UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-14036
DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
Delaware 43-1581814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 435-1000
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the Company's common stock as of July 30, 1999:
Common Stock $.01 par value - 63,367,433
<PAGE>
DST Systems, Inc.
Form 10-Q
June 30, 1999
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
June 30, 1999 and December 31, 1998 4
Condensed Consolidated Statement of Income -
Three and Six Months Ended June 30, 1999 and 1998 5
Condensed Consolidated Statement of Cash Flows -
Six Months Ended June 30, 1999 and 1998 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
SIGNATURES 26
The Company's service marks and trademarks include without limitation
CUSTIMA(TM), DST(R), TRAC-2000(R), Automated Work Distributor(TM), AWD(R),
FAST2000(TM) referred to in this Report.
2
DST Systems, Inc.
Form 10-Q
June 30, 1999
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, 1998.
Additionally, the Condensed Consolidated Financial Statements should be read in
conjunction with Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
The results of operations for the three and six months ended June 30, 1999, are
not necessarily indicative of the results to be expected for the full year 1999.
3
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
June 30, December 31,
1999 1998
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 58.8 $ 28.1
Accounts receivable 275.7 282.4
Other current assets 62.4 65.3
--------------- ---------------
396.9 375.8
Investments 1,273.9 1,130.5
Properties 320.3 328.4
Intangibles and other assets 53.7 62.3
--------------- ---------------
Total assets $ 2,044.8 $ 1,897.0
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 15.3 $ 12.1
Accounts payable 67.5 85.3
Accrued compensation and benefits 39.5 53.4
Deferred revenues and gains 34.2 41.1
Other liabilities 70.3 76.7
--------------- ---------------
226.8 268.6
Long-term debt 37.7 49.7
Deferred income taxes 394.2 343.2
Other liabilities 70.7 68.5
--------------- ---------------
729.4 730.0
--------------- ---------------
Commitments and contingencies
--------------- ---------------
Minority interest 0.6 0.8
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares authorized,
63,816,639 shares issued 0.6 0.6
Additional paid-in capital 458.4 462.3
Retained earnings 445.1 378.1
Treasury stock (659,219 and 945,114 shares,
respectively), at cost (26.4) (34.1)
Accumulated other comprehensive income 437.1 359.3
--------------- ---------------
Total stockholders' equity 1,314.8 1,166.2
--------------- ---------------
Total liabilities and stockholders' equity $ 2,044.8 $ 1,897.0
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 299.6 $ 269.8 $ 592.4 $ 535.8
Costs and expenses 220.4 207.6 435.8 406.0
Depreciation and amortization 27.8 24.6 55.3 51.8
-------------- --------------- --------------- ---------------
Income from operations 51.4 37.6 101.3 78.0
Interest expense (1.2) (2.3) (2.7) (4.9)
Other income, net (0.9) 1.3 0.8 2.3
Equity in earnings (losses) of unconsolidated
affiliates, net of income taxes 2.6 0.1 4.8 (0.3)
-------------- --------------- --------------- ---------------
Income before income taxes and minority interests 51.9 36.7 104.2 75.1
Income taxes 18.6 13.6 37.4 27.9
-------------- --------------- --------------- ---------------
Income before minority interest 33.3 23.1 66.8 47.2
Minority interest (0.1) (0.2) (0.2) (0.2)
-------------- --------------- --------------- ---------------
Net income $ 33.4 $ 23.3 $ 67.0 $ 47.4
============== =============== =============== ===============
Average common shares outstanding 63.1 62.8 63.1 62.7
Diluted shares outstanding 64.8 64.2 64.7 64.1
Basic earnings per share $ 0.53 $ 0.37 $ 1.06 $ 0.76
Diluted earnings per share $ 0.52 $ 0.36 $ 1.04 $ 0.74
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
For the Six Months
Ended June 30,
1999 1998
---------------- ----------------
<S> <C> <C>
Cash flows -- operating activities:
Net income $ 67.0 $ 47.4
---------------- ----------------
Depreciation and amortization 55.3 51.8
Equity in (earnings) losses of unconsolidated affiliates (4.8) 0.3
Cash dividends received from unconsolidated affiliates 0.1 8.3
Deferred taxes 1.4 (9.6)
Changes in accounts receivable 6.7 (13.9)
Changes in other current assets 2.2 7.1
Changes in accounts payable and accrued liabilities (33.0) 5.0
Other, net (8.1) 8.3
---------------- ----------------
Total adjustments to net income 19.8 57.3
---------------- ----------------
Net 86.8 104.7
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of investments 11.3
Investments and advances to unconsolidated affiliates (11.7) (13.4)
Capital expenditures (55.6) (55.9)
Other, net 7.9 (1.9)
---------------- ----------------
Net (48.1) (71.2)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of long-term debt 11.5 7.4
Proceeds from exercise of stock options 8.6 2.4
Principal payments on long-term debt (7.9) (9.4)
Net increase (decrease) in revolving credit
facilities and notes payable (12.4) 9.2
Common stock repurchased (7.2) (12.6)
Other, net (0.6) (10.8)
---------------- ----------------
Net (8.0) (13.8)
---------------- ----------------
Net increase in cash and cash equivalents 30.7 19.7
Cash and cash equivalents at beginning of period 28.1 19.5
---------------- ----------------
Cash and cash equivalents at end of period $ 58.8 $ 39.2
================ ================
</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, 1998.
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.
Effective December 21, 1998, the Company acquired USCS International, Inc.
("USCS"), which was accounted for as a pooling of interests. Accordingly, the
Company's consolidated financial statements for periods prior to December 21,
1998 have been restated to include the financial position and results of
operations of USCS.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal interim
closing procedures) necessary to present fairly the financial position of the
Company and its subsidiaries at June 30, 1999 and December 31, 1998, and the
results of operations for the three and six months ended June 30, 1999 and 1998,
and cash flows for the six months ended June 30, 1999 and 1998.
The results of operations for the three and six months ended June 30, 1999, are
not necessarily indicative of the results to be expected for the full year 1999.
Software development and maintenance. Effective January 1, 1999, DST adopted, as
required, Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which requires that certain
costs incurred for the development of internal use software be capitalized.
Prior to the adoption of SOP 98-1, the Company expensed the costs of internally
developed proprietary software as incurred. For the three and six months ended
June 30, 1999, the Company capitalized $6.1 million and $11.9 million,
respectively, of costs related to the development of internal use software
consisting of $5.6 million and $10.3 million, respectively, for the Financial
Services Segment for the three and six months ended June 30, 1999, and $0.5
million and $1.6 million, respectively, for the Output Solutions Segments for
the three and six months ended June 30, 1999. If internal use software
development costs had been expensed rather than capitalized, consolidated net
income for the three and six months ended June 30, 1999 would have been $29.5
million ($0.47 per basic share, $0.46 per diluted share) and $59.4 million
($0.94 per basic share, $0.92 per diluted share), respectively.
2. USCS Merger Integration Costs
In December 1998, DST's management approved plans which include initiatives to
integrate the operations of certain DST and USCS subsidiaries and consolidate
certain facilities. Total accrued integration costs of $16.9 million were
recorded in the fourth quarter of 1998, of which $0.7 million, $12.8 million and
$3.4 million related to the Financial Services, Output Solutions, and Customer
Management Segments, respectively. $8.0 million of these costs were utilized
during 1998.
7
The Company paid $0.6 million in the quarter ended June 30, 1999 and $0.8
million for the six months ended June 30, 1999 related to the accrued
integration costs. Of the remaining accrued integration costs of $8.1 million at
June 30, 1999, $0.4 million, $6.1 million, and $1.6 million relate to the
Financial Services, Output Solutions, and Customer Management Segments,
respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 1999 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
1999 through 2003. Location closures are planned to occur through the year 2000
once arrangements have been made to process continuing business at other
facilities. Three of the locations have been closed as of June 30, 1999. The
costs of transitioning the continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things additional employee
costs, relocation costs and integration costs of moving to common internal
systems. Although precise estimates cannot be made, management does not believe
such costs will have a materially adverse effect on the Company's consolidated
results of operations, liquidity or financial position.
3. Investments
Investments are as follows (in millions):
<TABLE>
<CAPTION>
Carrying Value
-----------------------------------
Ownership June 30, December 31,
Percentage 1999 1998
-------------------- ---------------- ----------------
Available-for-sale securities:
<S> <C> <C> <C>
Computer Sciences Corporation 5% $ 597.3 $ 554.6
State Street Corporation 4% 512.2 420.8
Euronet Services, Inc. 12% 3.7 4.5
Other available-for-sale securities 33.4 38.7
---------------- ----------------
1,146.6 1,018.6
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 44.5 39.4
European Financial Data Services Ltd. 50% 9.7 5.5
Argus Health Systems, Inc. 50% 5.5 3.8
Other unconsolidated affiliates 22.9 25.6
---------------- ----------------
82.6 74.3
---------------- ----------------
Other:
Net investment in leases 19.9 16.3
Other 24.8 21.3
---------------- ----------------
44.7 37.6
---------------- ----------------
Total investments $ 1,273.9 $ 1,130.5
================ ================
</TABLE>
8
Certain information related to the Company's available for sale securities is as
follows (in millions):
June 30, December 31,
1999 1998
----------------- -----------------
Cost $ 425.5 $ 427.9
Gross unrealized gains 722.8 591.2
Gross unrealized losses (1.7) (0.5)
----------------- -----------------
Market value $ 1,146.6 $ 1,018.6
================= =================
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Boston Financial Data Services, Inc. $ 2.3 $ 2.0 $ 5.0 $ 3.6
European Financial Data Services Limited (0.5) (2.2) (1.9) (4.8)
Argus Health Systems, Inc. 0.8 0.6 1.7 1.2
Other (0.3) (0.3)
------------ ------------- ------------- -------------
$ 2.6 $ 0.1 $ 4.8 $ (0.3)
============ ============= ============= =============
</TABLE>
4. Earnings Per Share and Comprehensive Income
Earnings per share. The computation of basic and diluted earnings per share is
as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $ 33.4 $ 23.3 $ 67.0 $ 47.4
============= ============= ============= =============
Average common shares outstanding 63.1 62.8 63.1 62.7
Incremental shares from assumed
conversions of stock options 1.7 1.4 1.6 1.4
------------- ------------- ------------- -------------
Dilutive potential common shares 64.8 64.2 64.7 64.1
============= ============= ============= =============
Basic earnings per share $ 0.53 $ 0.37 $ 1.06 $ 0.76
Diluted earnings per share $ 0.52 $ 0.36 $ 1.04 $ 0.74
</TABLE>
9
Comprehensive income. Components of comprehensive income consist of the
following (in millions):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $ 33.4 $ 23.3 $ 67.0 $ 47.4
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 140.4 83.4 134.3 260.1
Less reclassification adjustment for gains
included in net income (0.6) (3.9)
Foreign currency translation adjustments (2.4) (0.8) (1.7) (0.3)
Deferred income taxes (54.6) (32.6) (50.9) (101.6)
-------------- ------------- -------------- --------------
Other comprehensive income 82.8 50.0 77.8 158.2
-------------- ------------- -------------- --------------
Comprehensive income $ 116.2 $ 73.3 $ 144.8 $ 205.6
============== ============= ============== ==============
</TABLE>
10
5. Segment Information
The Company evaluates the performance of its segments based on income before
taxes, non-recurring items and interest expense. Intersegment revenues are
reflected at rates prescribed by the Company and may not be reflective of market
rates. Summarized financial information concerning the segments is shown in the
following tables (in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 138.0 $ 106.1 $ 52.3 $ 3.2 $ $ 299.6
Intersegment revenues 0.3 12.8 5.3 (18.4)
------------- ------------- ------------- ------------- ------------- -------------
138.3 118.9 52.3 8.5 (18.4) 299.6
Costs and expenses 91.1 99.0 44.6 4.1 (18.4) 220.4
Depreciation and amortization 14.6 7.9 3.4 1.9 27.8
------------- ------------- ------------- ------------- ------------- -------------
Income from operations 32.6 12.0 4.3 2.5 51.4
Other income (loss), net (2.7) 0.2 (0.1) 1.7 (0.9)
Equity in earnings (losses) of
unconsolidated affiliates 2.6 2.6
------------- ------------- ------------- ------------- ------------- -------------
Income before interest
and income taxes $ 32.5 $ 12.2 $ 4.2 $ 4.2 $ $ 53.1
============= ============= ============= ============= ============= =============
Three Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ 122.0 $ 89.2 $ 55.7 $ 2.9 $ $ 269.8
Intersegment revenues 0.4 14.2 6.0 (20.6)
------------- ------------- ------------- ------------- ------------- -------------
122.4 103.4 55.7 8.9 (20.6) 269.8
Costs and expenses 88.9 88.7 45.8 4.8 (20.6) 207.6
Depreciation and amortization 13.5 6.7 2.6 1.8 24.6
------------- ------------- ------------- ------------- ------------- -------------
Income from operations 20.0 8.0 7.3 2.3 37.6
Other income (loss), net 0.1 0.2 (0.2) 1.0 0.2 1.3
Equity in earnings (losses) of
unconsolidated affiliates 0.4 (0.3) 0.1
------------- ------------- ------------- ------------- ------------- -------------
Income before interest
and income taxes $ 20.5 $ 8.2 $ 7.1 $ 3.0 $ 0.2 $ 39.0
============= ============= ============= ============= ============= =============
11
Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ 272.2 $ 213.7 $ 100.5 $ 6.0 $ $ 592.4
Intersegment revenues 0.7 26.3 10.7 (37.7)
------------- ------------- ------------- ------------- ------------- -------------
272.9 240.0 100.5 16.7 (37.7) 592.4
Costs and expenses 181.6 196.5 87.0 8.4 (37.7) 435.8
Depreciation and amortization 29.5 15.0 7.0 3.8 55.3
------------- ------------- ------------- ------------- ------------- -------------
Income from operations 61.8 28.5 6.5 4.5 101.3
Other income (loss), net (2.4) 0.3 (0.2) 3.1 0.8
Equity in earnings (losses) of
unconsolidated affiliates 4.8 0.1 (0.1) 4.8
------------- ------------- ------------- ------------- ------------- -------------
Income before interest
and income taxes $ 64.2 $ 28.9 $ 6.3 $ 7.5 $ $ 106.9
============= ============= ============= ============= ============= =============
Six Months Ended June 30, 1998
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- -------------
Revenues $ 242.6 $ 180.4 $ 107.1 $ 5.7 $ $ 535.8
Intersegment revenues 0.7 28.7 11.8 (41.2)
------------- ------------- ------------- ------------- ------------- -------------
243.3 209.1 107.1 17.5 (41.2) 535.8
Costs and expenses 175.1 174.8 87.8 9.5 (41.2) 406.0
Depreciation and amortization 29.9 13.2 5.1 3.6 51.8
------------- ------------- ------------- ------------- ------------- -------------
Income from operations 38.3 21.1 14.2 4.4 78.0
Other income (loss), net 0.2 0.4 (0.4) 1.8 0.3 2.3
Equity in losses of
unconsolidated affiliates (0.3) (0.3)
------------- ------------- ------------- ------------- ------------- -------------
Income before interest
and income taxes $ 38.5 $ 21.5 $ 13.8 $ 5.9 $ 0.3 $ 80.0
============= ============= ============= ============= ============= =============
</TABLE>
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.2 million and
$2.7 million for the three and six months ended June 30, 1999, respectively, and
$2.3 million and $4.9 million for the three and six months ended June 30, 1998,
respectively, is equal to the Company's income before income taxes and minority
interests on a consolidated basis for the corresponding quarter.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The discussions set forth in this Quarterly Report on Form 10-Q contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Quarterly Report, including assumptions about risks and uncertainties faced by
the Company. Readers can identify these forward-looking statements by the use of
such verbs as expects, anticipates, believes or similar verbs or conjugations of
such verbs. If any of management's assumptions prove incorrect or should
unanticipated circumstances arise, the Company's actual results could materially
differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's amended
Current Report on Form 8-K dated March 25, 1999, which is hereby incorporated by
reference. This report has been filed with the United States Securities and
Exchange Commission ("SEC") in Washington, D.C. and can be obtained by
contacting the SEC's Public Reference Branch. Readers are strongly encouraged to
obtain and consider the factors listed in the March 25, 1999 Current Report and
any amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company will not update any
forward-looking statements in this Quarterly Report to reflect future events or
developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included in
this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998.
INTRODUCTION
The Company has several operating business units that offer sophisticated
information processing and software services and products. These operating
business units have been aggregated into three operating segments (Financial
Services, Output Solutions and Customer Management). In addition, certain
investments in equity securities, financial interests and real estate holdings
have been aggregated into an Investments and Other Segment. A summary of each of
the Company's segments follows:
Financial Services
The Financial Services Segment provides sophisticated information processing and
computer software services and products primarily to mutual funds, investment
managers, insurance companies, banks and other financial services organizations.
Output Solutions
The Output Solutions Segment provides complete statement processing services and
solutions, including electronic presentment, which include generation of
customized statements that are produced in sophisticated automated facilities
designed to minimize turnaround time and mailing costs.
Customer Management
The Customer Management Segment provides sophisticated customer management
processing and computer software services and products to cable television,
direct broadcast satellite (DBS), wire-line telephony and multi-service
providers.
Investments and Other
The Investments and Other Segment holds certain investments in securities,
financial interests, the Company's real estate subsidiaries and the Company's
hardware leasing subsidiary.
13
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------- -----------------------------
Operating results 1999 1998 1999 1998
------------- ------------- ------------- --------------
Revenues
<S> <C> <C> <C> <C>
Financial Services $ 138.3 $ 122.4 $ 272.9 $ 243.3
Output Solutions 118.9 103.4 240.0 209.1
Customer Management 52.3 55.7 100.5 107.1
Investments and Other 8.5 8.9 16.7 17.5
Eliminations (18.4) (20.6) (37.7) (41.2)
------------- ------------- ------------- --------------
$ 299.6 $ 269.8 $ 592.4 $ 535.8
============= ============= ============= ==============
% change from prior year periods 11.0% 18.3% 10.6% 17.1%
Income from operations
Financial Services $ 32.6 $ 20.0 $ 61.8 $ 38.3
Output Solutions 12.0 8.0 28.5 21.1
Customer Management 4.3 7.3 6.5 14.2
Investments and Other 2.5 2.3 4.5 4.4
------------- ------------- ------------- --------------
51.4 37.6 101.3 78.0
Interest expense (1.2) (2.3) (2.7) (4.9)
Other income, net (0.9) 1.3 0.8 2.3
Equity in earnings (losses) of unconsolidated
affiliates, net of income taxes 2.6 0.1 4.8 (0.3)
------------- ------------- ------------- --------------
Income before income taxes and
minority interests 51.9 36.7 104.2 75.1
Income taxes 18.6 13.6 37.4 27.9
Minority interests (0.1) (0.2) (0.2) (0.2)
------------- ------------- ------------- --------------
Net income $ 33.4 $ 23.3 $ 67.0 $ 47.4
============= ============= ============= ==============
Basic earnings per share $ 0.53 $ 0.37 $ 1.06 $ 0.76
Diluted earnings per share $ 0.52 $ 0.36 $ 1.04 $ 0.74
</TABLE>
Consolidated revenues
Consolidated revenues for the three and six months ended June 30, 1999 increased
$29.8 million and $56.6 million, respectively, which represent an increase of
11.0% and 10.6%, respectively, over the comparable periods in 1998. U.S.
revenues for the three and six months ended June 30, 1999 were $256.8 million
and $508.4 million, respectively, an increase of 10.7% and 9.5%, respectively,
over the same periods in 1998. International revenues for the three and six
months ended June 30, 1999 were $42.8 million and $84.0 million, respectively,
an increase of 12.9% and 17.5%, respectively, over the same periods in 1998.
Financial Services Segment revenues for the three and six months ended June 30,
1999 increased $15.9 million and $29.6 million, respectively, or 13.0% and
12.2%, respectively, over the same periods in 1998. U.S. Financial Services
Segment revenues for the three and six months ended June 30, 1999 increased
$11.6 million and $19.5 million, respectively, or 12.4% and 10.4%, respectively,
over the same periods in 1998, primarily from an increase in mutual fund
shareowner accounts processed. U.S. mutual fund shareowner accounts serviced
totaled 53.3 million at June 30, 1999, an increase of 7.0% from the 49.8 million
serviced at December 31, 1998 and an increase of 10.6% from the 48.2 million
serviced at June 30, 1998.
14
Output Solutions Segment revenues for the three and six months ended June 30,
1999 increased $15.5 million and $30.9 million, respectively, or 15.0% and
14.8%, respectively, over the same periods in 1998. Revenue growth resulted from
increased volume of images and statements produced from U.S. mutual fund
shareowner account growth, new customers, and internal growth of existing
customers primarily in telecommunications and other industries. Output Solutions
Segment images produced for the three and six months ended June 30, 1999
increased 26.1% and 26.1%, respectively, to 1,502.5 million and 3,066.3 million,
respectively, and statements mailed increased 18.5% and 11.4%, respectively, to
406.8 million and 822.9 million, respectively, compared to the same periods in
1998.
Customer Management Segment revenues, exclusive of Tele-Communications, Inc.
("TCI"), a discontinued customer, for the three and six months ended June 30,
1999 increased $3.1 million and $6.6 million, respectively, or 6.8% and 7.7%,
respectively, over same periods in 1998, as processing and software service
revenues increased $4.5 million and $10.5 million, respectively, for the three
and six months ended June 30, 1999 offset by decreases in equipment sales and
services of $1.4 million and $3.9 million, respectively, for the three and six
months ended June 30, 1999. Processing and software service revenues increased
primarily from subscriber growth, increased prices and migration of clients to
higher value services. Overall Customer Management Segment revenues for the
three and six months ended June 30, 1999 decreased $3.4 million and $6.6
million, respectively, or 6.1% and 6.2%, respectively, over the same periods in
1998 as a result of a decrease in processing and software service revenues and
equipment sales.
Investments and Other Segment revenues decreased $0.4 million and $0.8 million,
respectively, or 4.5% and 4.6%, respectively, for the three and six months ended
June 30, 1999, as compared to the same periods in 1998. Segment revenues are
primarily rental income for facilities leased to the Company's operating
segments and hardware leasing activities.
Income from operations
Consolidated income from operations for the three and six months ended June 30,
1999, increased $13.8 million and $23.3 million, respectively, or 36.7% and
29.9%, respectively, over same periods in 1998. The growth during these periods
was primarily a result of respective increases for such periods in the Financial
Services Segment of $12.6 million and $23.5 million, or 63.0% and 61.4%, which
resulted in respective operating margins of 23.6% and 22.6% for the Financial
Services Segment for the three and six months ended June 30, 1999, compared to
respective margins of 16.3% and 15.7% for the same periods in 1998. The increase
in 1999 Financial Services Segment operating margin resulted from increased U.S.
revenues, capitalization of internal use software costs under SOP 98-1, and an
improvement in international operations.
Output Solutions Segment income from operations for the three and six months
ended June 30, 1999 increased $4.0 million and $7.4 million, respectively, or
50.0% and 35.1%, respectively, over the same periods in 1998. Output Solutions
Segment operating margin was 10.1% and 11.9%, respectively, for the three and
six months ended June 30, 1999 compared to 7.7% and 10.1%, respectively, for the
same periods in 1998. The improvement in the 1999 operating margin results are
primarily from increased U.S. revenue.
In the second quarter 1999, Customer Management Segment income from operations
decreased $3.0 million or 41.1% compared to the prior year quarter, resulting in
an operating margin of 8.2% as compared to 13.1% for the prior year. For the six
months ended June 30, 1999, Customer Management Segment income from operations
decreased $7.7 million or 54.2% compared to the six months ended June 30, 1998,
resulting in an operating margin of 6.5% as compared to 13.3% for the prior
year. The decreases were primarily attributable to increased product development
costs, the consolidation of Custima International Holdings, plc ("Custima")
operations and a decrease in revenues, partially offset by a decrease in
equipment costs related to sales to customers.
15
Investments and Other Segment income from operations was $2.5 million and $4.5
million, respectively, for the three and six months ended June 30, 1999, as
compared to $2.3 million and $4.4 million, respectively, for the three and six
months ended June 30, 1998.
The Company experienced increases in costs 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 least through the Year 2000 at rates
above general inflation.
Interest expense
Interest expense totaled $1.2 million and $2.7 million, respectively, for the
three and six months ended June 30, 1999, down from $2.3 million and $4.9
million recorded in the comparable periods in 1998. Average debt balances were
lower in 1999 compared to 1998.
Other income, net
Other income and losses were a loss of $0.9 million and income of $0.8 million,
respectively, for the three and six months ended June 30, 1999, a decrease of
$2.2 million and $1.5 million over the comparable periods in 1998, principally
from net losses on equipment dispositions of $2.9 million and $2.5 million,
respectively, for the three and six months ended June 30, 1999, partially offset
by higher levels of interest and dividend income. Included in other income
during the three and six months ended June 30, 1999 were gains from the sale of
available-for-sale securities of $0.6 million and $3.9 million, respectively,
offset by impairment charges related to other available-for-sale securities of
$0.1 million and $3.5 million, respectively.
Equity in earnings (losses) of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates respectively totaled $2.6
million and $4.8 million for the three and six months ended June 30, 1999, as
compared to respective equity in earnings (losses) of unconsolidated affiliates
of $0.1 million and ($0.3) million for the three and six months ended June 30,
1998. Increased earnings were recorded at Boston Financial Data Services from
higher levels of mutual fund activity and at Argus as claims processed
increased. The Company recorded respective losses from European Financial Data
Services (EFDS) of $0.5 million and $1.9 million for the three and six months
ended June 30, 1999, a reduction from $2.2 million and $4.8 million of losses,
respectively, for the three and six months ended June 30, 1998. EFDS losses
decreased from the three and six months ended June 30, 1998 as a result of
increased operating earnings as accounts serviced totaled 1.7 million at June
30, 1999, an increase of 0.3 million over both year-end 1998 and June 30, 1998,
which was partially offset by higher system development and conversion costs for
FAST2000. In addition, the Company's share of internal use software development
costs capitalized by EFDS for the three and six months ended June 30, 1999 was
$0.8 million and $1.6 million, respectively.
Income taxes
The Company's effective tax rate was 35.8% and 35.9%, respectively, for the
three and six months ended June 30, 1999, as compared to 37.1% and 37.2%,
respectively, for the three and six months ended June 30, 1998. The 1999 tax
rate was affected by tax benefits relating to certain international operations
and recognition of state tax benefits associated with income apportionment
rules.
16
Business Segment Comparisons
FINANCIAL SERVICES SEGMENT
Revenues
Financial Services Segment revenues for the three and six months ended June 30,
1999 increased 13.0% and 12.2%, respectively, over the same periods in 1998 to
$138.3 million and $272.9 million, respectively. U.S. Financial Services revenue
increased 12.4% to $105.4 million and 10.3% to $207.8 million for the three and
six months ended June 30, 1999, respectively. U.S. mutual fund processing
revenues for the three and six months ended June 30, 1999 increased 14.2% and
13.0%, respectively, over the prior year periods as shareowner accounts serviced
increased 10.6% from 48.2 million at June 30, 1998 to 53.3 million at June 30,
1999. In the first quarter 1998, the Company recognized a one-time $2.6 million
contract termination fee from Zurich Kemper Investments as a result of its
merged operations with Scudder. Exclusive of the termination fee, U.S. Financial
Services would have increased 11.9% for the six months ended June 30, 1999. U.S.
AWD product revenues for the six months ended June 30, 1999 increased 11.7% over
the same period in the prior year primarily due to an increase in the number of
AWD workstations licensed.
Financial Services Segment revenues from international operations for the three
and six months ended June 30, 1999 increased 15.0% to $32.9 million and 18.6% to
$65.1 million, respectively. The revenue increase resulted primarily from
increased investment accounting software maintenance and services and growth in
Canadian mutual fund shareowner processing and service revenues.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 1999
increased 2.5% to $91.1 million and 3.7% to $181.6 million, respectively, over
the comparable periods in 1998. Personnel costs for the three and six months
ended June 30, 1999, exclusive of amounts capitalized for internal use software,
increased 5.2% and 6.9%, respectively, over the comparable prior year periods as
a result of increased staff levels to support volume growth, development costs
for the Company's new securities transfer system (Fairway) and increased wages
for data processing professionals. In addition, the renegotiation of certain
third party software agreements, effective March 31, 1998, resulted in certain
amounts being recorded as costs and expenses instead of as depreciation expense.
Depreciation and amortization
Segment depreciation and amortization for the three months ended June 30, 1999
increased 8.1% or $1.1 million and for the six months ended June 30, 1999
decreased 1.3% or $0.4 million over the comparable periods in 1998. The
decrease for the six months ended June 30, 1999 is primarily attributable to a
one-time write-off of intangible assets totaling $3.2 million in the first
quarter 1998 and by the renegotiation of certain third party software
agreements, effective March 31, 1998, resulting in certain amounts being
recorded as costs and expenses instead of as depreciation expense.
Income from operations
The Segment's income from operations for the three and six months ended June 30,
1999 increased 63.0% to $32.6 million and 61.4% to $61.8 million, respectively,
over the comparable prior year periods. The Segment's operating margins were
23.6% and 22.6%, respectively, for the three and six months ended June 30, 1999
and 16.3% and 15.7%, respectively, for the three and six months ended June 30,
1998. The increases in Financial Services Segment operating margins are a result
of increased U.S. revenues, capitalization costs of internal use software of
$4.8 million and $8.7 million, respectively, for the three and six months ended
June 30, 1999, and an improvement in international operations.
17
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three and six months ended June 30,
1999 increased 15.0% to $118.9 million and 14.8% to $240.0 million,
respectively, as compared to the same periods in 1998. The growth in segment
revenue was derived primarily from an increase in the volume of statements and
images produced because of the growth of existing customers in the Financial
Services Segment, new customers and internal growth of existing customers,
primarily in telecommunications and other high-volume markets.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 1999
increased 11.6% to $99.0 million and 12.4% to $196.5 million, respectively, over
the comparable prior year periods. Personnel costs for the three and six months
ended June 30, 1999 increased 15.4% and 17.5%, respectively, over the comparable
prior year periods as a result of increased staff levels to support volume
growth and research and development costs relating primarily to ongoing product
development partially offset by the capitalization of costs related to the
development of software for internal use.
Depreciation and amortization
Depreciation and amortization for the three and six months ended June 30, 1999
increased 17.9% to $7.9 million and 13.6% to $15.0 million, respectively, as
compared to the same periods in 1998 related to the expansion of certain bill
processing lines and other equipment.
Income from operations
The increase in the Segment's income from operations for the three and six
months ended June 30, 1999 of $4.0 million or 50.0% and $7.4 million or 35.1%,
respectively, over the same periods in 1998 is primarily attributable to
realizing processing efficiencies and economies of scale and the effect of
capitalizing $0.5 million and $1.6 million, respectively, of internal use
software development costs for the three and six months ended June 30, 1999. The
Segment's operating margins were 10.1% and 11.9%, respectively, for the three
and six months ended June 30, 1999, and 7.7% and 10.1%, respectively, for the
three and six months ended June 30, 1998.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Exclusive of revenues from TCI, the revenue increase for the three and six
months ended June 30, 1999 was $3.1 million or 6.8%, and $6.6 million or 7.7%,
respectively, as compared to the prior year as processing and software service
revenues increased $4.5 million and $10.5 million, respectively, for the three
and six months ended June 30, 1999, offset by decreases in equipment sales and
services of $1.4 million and $3.9 million, respectively, for the three and six
months ended June 30, 1999. The growth in Customer Management Segment software
and services revenues, exclusive of revenue from TCI, came primarily from
increases in the number of subscribers of existing and new clients in the U.S.
and international markets, increases in prices allowed by existing contracts,
migration of clients to higher-priced services, and the inclusion of $3.6
million of revenues for the six months ended June 30, 1999 from the acquisition
of Custima in the third quarter of 1998. During the six months ended June 30,
1999, TCI continued to remove subscribers from the Company's systems. TCI
related revenues and percentage of total Customer Management Segment revenues
for the three and six months ended June 30, 1999 totaled $3.8 million and 7.3%,
and $8.3 million and 8.3%, respectively, as compared to $10.3 million and 18.5%,
and $21.5 million and 20.1%, respectively, for the three and six months ended
June 30, 1998. TCI subscribers serviced by the Company totaled 2.0 million, 2.4
million and 7.2 million, respectively, at June 30, 1999, December 31, 1998 and
June 30, 1998. The Company expects the TCI subscriber count to decrease to
approximately 0.9 million by September 1999.
18
Customer Management Segment revenues for the three and six months ended June 30,
1999 decreased 6.1% to $52.3 million, and 6.2% to $100.5 million, respectively,
from $55.7 million and $107.1 million, respectively, for the three and six
months ended June 30, 1998. Equipment sales and services revenue decreased to
$4.8 million and $8.1 million, respectively, for the three and six months ended
June 30, 1999, from $6.6 million and $12.9 million, respectively, for the three
and six months ended June 30, 1998.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 1999
decreased $1.2 million or 2.6%, and $0.8 million or 1.0%, respectively,
primarily attributable to a decrease in equipment costs related to sales to
customers offset by increased product development costs and the consolidation of
Custima's operations.
Depreciation and amortization
Depreciation and amortization increased $0.8 million and $1.9 million,
respectively, for the three and six months ended June 30, 1999, or 30.8% and
38.0%, respectively, of which $0.5 million and $0.9 million, respectively, is
intangible amortization related to the Custima acquisition.
Income from operations
The Segment's income from operations for the three and six months ended June 30,
1999 decreased $3.0 million and $7.7 million, respectively, or 41.1% and 54.2%,
respectively, compared to the comparable periods in the prior year, resulting in
an operating margin of 8.2% and 6.5%, respectively, for the three and six months
ended June 30, 1999, as compared to 13.1% and 13.3%, respectively, for the three
and six months ended June 30, 1998.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $8.5 million and $16.7,
respectively, million for the three and six months ended June 30, 1999, as
compared to $8.9 million and $17.5 million, respectively, for the three and six
months ended June 30, 1998. Real estate revenues of $6.0 million and $11.8
million, respectively, for the three and six months ended June 30, 1999, as
compared to $6.6 million and $13.2 million, respectively, for the three and six
months ended June 30, 1998, were primarily derived from the lease of facilities
to the Company's other business segments. Revenues of $2.5 million and $4.9
million, respectively, for the three and six months ended June 30, 1999, as
compared to $2.3 million and $4.2 million, respectively, for the three and six
months ended June 30, 1998, were derived from the Segment's hardware leasing
activities.
Costs and expenses
Investments and Other Segment costs and expenses decreased in the three and six
months ended June 30, 1999, respectively, as compared the three and six months
ended June 30, 1998, respectively, primarily as a result of changes in real
estate related costs.
Depreciation and amortization
Investments and Other Segment depreciation and amortization increased $0.1
million and $0.2 million, respectively, for the three and six months ended June
30, 1999, over the same periods in 1998, as a result of increased depreciation
related to additional real estate activities and an increase in depreciation
related to equipment leased to customers.
Income from operations
The segment's income from operations totaled $2.5 million and $4.5 million,
respectively, for the three and six months ended June 30, 1999, as compared to
$2.3 million and $4.4 million, respectively, for the three and six months ended
June 30, 1998.
19
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $86.8 million for the
six months ended June 30, 1999. Operating cash flows for the six months ended
June 30, 1999 were impacted by net income of $67.0 million, depreciation and
amortization of $55.3 million, a decrease in accounts payable and accrued
liabilities of $33.0 million partially offset by a net decrease in accounts
receivable and other current assets of $8.9 million.
Cash flows used in investing activities totaled $48.1 million for the six months
ended June 30, 1999. The Company expended $55.6 million during the six months
for capital additions including $9.6 million for assets placed in service in
1998 but not paid for until 1999. Investments and advances to unconsolidated
affiliates totaled $11.7 million relating to funding the development of FAST2000
at EFDS and other investments. During the six months ended June 30, 1999, the
Company received $11.3 million from the sale of investments in
available-for-sale securities.
Cash flows used in financing activities totaled $8.0 million for the six months
ended June 30, 1999. Proceeds from debt to finance the Company's equipment
leasing activities totaled $11.5 million during the period. The Company
maintains $90 million in bank lines of credit for working capital requirements
and general corporate purposes, of which $60 million matures May 2000 and $30
million matures December 2000. The Company also maintains a $125 million
revolving credit facility with a syndicate of U.S. and international banks which
is available through December 2001. Net payments under these facilities totaled
$13.0 million for the six months ended June 30, 1999, bringing total borrowings
under these facilities to $10.1 million.
In December 1998, the Board of Directors approved a plan to repurchase 600,000
shares of common stock at a rate of approximately 25,000 shares per month
beginning in February 1999 to provide additional shares for use under various
DST option and benefit programs needed as a result of the USCS Merger. Such
purchases may be made in private or market transactions and will be made in
compliance with SEC regulations. The Company repurchased 125,000 shares during
the six months ended June 30, 1999 for $7.2 million under this plan.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will suffice to meet the
Company's operating and debt service requirements and other current liabilities
for at least the next 12 months. Further, the Company believes that its longer
term liquidity and capital requirements will also be met through cash provided
by operating activities and bank credit facilities, as well as the Company's
$125 million revolving credit facility described above.
OTHER
Software development and maintenance. Effective January 1, 1999, DST adopted, as
required, Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, which requires that certain
costs incurred for the development of internal use software be capitalized.
Prior to the adoption of SOP 98-1, the Company expensed the costs of internally
developed proprietary software as incurred. For the three and six months ended
June 30, 1999, the Company capitalized $6.1 million and $11.9 million,
respectively, of costs related to the development of internal use software
consisting of $5.6 million and $10.3 million, respectively, for the Financial
Services Segment for the three and six months ended June 30, 1999, and $0.5
million and $1.6 million, respectively, for the Output Solutions Segments for
the three and six months ended June 30, 1999. If internal use software
development costs had been expensed rather than capitalized, consolidated net
income for the three and six months ended June 30, 1999 would have been $29.5
million ($0.47 per basic share, $0.46 per diluted share) and $59.4 million
($0.94 per basic share, $0.92 per diluted share), respectively.
20
Comprehensive income. The Company's comprehensive income totaled $116.2 million
and $144.8 million, respectively, for the three and six months ended June 30,
1999, as compared to $73.3 million and $205.6 million, respectively, for the
three and six months ended June 30, 1998. Comprehensive income consists of net
income of $33.4 million and $67.0 million, respectively, and other comprehensive
income of $82.8 million and $77.8 million, respectively, for the three and six
months ended June 30, 1999, and net income of $23.3 million and $47.4 million,
respectively, and other comprehensive income of $50.0 million and $158.2
million, respectively, for the three and six months ended June 30, 1998. Other
comprehensive income consists of unrealized gains (losses) net of deferred taxes
on available-for-sale securities and foreign currency translation adjustments.
USCS Merger Integration Costs. In December 1998, DST's management approved plans
which include initiatives to integrate the operations of certain DST and USCS
subsidiaries and consolidate certain facilities. Total accrued integration costs
of $16.9 million were recorded in the fourth quarter of 1998, of which $0.7
million, $12.8 million and $3.4 million related to the Financial Services,
Output Solutions, and Customer Management Segments, respectively. $8.0 million
of these costs were utilized during 1998.
The Company paid $0.6 million in the quarter ended June 30, 1999 and $0.8
million for the six months ended June 30, 1999 related to the accrued
integration costs. Of the remaining accrued integration costs of $8.1 million at
June 30, 1999, $0.4 million, $6.1 million, and $1.6 million relate to the
Financial Services, Output Solutions, and Customer Management Segments,
respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 1999 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
1999 through 2003. Location closures are planned to occur through the year 2000
once arrangements have been made to process continuing business at other
facilities. Three of the locations have been closed as of June 30, 1999. The
costs of transitioning the continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things additional employee
costs, relocation costs and integration costs of moving to common internal
systems. Although precise estimates cannot be made, management does not believe
such costs will have a materially adverse effect on the Company's consolidated
results of operations, liquidity or financial position.
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 depend 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 the Company's customers or suppliers to be Year 2000
ready could have a material adverse effect on the Company.
21
The Company has completed its review and evaluation of its mission critical U.S.
shareowner accounting and U.S. portfolio accounting related products, services
and internal systems and achieved material Year 2000 readiness in such products,
services and systems as of December 31, 1998. The Company anticipates readiness
for its other mission critical systems and products by September 30, 1999. The
Company will continue testing its systems with clients and other third parties
for Year 2000 related issues as needed throughout 1999, as well as assisting
clients with interrelated hardware and software upgrades, subject to the
cooperation of such third parties. The Company licenses certain of its software
products to third parties. The Company expects that customers which elect to
upgrade to current versions will be provided with Year 2000 ready software by
September 30, 1999. In certain cases, the Company will be required under
applicable maintenance contracts to provide Year 2000 ready software free of
charge. The Company believes that the cost of such upgrades will be immaterial.
The Company believes it will not experience any material Year 2000 problems from
most of its major vendors and suppliers; however, the Company is unable to
determine whether certain suppliers, principally the Company's utilities
providers, will likely be Year 2000 ready in time. As part of addressing its
Year 2000 issues, the Company is developing contingency plans. The Company has
had for several years formal contingency plans, including an uninterruptable
power supply with permanent generator backup, for its Winchester and Poindexter
Data Centers in the event of a natural disaster. The contingency plans have been
reviewed with respect to failures that could be caused by Year 2000 issues. The
Company has formalized contingency plans for its U.S. shareowner accounting and
U.S. portfolio accounting business units, which would incorporate Year 2000
related contingencies, and has tested these contingency plans. The Company
expects to formalize contingency plans for its other mission critical products,
services and systems and to test the contingency plans by October 31, 1999.
There can be no assurances that an acceptable contingency plan can be developed
for certain suppliers, such as utilities, or that any such plan would
successfully protect the Company from any Year 2000 exposure. The costs to
address the Year 2000 related issues to date have not been material, and the
Company does not anticipate such costs to become material in the future.
Although the Company is not aware of any material operational or financial Year
2000-related issues not being addressed, the Company cannot assure 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 or 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.
22
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the operations of its businesses, the Company's financial results can be
affected by changes in interest rates, currency exchange rates and equity
pricing. Changes in interest rates and exchange rates have not materially
impacted the consolidated financial position, results of operations or cash
flows of the Company. Changes in equity values of the Company's investments have
had a material effect on the Company's comprehensive income and financial
position.
Interest rate risk
At June 30, 1999, the Company had $52.9 million of long-term debt, of which
$13.7 million was subject to variable interest rates (Federal Funds rates, LIBOR
rates, Prime rates). The Company estimates that a 10% increase in interest rates
would not be material to the Company's consolidated pretax earnings for 1999 or
to the fair value of its debt.
Foreign currency exchange rate risk
The operation of the Company's subsidiaries in international markets results in
exposure to movements in currency exchange rates. The principal currencies
involved are the Canadian dollar, the Australian dollar and the British pound.
As currency exchange rates change, translation of the financial results of
international operations into U.S. dollars does not now materially affect, and
has not historically materially affected, the consolidated financial results of
the Company.
The Company's international subsidiaries use the local currency as the
functional currency. The Company translates all assets and liabilities at
month-end exchange rates and income and expense accounts at average rates during
the year. While it is generally not the Company's practice to enter into
derivative contracts, from time to time the Company and its subsidiaries do
utilize forward foreign currency exchange contracts to minimize the impact of
currency movements.
Equity price risk
The Company's investments in available-for-sale equity securities are subject to
price risk. The fair value of such investments, as of June 30, 1999 was
approximately $1.1 billion. The potential change in the fair value of these
investments, assuming a 10% change in prices would be approximately $115 million
on a pretax basis. As discussed under "Comprehensive Income" in Item 1 above,
net unrealized gains on the Company's investments in available-for-sale
securities have had a material effect on the Company's comprehensive income and
financial position.
23
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
The Company held its Annual Meeting of Stockholders on May 11, 1999. Proxies for
the meeting were solicited pursuant to Regulation 14A; there was no solicitation
in opposition to management's nominees for directors as listed in such Proxy
Statement and all such nominees were elected. Listed below is the matter voted
on at the Company's Annual Meeting. This matter is fully described in the
Company's Definitive Proxy Statement dated March 30, 1999. A total of 57,810,656
shares of Common Stock, or 91.8% of the shares of Common Stock outstanding on
the record date, were present in person or by proxy at the annual meeting. These
shares were voted on the following matter as follows:
1) Election of two directors for terms ending in 2002:
Thomas A. M. Jeannine
McDonnell Strandjord
------------------ ------------------
For 57,406,005 57,372,324
Withheld 404,651 438,332
================== ==================
Total 57,810,656 57,810,656
================== ==================
Based upon votes required for approval, this matter passed.
The terms of office of Directors James C. Castle, Thomas A. McCullough and
William C. Nelson will continue until the Annual Meeting of Stockholders in
2000. The terms of office of Directors A. Edward Allinson, George L. Argyros and
Michael G. Fitt will continue until the Annual Meeting of Stockholders in 2001.
If a stockholder desires to have a proposal included in DST's Proxy Statement
for next year's annual meeting of stockholders, the Corporate Secretary of DST
much receive such proposal on or before December 2, 1999, and the proposal must
comply with the applicable SEC regulations and with the procedures set forth is
DST's by-laws.
24
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
<S> <C> <C>
U.S. 53.3 49.8
Canada 1.9 1.6
United Kingdom (1) 1.7 1.4
TRAC-2000 mutual fund accounts (millions) (2) 2.9 2.5
TRAC-2000 participants (thousands) 987 905
IRA mutual fund accounts (millions) (2) 13.1 12.0
Portfolio Accounting System portfolios 2,031 1,962
Automated Work Distributor workstations 49,000 45,300
Customer Management Operating Data
Cable/satellite TV subscribers processed (millions)
Total before discontinued customer 36.8 35.6
Discontinued customer 2.0 2.4
--------------- ---------------
Total cable/satellite TV subscribers processed 38.8 38.0
=============== ===============
For the Six Months
Ended June 30,
1999 1998
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 3,066 2,432
Items mailed (millions) 823 739
</TABLE>
(1) Processed by EFDS, an unconsolidated affiliate of the Company
(2) Included in U.S. mutual fund shareowner accounts processed
25
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Document
4.15.1 First Amendment to the Registration Rights Agreements
dated June 30, 1999
4.15.2 Assignment, Consent and Acceptance to the Registration
Rights Agreement dated August 11, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated April
23, 1999, reporting the announcement of financial results for the quarter ended
March 31, 1999.
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 August 13, 1999.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President and Chief Financial Officer
(Principal Financial Officer)
26
FIRST AMENDMENT TO
REGISTRATION RIGHTS AGREEMENT
WHEREAS, DST Systems, Inc. ("DST") and Kansas City Southern Industries,
Inc. ("KCSI") are parties to that certain Registration Rights Agreement dated as
of October 24, 1995 (the "Agreement"); and
WHEREAS, DST and KCSI desire to amend the Agreement as set forth
herein.
NOW, THEREFORE, DST and KCSI agree as follows:
1. Capitalized terms used herein have the meaning set forth herein or
in the Agreement.
2. Clause (ii) of Section 1(b) of the Agreement is hereby amended to
read as follows:
"(ii) such securities shall have been distributed pursuant to
Rule 144 or KCSI otherwise transfers or disposes of such securities
without the written consent of DST."
3. Clause (a) of Section 1.(g) of the Agreement is hereby amended to
read as follows:
"(a) the date on which KCSI or its Permitted Assignee no
longer holds any Registrable Securities . . . ."
4. Section 1 of the Agreement is hereby amended to add a new
Section 1(h) to read as follows:
"(h) "Permitted Assignee" shall mean any entity to which
any rights under this Agreement are assigned with DST's written
consent."
5. Section 3(b) of the Agreement is hereby amended to read as follows:
(b)(i) if the registration referred to in the first sentence
of this Section 3 is to be an underwritten primary registration on
behalf of the Company, and the managing underwriter advised the Company
in writing that, in such firm's opinion, such offering would be
materially and adversely affected by the inclusion therein of the
Registrable Securities requested to be included therein, the Company
shall include in such registration: (1) first, all securities the
Company proposes to sell for its own account ("Company Securities"),
(2) second, up to the full number of Registrable Securities held by
KCSI and requested to be included in such registration by KCSI in
excess of the number or dollar amount of securities the Company
proposes to sell which, in the good-faith opinion of such managing
underwriter, can be sold without so materially and adversely affecting
such offering, and (3) third, an amount of other securities, if any,
requested to be included therein in excess of the number or dollar
amount of Company Securities and Registrable Securities held by KCSI
which, in the opinion of such underwriter(s), can be so sold without
materially and adversely affecting such offering (allocated among the
holders of such other securities in such proportions as such holders
and the Company may agree); and (ii) if the registration referred to in
the first sentence of this Section 3 is to be an underwritten secondary
registration on behalf of holders of securities (other than Registrable
Securities) of the Company (the "Other Holders"), and the managing
underwriter advises the Company in writing that in its good-faith
opinion such offering would be materially and adversely affected by the
inclusion therein of the Registrable Securities requested to be
included therein, the Company shall include in such registration the
amount of securities (including Registrable Securities) that such
managing underwriter advises can be sold allocated pro rata among the
Other Holders and KCSI, on the basis of the number of securities
(including Registrable Securities) requested to be included therein by
each Other Holder and KCSI;
6. Section 6 of the Agreement is hereby amended to read as follows:
6. Non-assignability of Registration Rights. The rights to
cause the Company to register Registrable Securities pursuant to this
Agreement are reserved for the use and benefit of KCSI and may not be
assigned or transferred by KCSI to any other person, without the
written consent of the Company.
7. This Amendment shall be effective as of June 30, 1999 (the
"Effective Date"). Except as amended hereby, the Agreement shall continue in
full force and effect in accordance with its terms.
IN WITNESS WHEREOF, DST and KCSI have caused this Amendment to be duly
executed by their authorized representatives as of the Effective Date.
DST SYSTEMS, INC.
By: /s/Kenneth V. Hager
Printed Name: Kenneth V. Hager
Title: Vice President and Chief Financial Officer
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By: /s/Landon H. Rowland
Printed Name: Landon H. Rowland
Title: President
ASSIGNMENT, CONSENT AND ACCEPTANCE
WHEREAS, DST Systems, Inc. ("DST") and Kansas City Southern Industries,
Inc. ("KCSI") are parties to that certain Registration Rights Agreement dated as
of October 24, 1995, amended as of June 30, 1999 (the "Agreement"), a copy of
which amendment is attached hereto as Exhibit A; and
WHEREAS, KCSI desires to assign all of its rights and obligations under
the Agreement to KCSI's wholly-owned subsidiary, Stilwell Financial, Inc.
("Stilwell") which may in turn desire to make further assignments, and DST
desires to consent to such assignments on certain terms and conditions.
NOW, THEREFORE, KCSI, DST and Stilwell agree as follows:
I. Defined Terms
Capitalized terms used herein shall have the meaning set forth herein
or in the Agreement.
II. Assignment
KCSI hereby transfers and assigns to Stilwell all of KCSI's rights and
obligations under the Agreement subject to the consent of DST and the acceptance
of Stilwell set forth below.
III. Consent to Transfers
A. DST consents to the transfer by KCSI to Stilwell of all of KCSI's
shares of DST common stock, and agrees that such shares shall continue to be
Registrable Securities; provided, however, that Stilwell is not an investment
advisor or investment company under the Investment Company Act of 1940 or
Investment Advisors Act of 1940, each as amended.
B. DST consents to the transfer by Stilwell to Stilwell Management,
Inc. ("Stilwell Management") of all of Stilwell's shares of DST common stock and
agrees that such shares shall continue to be Registrable Securities; provided,
however, that Stilwell owns at least ninety-five percent (95%) of Stilwell
Management's voting power and that by December 31, 1999 Stilwell Management is
not an investment advisor or investment company under the Investment Company Act
of 1940 or Investment Advisors Act of 1940, each as amended.
IV. Consent to Assignment
Pursuant to Section 6 of the Agreement, DST (1) consents to the above
assignment by KCSI to Stilwell, and (2) following distribution by KCSI to its
shareholders of all of the common stock of Stilwell, consents to Stilwell
assigning, at its discretion, the Agreement or registration rights as to some or
all of the Registrable Securities under the Agreement to (a) one or more direct
or indirect wholly-owned subsidiaries of Stilwell ("Stilwell Subsidiaries"),
and/or (b) a third party in connection with any transaction involving the sum of
One Hundred Million Dollars ($100,000,000.00) or more, which is a sale of
Registrable Securities in a private placement or a transaction in which Stilwell
or a Stilwell Subsidiary has the right or obligation to deliver Registrable
Securities in repayment of borrowed funds. This Consent to Assignment is subject
to the following:
(a) the entities to which the Agreement or rights thereunder
be assigned as set forth in clause 2 above ("Permitted Assigns") may
exercise rights under the Agreement only if (1) DST is notified in
writing in advance of the assignment of the identity of the Permitted
Assignee, the number of Registrable Shares to which the assignment
applies, and the substance of the transaction under which the
assignment is made; and (2) the Permitted Assignee agrees in writing to
be bound by all of the terms and conditions of the Agreement;
(b) all Permitted Assignees and Stilwell shall be considered
as one entity for purposes of Sections 2(e) and 3(b) of the Agreement,
except that Permitted Assignees (other than Stilwell and Stilwell
Subsidiaries) will not be, collectively, subject to the
one-time-in-any-twelve-month-period requirement of Section 2(e) of the
Agreement; and
(c) all notices required or permitted to be given by DST under
the Agreement may be given by DST to Stilwell only, regardless of any
assignment by Stilwell to Permitted Assignees.
V. Acceptance
Stilwell hereby accepts assignment of the Agreement by KCSI set forth
above subject to the terms and conditions of the Consent to Assignment by DST
set forth above, and Stilwell agrees to be bound by all of the terms and
conditions of the Agreement and to perform all of KCSI's obligations under the
Agreement.
Dated as of this 11th day of August, 1999.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By: /s/Landon H. Rowland
Printed Name: Landon H. Rowland
Title: President
DST SYSTEMS, INC.
By: /s/Kenneth V. Hager
Printed Name: Kenneth V. Hager
Title: Vice President and Chief Financial Officer
STILWELL FINANCIAL, INC.
By: /s/Danny R. Carpenter
Printed Name: Danny R. Carpenter
Title: Vice President and Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule, submitted as Exhibit 27.1 to Form 10-Q, contains summary
financial information extracted from the consolidated condensed balance sheet
and statement of income of DST Systems, Inc., Commission file no. 1-14036, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000714603
<NAME> DST Systems, Inc.
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 59
<SECURITIES> 0
<RECEIVABLES> 276
<ALLOWANCES> 0
<INVENTORY> 19
<CURRENT-ASSETS> 397
<PP&E> 838
<DEPRECIATION> 518
<TOTAL-ASSETS> 2,045
<CURRENT-LIABILITIES> 227
<BONDS> 38
0
0
<COMMON> 1
<OTHER-SE> 1,314
<TOTAL-LIABILITY-AND-EQUITY> 2,045
<SALES> 0
<TOTAL-REVENUES> 592
<CGS> 0
<TOTAL-COSTS> 491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3
<INCOME-PRETAX> 104
<INCOME-TAX> 37
<INCOME-CONTINUING> 67
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67
<EPS-BASIC> 1.06
<EPS-DILUTED> 1.04
</TABLE>
