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 Exchange Act of 1934
Date of Report (Date of earliest event reported):
DECEMBER 1, 2003
DST SYSTEMS, INC.
(Exact name of company as specified in its charter)
DELAWARE 1-14036 43-1581814
(State or other jurisdiction (Commission file number) (IRS Employer
of incorporation) Identification Number)
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)
NOT APPLICABLE
(Former name or former address if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On December 1, 2003, DST Systems, Inc. ("DST") and Janus Capital Group Inc.
("Janus") completed their previously announced share exchange. Under the terms
of the transaction, Janus exchanged 32.3 million shares of DST common stock
(27.9 % of the outstanding shares) for 100% of the stock of a DST subsidiary,
DST Output Marketing Services, Inc. ("OMS"), which was previously part of DST's
Output Solutions segment. At the time of the exchange, OMS held a printing and
graphics design business valued at $115 million, as well as cash of
approximately $999 million. The transaction was structured as a tax-free
exchange under Section 355 of the Internal Revenue Code.
Janus and DST had agreed that the exchange value of the DST shares at
closing was to be determined based on the average price of DST common stock
during the twenty trading day period prior to the closing of the transaction,
but not less than $30.00 per share nor more than $34.50 per share. The per share
value determined pursuant to that agreement was $34.50.
Upon completion of the transaction, Janus still owned 7.4 million shares of
DST common stock (approximately 9% of the outstanding shares) but granted DST a
proxy to vote those shares.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(b) Pro Forma Financial Statements
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements are based
on the historical consolidated balance sheets and statements of income of DST
and OMS, adjusted to give effect to the Exchange.
The unaudited pro forma condensed statements of income for the nine months
ended September 30, 2003 and for the year ended December 31, 2002 reflect the
historical results of operations of DST less the historical operations of OMS as
if the Exchange occurred at the beginning of the earliest period presented.
The unaudited pro forma condensed combined balance sheet as of September
30, 2003 assumes that the Exchange occurred as of that date.
The following unaudited pro forma condensed financial statements have been
prepared from, and should be read in conjunction with the historical
consolidated financial statements and notes thereto of DST appearing in its
Annual Report on Form 10-K for the year ended December 31, 2002 and Quarterly
Report on Form 10-Q for the quarter ended September 30, 2003, and the historical
combined financial statements and notes of OMS for the year ended December 31,
2002 included as exhibits to the proxy statement dated November 13, 2003. These
unaudited pro forma condensed financial statements are presented for
illustrative purposes only and are not necessarily indicative of the operating
results or financial position that would have occurred had the Exchange been
consummated on the dates indicated in the preceding paragraphs, and are not
necessarily indicative of the future operating results or financial position of
DST.
DST
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
SEPTEMBER 30, 2003
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
)
ADJUSTMENTS
----------------------------------
ADDITIONAL
DST OMS ASSETS PRO FORMA
-------------- --------------- -------------- --------------
ASSETS
Current Assets
Cash and cash equivalents $ 595.7 $ $ (499.0) $ 96.7
Transfer agency investments 47.1 47.1
Accounts receivable 355.4 9.7 345.7
Other current assets 113.7 3.3 110.4
-------------- --------------- -------------- --------------
1,111.9 13.0 (499.0) 599.9
Investments 1,239.8 1,239.8
Properties 649.9 4.0 645.9
Goodwill 261.3 261.3
Intangibles 126.5 126.5
Other assets 55.3 6.0 0.2 (6) 49.5
-------------- --------------- -------------- --------------
Total assets $ 3,444.7 $ 23.0 $ (498.8) $ 2,922.9
============== =============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Debt due within one year $ 26.7 $ $ 26.7
Transfer agency deposits 47.1 47.1
Accounts payable 117.5 3.2 114.3
Accrued compensation and benefits 99.2 1.8 97.4
Deferred revenues and gains 84.9 84.9
Other liabilities 126.7 6.1 120.6
-------------- --------------- -------------- --------------
502.1 11.1 491.0
Long-term debt 971.6 500.4 (3) 1,472.0
Deferred income taxes 361.6 361.6
Other liabilities 82.3 82.3
-------------- --------------- -------------- --------------
1,917.6 11.1 500.4 2,406.9
-------------- --------------- -------------- --------------
Commitments and contingencies
-------------- --------------- -------------- --------------
Stockholders' equity
Common stock 1.3 1.3
Additional paid-in capital 363.2 (363.2) (6)
Retained earnings 1,326.5 11.9 (636.0) (6) 678.6
Treasury stock (455.5) (1) (455.5)
Accumulated other comprehensive income 291.6 291.6
-------------- --------------- --------------- ---------------
Total stockholders' equity 1,527.1 11.9 (999.2) 516.0
-------------- --------------- --------------- ---------------
Total liabilities and stockholders' equity $ 3,444.7 $ 23.0 $ (498.8) $ 2,922.9
============== =============== =============== ===============
See accompanying notes to unaudited pro forma condensed financial statements.
DST
UNAUDITED PRO FORMA CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ADJUSTMENTS
--------------- -- ----------------
ADDITIONAL
DST OMS(2) ASSETS PRO FORMA
----------------- --------------- ---------------- -------------
Total revenues $ 1,806.5 $ 65.7 $ $ 1,740.8
Costs and expenses 1,471.7 61.1 1,410.6
Depreciation and amortization 108.7 2.6 106.1
----------------- --------------- ---------------- -------------
Income from operations 226.1 2.0 224.1
Interest expense (14.3) (26.0) (3) (40.3)
Other income, net 18.6 18.6
Equity in earnings of unconsolidated affiliates 7.8 7.8
----------------- --------------- ---------------- -------------
Income (loss) before income taxes 238.2 2.0 (26.0) 210.2
Provision (benefit) for income taxes 80.9 0.8 (10.1) (4) 70.0
----------------- --------------- ---------------- -------------
Net income (loss) from continuing operations $ 157.3 $ 1.2 $ (15.9) $ 140.2
================= =============== ================ =============
Average common shares outstanding 117.9 (32.3) (5) 85.6
Diluted shares outstanding 119.2 (32.3) (5) 86.9
Basic earnings per share $ 1.33 $ 0.49 (7) $ 1.64
Diluted earnings per share $ 1.32 $ 0.49 (7) $ 1.61
See accompanying notes to unaudited pro forma condensed financial statements.
DST
UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR YEAR ENDED DECEMBER 2002
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
ADJUSTMENTS
---------------- -- --------------
ADDITIONAL
DST OMS (2) ASSETS PRO FORMA
--------------- ---------------- -------------- --------------
Total revenues $ 2,383.8 $ 105.7 $ $ 2,278.1
Costs and expenses 1,936.7 95.8 1,840.9
Depreciation and amortization 143.8 5.3 138.5
--------------- ---------------- -------------- --------------
Income from operations 303.3 4.6 298.7
Interest expense (13.4) (0.1) (41.5) (3) (54.8)
Other income, net 20.2 20.2
Equity in earnings of unconsolidated affiliates 6.5 6.5
--------------- ---------------- -------------- --------------
Income (loss) before income taxes 316.6 4.5 (41.5) 270.6
Provision (benefit) for income taxes 107.6 1.9 (16.2) (4) 89.5
--------------- ---------------- -------------- --------------
Net income (loss) from continuing operations $ 209.0 $ 2.6 $ (25.3) $ 181.1
=============== ================ ============== ==============
Average common shares outstanding 120.0 (32.3) (5) 87.7
Diluted shares outstanding 121.7 (32.3) (5) 89.4
Basic earnings per share $ 1.74 $ $ 0.78 (7) $ 2.06
Diluted earnings per share $ 1.72 $ $ 0.78 (7) $ 2.03
See accompanying notes to unaudited pro forma condensed financial statements.
DST
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
1. On August 25, 2003, DST, OMS (a wholly-owned subsidiary of DST) and Janus
entered into a Share Exchange Agreement that provides for the exchange of
all of the outstanding shares of OMS owned by DST for 32.3 million shares
of DST Common Stock owned by Janus. The Exchange has been designed to
comply with Section 355 of the Internal Revenue Code, accordingly, DST
should not incur income tax relating to the split-off of OMS. Under the
terms of the Share Exchange Agreement, the Janus DST Shares will be valued
at a price ranging from $30.00 to $34.50 per share, based on the average
closing price for the 20 trading days preceding the Closing of the
Exchange. DST will equalize the difference between the negotiated value of
OMS of $115.0 million and the gross transaction value, which can range from
$969.0 million to $1,114.4 million, with cash ranging from $854.0 million
to $999.4 million (Additional Assets).
On November 28, 2003, DST held a special shareholder meeting. At that
meeting, DST shareholders approved the previously announced Share Exchange
Agreement, dated August 25, 2003 by and among DST, DST Output Marketing
Services, Inc. and Janus Capital Group Inc. The Exchange closed on December
1, 2003. Based on the average closing price of DST Common Stock and terms
within the Share Exchange Agreement, $34.50 was used as the DST Common
Stock share price. DST contributed cash of $999.4 million to equalize the
difference between the negotiated value of OMS of $115.0 million and the
final transaction value determined for the Exchange. For accounting
purposes, the treasury stock is recorded at the implied transaction value
($1,126.0 million), which represents the value of OMS on the Exchange date
and the contributed cash. Immediately after the Exchanged closed, the
shares received were retired.
2. Reflects the historical operations of OMS for the nine months ended
September 30, 2003 and for the year ended December 31, 2002 and the
financial position of OMS at September 30, 2003, respectively.
3. Reflects the annual interest expense of $41.5 million resulting from
funding the contribution of the Additional Assets ($999.4 million) to OMS
based on $34.50 per share of DST Common Stock at Closing. The interest
expense for the nine month period ended September 30, 2003 is $31.2 million
based on the following calculation. DST funded the Additional Assets as
follows (dollars in millions):
PRINCIPAL INTEREST
DEBT ISSUED AMOUNT INTEREST RATE EXPENSE
----------------------------------------------------- ---------------- ---------------- -------------
Convertible notes $ 840.0 3.95% $ 33.2
Secured revolving credit facility draws
specifically used for the Exchange 180.4 2.75% 4.9
---------------- -------------
Total 1,020.4 38.1
Less debt issuance costs (21.0) 5 - 7 years 3.4
---------------- -------------
Net $ 999.4 $ 41.5
================ =============
On August 12, 2003, DST completed its offering of $840.0 million in
Convertible Senior Debentures due 2023. For the nine months ended September
30, 2003, the DST historical numbers include $5.2 million in interest
expense related to the convertible notes and debt issuance costs. If the
convertible notes were issued as of January 1, 2002, the interest expense
related to the convertible notes would have been $27.5 million for the nine
months ended September 30, 2003. The debt issuance costs represents 2.5% of
the offering paid to the underwriters.
The DST secured revolving credit facility is subject to a variable interest
rate. The effect of a 1/8% variance in the interest rate on net income is
$0.2 million based on a transaction value of $34.50 per share.
An additional $500.4 million was borrowed to help fund the $999.4 million
in Additional Assets related to the Exchange. Of the additional borrowings,
$320.0 million was used to finance existing debt and $180.4 million was
used to fund the Exchange. The $320.0 million was needed due to DST using a
portion of the convertible notes proceeds to payoff existing debt at the
time of the Convertible Notes offering.
4. Reflects the income tax effects of the pro forma adjustments for the
Additional Assets at DST's statutory income tax rate of 39%.
5. Reflects the reduction in average and diluted shares outstanding of 32.3
million shares in accordance with the Share Exchange Agreement.
6. The accompanying pro forma income statements do not reflect an estimated
$114.3 million gain expected to be realized from the Share Exchange
Agreement. The gain has not been reflected in the pro forma income
statements given the non-recurring nature of the gain. For accounting
purposes, approximately 29.0 million shares were allocated to the cash
portion of the Exchange and approximately 3.3 million shares were allocated
to the value of OMS. The shares allocated to OMS are valued at $37.97,
which was the closing price of DST Common Stock as of December 1, 2003.
The accompanying pro forma balance sheet reflects the net gain in retained
earnings as of September 30, 2003 and reflects the following (in millions):
Description Amount
--------------------------------------------------- -------------------
Value of OMS $ 126.6
Investment in OMS as of
September 30, 2003 (11.9)
Stock option compensation expense ($0.6), net of
tax 39% ($0.2) (0.4)
-------------------
Net gain on transaction $ 114.3
===================
The $0.2 million deferred tax asset is shown as an adjustment to other
assets in the accompanying pro forma balance sheet.
7. The debentures are convertible under certain circumstances into shares of
DST Common Stock per $1,000 original principal amount of debentures at an
initial conversion rate of 20.3732 shares, each subject to adjustment in
certain events. This is equivalent to an initial conversion price of $49.08
per share for the debentures. Upon conversion, DST has the right to
deliver, in lieu of DST Common Stock, cash or any combination of cash and
DST Common Stock. If the conversion criteria were met, the debentures would
be convertible to 17,113,488 shares of DST Common Stock. Since the
conversion criteria is not met, the shares are not reflected in the
earnings per share. Management currently intends to pay cash in the event
the debt is put.
(c) Exhibits
Exhibit No. Description of Document
99.1 Share Exchange Agreement dated August 25, 2003 by and among
DST Systems, Inc., DST Output Marketing Services, Inc. and
Janus Capital Group Inc., which is attached as Appendix A to
the Company's Definitive Proxy Statement for the Special
Meeting of Stockholders on November 28, 2003, is hereby
incorporated by reference as Exhibit 99.1
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 hereunto duly authorized.
DST Systems, Inc.
Date: December 16, 2003 By: /S/ KENNETH V. HAGER
--------------------------------
Kenneth V. Hager
Vice President and
Chief Financial Officer