Inc. 1,238 620
European Financial Data Services Limited (1,683) (2,626)
Other (130) (78)
----------------- -----------------
$ 1,044 $ (444)
================= =================
</TABLE>
8
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 their 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 Current
Report on Form 8-K/A dated April 13, 1998, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can
be obtained by contacting the SEC's Public Reference Branch or in the SEC's
EDGAR database accessible through the SEC's web site on the World Wide Web at
www.sec.gov. Readers are strongly encouraged to obtain and consider the factors
listed in the April 13, 1998 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, 1997.
INTRODUCTION
The Company provides sophisticated information processing and computer software
services and products, primarily to mutual funds, insurance companies, banks and
other financial services organizations.
RECENT EVENTS
On February 10, 1998, Boston EquiServe, LP ("Boston EquiServe"), a 50% owned
joint venture between Boston Financial Data Services, Inc. ("BFDS") (a 50% owned
joint venture of the Company and State Street Corporation) and BankBoston
Corporation, announced an agreement to merge with First Chicago Trust Company of
New York ("First Chicago") which would create the largest corporate securities
transfer agent in the United States, processing approximately 25 million
accounts. The merger of the two businesses, to be named EquiServe, LP, is
expected to be completed in mid 1998.
DST is currently developing a new securities transfer system ("Fairway") to be
used by Boston EquiServe to process all of its accounts. In conjunction with the
merger, DST entered into a memorandum of understanding with Boston EquiServe and
First Chicago to complete development of Fairway for the exclusive use by
EquiServe to process all of its accounts. The Company has also agreed with
EquiServe to provide data processing services for EquiServe to use Fairway. The
terms and conditions of this memorandum of understanding will be set forth in a
definitive agreement, the completion of which is a condition to the closing of
the merger agreement between Boston EquiServe and First Chicago. Upon acceptance
of defined components of Fairway, DST will contribute Fairway and its
non-EquiServe securities transfer processing business (approximately 2 million
accounts) to EquiServe for a direct ownership interest in EquiServe. DST will
also continue to hold an indirect ownership interest in EquiServe through BFDS.
9
RESULTS OF OPERATIONS
First Quarter 1997 versus First Quarter 1998
For the quarter ended March 31, 1998, DST's consolidated net income was $18.6
million, or $0.38 basic and $0.37 diluted earnings per share, as compared to
$15.1 million, or $0.30 basic and diluted earnings per share for the quarter
ended March 31, 1997.
Revenues
Consolidated revenues for the quarter ended March 31, 1998 increased 18.1% over
the prior year to $187.4 million primarily due to increased U.S. mutual fund,
output and satellite television subscriber management processing and an increase
in international revenues.
U.S. revenues increased 13.6% to $157.5 million resulting from higher levels of
mutual fund, output processing, Automated Work Distributor (AWD) and
subscriber management volumes. U.S. mutual fund processing revenues increased
approximately 14.2% as shareowner accounts serviced increased to 45.9 million at
March 31, 1998, an increase of 9.8% from 41.8 million at March 31, 1997 and 2.0%
from 45.0 million at December 31, 1997. As expected and earlier reported,
Prudential Financial Management Services ("Prudential") internalized the
processing for approximately 900,000 mutual fund shareowner accounts during the
quarter which have been excluded from the account totals at March 31, 1998.
Excluding the Prudential accounts removed, accounts serviced grew by 12.2% from
March 31, 1997 and 4.1% from December 31, 1997. Increased individual retirement
account (IRA) activity contributed to the account growth during the quarter. For
the quarter ended March 31, 1998, new IRA accounts opened increased by 470,000
accounts over the 1997 quarter, and approximately two-thirds of the increase
were the new Roth IRA or Educational IRA accounts. U.S. mutual fund output
processing revenues increased 9.6% as pages printed for the quarter increased
9.1% over first quarter 1997 volumes to 428.1 million pages. U.S. AWD
workstations licensed increased 4.6% over year-end 1997 levels. Satellite
television subscriber management revenues increased 71.2% over the prior year
quarter due to an increased number of subscribers and continuing systems
development activities. Additionally, the Company received a one-time $2.6
million contract termination fee from a portfolio accounting client during the
1998 quarter.
International revenues for the quarter ended March 31, 1998 increased 49.6% over
the prior year quarter. The increase was attributable to significantly higher
software and services revenues from the Company's investment accounting
products. Canadian mutual fund processing and international AWD revenues also
increased.
Costs and expenses
Consolidated costs and expenses for the first quarter 1998 increased 16.5%
to $134.4 million, primarily as a result of higher operating volumes and
increased personnel costs to support increased revenues both in the U.S. and
internationally. U.S. costs and expenses for the first quarter 1998 increased
15.7%. International costs and expenses increased 20.2%
The Company continued to experience increases in compensation necessary to hire
and retain computer programmers and other systems professionals. While these
cost increases have not materially affected the Company's overall cost structure
to date, the Company believes that the costs associated with computer
programmers and other systems professionals may continue to increase at rates
above general inflation at least through 2000.
10
Depreciation and amortization
Consolidated depreciation and amortization increased 11.0% to $21.8 million for
the first quarter 1998. U.S depreciation and amortization increased 10.4% as a
result of a one-time write-off of intangible assets totaling $3.2 million,
primarily associated with the $2.6 million contract termination fee referred to
above. International depreciation and amortization increased 16.4% due to
related increases in capital additions.
Interest expense
Interest expense for the first quarter 1998 increased 6.4% to $2.3 million on
higher average debt balances.
Equity in earnings (losses) of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates was a loss of $0.4 million for
the quarter ended March 31, 1998 as compared to income of $1.0 million for the
quarter ended March 31, 1997. Increased losses were recorded at European
Financial Data Services Limited ("EFDS") due to continuing development costs of
FAST2000 which costs are being expensed as incurred and costs of conversions of
new and existing client accounts to the new system. Lower earnings were recorded
by Argus Health Systems due to the contract termination of a large client.
Slightly higher operating earnings were recorded at Boston Financial Data
Services, Inc.
Income taxes
Income tax expense increased $2.5 million, or 30.0%, primarily as a result of an
increase in pretax income. The Company's effective tax rate for the first
quarter 1998 was approximately 36.8% as compared to 35.2% for the prior year
quarter, primarily caused by changes in the components of taxable income.
LIQUIDITY AND CAPITAL RESOURCES
The Company uses its cash available from operating activities, borrowings from
banks and financing from third-party vendors and others to fund operating,
investing and financing activities.
Cash flows from operating activities totaled $28.7 million for the quarter ended
March 31, 1998. Operating cash flows for the quarter were affected by a $6.8
million dividend from Argus Health Systems and a $14.1 million increase in
accounts receivable related to revenue growth.
Cash flows used in investing activities totaled $21.7 million for the quarter.
The Company expended $13.9 million during the quarter for capital additions.
Investments and advances to unconsolidated affiliates totaled $7.7 million,
relating to funding the development of FAST2000 at EFDS and other investments.
Cash flows provided by financing activities totaled $8.0 million for the
quarter. During the first quarter, the Company repurchased 200,000 shares of
common stock for $10.0 million, completing its 1.2 million share repurchase
program. Financing activities also include $10.8 million in payments relating to
accrued settlements of prior years sales and use tax matters.
11
The Company maintains a $50 million bank line of credit facility to finance
short-term working capital requirements available through May 1998, of which
total borrowings were $25.5 million as of March 31, 1998. The Company
anticipates this line to be renewed for at least another year. 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 $60.0 million
were outstanding on this facility at March 31, 1998.
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, as well as the Company's $125 million revolving
credit facility described above.
Other
Unrealized gain on securities. The Company holds, among others, approximately
8.6 million shares of Computer Sciences Corporation common stock and
approximately 6.0 million shares of State Street Corporation common stock as
investments. At December 31, 1997 and March 31, 1998, the market value of the
Company's investments in available-for-sale securities reflected aggregate
unrealized gains (net of deferred taxes) of $197.0 million and $307.6 million,
respectively, which are included in Accumulated Other Comprehensive Income on
the Condensed Consolidated Balance Sheet. The $110.6 million net unrealized gain
on the Company's investments in these securities during the first quarter 1998
and the $35.7 million unrealized loss during the first quarter 1997, are
included in the computation of comprehensive income in accordance with Statement
on Financial Accounting Standards No. 130, "Reporting Comprehensive Income".
Software usage agreement. On March 31, 1998, the Company entered into a software
usage and maintenance agreement for certain computer software to be utilized at
the Winchester Data Center. The new software agreement replaces an existing
agreement with the same vendor, extending the term from 2000 until 2003 and
provides for an increase in software usage capacity. Under the previous
agreement, the Company capitalized the total fixed costs to be incurred under
the agreement and recorded a corresponding liability. Capitalized costs under
the previous agreement were depreciated over the period of the contract while
variable payments for incremental usage were recorded as costs and expenses when
incurred. Based on the terms of the new agreement, annual payments will be
recorded as costs and expenses over the period which they benefit. As a result
of replacing the previous agreement, approximately $9.0 million of computer
software previously capitalized by the Company and related short-term and
long-term liabilities were removed from the Company's balance sheet. Although
the new agreement will result in certain future costs being recorded as costs
and expenses instead of depreciation expense, the Company does not believe that
the new agreement will have an adverse affect on the Company's operating
expenses.
Segment information. The Financial Accounting Standards Board issued Statement
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
in June 1997. This statement requires that publicly traded companies report
certain information about their operating segments, products and services,
geographic areas in which they operate, and major customers beginning with the
1998 annual report. The Company is currently evaluating the effect that
implementation of this new standard will have on the information disclosed in
its financial statements.
12
Internal use software. The Accounting Standards Executive Committee recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The new statement is effective
for fiscal periods beginning after December 15, 1998 and concludes that certain
costs for the development of internal use software are an asset. Accordingly,
certain primary types of development activities should be capitalized, including
coding and software configuration costs, costs of testing and installing the
software, and when clearly distinguishable from maintenance, the costs of
upgrades and enhancements. The Company currently expenses costs of internally
developed proprietary software as it is incurred. The Company is currently
evaluating the effect that implementation of this new standard will have on its
software development accounting policies and is unable to determine the effects
on the Company's results of operations at this time.
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.
Year 2000. Many computer programs use only two digits to identify a year in a
date field within the program (e.g., "98" or "02"). If not corrected, computer
applications making calculations and comparisons in different centuries may
cause inaccurate results, or fail by or at the Year 2000.These Year 2000 related
issues are of particular importance to the Company. The Company depends upon its
computer and other systems and the computer and other systems of third-parties
to conduct and manage the Company's business. Additionally, the Company's
products and services are dependent upon using accurate dates in order to
function properly. These Year 2000-related issues may also adversely affect the
operations and financial performance of one or more of the Company's customers
or suppliers. As a result, the failure of the Company's computer and other
systems, products or services, the computer systems and other systems upon which
the Company depends, or of the Company's customers or suppliers to be Year 2000
ready could have a material adverse effect on the Company's results of
operations, financial position and cash flows.
The Company recognizes the significance of the Year 2000 problem and is
executing a program to achieve Year 2000 readiness. The Company's Year 2000
program is supported by a corporate-wide structure of project teams, a
governance structure and a central Project Office. The Project Office was
established to lead the readiness efforts for the Company and manage the overall
progress of the project. The Company has redirected some of its development
employees to address the Year 2000 issues.
The program's purpose is to identify, evaluate and resolve potential Year 2000
related issues for the Company's products, services, internal systems, hardware,
communications and other systems. The program includes the following key steps:
1. Identification of systems and applications that must be modified
2. Evaluation of alternatives (modification, replacement or discontinuance)
3. Establishment of plans which include timely milestones and appropriate
testing to ensure that the systems and applications are ready for the
Year 2000.
13
The program also includes:
1. Projects to ensure that external vendors and services are also ready
2. The development of alternatives where necessary
3. Interoperability testing with clients and key organizations in the financial
services industry.
The Company's goal is to be ready, internally, for the Year 2000 by December 31,
1998. This goal allows for one full year of testing with clients and the
industry prior to the Year 2000. The Company's Year 2000 program is under way,
and the Company expects to achieve its goal.
The expenses associated with the program will be expensed as incurred. The
Company does not believe the amount to be spent on Year 2000 issues will be
material to the Company's results of operations, liquidity or capital resources.
However, although the Company is not aware of any material operational or
financial Year 2000 related issues, the Company cannot make any assurances that
its computer systems, products, services or other systems or the computers and
other systems of others upon which the Company depends will be Year 2000 ready
on schedule, that the costs of its Year 2000 program will not become material or
that the Company's alternative plans will be adequate. The Company is currently
unable to anticipate accurately the magnitude, if any, of the Year 2000 related
issues arising from the Company's customers and suppliers. If any such risks
(either with respect to the Company or its customers or suppliers) materialize,
the Company could experience material adverse consequences to its business which
could have material adverse effects on the Company's results of operations,
financial position and cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
14
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 12, 1998.
Item 5. Other Information
The following table presents the sources of the Company's revenues:
<TABLE>
<CAPTION>
Sources of Revenue
Three Months Ended March 31,
1997 1998
----------------------------------- -----------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
U.S. revenues
Mutual fund and
Investment management
Data processing services $ 70,512 44.4% $ 80,495 42.9%
Output processing 24,572 15.5% 26,933 14.4%
----------------- ---------------- --------------- ---------------
95,084 59.9% 107,428 57.3%
Other output processing 31,837 20.1% 29,383 15.7%
Other 11,788 7.4% 20,738 11.1%
----------------- ---------------- --------------- ---------------
Total U.S. revenues 138,709 87.4% 157,549 84.1%
International revenues 19,975 12.6% 29,874 15.9%
----------------- ---------------- --------------- ---------------
Total revenues $ 158,684 100.0% $ 187,423 100.0%
================= ================ =============== ===============
</TABLE>
15
The following table identifies geographic operating results:
<TABLE>
<CAPTION>
For the Three Months
Geographic information Ended March 31,
(in thousands) 1997 1998
------------------ -----------------
<S> <C> <C>
Domestic revenues $ 138,709 $ 157,549
Domestic income from operations 26,057 28,130
International revenues 19,975 29,874
International income (losses) from operations (2,356) 3,092
</TABLE>
The following table summarizes certain key operating and financial data for the
periods indicated:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
--------------------- ----------------------
<S> <C> <C>
Investment Market Values (in thousands) (1)
Computer Sciences Corporation $ 360,400 $ 474,779
State Street Corporation 347,509 406,487
Euronet Services, Inc. $ 9,136 $ 8,988
Other Operating Data
Mutual fund shareowner accounts processed (millions)
U.S. 45.0 45.9
Canada 0.9 1.2
United Kingdom 1.0 1.2
TRAC-2000 mutual fund accounts (millions) (2) 1.9 2.1
TRAC-2000 participants (thousands) 696 801
Portfolio Accounting System portfolios 1,925 1,998
Automated Work Distributor workstations 35,100 36,200
Three Months Ended March 31,
1997 1998
--------------------- ----------------------
Output Technologies pages printed (millions) 402.8 444.3
Argus pharmaceutical claims processed (millions) 37.5 32.3
<FN>
(1) Based upon the closing price on the last trading day of the applicable
period at the exchange where principally traded.
(2) Included in TA2000 mutual fund shareowner accounts processed.
</FN>
</TABLE>
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27.1 - Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated January 22, 1998, under Item 5 of such
form, reporting the announcement of financial results for the quarter and
year ended December 31, 1997.
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 15, 1998.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President and Chief Financial Officer
(Principal Financial Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000714603
<NAME> DST Systems, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<CASH> 30,846
<SECURITIES> 1,003,450
<RECEIVABLES> 184,819
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 254,627
<PP&E> 589,237
<DEPRECIATION> 358,195
<TOTAL-ASSETS> 1,545,434
<CURRENT-LIABILITIES> 123,427
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 959,065
<TOTAL-LIABILITY-AND-EQUITY> 1,545,434
<SALES> 0
<TOTAL-REVENUES> 187,423
<CGS> 0
<TOTAL-COSTS> 156,201
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,301
<INCOME-PRETAX> 29,318
<INCOME-TAX> 10,792
<INCOME-CONTINUING> 18,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,573
<EPS-PRIMARY> 0.38
<EPS-DILUTED> 0
</TABLE>
