UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
Date of Report (Date of earliest event reported) February 1, 1999
(Exact name of registrant as specified in its charter)
DST Systems, Inc.
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
Delaware 1-14036 43-1581814
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (816) 435-6568
Not Applicable
(Former name or former address, if changed since last report.)
<PAGE>
FORM 8-K
DST SYSTEMS, INC.
ITEM 1 CHANGES IN CONTROL OF REGISTRANT
Not applicable.
ITEM 2 ACQUISITION OR DISPOSITION OF ASSETS
Not applicable.
ITEM 3 BANKRUPTCY OR RECEIVERSHIP
Not applicable.
ITEM 4 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 5 OTHER EVENTS
See attached as an Exhibit to this Form 8-K a News Release released February 1,
1999 concerning the announcement of financial results.
ITEM 6 RESIGNATIONS OF REGISTRANT'S DIRECTORS
Not applicable.
ITEM 7 FINANCIAL STATEMENTS AND EXHIBITS
Not applicable.
ITEM 8 CHANGE IN FISCAL YEAR
Not applicable.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DST Systems, Inc.
/s/ Robert C. Canfield
Senior Vice President, General Counsel,
Secretary
Date: February 2, 1999
DST SYSTEMS, INC. ANNOUNCES FOURTH QUARTER AND FULL YEAR 1998 RESULTS
KANSAS CITY, MO (FEBRUARY 1, 1999) - DST Systems, Inc. (DST) announces financial
results for the three months and year ended December 31, 1998.
DST/USCS COMBINED RESULTS
On December 21, 1998, DST completed its merger (the USCS Merger) with USCS
International, Inc.(USCS) through the issuance of .62 shares of DST common
stock for each outstanding share of USCS common stock. DST issued approximately
13.8 million shares of common stock in the transaction. The USCS Merger was
accounted for under the pooling of interests accounting method. Accordingly, the
DST financial results have been restated to combine the historical results of
operations of DST and USCS, adjusted for conformity of accounting policies
relating primarily to USCS depreciation and amortization policies and accounting
for the costs of software developed for internal USCS use.
Fourth quarter 1998 results include recognition of merger charges of $19.4
million net of tax ($.30 per diluted share) comprised of $9.1 million of
transaction related expenses (recognized without any associated tax benefit) for
the USCS Merger and $16.9 million of integration costs ($10.3 million after tax)
related to the USCS Merger. The integration costs consist primarily of asset
impairment charges and costs of leased excess capacity and terminating certain
contractual obligations.
Combined net income for the fourth quarter 1998 exclusive of merger charges,
was $25.9 million ($.40 per diluted share), as compared to fourth quarter 1997
combined net income of $21.8 million ($.34 per diluted share), an 18.8% increase
in net income and a 17.6% increase in diluted earnings per share. Including the
effects of the merger charges, combined fourth quarter 1998 net income was $6.5
million ($.10 per diluted share).
1998 results were also affected by the third quarter 1998 purchase by USCS of
100% of Custima International plc (Custima Acquisition), a utility billing
software company. In connection with this transaction, USCS recorded a $6.0
million in process research and development charge (recognized without any
associated tax benefit) and a $1.1 million integration charge ($.7 million after
tax). Exclusive of the merger charges, combined 1998 net income was $97.7
million ($1.52 per diluted share), as compared to combined 1997 net income of
$79.4 million ($1.23 per diluted share), a 23.0% increase in net income and a
23.6% increase in diluted earnings per share. Including the USCS Merger and
Custima Acquisition charges net income for 1998 was $71.6 million ($1.11 per
diluted share).
Diluted earnings per share and diluted shares outstanding comparisons are as
follows:
Quarter ended Year Ended
December 31, December 31,
------------------------------ ------------------------------
1997 1998 1997 1998
---- ---- ---- ----
DST/USCS Combined $.34 $.40 $1.23 $1.52
Merger Charges -- (.30) -- (.41)
-------- -------- -------- --------
$.34 $.10 $1.23 $1.11
======== ======== ======== ========
Diluted shares 64.2 64.5 64.7 64.3
outstanding (millions) ======== ========= ========= ========
The combined companies consolidated revenues for the quarter ended December 31,
1998 totaled $291.5 million, an increase of 12.4% over the prior year quarter.
Year-to-date 1998 consolidated revenues totaled $1.1 billion, an increase of
15.4% over the prior year.
The combined companies consolidated income from operations for the quarter ended
December 31, 1998 excluding merger charges increased 9.2% over the prior year
quarter to $39.0 million and for 1998 increased 20.3% over the prior year to
$152.6 million.
The combined companies effective income tax rate, excluding the impact of the
merger charges, was 31.2% for the 1998 quarter as compared to 32.6% for the 1997
quarter and 34.5% for 1998 as compared to 34.9% for 1997.
DST SYSTEMS, INC. STAND ALONE RESULTS
Operating results for DST on a stand alone basis excluding USCS results and
merger charges are as follows:
<TABLE>
<CAPTION>
For the three months For the year ended
ended December 31, December 31,
--------------------------- -------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $176.7 $191.0 $650.7 $749.0
Costs and expenses 130.0 139.4 479.1 550.9
Depreciation and amortization 20.7 24.0 79.4 84.7
----------- ----------- ---------- -----------
Income from operations 26.0 27.6 92.2 113.4
I nterest expense (1.7) (1.6) (7.6) (7.7)
Other income, net 1.0 1.2 5.5 6.6
Equity in (losses) of unconsolidated affiliates (2.7) (1.2) (1.3) (2.7)
----------- ----------- ---------- -----------
Income before income taxes and minority interests 22.6 26.0 88.8 109.6
Income taxes 6.7 6.9 29.2 36.0
----------- ----------- ---------- -----------
Income before minority interests 15.9 19.1 59.6 73.6
Minority interests in income (losses) (.1) (.1) .6 (.3)
----------- ----------- ---------- -----------
Net income $16.0 $19.2 $59.0 $73.9
=========== =========== ========== ===========
</TABLE>
Quarter Ended December 31, 1998
DST revenues for the quarter ended December 31, 1998 totaled $191.0 million, an
increase of 8.1% over the prior year quarter. U.S. revenues were $156.1 million
for the quarter, an increase of 7.8% over comparable period 1997 revenues. This
revenue increase resulted principally from growth in mutual fund shareowner
processing revenues and the recognition of a $3.9 million contract termination
fee from GT Global who terminated its services with DST as a result of its
acquisition by the AIM Management Group. U.S. mutual fund shareowner accounts
serviced totaled 49.8 million at December 31, 1998, an increase of 1.8% from the
48.9 million serviced at September 30, 1998, and an increase of 10.7 % from the
45.0 million serviced at December 31, 1997. During the fourth quarter of 1998
new clients with 1.7 million accounts were added, while 1.7 million accounts
derived from a broker-dealer were converted to the broker-dealer's system.
Output services revenues increased as pages printed by Output Technologies (OTI)
in the U.S. increased 16.9% over fourth quarter 1997 volumes to 423.5 million
pages, although OTI recognized approximately $2.8 million of adverse revenue
adjustments that related principally to periods prior to the fourth quarter of
1998. AWD revenues increased as workstations licensed in the U.S. increased
32.3% over year end 1997 levels to 27,400 workstations. Satellite TV subscriber
revenues declined as increases in subscribers processed were more than offset by
lower change order development revenues recognized in fourth quarter 1998 due to
the timing of revenue recognition.
DST's international revenues totaled $34.9 million for the quarter ended
December 31, 1998, an increase of 9.4% over comparable prior year quarter
revenues. The revenue increase resulted primarily from increased investment
accounting software licenses and services and growth in Canadian mutual fund
shareowner processing revenues, partially offset by a decline in international
AWD license revenues because of a significant license fee recorded in the prior
year quarter.
DST consolidated income from operations increased 6.2% over the prior year
quarter to $27.6 million, with an operating margin of 14.5% compared to 14.7%
for the prior year quarter. U.S. income from operations increased 1.6% to $24.7
million. U.S. costs and expenses increased 7.1% principally due to increased
personnel costs to support business growth, third party software usage costs and
increases in development costs for DST's new securities transfer system
(Fairway). U.S. depreciation and amortization increased 20.1% or $3.7 million as
a result of fourth quarter capital additions necessary to add capacity for year
end processing and $1.8 million relating to a write off of personal computers
being replaced. Excluding the effects of the GT Global termination revenues, OTI
adjustments and the accelerated personal computer write off, the U.S. operating
margin would have been approximately 16.4% as compared to 16.8% in the prior
year quarter. International businesses posted an aggregate operating income of
$2.9 million for the quarter, an increase of $1.2 million or 71% over the prior
year quarter, primarily driven by higher revenues previously described.
DST recorded equity in losses of unconsolidated affiliates of $1.2 million for
the quarter ended December 31, 1998, compared to $2.7 million of equity in
losses recorded in the prior year quarter. Increased earnings were recorded at
Boston Financial Data Services, Inc. from higher levels of mutual fund activity
while earnings at Argus Health Systems, Inc.(Argus) were slightly lower. The
amount of DST's share of losses at European Financial Data Services decreased
from the prior year quarter, but were higher than third quarter 1998 as a result
of increased costs associated with FAST2000 development and conversion activity.
DST's effective tax rate was 26.5% for the fourth quarter of 1998, as compared
to 29.6% in the prior year quarter, resulting from recognition of the benefits
associated with new Missouri income apportionment rules designed to attract and
retain mutual fund service companies, tax credits associated with the
rehabilitation of historic property that will be used as office space, and
changes in the components of taxable income.
Year Ended December 31, 1998
DST consolidated revenues for the year ended December 31, 1998 increased 15.1%
over the prior year to $749.0 million. U.S. revenues increased 12.5% to $618.3
million, primarily from increased numbers of mutual fund accounts serviced, AWD
workstations licensed, output pages printed and DirecTV subscribers supported.
DST's international revenues for the year increased 29.5% to $130.7 million,
from increased investment accounting software and services, and Canadian mutual
fund processing volumes.
DST 1998 consolidated income from operations was $113.4 million, an increase of
$21.2 million, or 23.0%, over the comparable 1997 period. Consolidated operating
margin rose to 15.1% in 1998 from 14.2% in 1997.
DST recorded $2.7 million in equity in losses of unconsolidated affiliates for
the year ended December 31, 1998 compared to $1.3 million in equity in losses of
unconsolidated affiliates for the comparable 1997 period, primarily due to lower
earnings at Argus and non-recurring real estate debt refinancing costs.
DST's effective tax rate was 32.8% for 1998 and 32.9% for 1997.
USCS INTERNATIONAL, INC. RESULTS
Operating results for USCS nternational, Inc., on a stand-alone basis,
excluding any merger charges associated with the USCS Merger and the Custima
Acquisition, follow. The operating results of USCS have been adjusted to conform
with DST's accounting policies relating primarily to depreciation and
amortization policies and accounting for the cost of software for internal use.
<TABLE>
<CAPTION>
For the three months For the year ended
ended December 31, December 31,
------------------------- ------------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
---------- --------- --------- ----------
Total Revenues:
Revenues $68.8 $93.5 $246.2 $305.3
Discontinued customer 13.8 7.0 53.1 41.8
---------- --------- --------- ----------
82.6 100.5 299.3 347.1
Costs and expenses 67.7 82.8 242.6 286.9
Depreciation and amortization 5.2 6.3 22.0 21.0
---------- --------- --------- ----------
Income from operations 9.7 11.4 34.7 39.2
Interest expense (.2) (.1) (.9) (.9)
Other income, net .1 .2 .3 .8
---------- --------- --------- ----------
Income before income taxes 9.6 11.5 34.1 39.1
Income taxes 3.8 4.8 13.7 15.3
---------- --------- --------- ----------
Net income $5.8 $6.7 $20.4 $23.8
========== ========= ========= ==========
</TABLE>
Quarter Ended December 31, 1998
USCS consolidated revenues for the quarter ended December 31, 1998 totaled
$100.5 million, an increase of 21.7% over the prior year quarter. The increase
in the 1998 fourth quarter revenue over the same period in 1997 was attributed
to growth in revenue from customer management software and services of $3.0
million or 7%, growth in bill processing of $11.2 million or 35%, and an
increase in equipment sales and services of $3.7 million or 44%.
Exclusive of Tele-Communications, Inc. (TCI) (discontinued customer), revenue
increases for the quarter ended December 31, 1998, were 29% to $39.6 million for
customer management software and services, 37% to $42.9 million for bill
processing, and 65% to $11.0 million for equipment sales and services. Growth in
non-TCI customer management software and services revenue for the quarter,
resulted primarily from increases in the number of subscribers of existing and
new clients in the U.S. and international markets, migration of clients to
higher priced services and the acquisition of Custima, which contributed $3.3
million of revenue. Growth in bill processing revenue was derived from an
increase in the volume of statements and images produced caused by the internal
growth of existing customers and the acquisition of new customers, primarily in
telecommunications and other high volume markets. The increase in equipment
sales and services revenue was primarily the result of large equipment sales and
higher revenues related to leasing transactions. Equipment sale volumes
experienced in the fourth quarter of 1998 should not be considered indicative of
future equipment sales volumes.
USCS consolidated income from operations increased 17.5% over the prior year
quarter to $11.4 million, with an operating margin of 11.3% compared to 11.7% in
the prior year quarter. USCS experienced an increase in bill processing
operating margins from realizing processing efficiencies and economies of scale
as a result of the increase in volumes. This was offset by a decrease in
customer management software and services and equipment sales and services
operating margins. The decline in customer management software and services
operating margins is attributable to costs incurred in transitioning new
customers onto USCS' products and services while transitioning TCI off, and to a
lesser degree, the consolidation of Custima's operations. The decline in
equipment sales and services results from discounting equipment sales and
increased depreciation expense on leased equipment.
USCS' effective tax rate was 41.7% for the fourth quarter of 1998, as compared
to 39.6% in the prior year quarter. The change results from the tax benefits
associated with certain international operations.
Year Ended December 31, 1998
USCS consolidated revenues for the year ended December 31, 1998 totaled $347.1
million, an increase of 16.0% over the prior year. The increase in the 1998
revenue over 1997 was attributed to growth in revenue from customer management
software and services of $9.8 million or 6%, growth in bill processing of $30.1
million or 25%, and an increase in equipment sales and services of $7.9 million
or 34%.
Non-TCI revenue increases for the year ended December 31, 1998, were 18% to
$134.3 million for customer management software and services, 24% to $145.4
million for bill processing, and 67% to $25.6 million for equipment sales and
services. Growth in non-TCI customer management software and services revenue
for the year ended December 31, 1998 compared to the same period in 1997, came
primarily from increases in the number of subscribers of existing and new
clients in the U.S. and international markets, migration of clients to higher
priced services and the acquisition of Custima. Growth in bill processing
revenue was derived from an increase in the volume of statements and images
produced because of the internal growth of existing customers and the
acquisition of new customers, primarily in telecommunications and other high
volume markets. The increase in equipment sales and services revenue was
primarily the result of large equipment sales and higher revenues related to
leasing transactions.
USCS consolidated income from operations increased 13.0% over the prior year to
$39.2 million, with an operating margin of 11.3% compared to 11.6% in the prior
year. Increased bill processing operating margins resulted from processing
efficiencies and economies of scale as a result of the increase in volumes. This
was offset by a decrease in customer management software and services and
equipment sales and services operating margins. The decline in customer
management software and services operating margins is attributable to costs
incurred in transitioning new customers onto USCS' products and services while
transitioning TCI off, and to a lesser degree, the consolidation of Custima's
operations. The decline in equipment sales and services results from discounting
equipment sales and services and increased depreciation expense on leased
equipment.
USCS' effective tax rate for 1998 was 39.1% versus 40.2% in 1997.
OTHER MATTERS
The Board of Directors of DST has approved a plan for DST to repurchase 600,000
shares of DST common stock at the 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 information and comments above may include forward-looking statements
respecting DST and its businesses. Such information and comments are based on
DST's views as of today, and actual results could differ. There could be a
number of factors affecting future results, including those set forth in Form
S-4 dated November 20, 1998 filed by DST with the Securities and Exchange
Commission. All such factors should be considered in evaluating any
forward-looking comments.
<PAGE>
<TABLE>
<CAPTION>
DST SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(In millions, except per share amounts)
(Unaudited)
For the Three Months For the Year
Ended December 31, Ended December 31,
------------------------------- -------------------------------
1997 1998 1997 1998
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
Revenues $ 259.3 $ 291.5 $ 950.0 $1,096.1
Costs and expenses 197.7 222.2 721.7 837.8
Depreciation and amortization 25.9 30.3 101.4 105.7
Merger charges 26.0 33.1
--------- ----------- ----------- ------------
Income from operations 35.7 13.0 126.9 119.5
Interest expense (1.9) (1.7) (8.5) (8.6)
Other income, net 1.1 1.4 5.8 7.4
Equity in (losses) of unconsolidated affiliates (2.7) (1.2) (1.3) (2.7)
----- ----- ----- -----
Income before income taxes and minority
interests 32.2 11.5 122.9 115.6
Income taxes 10.5 5.1 42.9 44.3
----- ----- ----- -----
Income before minority interests 21.7 6.4 80.0 71.3
Minority interests in income (losses) (0.1) (0.1) 0.6 (0.3)
----- ----- ---- -----
Net income $ 21.8 $ 6.5 $ 79.4 $ 71.6
======= ====== ======= =======
Average common shares outstanding 63.0 62.8 63.6 62.7
Basic earnings per share $ 0.35 $ 0.10 $ 1.25 $ 1.14
Diluted shares outstanding 64.2 64.5 64.7 64.3
Diluted earnings per share $ 0.34 $ 0.10 $ 1.23 $ 1.11
</TABLE>
Note: The above financial results have been restated to combine the historical
results of DST and USCS as a result of their December 21, 1998 merger, which has
been accounted for under the pooling of interests accounting method.
NYSE & CSE Symbol: DST
Contact:
Thomas A. McDonnell (816) 435-8684
President and Chief Executive Officer
Kenneth V. Hager (816) 435-8603
Vice President and Chief Financial officer
