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, 2003
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 registrant 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
(Registrant'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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Number of shares outstanding of the Company's common stock
as of July 31, 2003:
Common Stock $0.01 par value - 115,671,587
1
DST Systems, Inc.
Form 10-Q
June 30, 2003
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
June 30, 2003 and December 31, 2002 4
Condensed Consolidated Statement of Income -
Three and Six months Ended June 30, 2003 and 2002 5
Condensed Consolidated Statement of Cash Flows -
Six months Ended June 30, 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26-27
Item 4. Controls and Procedures 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults Upon Senior Securities 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30
SIGNATURE 30
The brand, service or product names or marks referred to in this Report are
trademarks or services marks, registered or otherwise, of DST Systems, Inc. or
its subsidiaries and affiliates or of vendors to the Company.
2
DST Systems, Inc.
Form 10-Q
June 30, 2003
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 accounting principles
generally accepted in the United States of America 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, 2002.
The results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the results to be expected for the full year 2003.
3
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
June 30, December 31,
2003 2002
---------- -----------
ASSETS
Current assets
Cash and cash equivalents $ 72.6 $ 92.3
Transfer agency investments 59.3 61.6
Accounts receivable 405.4 394.7
Other current assets 119.1 116.5
---------- -----------
656.4 665.1
Investments 1,191.9 1,137.5
Properties 588.4 524.7
Goodwill 261.2 259.8
Intangibles 128.3 130.1
Other assets 34.2 27.0
---------- -----------
Total assets $ 2,860.4 $ 2,744.2
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 126.4 $ 59.2
Transfer agency deposits 59.3 61.6
Accounts payable 119.3 96.3
Accrued compensation and benefits 92.7 96.9
Deferred revenues and gains 94.4 79.7
Other liabilities 109.6 152.8
---------- -----------
601.7 546.5
Long-term debt 408.2 379.5
Deferred income taxes 330.8 308.7
Other liabilities 93.8 87.5
---------- -----------
1,434.5 1,322.2
---------- -----------
Commitments and contingencies (Note 7)
---------- -----------
Stockholders' equity
Common stock, $0.01 par; 300 million shares
authorized, 127.6 million shares issued 1.3 1.3
Additional paid-in capital 362.8 367.2
Retained earnings 1,273.6 1,169.2
Treasury stock (12.0 million and 8.0 million
shares, respectively), at cost (458.3) (326.6)
Accumulated other comprehensive income 246.5 210.9
---------- -----------
Total stockholders' equity 1,425.9 1,422.0
---------- -----------
Total liabilities and stockholders' equity $ 2,860.4 $ 2,744.2
========== ===========
The accompanying notes are an integral part of these financial statements.
4
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,
2003 2002 2003 2002
---------------- ---------------- -------------- ---------------
Operating revenues $ 431.0 $ 402.9 $ 862.7 $ 829.5
Out-of-pocket reimbursements 186.0 177.4 374.1 371.7
---------------- ---------------- -------------- ---------------
Total revenues 617.0 580.3 1,236.8 1,201.2
Costs and expenses 506.6 475.4 1,013.9 982.4
Depreciation and amortization 36.6 33.6 71.7 66.2
---------------- ---------------- -------------- ---------------
Income from operations 73.8 71.3 151.2 152.6
Interest expense (3.1) (2.9) (6.5) (5.7)
Other income, net 5.9 10.4 10.1 18.5
Equity in earnings of unconsolidated affiliates 3.7 2.6 3.4 5.1
---------------- ---------------- -------------- ---------------
Income before income taxes 80.3 81.4 158.2 170.5
Income taxes 27.3 27.7 53.8 58.0
---------------- ---------------- -------------- ---------------
Net income $ 53.0 $ 53.7 $ 104.4 $ 112.5
================ ================ ============== ===============
Average common shares outstanding 118.7 120.2 119.0 120.4
Diluted shares outstanding 119.6 122.1 120.2 122.4
Basic earnings per share $ 0.45 $ 0.45 $ 0.88 $ 0.93
Diluted earnings per share $ 0.44 $ 0.44 $ 0.87 $ 0.92
The accompanying notes are an integral part of these financial statements.
5
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
For the Six Months
Ended June 30,
2003 2002
---------------- ----------------
Cash flows -- operating activities:
Net income $ 104.4 $ 112.5
---------------- ----------------
Depreciation and amortization 71.7 66.2
Equity in earnings of unconsolidated affiliates (3.4) (5.1)
Net realized gain on investments (2.0) (7.4)
Deferred taxes (2.3) 6.7
Changes in accounts receivable (10.0) (9.4)
Changes in other current assets (5.5) (0.7)
Changes in accounts payable and accrued liabilities (19.4) 1.6
Changes in deferred revenues and gains 14.7 3.1
Changes in accrued compensation and benefits (2.0) 5.3
Other, net 2.1 6.1
---------------- ----------------
Total adjustments to net income 43.9 66.4
---------------- ----------------
Net 148.3 178.9
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of investments 22.5 30.0
Investments and advances to unconsolidated affiliates (6.6) (18.6)
Investments in securities (20.8) (27.2)
Capital expenditures (130.0) (123.2)
Payment for purchase of subsidiaries, net of cash acquired (2.8) (5.5)
Other, net 1.1 2.3
---------------- ----------------
Net (136.6) (142.2)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 2.5 16.7
Principal payments on long-term debt (53.1) (55.1)
Net increase in revolving credit facilities and notes payable 161.5 48.9
Common stock repurchased (142.3) (69.6)
---------------- ----------------
Net (31.4) (59.1)
---------------- ----------------
Net decrease in cash and cash equivalents (19.7) (22.4)
Cash and cash equivalents at beginning of period 92.3 84.4
---------------- ----------------
Cash and cash equivalents at end of period $ 72.6 $ 62.0
================ ================
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 United States Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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, 2002.
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, 2003 and December 31, 2002, and the
results of operations for the three and six months ended June 30, 2003 and 2002
and cash flows for the six months ended June 30, 2003 and 2002.
Certain amounts in the prior year's consolidated financial statements have been
reclassified to conform to the current year presentation.
The results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the results to be expected for the full year 2003.
2. EquiServe, Inc. ("EquiServe")
On March 30, 2001, DST completed the acquisition of a 75% interest in EquiServe
by purchasing interests held by FleetBoston Financial ("FleetBoston") and Bank
One Corporation ("Bank One"). On July 31, 2001, DST completed the acquisition of
the remaining 25%, which was owned by Boston Financial Data Services, on
essentially the same terms provided to FleetBoston and Bank One.
A restructuring provision of $15.9 million was recorded for employee severances
and supplier contract termination costs related to the acquisition. The Company
utilized $0.7 million and $2.0 million for the three and six months ended June
30, 2003, respectively, related to the restructuring provision for employee
severances. The restructuring provision for employee severance costs, which
affected employees across nearly all classifications and locations, was $12.5
million relating to approximately 610 employees, of which 608 employees have
been separated from the Company as of June 30, 2003. The remaining employee
severances of approximately $1.1 million are expected to be paid in 2003. The
restructuring provision will be utilized as such severance payments are made.
Contract termination costs of approximately $3.4 million were paid in 2001 that
related to facilities that were closed.
3. DST Output Restructuring
The Output Solutions segment is consolidating its operations into three primary
facilities and is closing certain other smaller facilities, which the Company
believes will result in operational efficiencies. Lease termination costs of
$1.6 million, which were accrued during 2002, are to be paid out over the
remaining lease terms from 2003 to 2004. Approximately 388 employees have been
separated from the Company as of June 30, 2003 and approximately a remaining 65
employees are expected to be separated in 2003. The remaining employee
severances to be paid out, which were accrued during 2002, total approximately
$1.7 million. The restructuring provision will be utilized as such severance
payments are made. The segment recorded costs associated with facility and other
consolidations of $0.8 million and $1.5 million, respectively, for the three and
six months ended June 30, 2003, consisting of facility closure and relocation
costs of $0.8 million, asset impairments of $0.3 million and other costs of $0.4
million for the six
7
months ended June 30, 2003. Additional charges of $1 million to $2 million
related to facility consolidations will be expensed when incurred, which the
Company believes will be in 2003.
4. Investments
Investments are as follows (in millions):
Carrying Value
2003 -----------------------------------
Ownership June 30, December 31,
Percentage 2003 2002
-------------------- ---------------- ----------------
Available-for-sale securities:
State Street Corporation 4% $ 504.0 $ 498.9
Computer Sciences Corporation 5% 329.1 297.4
Euronet Worldwide, Inc. 7% 20.3 14.2
Other available-for-sale securities 128.6 126.1
---------------- ----------------
982.0 936.6
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 73.5 69.3
International Financial Data Services, U.K. 50% 8.0 9.2
International Financial Data Services, Canada 50% 14.8 14.5
Other unconsolidated affiliates 83.0 77.4
---------------- ----------------
179.3 170.4
---------------- ----------------
Other:
Net investment in leases 1.1
Other 30.6 29.4
---------------- ----------------
30.6 30.5
---------------- ----------------
Total investments $ 1,191.9 $ 1,137.5
================ ================
Certain information related to the Company's available-for-sale securities is as
follows (in millions):
June 30, December 31,
2003 2002
----------------- -----------------
Cost $ 584.0 $ 592.8
Gross unrealized gains 398.8 347.5
Gross unrealized losses (0.8) (3.7)
----------------- -----------------
Market value $ 982.0 $ 936.6
================= =================
The Company recognized investment impairments of $1.6 million and $5.8 million
for the three and six months ended June 30, 2003, respectively, and $0.2 million
for the six months ended June 30, 2002. The Company did not recognize investment
impairments for the three months ended June 30, 2002. A decline in a security's
net realizable value that is other than temporary is treated as a realized loss
in the statement of operations and the cost basis of the security is reduced to
its estimated fair value.
8
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Boston Financial Data Services, Inc. $ 2.2 $ 1.8 $ 4.2 $ 3.7
International Financial Data Services, U.K. 0.1 (0.1) (2.2) (0.3)
International Financial Data Services, Canada 0.3 0.5 0.3 0.7
Other 1.1 0.4 1.1 1.0
-------------- -------------- -------------- ---------------
$ 3.7 $ 2.6 $ 3.4 $ 5.1
============== ============== ============== ===============
5. Goodwill and Intangibles
The following table summarizes intangible assets (in millions):
June 30, 2003 December 31, 2002
---------------------------------- ------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
---------------- --------------- ----------------- ---------------
Amortized intangible assets:
Customer relationships $ 136.0 $ 8.0 $ 134.5 $ 4.6
Other 0.3 0.2
---------------- --------------- ----------------- ---------------
Total $ 136.3 $ 8.0 $ 134.7 $ 4.6
================ =============== ================= ===============
Amortization of intangible assets for the three and six months ended June 30,
2003 was $1.9 million and $3.8 million, respectively. Amortization of intangible
assets for the three and six months ended June 30, 2002 was $0.4 million and
$0.9 million, respectively. Annual amortization for intangible assets recorded
as of June 30, 2003 is estimated at $7.6 million for 2003 and $7.7 million for
each of the years 2004, 2005, 2006 and 2007.
The following table summarizes the changes in the carrying amount of goodwill
for the six months ended June 30, 2003, by segment (in millions):
December 31, June 30,
2002 Acquisitions Other 2003
--------------- ---------------- ---------------- ----------------
Financial Services $ 245.5 $ 2.0 $ (0.7) $ 246.8
Output Solutions 8.9 0.1 9.0
Customer Management 5.4 5.4
--------------- ---------------- ---------------- ----------------
Total $ 259.8 $ 2.0 $ (0.6) $ 261.2
=============== ================ ================ ================
9
6. Stockholders' Equity
Earnings per share. The computation of basic and diluted earnings per share is
as follows (in millions, except per share amounts):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
--------------- --------------- --------------- --------------
Net income $ 53.0 $ 53.7 $ 104.4 $ 112.5
=============== =============== =============== ==============
Average common shares outstanding 118.7 120.2 119.0 120.4
Incremental shares from assumed
conversions of stock options and
forward purchase agreements 0.9 1.9 1.2 2.0
--------------- --------------- --------------- --------------
Diluted potential common shares 119.6 122.1 120.2 122.4
=============== =============== =============== ==============
Basic earnings per share $ 0.45 $ 0.45 $ 0.88 $ 0.93
Diluted earnings per share $ 0.44 $ 0.44 $ 0.87 $ 0.92
Comprehensive income (loss). Components of comprehensive income (loss) consist
of the following (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------- ------------- -------------- --------------
Net income $ 53.0 $ 53.7 $ 104.4 $ 112.5
-------------- ------------- -------------- --------------
Other comprehensive income (loss):
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 170.1 (169.9) 53.1 (117.3)
Less reclassification adjustments for net
(gains) losses included in net income (0.7) (3.6) 1.1 (5.0)
Foreign currency translation adjustments 4.1 5.9 2.6 4.8
Deferred income taxes (66.2) 67.8 (21.2) 47.8
-------------- ------------- -------------- --------------
Other comprehensive income (loss) 107.3 (99.8) 35.6 (69.7)
-------------- ------------- -------------- --------------
Comprehensive income (loss) $ 160.3 $ (46.1) $ 140.0 $ 42.8
============== ============= ============== ==============
Stock-based compensation. The Company has stock-based compensation plans. The
Company accounts for stock-based compensation in accordance with Accounting
Principles Board Opinion ("APBO") No. 25, "Accounting for Stock Issued to
Employees," and related interpretations and has presented the required Statement
of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-Based
Compensation," as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," pro forma disclosure in the table
below.
10
The Company applies APBO No. 25 and related interpretations in accounting for
its plans, and accordingly, no compensation cost has been recognized for the
Company's fixed stock-based compensation. Had compensation cost been
determined consistent with SFAS No. 123, as amended by SFAS No. 148, the
Company's net income would have been reduced to the following pro forma amounts:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Net income (millions): As reported $ 53.0 $ 53.7 $ 104.4 $ 112.5
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net of
related tax effects (8.1) (7.5) (17.5) (14.0)
Net Income Pro forma 44.9 46.2 86.9 98.5
Basic earnings per share: As reported $ 0.45 $ 0.45 $ 0.88 $ 0.93
Pro forma $ 0.38 $ 0.38 $ 0.73 $ 0.82
Diluted earnings per share: As reported $ 0.44 $ 0.44 $ 0.87 $ 0.92
Pro forma $ 0.38 $ 0.38 $ 0.72 $ 0.81
The Company uses the Black-Scholes option pricing model which requires the
Company to make certain assumptions in order to estimate fair value.
7. Commitments and Contingencies
The Company has entered into an agreement to guarantee 100% of a $30 million
revolving credit facility of a 50% owned real estate joint venture. The Company
has entered into an agreement with the other 50% partner in the joint venture,
whereby the Company can recover 50% of payments made pursuant to the guarantee
on the revolving credit facility from the joint venture partner. The joint
venture partner has also granted a security interest in its partnership interest
in the joint venture as security for the partner's obligations under the
agreement. At June 30, 2003, borrowings of $23.8 million were outstanding under
this credit facility.
The Company has entered into an agreement to guarantee 50% of a $2.1 million
construction loan of a 50% owned real estate joint venture, and to guarantee 49%
of a $2.2 million mortgage loan of a 50% owned real estate joint venture.
The Company and State Street Corporation ("State Street") have each guaranteed
50% of a lease obligation of International Financial Data Services, U.K. ("IFDS
U.K."), which requires IFDS U.K. to make annual rent payments of approximately
$2.8 million for the next 15 years for its use of a commercial office building.
The commercial office building is owned by a wholly owned affiliate of
International Financial Data Services, Canada ("IFDS Canada") and was financed
with a $19.5 million mortgage from a bank. The loan has a floating interest rate
based upon LIBOR and fully amortizes over the 15 year term. To fix the rate of
borrowing costs, the IFDS Canada affiliate entered into a 15 year interest rate
hedge agreement with the same bank. The interest rate hedge, which has an
initial notional amount value of approximately $19.5 million and scheduled
reductions that coincide with the scheduled principal payments for the mortgage
loan, was entered into for the purpose of fixing the borrowing costs of the
mortgage at approximately 6.3%. The Company and State Street have each
guaranteed 50% of the amounts of the interest rate hedge obligations. The
Company would pay 50% of the total amount to close out of the hedge, which is
approximately $0.6 million at June 30, 2003.
11
The Company's 50% owned joint ventures are generally governed by shareholder or
partnership agreements. The agreements generally entitle the Company to elect
one-half of the directors to the board in the case of corporations and to have
50% voting/managing interest in the case of partnerships.
The agreements generally provide that the Company or the other party has the
option to establish a price payable in cash, or a promise to pay cash, for all
of the other's ownership in the joint venture and to submit an offer, in
writing, to the other party to sell to the other party all of its ownership
interests in the joint venture or to purchase all ownership interests owned by
the other party at such offering price. The party receiving the offer generally
has a specified period of time to either accept the offer to purchase, or to
elect to purchase the offering party's stock at the offering price. The Company
cannot estimate the potential aggregate offering price that it could be required
to receive or elect to pay in the event this option becomes operable, however
the amount could be material.
FIN 45 Disclosures
In addition to the guarantees entered into above, the Company has also
guaranteed certain obligations of certain joint ventures under service
agreements entered into by the joint ventures and their customers. The amount of
such obligations is not stated in the agreements. Depending on the negotiated
terms of the guaranty and/or on the underlying service agreement, the Company's
liability under the guaranty may be subject to time and materiality limitations,
monetary caps and other conditions and defenses.
In certain instances in which the Company licenses proprietary systems to
customers, the Company gives certain warranties and infringement indemnities to
the licensee, the terms of which vary depending on the negotiated terms of each
respective license agreement, but which generally warrant that such systems will
perform in accordance with their specifications. The amount of such obligations
is not stated in the license agreements. The Company's liability for breach of
such warranties may be subject to time and materiality limitations, monetary
caps and other conditions and defenses.
From time to time, the Company enters into agreements with unaffiliated parties
containing indemnification provisions, the terms of which vary depending on the
negotiated terms of each respective agreement. The amount of such obligations is
not stated in the agreements. The Company's liability under such indemnification
provisions may be subject to time and materiality limitations, monetary caps and
other conditions and defenses. Such indemnity obligations include the following:
The Company has entered into purchase and service agreements with its vendors,
and consulting agreements with providers of consulting services to the Company,
pursuant to which the Company has agreed to indemnify certain of such vendors
and consultants, respectively, against third party claims arising from the
Company's use of the vendor's product or the services of the vendor or
consultant.
In connection with the acquisition or disposition of subsidiaries, operating
units and business assets by the Company, the Company has entered into
agreements containing indemnification provisions, the terms of which vary
depending on the negotiated terms of each respective agreement, but which are
generally described as follows: (i) in connection with acquisitions made by the
Company, the Company has agreed to indemnify the seller against third party
claims made against the seller relating to the subject subsidiary, operating
unit or asset and arising after the closing of the transaction, and (ii) in
connection with dispositions made by the Company, the Company has agreed to
indemnify the buyer against damages incurred by the buyer due to the buyer's
reliance on representations and warranties relating to the subject subsidiary,
operating unit or business assets in the disposition agreement if such
representations or warranties were untrue when made.
The Company has entered into agreements with certain third parties, including
banks and escrow agents, that provide software escrow, fiduciary and other
services to the Company or to its benefit plans or customers. Under such
agreements, the Company has agreed to indemnify such service providers for third
party claims relating to the carrying out of their respective duties under such
agreements.
12
The Company has entered into agreements with lenders providing financing to the
Company pursuant to which the Company agrees to indemnify such lenders for third
party claims arising from or relating to such financings. In connection with
real estate mortgage financing, the Company has entered into environmental
indemnity agreements in which the Company has agreed to indemnify the lenders
for any damage sustained by the lenders relating to any environmental
contamination on the subject properties.
In connection with the acquisition or disposition of real estate by the Company,
the Company has entered into real estate contracts containing indemnification
provisions, the terms of which vary depending on the negotiated terms of each
respective contract, but which are generally described as follows: (i) in
connection with acquisitions by the Company, the Company has agreed to indemnify
the seller against third party claims made against the seller arising from the
Company's on-site inspections, tests and investigations of the subject property
made by the Company as part of its due diligence and against third party claims
relating to the operations on the subject property after the closing of the
transaction, and (ii) in connection with dispositions by the Company, the
Company has agreed to indemnify the buyer for damages incurred by the buyer due
to the buyer's reliance on representations and warranties relating to the
subject property made by the Company in the real estate contract if such
representations or warranties were untrue when made and against third party
claims relating to operations on the subject property prior to the closing of
the transaction.
In connection with the leasing of real estate by the Company, as landlord and as
tenant, the Company has entered into occupancy leases containing indemnification
provisions, the terms of which vary depending on the negotiated terms of each
respective lease, but which are generally described as follows: (i) in
connection with leases in which the Company is the tenant, the Company has
agreed to indemnify the landlord against third party claims relating to the
Company's occupancy of the subject property, including claims arising from loss
of life, bodily injury and/or damage to property thereon, and (ii) in connection
with leases in which the Company is the landlord, the Company has agreed to
indemnify the tenant against third party claims to the extent occasioned wholly
or in part by any negligent act or omission of the Company or arising from loss
of life, bodily injury and/or damage to property in or upon any of the common
areas or other areas under the Company's control.
Pursuant to the charter of the Company, the Company is obligated to indemnify
the officers and directors of the Company to the maximum extent authorized by
Delaware law. Pursuant to resolutions of the Company's Board of Directors, the
Company is obligated to indemnify its employees who are certified and/or
licensed accountants and attorneys in connection with professional services they
provide to the Company. The amount of such obligations is not stated in the
charter or the resolutions and is subject only to limitations imposed by
Delaware law.
At June 30, 2003, the Company had not accrued any liability on the
aforementioned guarantees or indemnifications.
8. Segment Information
The Company has several operating business units that offer sophisticated
information processing and software services and products. These business units
are reported as three operating segments (Financial Services, Output Solutions
and Customer Management). In addition, investments in equity securities and
certain financial interests and the Company's real estate subsidiaries and
affiliates have been aggregated into an Investments and Other segment. The
Company evaluates the performance of its segments based on income before income
taxes and interest expense, adjusted for certain items that are not necessarily
ongoing in nature, do not have a high level of predictability associated with
them or are non-operational in nature. Generally, these items include net gains
(losses) associated with securities, restructuring costs and other similar
items. Management believes the exclusion of these items provides a better basis
for evaluating underlying business unit performance. 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):
13
Three Months Ended June 30, 2003
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- -------------- -------------
Operating revenues $ 261.8 $ 122.3 $ 43.7 $ 3.2 $ $ 431.0
Intersegment operating revenues 1.6 12.6 11.6 (25.8)
Out-of-pocket reimbursements 39.3 151.5 15.9 0.1 (20.8) 186.0
------------- ------------- ------------- ------------- -------------- -------------
302.7 286.4 59.6 14.9 (46.6) 617.0
Costs and expenses 220.0 272.0 51.5 9.7 (46.6) 506.6
Depreciation and amortization 23.1 8.8 1.6 3.1 36.6
------------- ------------- ------------- ------------- -------------- -------------
Income from operations 59.6 5.6 6.5 2.1 73.8
Other income, net 1.0 2.0 2.9 5.9
Equity in earnings of
unconsolidated affiliates 3.4 0.3 3.7
------------- ------------- ------------- ------------- -------------- -------------
Income before interest
and income taxes $ 64.0 $ 7.6 $ 6.5 $ 5.3 $ $ 83.4
============= ============= ============= ============= ============== =============
Three Months Ended June 30, 2002
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- -------------- -------------
Operating revenues $ 230.7 $ 127.7 $ 41.8 $ 2.7 $ $ 402.9
Intersegment operating revenues 2.2 16.0 11.3 (29.5)
Out-of-pocket reimbursements 39.7 143.7 14.9 0.2 (21.1) 177.4
------------- ------------- ------------- ------------- -------------- -------------
272.6 287.4 56.7 14.2 (50.6) 580.3
Costs and expenses 190.1 274.3 52.8 8.8 (50.6) 475.4
Depreciation and amortization 19.4 9.4 1.9 2.9 33.6
------------- ------------- ------------- ------------- -------------- -------------
Income from operations 63.1 3.7 2.0 2.5 71.3
Other income, net 2.1 2.3 6.0 10.4
Equity in earnings of
unconsolidated affiliates 1.9 0.7 2.6
------------- ------------- ------------- ------------- -------------- -------------
Income before interest
and income taxes $ 67.1 $ 6.0 $ 2.0 $ 9.2 $ $ 84.3
============= ============= ============= ============= ============== =============
14
Six Months Ended June 30, 2003
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Operating revenues $ 513.2 $ 253.1 $ 89.9 $ 6.5 $ $ 862.7
Intersegment operating revenues 4.2 25.9 23.0 (53.1)
Out-of-pocket reimbursements 76.5 313.9 32.1 0.2 (48.6) 374.1
------------- ------------- ------------- ------------- -------------- -------------
593.9 592.9 122.0 29.7 (101.7) 1,236.8
Costs and expenses 433.8 560.1 103.1 18.6 (101.7) 1,013.9
Depreciation and amortization 44.7 17.6 3.3 6.1 71.7
------------- ------------- ------------- ------------- -------------- -------------
Income from operations 115.4 15.2 15.6 5.0 151.2
Other income, net 2.8 4.5 2.8 10.1
Equity in earnings of
unconsolidated affiliates 3.0 0.4 3.4
------------- ------------- ------------- ------------- -------------- -------------
Income before interest
and income taxes $ 121.2 $ 19.7 $ 15.6 $ 8.2 $ $ 164.7
============= ============= ============= ============= ============== =============
Six Months Ended June 30, 2002
-----------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- -------------- -------------
Operating revenues $ 465.8 $ 266.5 $ 91.9 $ 5.3 $ $ 829.5
Intersegment operating revenues 4.3 31.8 21.7 (57.8)
Out-of-pocket reimbursements 85.0 300.8 30.4 0.3 (44.8) 371.7
------------- ------------- ------------- ------------- -------------- -------------
555.1 599.1 122.3 27.3 (102.6) 1,201.2
Costs and expenses 397.4 560.8 109.4 17.4 (102.6) 982.4
Depreciation and amortization 39.0 18.2 3.7 5.3 66.2
------------- ------------- ------------- ------------- -------------- -------------
Income from operations 118.7 20.1 9.2 4.6 152.6
Other income, net 4.1 3.7 10.7 18.5
Equity in earnings of
unconsolidated affiliates 3.9 1.2 5.1
------------- ------------- ------------- ------------- -------------- -------------
Income before interest
and income taxes $ 126.7 $ 23.8 $ 9.2 $ 16.5 $ $ 176.2
============= ============= ============= ============= ============== =============
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $3.1 million and
$6.5 million for the three and six months ended June 30, 2003, respectively, and
$2.9 million and $5.7 million for the three and six months ended June 30, 2002,
respectively, is equal to the Company's income before income taxes on a
consolidated basis for the corresponding periods.
15
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/A dated March 17, 2003, which is hereby incorporated
by reference. This report has been filed with the United States Securities and
Exchange Commission ("SEC") in Washington, D.C. Readers are strongly encouraged
to obtain and consider the factors listed in the March 17, 2003 Current Report
and any amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company's Current Report may be obtained,
along with other reports filed with or furnished to the SEC on Form 8-K, Form
10-K, Form 10-Q and other forms and any amendments to those reports, by
contacting the SEC's Public Reference Branch at 1-800-SEC-0330 or by accessing
the forms electronically, free of charge, through the SEC's Internet website at
http://www.sec.gov or through the Company's Internet website, as soon as
reasonably practicable after filing with the SEC, at http://www.dstsystems.com.
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, 2002.
INTRODUCTION
The Company has several operating business units that offer sophisticated
information processing and software services and products. These business units
are reported as three operating segments (Financial Services, Output Solutions
and Customer Management). In addition, investments in equity securities and
certain financial interests and the Company's real estate subsidiaries and
affiliates have been aggregated into an Investments and Other segment.
Financial Services
The Financial Services segment provides sophisticated information processing and
computer software services and products primarily to mutual funds, investment
managers, corporations, insurance companies, banks, brokers and financial
planners. The segment also provides design, management and transaction
processing services for customized consumer equipment maintenance and debt
protection programs.
Output Solutions
The Output Solutions segment provides single source, integrated print and
electronic communications solutions, including customized and personalized bill
and statement processing services and electronic bill payment and presentment
solutions.
Customer Management
The Customer Management segment provides customer management, billing and
marketing solutions to the video/broadband, direct broadcast satellite,
wire-line and Internet Protocol telephony, Internet and utility markets.
Investments and Other
The Investments and Other segment holds investments in equity securities and
certain financial interests and the Company's real estate subsidiaries and
affiliates.
16
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- -------------- -------------- -------------
Operating revenues
Financial Services $ 263.4 $ 232.9 $ 517.4 $ 470.1
Output Solutions 134.9 143.7 279.0 298.3
Customer Management 43.7 41.8 89.9 91.9
Investments and Other 14.8 14.0 29.5 27.0
Eliminations (25.8) (29.5) (53.1) (57.8)
-------------- --------------- --------------- --------------
$ 431.0 $ 402.9 $ 862.7 $ 829.5
-------------- --------------- --------------- --------------
% change from prior year period 7.0% 4.0%
Out-of-pocket reimbursements
Financial Services $ 39.3 $ 39.7 $ 76.5 $ 85.0
Output Solutions 151.5 143.7 313.9 300.8
Customer Management 15.9 14.9 32.1 30.4
Investments and Other 0.1 0.2 0.2 0.3
Eliminations (20.8) (21.1) (48.6) (44.8)
-------------- --------------- --------------- --------------
$ 186.0 $ 177.4 $ 374.1 $ 371.7
-------------- --------------- --------------- --------------
% change from prior year period 4.8% 0.6%
Total revenues $ 617.0 $ 580.3 $ 1,236.8 $ 1,201.2
============== =============== =============== ==============
% change from prior year period 6.3% 3.0%
Income from operations
Financial Services $ 59.6 $ 63.1 $ 115.4 $ 118.7
Output Solutions 5.6 3.7 15.2 20.1
Customer Management 6.5 2.0 15.6 9.2
Investments and Other 2.1 2.5 5.0 4.6
-------------- --------------- --------------- --------------
73.8 71.3 151.2 152.6
Interest expense (3.1) (2.9) (6.5) (5.7)
Other income, net 5.9 10.4 10.1 18.5
Equity in earnings of unconsolidated
affiliates, net of income taxes 3.7 2.6 3.4 5.1
-------------- --------------- --------------- --------------
Income before income taxes 80.3 81.4 158.2 170.5
Income taxes 27.3 27.7 53.8 58.0
-------------- --------------- --------------- --------------
Net income $ 53.0 $ 53.7 $ 104.4 $ 112.5
============== =============== =============== ==============
Basic earnings per share $ 0.45 $ 0.45 $ 0.88 $ 0.93
Diluted earnings per share $ 0.44 $ 0.44 $ 0.87 $ 0.92
17
Consolidated revenues
Consolidated total revenues (including Out-of-Pocket ("OOP") reimbursements) for
the three and six months ended June 30, 2003 increased $36.7 million or 6.3% and
$35.6 or 3.0%, respectively, over the same periods in 2002. Consolidated
operating revenues (excluding OOP reimbursements) for the three months and six
months ended June 30, 2003 were $431.0 million and $862.7 million, respectively,
an increase of $28.1 million or 7.0% over the prior year quarter and $33.2
million or 4.0% over the prior year six month period. U.S. operating revenues
for the three and six months ended June 30, 2003 were $389.3 million and $782.8
million, respectively, an increase of 6.4% and 3.2%, respectively, over the same
periods in 2002. International operating revenues for the three and six months
ended June 30, 2003 were $41.7 million and $79.9 million, respectively, an
increase of 12.4% and 12.2%, respectively, over the same periods in 2002.
Financial Services segment total revenues for the three and six months ended
June 30, 2003 increased $30.1 million or 11.0% and increased $38.8 million or
7.0%, respectively, over the same periods in 2002. Financial Services operating
revenues for the three and six months ended June 30, 2003 increased $30.5
million or 13.1% and $47.3 million or 10.1%, respectively, over the same periods
in 2002. U.S. Financial Services segment operating revenues for the three and
six months ended June 30, 2003 increased $30.3 million or 14.6% and $44.8
million or 10.6%, respectively, over the same periods in 2002. The increase in
U.S. Financial Services segment revenues resulted from increased U.S. mutual
fund servicing revenues and the inclusion of lock\line, LLC ("lock\line")
revenues, partially offset by a decrease in EquiServe, Inc. ("EquiServe")
revenues from lower demutualization activity and lower corporate action
revenues. U.S. mutual fund servicing revenues increased as U.S. mutual fund open
shareowner accounts processed totaled 86.0 million at June 30, 2003, an increase
of 6.0 million or 7.5% from the 80.0 million serviced at December 31, 2002 and
an increase of 8.1 million or 10.4% from the 77.9 million serviced at June 30,
2002. Financial Services segment operating revenues from international
operations for the three and six months ended June 30, 2003 were $26.0 million
and $49.6 million, respectively, an increase of $0.2 million or 0.8% and $2.5
million or 5.3%, respectively, over the same periods in 2002. The changes are
primarily from higher investment accounting and AWD maintenance, consulting and
development revenues.
Output Solutions segment total revenues for the three and six months ended June
30, 2003 decreased $1.0 million or 0.3% and $6.2 million or 1.0%, respectively,
over the same periods in 2002. Output Solutions segment operating revenues for
the three and six months ended June 30, 2003 were $134.9 million and $279.0
million, respectively, a decrease of $8.8 million or 6.1% and $19.3 million or
6.5%, respectively, over the same periods in 2002. The operating revenue decline
resulted from lower mutual fund, brokerage, transportation, insurance and video
service revenues due to lower volumes and changes in unit pricing on certain
product lines. Output Solutions segment images produced for the three and six
months ended June 30, 2003 increased 9.5% to 2.3 billion and 7.0% to 4.6
billion, respectively, and items mailed decreased 1.2% to 417 million and 3.5%
to 864 million, respectively, compared to the same periods in 2002.
Customer Management segment total revenues for the three and six months ended
June 30, 2003 increased $2.9 million or 5.1% and decreased $0.3 million or 0.2%,
respectively, over the same periods in 2002. Customer Management segment
operating revenues for the three and six months ended June 30, 2003 were $43.7
million and $89.9 million, respectively, an increase of $1.9 million or 4.5% and
a decrease of $2.0 million or 2.2%, respectively, over the same periods in 2002.
The increase for the quarter was primarily a result of increased processing and
software service revenues.
Investments and Other segment total revenues increased $0.7 million or 4.9% and
$2.4 million or 8.8% for the three and six months ended June 30, 2003,
respectively, as compared to the same periods in 2002. Investments and Other
segment operating revenues increased $0.8 million or 5.7% and $2.5 million or
9.3% for the three and six months ended June 30, 2003, respectively, as compared
to the same periods in 2002. The increase was primarily from increased real
estate leasing activity. Segment revenues are primarily rental income for
facilities leased to the Company's operating segments.
18
Income from operations
Consolidated income from operations for the three and six months ended June 30,
2003 was $73.8 million and $151.2 million, respectively, an increase of $2.5
million or 3.5% and a decrease of $1.4 million or 0.9%, respectively, over the
same periods in 2002.
Financial Services segment income from operations for the three and six months
ended June 30, 2003 was $59.6 million and $115.4 million, respectively, a
decrease of $3.5 million or 5.5% and $3.3 million or 2.8%, respectively, over
the same periods in 2002. The decrease resulted primarily from increased costs
and expenses from the acquisition of lock\line and increased system development
and implementation costs on new applications, partially offset by lower
EquiServe costs associated with reduced demutualization activities.
Output Solutions segment income from operations for the three and six months
ended June 30, 2003 increased $1.9 million or 51.4% and decreased $4.9 million
or 24.4%, respectively, over the same periods in 2002. The increase related
primarily to lower facility consolidation costs and the decrease related
primarily to lower revenues. The segment results include $0.8 million and $1.5
million of costs for the three and six months ended June 30, 2003, respectively,
and $7.6 million of costs for the three and six months ended June 30, 2002
associated with previously announced facility and other consolidations.
Estimated additional facility consolidation charges of $1 million to $2 million
will be expensed when incurred. There may be material differences between these
estimates and actual costs.
Customer Management segment income from operations totaled $6.5 million and
$15.6 million for the three and six months ended June 30, 2003, respectively, an
increase of $4.5 million or 225.0% and $6.4 million or 69.6%, respectively, over
the same periods in 2002. The increase is primarily attributable to lower
processing and equipment costs and cost containment activities.
Investments and Other segment income from operations totaled $2.1 million and
$5.0 million for the three and six months ended June 30, 2003, respectively, as
compared to $2.5 million and $4.6 million for the three and six months ended
June 30, 2002, respectively.
Interest expense
Interest expense totaled $3.1 million and $6.5 million, respectively, for the
three and six months ended June 30, 2003, an increase from $2.9 million and $5.7
million, respectively, recorded in the same periods in 2002. Average debt
balances were higher in 2003 compared to 2002, primarily as a result of the
lock\line acquisition and common stock repurchases.
Other income, net
Other income was $5.9 million for the quarter ended June 30, 2003, compared to
$10.4 million recorded in the same prior year period. Second quarter 2003
results include $4.0 million primarily related to interest and dividend income
and $1.9 million in net gains on securities. Second quarter 2002 results include
$4.2 million of income primarily related to interest and dividend income, $3.9
million related primarily to net gains on securities and a $2.3 million gain
from the sale of the DST Output presort business.
Other income was $10.1 million for the six months ended June 30, 2003, compared
to $18.5 million in the same prior year period. Year to date 2003 results
include $8.1 million primarily related to interest and dividend income and $2.0
million in net gains on securities. Year to date 2002 results include $8.4
million of income primarily related to interest and dividend income, $7.8
million related primarily to net gains on securities and a $2.3 million gain
from the sale of the DST Output presort business.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $3.7 million and $3.4
million, respectively, for the three and six months ended June 30, 2003 as
compared to $2.6 million and $5.1 million, respectively, for the three and six
months ended June 30, 2002. Boston Financial Data Services earnings increased
primarily from cost containment activities.
19
International Financial Data Services ("IFDS") results were basically flat
compared to prior year due to higher revenues associated with new client
conversion activity and higher occupancy costs related to a facilities move and
consolidation. Accounts serviced by IFDS U.K. were 4.1 million at June 30,
2003, an increase of 0.6 million or 17.1% from year end 2002 levels and 0.9
million or 28.1% over June 30, 2002 levels, primarily from new client
conversions. An additional 1.0 million accounts are scheduled to convert prior
to year end 2003. Accounts serviced by IFDS Canada were 2.6 million at June 30,
2003, an increase of 0.1 million or 4.0% from year end 2002 levels and 0.9
million or 52.9% over June 30, 2002 levels.
Income taxes
The Company's effective tax rate was 34.0% for the three and six months ended
June 30, 2003 and 2002. The 2003 and 2002 tax rates were affected by tax aspects
of certain international operations and of state tax income apportionment rules.
Business Segment Comparisons
FINANCIAL SERVICES SEGMENT
Revenues
Financial Services segment total revenues for the three and six months ended
June 30, 2003 increased 11.0% and 7.0%, respectively, over the same periods in
2002 to $302.7 million and $593.9 million, respectively. Financial Services
segment operating revenues for the three and six months ended June 30, 2003 were
$263.4 million and $517.4 million, respectively, an increase of $30.5 million or
13.1% and $47.3 million or 10.1%, respectively, over the same periods in 2002.
U.S. Financial Services segment operating revenue increased 14.6% to $237.4
million and 10.6% to $467.8 million, respectively, for the three and six months
ended June 30, 2003. The increase in U.S. Financial Services segment revenues
resulted from increased U.S. mutual fund servicing revenues and the inclusion of
lock\line revenues, partially offset by a decrease in EquiServe revenues from
lower demutualization activity and lower corporate action revenues from lower
levels of general market activity. U.S. mutual fund servicing revenues increased
as U.S. mutual fund open shareowner accounts processed increased 10.4% from 77.9
million at June 30, 2002 to 86.0 million at June 30, 2003. Financial Services
segment operating revenues from international operations for the three and six
months ended June 30, 2003 increased 0.8% to $26.0 million and 5.3% to $49.6
million, respectively, over the same periods in 2002, primarily from higher
maintenance revenues and partially offset by lower professional services
revenues.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2003
increased 15.7% to $220.0 million and 9.2% to $433.8 million, respectively, over
the same periods in 2002. Personnel costs for the three and six months ended
June 30, 2003 increased 20.0% and 16.7%, respectively, over the same periods in
2002. Costs and expenses increased primarily from the acquisition of lock\line
and increased system development and implementation costs, partially offset by
lower EquiServe costs associated with reduced demutualization activities.
Depreciation and amortization
Segment depreciation and amortization increased 19.1% or $3.7 million and 14.6%
or $5.7 million, respectively, for the three and six months ended June 30, 2003
over the same periods in 2002, primarily attributable to the inclusion of
lock\line.
Income from operations
Segment income from operations for the three and six months ended June 30, 2003
decreased 5.5% to $59.6 million and 2.8% to $115.4 million over the same periods
in 2002. The decrease resulted primarily from increased system development and
implementation costs on new applications.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions segment total revenues for the three and six months ended June
30, 2003 decreased 0.3% to $286.4
20
million and 1.0% to $592.9 million, respectively, as compared to the same
periods in 2002. Output Solutions segment operating revenues for the three and
six months ended June 30, 2003 decreased 6.1% to $134.9 million and 6.5% to
$279.0 million, as compared to the same periods in 2002. The revenue decline
resulted from lower mutual fund, brokerage, transportation, insurance and video
service revenues due to lower volumes and changes in unit pricing on certain
product lines.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2003
decreased 0.8% to $272.0 million and 0.1% to $560.1 million, respectively, over
the same periods in 2002. The segment results include $0.8 million and $1.5
million of costs for the three and six months ended June 30, 2003, respectively,
and $7.6 million of costs for the three and six months ended June 30, 2002
associated with previously announced facility and other consolidations.
Personnel costs for the three and six months ended June 30, 2003 decreased 4.6%
and 3.8%, respectively, over the same periods in 2002.
Depreciation and amortization
Segment depreciation and amortization decreased 6.4% to $8.8 million and 3.3% to
$17.6 million for the three and six months ended June 30, 2003, respectively,
compared to the same periods in 2002.
Income from operations
Segment income from operations for the three and six months ended June 30, 2003
increased $1.9 million to $5.6 million and decreased $4.9 million to $15.2
million, respectively, over the same periods in 2002. The increase related
primarily to lower facility consolidation costs and the decrease related
primarily to lower revenues. The segment results include $0.8 million and $1.5
million of costs for the three and six months ended June 30, 2003, respectively,
and $7.6 million of costs for the three and six months ended June 30, 2002
associated with previously announced facility and other consolidations.
Estimated additional facility consolidations charges of $1 million to $2 million
will be expensed when incurred. There may be material differences between these
estimates and actual costs.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management segment total revenues for the three and six months ended
June 30, 2003 increased 5.1% to $59.6 million and decreased 0.2% to $122.0
million, respectively, as compared to the same periods in 2002. Customer
Management segment operating revenues for the three and six months ended June
30, 2003 were $43.7 million, an increase of $1.9 million or 4.5%, and $89.9
million, a decrease of $2.0 million or 2.2%, respectively, over the same periods
in 2002. Processing and software service revenues increased to $42.9 million and
$88.2 million, respectively, for the three and six months ended June 30, 2003
from $40.9 million and $87.2 million, respectively, for the three and six months
ended June 30, 2002. Processing and software service revenues increased
primarily as a result of incremental revenues from additional product features
and higher subscribers for selected customers, partially offset by lower
software service development revenues. Equipment sales decreased to $0.8 million
and $1.7 million, respectively, for the three and six months ended June 30, 2003
from $0.9 million and $4.7 million, respectively, for the three and six months
ended June 30, 2002. Equipment sales decreased primarily from a significant
hardware sale recorded in the first quarter 2002. Total cable and satellite
subscribers serviced were 40.5 million at June 30, 2003, a decrease of 1.5%
compared to year end 2002 levels, principally from a net decrease in U.S. cable
subscribers serviced.
As previously disclosed, two clients are discontinuing their processing
agreements. At June 30, 2003 approximately 3.4 million subscribers were serviced
for these clients.
Costs and expenses
Segment costs and expenses for the three and six months ended June 30, 2003
decreased $1.3 million or 2.5% and $6.3 million or 5.8%, respectively, compared
to the same periods in 2002, primarily attributable to lower processing and
equipment costs and cost containment efforts.
21
Depreciation and amortization
Segment depreciation and amortization for the three and six months ended June
30, 2003 decreased $0.3 million to $1.6 million and $0.4 million to $3.3
million, respectively, compared to the same periods in 2002.
Income from operations
Customer Management segment income from operations for the three and
six months ended June 30, 2003 increased $4.5 million to $6.5 million and $6.4
million to $15.6 million, respectively, compared to the same periods in 2002.
The increase is primarily attributable to lower processing and equipment costs
and cost containment activities.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other segment total revenues were $14.9 million and $29.7
million, respectively, for the three and six months ended June 30, 2003, an
increase of $0.7 million and $2.4 million, respectively, as compared to the same
periods in 2002. Investments and Other segment operating revenues were $14.8
million and $29.5 million, respectively, for the three and six months ended June
30, 2003, an increase of $0.8 million and $2.5 million, respectively, as
compared to the same periods in 2002. The increase is primarily attributable to
increased real estate leasing activity.
Costs and expenses
Segment costs and expenses increased $0.9 million to $9.7 million and $1.2
million to $18.6 million, respectively, for the three and six months ended June
30, 2003, as compared to the same periods in 2002.
Depreciation and amortization
Segment depreciation and amortization increased $0.2 million to $3.1 million and
$0.8 million to $6.1 million, respectively, for the three and six months ended
June 30, 2003, as compared to the same periods in 2002.
Income from operations
Segment income from operations totaled $2.1 million and $5.0 million,
respectively, for the three and six months ended June 30, 2003, as compared to
$2.5 million and $4.6 million, respectively, for the three and six months ended
June 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $148.3 million for the
six months ended June 30, 2003. Operating cash flows for the six months ended
June 30, 2003 primarily resulted from net income of $104.4 million, depreciation
and amortization of $71.7 million and increases in deferred revenues and gains
of $14.7 million, partially offset by decreases in accounts payable and accrued
liabilities of $19.4 million.
Cash flows used in investing activities totaled $136.6 million for the six
months ended June 30, 2003. The Company expended $130.0 million during the six
months ended June 30, 2003 for capital additions, of which $82.6 million related
to the Financial Services, Output Solutions and Customer Management segments and
$47.4 million related to the Investments and Other segment, which primarily
related to acquisitions of buildings and building improvements. The Company made
$20.8 million of investments in available-for-sale securities and expended $6.6
million for advances to affiliates and other investments. During the six months
ended June 30, 2003, the Company received $16.9 million from the sale and
maturities of investments in available-for-sale securities and $5.6 million
primarily from the sale of other investments.
Cash flows used in financing activities totaled $31.4 million for the six months
ended June 30, 2003. For the six months ended June 30, 2003, the Company
repurchased $142.3 million of common stock. Net borrowings totaled $61.7 million
for the six months ended June 30, 2003 on the Company's $315 million revolving
credit facility and there was $251.7 million outstanding at June 30, 2003. Net
payments under the Company's 364-day $50 million line of credit totaled $10.9
million for the six months ended June 30, 2003, bringing total net borrowings
under this facility
22
to $37.7 million at June 30, 2003. The Company also borrowed $100 million
relating to the repurchase of its common stock.
On August 2, 2002, the Company acquired lock\line, LLC ("lock\line") for cash.
lock\line provides administrative services to support insurance programs for
wireless communication devices, extended warranty programs for land line
telephone and consumer equipment and event based debt protection programs. The
lock\line acquisition was accounted for as a purchase and the results of
lock\line's operations were included in the Company's 2002 consolidated
financial statements. The minimum purchase price of $190 million was paid in
cash at closing. The purchase price was funded by the Company's $315 million
syndicated line of credit and a $100 million term bridge loan, which expired on
December 30, 2002, and had essentially the same terms and financial covenants as
the $315 million syndicated line of credit. There are provisions in the
acquisition agreement that allow for additional consideration to be paid in cash
if lock\line's revenues, as defined in the acquisition agreement, exceed certain
targeted levels for 2003 and 2004. Goodwill will be increased by the amount of
additional consideration paid.
On March 30, 2001, the Company completed the acquisition of a 75% interest in
EquiServe, Inc. ("EquiServe") by purchasing interests held by FleetBoston
Financial ("FleetBoston") and Bank One Corporation ("Bank One"). On July 31,
2001, the Company completed the acquisition of the remaining 25%, which was
owned by Boston Financial Data Services, on essentially the same terms provided
to FleetBoston and Bank One.
The EquiServe acquisitions were accounted for as a purchase and the results of
EquiServe's operations are included in the Company's consolidated financial
statements beginning March 30, 2001. The minimum purchase price of $186.7
million is to be paid in four installments. The first installments of
approximately $58.5 million were paid at the closings. The second installments
of $55.8 million were paid on March 8, 2002. The third installments of $50.8
million were paid on March 7, 2003. The remaining minimum installments, which
are approximately $21.6 million (discounted to $18.9 million for accounting
purposes) are payable on February 28, 2004. The remaining minimum purchase price
installments can increase pursuant to a formula that provides for additional
consideration to be paid in cash if EquiServe's revenues, as defined in the
agreements, for the years ending 2000, 2001, 2002 and 2003 exceed certain
targeted levels. The aggregate minimum purchase price (discounted to $177.7
million for accounting purposes) has been allocated to the net assets acquired
based upon their fair values as determined by a valuation. Goodwill will be
increased by the amount of contingent consideration paid. Based upon
management's current expectations, the Company expects to pay approximately $52
million, of which approximately $30 million will be considered contingent
consideration.
In December 2001, the Company entered into a $285 million (increased to $315
million in February 2002) unsecured revolving credit facility with a syndicate
of U.S. and international banks. The $315 million revolving credit facility
replaced the Company's previous $125 million five year revolving credit facility
and $120 million 364-day revolving credit facility. The $315 million facility is
comprised of a $210 million three-year facility and a $105 million 364-day
facility. Borrowings under the facility are available at rates based on the
offshore (LIBOR), Federal Funds or prime rates. An annual facility fee of 0.1%
to 0.125% is required on the total facility. An additional utilization fee of
0.125% is required if the aggregate principal amount outstanding plus letter of
credit obligations exceeds 33% of the total facility. The revolving credit
facility has a grid that adjusts borrowing costs up or down based upon
applicable credit ratings and the Company's level of indebtedness. The grid may
result in fluctuations in borrowing costs. Among other provisions, the revolving
credit facility limits consolidated indebtedness, subsidiary indebtedness, asset
dispositions and requires certain coverage ratios to be maintained. In addition,
the Company is limited, on an annual basis, to making dividends or repurchasing
its capital stock in any fiscal year in an amount not to exceed 20% of
consolidated net tangible assets. In the event of default, which includes, but
is not limited to, a default in performance of covenants, default in payment of
principal of loans or change of control, as defined in the revolving credit
facility, the syndicated lenders may elect to declare the principal and interest
under the syndicated line of credit as due and payable and in certain situations
automatically terminate the syndicated line of credit. In the event the Company
experiences a material adverse change, as defined in the revolving credit
facility, the lenders may not be required to make additional loans under the
facility.
One of the Company's subsidiaries maintains a 364-day $50 million line of credit
for working capital requirements and general corporate purposes. The line of
credit is scheduled to mature May 2004. The Company plans to renew the facility.
Borrowings under the facility are available at rates based on the Euro dollar,
Federal Funds or LIBOR rates.
23
Commitment fees of 0.1% to 0.2% per annum on the unused portions are payable
quarterly. Among other provisions, the agreement requires the subsidiary to
maintain unencumbered liquid assets and stockholder's equity of at least $300
million and to maintain certain interest coverage ratios. In the event of
non-compliance, an event of default may occur, which could result in the loan
becoming immediately due and payable.
In September 2002, one of the Company's subsidiaries borrowed $106.4 million in
real estate mortgages scheduled to mature October 2009. Prepayment is allowed
after the first year with a fee of 0% to 1.5% on the prepayment amount, as
defined in the loan agreement. Payments are made monthly of principal and
interest, based on a 15 year amortization, with interest based on the 30-day
LIBOR rate. The loan is secured by real property owned by the Company. The
outstanding balance at June 30, 2003 totaled $102.7 million.
On June 30, 2003, the Company entered into a $100 million unsecured note
scheduled to mature September 30, 2003. The note carries an interest rate of
LIBOR plus 1.00%.
During the three months and six months ended June 30, 2003, the Company
purchased 3.4 million and 4.2 million shares, respectively, of its common stock
under previously announced share repurchase programs for $115.6 million and
$142.1 million, respectively. The purchase of the shares was financed from cash
flow from operations, borrowings under the Company's syndicated line of credit
and a $100 million unsecured note. The shares purchased will be utilized for the
Company's stock award, employee stock purchase and stock option programs and for
general corporate purposes. At June 30, 2003, the Company had 2.2 million shares
remaining to be purchased under these programs and had purchased 20.1 million
shares since the programs commenced.
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.
FIN 45 Disclosures
The Company has guaranteed certain obligations of certain joint ventures under
service agreements entered into by the joint ventures and their customers. The
amount of such obligations is not stated in the agreements. Depending on the
negotiated terms of the guaranty and/or on the underlying service agreement, the
Company's liability under the guaranty may be subject to time and materiality
limitations, monetary caps and other conditions and defenses.
In certain instances in which the Company licenses proprietary systems to
customers, the Company gives certain warranties and infringement indemnities to
the licensee, the terms of which vary depending on the negotiated terms of each
respective license agreement, but which generally warrant that such systems will
perform in accordance with their specifications. The amount of such obligations
is not stated in the license agreements. The Company's liability for breach of
such warranties may be subject to time and materiality limitations, monetary
caps and other conditions and defenses.
From time to time, the Company enters into agreements with unaffiliated parties
containing indemnification provisions, the terms of which vary depending on the
negotiated terms of each respective agreement. The amount of such obligations is
not stated in the agreements. The Company's liability under such indemnification
provisions may be subject to time and materiality limitations, monetary caps and
other conditions and defenses. Such indemnity obligations include the following:
The Company has entered into purchase and service agreements with its vendors,
and consulting agreements with providers of consulting services to the Company,
pursuant to which the Company has agreed to indemnify certain of such vendors
and consultants, respectively, against third party claims arising from the
Company's use of the vendor's product or the services of the vendor or
consultant.
24
In connection with the acquisition or disposition of subsidiaries, operating
units and business assets by the Company, the Company has entered into
agreements containing indemnification provisions, the terms of which vary
depending on the negotiated terms of each respective agreement, but which are
generally described as follows: (i) in connection with acquisitions made by the
Company, the Company has agreed to indemnify the seller against third party
claims made against the seller relating to the subject subsidiary, operating
unit or asset and arising after the closing of the transaction, and (ii) in
connection with dispositions made by the Company, the Company has agreed to
indemnify the buyer against damages incurred by the buyer due to the buyer's
reliance on representations and warranties relating to the subject subsidiary,
operating unit or business assets in the disposition agreement if such
representations or warranties were untrue when made.
The Company has entered into agreements with certain third parties, including
banks and escrow agents, that provide software escrow, fiduciary and other
services to the Company or to its benefit plans or customers. Under such
agreements, the Company has agreed to indemnify such service providers for third
party claims relating to the carrying out of their respective duties under such
agreements.
The Company has entered into agreements with lenders providing financing to the
Company pursuant to which the Company agrees to indemnify such lenders for third
party claims arising from or relating to such financings. In connection with
real estate mortgage financing, the Company has entered into environmental
indemnity agreements in which the Company has agreed to indemnify the lenders
for any damage sustained by the lenders relating to any environmental
contamination on the subject properties.
In connection with the acquisition or disposition of real estate by the Company,
the Company has entered into real estate contracts containing indemnification
provisions, the terms of which vary depending on the negotiated terms of each
respective contract, but which are generally described as follows: (i) in
connection with acquisitions by the Company, the Company has agreed to indemnify
the seller against third party claims made against the seller arising from the
Company's on-site inspections, tests and investigations of the subject property
made by the Company as part of its due diligence and against third party claims
relating to the operations on the subject property after the closing of the
transaction, and (ii) in connection with dispositions by the Company, the
Company has agreed to indemnify the buyer for damages incurred by the buyer due
to the buyer's reliance on representations and warranties relating to the
subject property made by the Company in the real estate contract if such
representations or warranties were untrue when made and against third party
claims relating to operations on the subject property prior to the closing of
the transaction.
In connection with the leasing of real estate by the Company, as landlord and as
tenant, the Company has entered into occupancy leases containing indemnification
provisions, the terms of which vary depending on the negotiated terms of each
respective lease, but which are generally described as follows: (i) in
connection with leases in which the Company is the tenant, the Company has
agreed to indemnify the landlord against third party claims relating to the
Company's occupancy of the subject property, including claims arising from loss
of life, bodily injury and/or damage to property thereon, and (ii) in connection
with leases in which the Company is the landlord, the Company has agreed to
indemnify the tenant against third party claims to the extent occasioned wholly
or in part by any negligent act or omission of the Company or arising from loss
of life, bodily injury and/or damage to property in or upon any of the common
areas or other areas under the Company's control.
Pursuant to the charter of the Company, the Company is obligated to indemnify
the officers and directors of the Company to the maximum extent authorized by
Delaware law. Pursuant to resolutions of the Company's Board of Directors, the
Company is obligated to indemnify its employees who are certified and/or
licensed accountants and attorneys in connection with professional services they
provide to the Company. The amount of such obligations is not stated in the
charter or the resolutions and is subject only to limitations imposed by
Delaware law.
At June 30, 2003, the Company had not accrued any liability on the
aforementioned guarantees or indemnifications.
25
OTHER
Comprehensive income (loss). The Company's comprehensive income (loss) totaled
$160.3 million and $140.0 million for the three and six months ended June 30,
2003, respectively, compared to $(46.1) million and $42.8 million for the
comparable periods in 2002. Comprehensive income consists of net income of $53.0
million and $104.4 million and other comprehensive income of $107.3 million and
$35.6 million for the three and six months ended June 30, 2003, respectively,
and net income of $53.7 million and $112.5 million and other comprehensive loss
of $99.8 million and $69.7 million for the three and six months ended June 30,
2002, respectively. Other comprehensive income consists of unrealized gains
(losses) on available-for-sale securities, net of deferred taxes,
reclassifications for net gains included in net income and foreign currency
translation adjustments. The principal difference between net income and
comprehensive net income is the net change in unrealized gains (losses) on
available-for-sale securities.
Other than temporary impairments. At June 30, 2003, the Company's
available-for-sale securities had unrealized losses of $0.8 million. If it is
determined that a security's net realizable value is other than temporary, a
realized loss will be recognized in the statement of operations and the cost
basis of the security reduced to its estimated fair value. The Company does not
believe that the unrealized losses recorded at June 30, 2003 are other than
temporary.
The Company recognized investment impairments of $1.6 million and $5.8 million
for the three and six months ended June 30, 2003, respectively, and $0.2 million
for the six months ended June 30, 2002. The Company did not recognize investment
impairments for the three months ended June 30, 2002. A decline in a security's
net realizable value that is other than temporary is treated as a realized loss
in the statement of operations and the cost basis of the security is reduced to
its estimated fair value.
Seasonality. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output solutions volumes
for mutual fund and corporate securities transfer processing 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.
Revenues and operating results from individual license sales depend heavily on
the timing and size of the contract.
Recently Issued Accounting Standards
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. FIN 46
applies immediately to variable interest entities created after January 31,
2003. It applies in the first fiscal year or interim period beginning after June
15, 2003, to variable interest entities created prior to February 1, 2003.
Through its Investments and Other segment, the Company has investments in a
number of real estate operations, along with the Company's wholly owned real
estate, primarily for the purpose of providing facilities for lease to the
Company's other business segments and its affiliates. As described in Liquidity
and Capital Resources, the Company has outstanding commitments to certain of
these operations, as well as loans to and other potential variable interests in
these entities. The Company is evaluating whether these real estate operations
are variable interest entities as defined in FIN 46 and whether FIN 46 otherwise
impacts the Company's historical accounting for these relationships.
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 equity pricing, interest rates and currency exchange
rates. 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.
26
Available-for-sale equity price risk
The Company's investments in available-for-sale equity securities are subject to
price risk. The fair value of the Company's available-for-sale investments as of
June 30, 2003 was $982.0 million. The impact of a 10% change in fair value of
these investments would be approximately $59.8 million to comprehensive income.
As discussed under "Comprehensive income (loss)" 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.
Interest rate risk
The Company derives a certain amount of its service revenues from investment
earnings related to cash balances maintained in transfer agency customer bank
accounts, on which the Company is named as agent. The balances maintained in the
bank accounts are subject to fluctuation. At June 30, 2003, there was
approximately $1.2 billion of cash balances maintained in such accounts. The
Company estimates that a 50 basis point change in interest earnings rate would
be approximately $4.1 million of net income.
At June 30, 2003, the Company had $534.6 million of debt, of which $492.1
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 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 British pound, Canadian dollar and Australian dollar. Currency
exchange rate fluctuations have 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
year-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.
Item 4. Controls and Procedures
As of the end of the fiscal quarter for which this quarterly report on Form 10-Q
is filed, the Company's Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the Company's disclosure controls and procedures.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures (i)
are effective for recording, processing, summarizing and reporting, within the
time periods specified in the Securities and Exchange Commission's rules and
forms, the information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934, and (ii) include
controls and procedures designed to ensure that information required to be
disclosed by the Company in such reports is accumulated and communicated to the
Company's management, including the Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company's internal control over financial
reporting that occurred during the fiscal quarter for which this quarterly
report on Form 10-Q is filed that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
27
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 and Use of Proceeds
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 13, 2003. 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 each matter voted
on at the Company's Annual Meeting. Each of these matters is fully described in
the Company's Definitive Proxy Statement dated March 31, 2003. A total of
118,884,431 shares of Common Stock, or 95.0% 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 matters as follows:
1) Election of three directors for terms ending in 2006:
Thomas A. William C. Travis E.
McCullough Nelson Reed
For 112,221,595 111,660,299 111,652,662
Withheld 1,156,249 1,717,545 1,725,182
------------- ------------- -------------
Total 113,377,844 113,377,844 113,377,844
The terms of office of Directors A. Edward Allinson and Michael G. Fitt will
expire at the Annual Meeting of Stockholders in 2004. The terms of office of
Directors Thomas A. McDonnell and M. Jeannine Strandjord will expire at the
Annual Meeting of Stockholders 2005.
Based upon votes required for approval, each of these matters passed.
If a stockholder desires to have a proposal included in DST's Proxy Statement
for the annual meeting of stockholders to be held in 2004, the Corporate
Secretary of DST must receive such proposal on or before November 28, 2003, and
the proposal must comply with the applicable SEC laws and rules and the
procedures set forth in the DST By-laws.
28
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
June 30, December 31,
2003 2002
--------------- ---------------
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S. 86.0 80.0
International
United Kingdom (1) 4.1 3.5
Canada (2) 2.6 2.5
Security transfer accounts processed (millions) 26.3 25.7
TRAC participants (millions) 3.2 2.8
lock\line supported consumers (millions) 16.8 16.4
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions)
U.S. 31.8 32.6
International 8.7 8.5
For the Six Months
Ended June 30,
2003 2002
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 4,604 4,304
Items mailed (millions) 864 895
(1) Processed by International Financial Data Services, (U.K.) Limited, an
unconsolidated affiliate of the Company.
(2) Processed by International Financial Data Services, (Canada) Limited, an
unconsolidated affiliate of the Company.
29
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification of Thomas A. McDonnell, Chief Executive Officer of Registrant
31.2 Certification of Kenneth V. Hager, Chief Financial Officer of Registrant
32 Certification Pursuant to 18 U.S.C. Section 1350 of Thomas A. McDonnell,
Chief Executive Officer of Registrant and Kenneth V. Hager, Chief
Financial Officer of Registrant
Exhibit 32 shall not be deemed "filed" for the purposes of or otherwise
subject to the liabilities under Section 18 of the Securities Exchange Act
of 1934 and shall not be deemed to be incorporated by reference into the
filings of the Company under the Securities Act of 1933.
(b) Reports on Form 8-K:
The Company furnished a Current Report on Form 8-K dated April 22, 2003,
under Item 9 of such form, reporting the announcement of financial results
for the quarter ended March 31, 2003.
The Company furnished a Current Report on Form 8-K dated April 29, 2003,
under Item 5 of such form, reporting an announcement by the Company and
Janus Capital Group Inc. regarding potential transactions.
The Company furnished a Current Report on Form 8-K dated May 13, 2003,
under Item 9 of such form, reporting that certain information regarding
potential transactions with Janus Capital Group Inc. was inadvertently
disclosed.
SIGNATURE
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 4, 2003.
DST Systems, Inc.
/s/ Kenneth V. Hager
- --------------------------
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
30