UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 1-14036
DST SYSTEMS, INC.
(Exact name of Company as specified in its charter)
Delaware 43-1581814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
333 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 435-1000
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the Company's common
stock as of March 31, 2000:
Common Stock $.01 par value - 62,758,160
<PAGE>
DST Systems, Inc.
Form 10-Q
March 31, 2000
Table of Contents
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 3
Condensed Consolidated Balance Sheet -
March 31, 2000 and December 31, 1999 4
Condensed Consolidated Statement of Income -
Three Months Ended March 31, 2000 and 1999 5
Condensed Consolidated Statement of Cash Flows -
Three Months Ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
The Company's service marks and trademarks include without limitation DST(R),
Automated Work Distributor(TM), AWD(R), FAST(TM) referred to in this Report.
2
DST Systems, Inc.
Form 10-Q
March 31, 2000
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 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, 1999. Additionally, the Condensed
Consolidated Financial Statements should be read in conjunction with Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this Form 10-Q.
The results of operations for the three months ended March 31,
2000, are not necessarily indicative of the results to be
expected for the full year 2000.
3
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Balance Sheet
(dollars in millions, except per share amounts)
(unaudited)
March 31, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 72.8 $ 89.0
Accounts receivable 328.0 320.6
Other current assets 51.3 54.9
--------------- ---------------
452.1 464.5
Investments 1,520.1 1,477.7
Properties 343.7 338.7
Intangibles and other assets 42.6 45.4
--------------- ---------------
Total assets $ 2,358.5 $ 2,326.3
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Debt due within one year $ 13.1 $ 18.4
Accounts payable 74.4 93.7
Accrued compensation and benefits 35.1 57.9
Deferred revenues and gains 42.1 44.1
Other liabilities 94.4 71.7
--------------- ---------------
259.1 285.8
Long-term debt 52.5 44.4
Deferred income taxes 460.2 452.2
Other liabilities 84.3 80.3
--------------- ---------------
856.1 862.7
--------------- ---------------
Commitments and contingencies
--------------- ---------------
Stockholders' equity
Common stock, $0.01 par; 125,000,000 shares authorized,
63,816,639 shares issued 0.6 0.6
Additional paid-in capital 450.3 454.2
Retained earnings 572.4 516.2
Treasury stock (1,058,479 and 690,269 shares,
respectively), at cost (64.9) (40.1)
Accumulated other comprehensive income 544.0 532.7
--------------- ---------------
Total stockholders' equity 1,502.4 1,463.6
--------------- ---------------
Total liabilities and stockholders' equity $ 2,358.5 $ 2,326.3
=============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Income
(in millions, except per share amounts)
(unaudited)
For the Three Months
Ended March 31,
2000 1999
-------------- ---------------
<S> <C> <C>
Revenues $ 340.4 $ 298.4
Costs and expenses 245.1 221.0
Depreciation and amortization 31.6 27.5
-------------- ---------------
Income from operations 63.7 49.9
Interest expense (1.4) (1.5)
Other income, net 21.3 1.7
Equity in earnings of unconsolidated affiliates 4.1 2.2
-------------- ---------------
Income before income taxes and minority interests 87.7 52.3
Income taxes 31.5 18.8
-------------- ---------------
Income before minority interests 56.2 33.5
Minority interests (0.1)
-------------- ---------------
Net income $ 56.2 $ 33.6
============== ===============
Average common shares outstanding 62.9 63.0
Diluted shares outstanding 64.4 64.7
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<TABLE>
<CAPTION>
DST Systems, Inc.
Condensed Consolidated Statement of Cash Flows
(in millions)
(unaudited)
For the Three Months
Ended March 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Cash flows -- operating activities:
Net income $ 56.2 $ 33.6
---------------- ----------------
Depreciation and amortization 31.6 27.5
Equity in earnings of unconsolidated affiliates (4.1) (2.2)
Net realized gain from sale of investments (7.6) (3.3)
Changes in accounts receivable (7.4) (6.3)
Changes in other current assets 4.6 (6.3)
Changes in accounts payable and accrued liabilities (17.3) (29.0)
Other, net (3.3) 2.2
---------------- ----------------
Total adjustments to net income (3.5) (17.4)
---------------- ----------------
Net 52.7 16.2
---------------- ----------------
Cash flows -- investing activities:
Proceeds from sale of investments 15.3 9.7
Investments and advances to unconsolidated affiliates (27.1) (6.0)
Capital expenditures (32.0) (25.3)
Other, net 4.6 (0.5)
---------------- ----------------
Net (39.2) (22.1)
---------------- ----------------
Cash flows -- financing activities:
Proceeds from issuance of common stock 3.1 3.1
Proceeds from issuance of long-term debt 11.5
Principal payments on long-term debt (3.4) (4.6)
Net increase in revolving credit
facilities and notes payable 5.1 14.8
Common stock repurchased (34.5) (2.8)
Other, net (0.7)
---------------- ----------------
Net (29.7) 21.3
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (16.2) 15.4
Cash and cash equivalents at beginning of period 89.0 28.1
---------------- ----------------
Cash and cash equivalents at end of period $ 72.8 $ 43.5
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
DST Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Summary of Accounting Policies
The Condensed Consolidated Financial Statements of DST Systems, Inc. ("DST" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States 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, 1999.
Additionally, the Condensed Consolidated Financial Statements should be read in
conjunction with Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations included in this Form 10-Q.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal interim
closing procedures) necessary to present fairly the financial position of the
Company and its subsidiaries at March 31, 2000 and December 31, 1999, and the
results of operations and cash flows for the three months ended March 31, 2000
and 1999.
The results of operations for the three months ended March 31, 2000, are not
necessarily indicative of the results to be expected for the full year 2000.
2. USCS Merger Integration Costs
In December 1998, DST's management approved plans which include initiatives to
integrate the operations of certain DST and USCS subsidiaries and consolidate
facilities. Total accrued integration costs of $16.9 million were recorded in
the fourth quarter of 1998, of which $0.7 million, $12.8 million and $3.4
million related to the Financial Services, Output Solutions, and Customer
Management Segments, respectively.
The Company utilized $0.1 million in the quarter ended March 31, 2000 related to
the accrued integration costs. Of the remaining accrued integration costs of
$5.2 million at March 31, 2000, $0.1 million, $3.5 million, and $1.6 million
relate to the Financial Services, Output Solutions, and Customer Management
Segments, respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 2000 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
2000 through 2003. Five locations have been closed as of March 31, 2000. The
remainder will be closed in 2000 once arrangements have been made to process
continuing business at other facilities. The costs of transitioning the
continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things, additional employee
costs, relocation and integration costs of moving to common internal systems.
Although precise estimates cannot be made, management does not believe such
costs will have a material adverse effect on the Company's consolidated results
of operations, liquidity or financial position.
7
3. Investments
Investments are as follows (in millions):
<TABLE>
<CAPTION>
Carrying Value
-----------------------------------
Ownership March 31, December 31,
Percentage 2000 1999
-------------------- ---------------- ----------------
<S> <C> <C> <C>
Available-for-sale securities:
Computer Sciences Corporation 5% $ 683.0 $ 816.8
State Street Corporation 4% 581.3 438.4
Euronet Services Inc. 12% 20.3 14.4
Other available-for-sale securities 83.7 63.3
---------------- ----------------
1,368.3 1,332.9
---------------- ----------------
Unconsolidated affiliates:
Boston Financial Data Services, Inc. 50% 52.3 48.3
European Financial Data Services Limited 50% 10.8 8.0
Argus Health Systems, Inc. 50% 6.5 6.4
Other unconsolidated affiliates 35.2 34.8
---------------- ----------------
104.8 97.5
---------------- ----------------
Other:
Net investment in leases 13.0 16.0
Other 34.0 31.3
---------------- ----------------
47.0 47.3
---------------- ----------------
Total investments $ 1,520.1 $ 1,477.7
================ ================
</TABLE>
Certain information related to the Company's available for sale securities is as
follows (in millions):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Cost $ 471.8 $ 456.5
Gross unrealized gains 898.3 877.9
Gross unrealized losses (1.8) (1.5)
----------------- -----------------
Market value $ 1,368.3 $ 1,332.9
================= =================
</TABLE>
8
The following table summarizes equity in earnings (losses) of unconsolidated
affiliates (in millions):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
------------ -------------
<S> <C> <C>
Boston Financial Data Services, Inc. $ 4.0 $ 2.7
European Financial Data Services Limited 0.3 (1.4)
Argus Health Systems, Inc. 0.2 0.9
Other (0.4)
------------ -------------
$ 4.1 $ 2.2
============ =============
</TABLE>
4. Earnings Per Share and Comprehensive Income
Earnings per share. The computation of basic and diluted earnings per share is
as follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
------------- -------------
<S> <C> <C>
Net income $ 56.2 $ 33.6
============= =============
Average common shares outstanding 62.9 63.0
Incremental shares from assumed
conversions of stock options 1.5 1.7
------------- -------------
Diluted potential common shares 64.4 64.7
============= =============
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
</TABLE>
9
Comprehensive income. Components of comprehensive income consist of the
following (in millions):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
-------------- -------------
<S> <C> <C>
Net income $ 56.2 $ 33.6
-------------- -------------
Other comprehensive income:
Unrealized gains (losses) on investments:
Unrealized holding gains (losses) arising
during the period 27.7 (6.1)
Less reclassification adjustments for gains
included in net income (7.6) (3.3)
Foreign currency translation adjustments (0.8) 0.7
Deferred income taxes (8.0) 3.7
-------------- -------------
Other comprehensive income 11.3 (5.0)
-------------- -------------
Comprehensive income $ 67.5 $ 28.6
============== =============
</TABLE>
5. 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, certain investments in equity securities,
financial interests and real estate holdings are reflected in an Investments and
Other Segment. The Company evaluates the performance of its segments based on
income before income taxes, non-recurring items and interest expense.
Effective January 1, 2000, the Output Solutions Segment began reporting certain
revenue and expense items on a gross basis rather than a net basis. The segment
information prior to January 1, 2000 has been restated to reflect these changes.
The effect of these changes increased Consolidated and Output Solutions Segment
revenues and costs and expenses by $5.6 million, $5.7 million, $5.9 million and
$7.0 million for the quarters ended March 31, 1999, June 30, 1999, September 30,
1999 and December 31, 1999, respectively. Effective July 1, 1999, certain
intersegment revenue agreements between the Output Solutions Segment and the
Customer Management Segment were revised. The segment information prior to July
1, 1999 has been restated to reflect this change. The effect of these revisions
decreased Output Solutions Segment revenues and Customer Management Segment
costs and expenses by $0.8 million for the quarter ended March 31, 1999 and
increased Output Solutions Segment revenues and Customer Management Segment
costs and expenses by $0.2 million for the quarter ended June 30, 1999.
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):
10
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 147.3 $ 141.8 $ 48.7 $ 2.6 $ $ 340.4
Intersegment revenues 0.5 13.4 5.6 (19.5)
------------- ------------- ------------- ------------- ------------- --------------
147.8 155.2 48.7 8.2 (19.5) 340.4
Costs and expenses 94.5 123.3 42.1 4.7 (19.5) 245.1
Depreciation and amortization 17.5 7.9 4.1 2.1 31.6
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 35.8 24.0 2.5 1.4 63.7
Other income, net 0.8 20.5 21.3
Equity in earnings (losses) of
unconsolidated affiliates 4.4 (0.3) 4.1
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 41.0 $ 24.0 $ 2.5 $ 21.6 $ $ 89.1
============= ============= ============= ============= ============= ==============
Three Months Ended March 31, 1999
------------------------------------------------------------------------------------------
Financial Output Customer Investments/ Consolidated
Services Solutions Management Other Eliminations Total
------------- ------------- ------------- ------------- ------------- --------------
Revenues $ 134.2 $ 113.2 $ 48.2 $ 2.8 $ $ 298.4
Intersegment revenues 0.4 12.7 5.4 (18.5)
------------- ------------- ------------- ------------- ------------- --------------
134.6 125.9 48.2 8.2 (18.5) 298.4
Costs and expenses 90.5 103.1 41.6 4.3 (18.5) 221.0
Depreciation and amortization 14.9 7.1 3.6 1.9 27.5
------------- ------------- ------------- ------------- ------------- --------------
Income from operations 29.2 15.7 3.0 2.0 49.9
Other income (loss), net 0.3 0.1 (0.1) 1.4 1.7
Equity in earnings (losses) of
unconsolidated affiliates 2.2 0.1 (0.1) 2.2
------------- ------------- ------------- ------------- ------------- --------------
Income before interest
and income taxes $ 31.7 $ 15.9 $ 2.9 $ 3.3 $ $ 53.8
============= ============= ============= ============= ============= ==============
</TABLE>
The consolidated total income before interest and income taxes as shown in the
segment reporting information above less interest expense of $1.4 million and
$1.5 million for the three months ended March 31, 2000 and 1999, respectively,
is equal to the Company's income before income taxes and minority interests on a
consolidated basis for the corresponding periods.
11
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 25, 1999, which is hereby incorporated
by reference. This report has been filed with the United States Securities and
Exchange Commission ("SEC") in Washington, D.C. and can be obtained by
contacting the SEC's Public Reference Branch. Readers are strongly encouraged to
obtain and consider the factors listed in the March 25, 1999 Current Report and
any amendments or modifications thereof when evaluating any forward-looking
statements concerning the Company. The Company will not update any
forward-looking statements in this Quarterly Report to reflect future events or
developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included in
this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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, certain investments in equity securities,
financial interests and real estate holdings are reflected in an Investments and
Other Segment. A summary of each of the Company's segments follows:
Financial Services
The Financial Services Segment provides sophisticated information processing and
computer software services and products primarily to mutual funds, investment
managers, insurance companies, banks, brokers and financial planners.
Output Solutions
The Output Solutions Segment provides complete bill and statement processing
services and solutions, including electronic presentment, which include
generation of customized statements that are produced in sophisticated automated
facilities designed to minimize turnaround time and mailing costs.
Customer Management
The Customer Management Segment provides sophisticated customer management and
open billing solutions to the video/broadband, direct broadcast satellite
("DBS"), wireless, wire-line and Internet-protocol telephony, Internet and
utility markets worldwide.
Investments and Other
The Investments and Other Segment holds investments in equity securities,
certain financial interests, the Company's real estate subsidiaries and the
Company's computer hardware leasing subsidiary.
12
RESULTS OF OPERATIONS
The following table summarizes the Company's operating results (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------------
Operating results 2000 1999
------------- -------------
<S> <C> <C>
Revenues
Financial Services $ 147.8 $ 134.6
Output Solutions 155.2 125.9
Customer Management 48.7 48.2
Investments and Other 8.2 8.2
Eliminations (19.5) (18.5)
------------- -------------
$ 340.4 $ 298.4
============= =============
% change from prior year periods 14.1% 12.2%
Income from operations
Financial Services $ 35.8 $ 29.2
Output Solutions 24.0 15.7
Customer Management 2.5 3.0
Investments and Other 1.4 2.0
------------- -------------
63.7 49.9
Interest expense (1.4) (1.5)
Other income, net 21.3 1.7
Equity in earnings of unconsolidated
affiliates, net of income taxes 4.1 2.2
------------- -------------
Income before income taxes and
minority interests 87.7 52.3
Income taxes 31.5 18.8
Minority interests (0.1)
------------- -------------
Net income $ 56.2 $ 33.6
============= =============
Basic earnings per share $ 0.89 $ 0.53
Diluted earnings per share $ 0.87 $ 0.52
</TABLE>
Consolidated revenues
Consolidated revenues for the three months ended March 31, 2000 increased $42.0
million, which represents an increase of 14.1%, over the comparable period in
1999. U.S. revenues for the three months ended March 31, 2000 were $302.7
million, an increase of 17.5%, over the same period in 1999. International
revenues for the three months ended March 31, 2000 were $37.7 million, a
decrease of 7.6% over the same period in 1999.
Financial Services Segment revenues for the three months ended March 31, 2000
increased $13.2 million, or 9.8% over the same period in 1999. U.S. Financial
Services Segment revenues for the three months ended March 31, 2000 increased
$16.7 million or 16.3% over the same period in 1999, primarily from an increase
in mutual fund shareowner accounts processed. International Financial Services
Segment revenues for the three months ended March 31, 2000 decreased $3.5
million or 10.9% over the same period in 1999.
13
Output Solutions Segment revenues for the three months ended March 31, 2000
increased $29.3 million, or 23.3%, over the same period in 1999. Revenue growth
resulted from increased volume of images and statements produced from U.S.
mutual fund shareowner account growth, new customers, and internal growth of
existing customers primarily in telecommunications and package delivery
industries.
Customer Management Segment revenues for the three months ended March 31, 2000
increased $0.5 million, or 1.0% over same period in 1999, as processing and
software service revenues increased primarily from subscriber growth and
increased services.
Investments and Other Segment revenues were $8.2 million for the three months
ended March 31, 2000 and 1999. Segment revenues are primarily rental income for
facilities leased to the Company's operating segments and hardware leasing
activities.
Income from operations
Consolidated income from operations for the three months ended March 31, 2000
increased $13.8 million, or 27.7%, over same period in 1999. U.S. income from
operations for the three months ended March 31, 2000 was $59.2 million, an
increase of 36.4% over the same period in 1999. International income from
operations was $4.5 million, a decrease of 29.7% compared to the same period in
1999.
Financial Services income from operations for the three months ended March 31,
2000 increased 22.6% or $6.6 million over the prior year quarter to $35.8
million, resulting in an operating margin of 24.2% compared to 21.7% for the
prior year. The increase in operating margin resulted primarily from an increase
in U.S. revenues related to mutual fund shareowner processing.
Output Solutions Segment income from operations for the three months ended March
31, 2000 increased $8.3 million, or 52.9%, over the same period in 1999. Output
Solutions Segment operating margin was 15.5% for the three months ended March
31, 2000 compared to 12.5% for the same period in 1999. The improvement in the
2000 operating margin results are primarily from increased volume of images and
statements produced.
In the first quarter 2000, Customer Management Segment income from operations
decreased $0.5 million or 16.7% compared to the prior year quarter, resulting in
an operating margin of 5.1% as compared to 6.2% for the prior year quarter. The
decreases were primarily attributable to increased costs of international
operations.
Investments and Other Segment income from operations was $1.4 million for the
three months ended March 31, 2000, as compared to $2.0 million for the three
months ended March 31, 1999.
Interest expense
Interest expense totaled $1.4 million for the three months ended March 31, 2000,
down from $1.5 million recorded in the comparable period in 1999. Average debt
balances were lower in 2000 compared to 1999.
Other income, net
Other income was $21.3 million for the three months ended March 31, 2000,
compared to $1.7 million for the comparable period in 1999. The increase is
primarily a result of a $10.8 million pretax settlement of a legal dispute
related to a former equity investment. The settlement agreement resolves all
outstanding issues related to this former equity investment. Other income also
includes gains from the sale of available-for-sale
14
securities of $7.6 million and interest and dividend income of $2.9 million for
the three months ended March 31, 2000.
Equity in earnings of unconsolidated affiliates
Equity in earnings of unconsolidated affiliates totaled $4.1 million for the
three months ended March 31, 2000, as compared to $2.2 million for the three
months ended March 31, 1999. Increased earnings were recorded at Boston
Financial Data Services from higher levels of mutual fund activity. The Company
recorded earnings from European Financial Data Services (EFDS) of $0.3 million
for the three months ended March 31, 2000, as compared to a recorded loss of
$1.4 million for the three months ended March 31, 1999. EFDS was positively
affected by an increase of 0.7 million accounts serviced to 2.3 million accounts
from the prior period in 1999, seasonal processing revenues related to U.K.
retirement plan funding deadlines and non-recurring overflow processing
performed for certain remote clients. EFDS continues to incur system development
and conversion costs for FAST(TM). Management believes that EFDS' results for
the first quarter 2000 are not indicative of their results for the remainder of
the year. Earnings from Argus Health Systems for the three months ended March
31, 2000 decreased from the prior year period primarily from increased data
processing costs and depreciation charges.
Income taxes
The Company's effective tax rate was 35.9% for the three months ended March 31,
2000 and 1999. The 2000 and 1999 tax rates were affected by tax benefits
relating to certain international operations and recognition of state tax
benefits associated with income apportionment rules.
Business Segment Comparisons
FINANCIAL SERVICES SEGMENT
Revenues
Financial Services Segment revenues for the three months ended March 31, 2000
increased 9.8% over the same period in 1999 to $147.8 million. U.S. Financial
Services revenue increased 16.3% to $119.2 million for the three months ended
March 31, 2000. U.S. mutual fund processing revenues for the three months ended
March 31, 2000 increased 19.2% over the prior year period as shareowner accounts
serviced increased 9.4 million from March 31, 1999 to 61.0 million at March 31,
2000. The Company has contracts with new clients to convert approximately 5.5
million new accounts to its system during 2000.
Financial Services Segment revenues from international operations for the three
months ended March 31, 2000 decreased 10.9% to $28.6 million. The decrease for
the quarter was attributable to a decline in professional service revenues and
investment management software license revenues, partially resulting from
customer Year 2000 software installation freezes that affected activity during
the first quarter 2000. This decrease was partially offset by higher Canadian
mutual fund shareowner processing revenues and an increase in international
Automated Work Distributor ("AWD") software license and maintenance revenues.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
4.4% to $94.5 million over the comparable period in 1999. Personnel costs for
the three months ended March 31, 2000 increased 4.6% over the comparable prior
year period as a result of increased staff levels to support volume growth and
increased wages for data processing professionals.
Depreciation and amortization
Segment depreciation and amortization for the three months ended March 31, 2000
increased 17.4% or $2.6 million over the comparable period in 1999. The increase
is partially attributable to the amortization of capitalized software
development costs.
15
Income from operations
The Segment's income from operations for the three months ended March 31, 2000
increased 22.6% to $35.8 million over the comparable prior year period. The
Segment's operating margin was 24.2% and 21.7% for the three months ended March
31, 2000 and 1999, respectively. The increases in Financial Services Segment
operating margins are a result of increased U.S. revenues.
OUTPUT SOLUTIONS SEGMENT
Revenues
Output Solutions Segment revenues for the three months ended March 31, 2000
increased 23.3% to $155.2 million as compared to the same period in 1999. The
growth in segment revenue was derived primarily from an increase in the volume
of images and statements produced from growth of existing customers in the
Financial Services Segment, new customers and internal growth of existing
customers, primarily in telecommunications and package delivery industries.
Output Solutions Segment images produced for the three months ended March 31,
2000 increased 17.2% to 1.8 billion and statements mailed increased 18.3% to
484.7 million, compared to the same period in 1999. In order to conform to 2000
presentation, Output Solutions Segment revenues for the first quarter 1999 were
restated to reflect an increase of $5.6 million.
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
19.6% to $123.3 million over the comparable prior year period. Personnel costs
for the three months ended March 31, 2000 increased 19.6% over the comparable
prior year period as a result of increased staff levels to support volume
growth, increased product development costs and integration costs to standardize
facilities and systems.
Depreciation and amortization
Depreciation and amortization for the three months ended March 31, 2000
increased 11.3% to $7.9 million compared to the same period in 1999. The
increase is related primarily to the purchase of additional capital equipment to
support revenue growth.
Income from operations
The increase in the Segment's income from operations for the three months ended
March 31, 2000 of $8.3 million or 52.9% over the same period in 1999 is
primarily attributable to increased volumes for images and statements. The
Segment's operating margins were 15.5% and 12.5% for the three months ended
March 31, 2000 and 1999, respectively.
CUSTOMER MANAGEMENT SEGMENT
Revenues
Customer Management Segment revenues for the three months ended March 31, 2000
increased 1.0% to $48.7 million from $48.2 million for the three months ended
March 31, 1999. Processing and software service revenues increased $0.6 million
for the three months ended March 31, 2000, from $45.4 million for the three
months ended March 31, 1999.
16
Costs and expenses
Segment costs and expenses for the three months ended March 31, 2000 increased
$0.5 million or 1.2%, compared to the same period in 1999, which is primarily
attributable to increased costs of international operations.
Depreciation and amortization
Depreciation and amortization increased $0.5 million for the three months ended
March 31, 2000, or 13.9%, compared to the same period in 1999, of which $0.3
million is attributable to the amortization of capitalized software development
costs.
Income from operations
The Segment's income from operations for the three months ended March 31, 2000
decreased $0.5 million, or 16.7%, compared to the same period in 1999, resulting
in an operating margin of 5.1% for the three months ended March 31, 2000, as
compared to 6.2% for the three months ended March 31, 1999.
INVESTMENTS AND OTHER SEGMENT
Revenues
Investments and Other Segment revenues totaled $8.2 million for the three months
ended March 31, 2000 and 1999. Real estate revenues of $7.0 million for the
three months ended March 31, 2000, as compared to $6.6 million for the three
months ended March 31, 1999, were primarily derived from the lease of facilities
to the Company's other business segments. Revenues of $1.2 million for the three
months ended March 31, 2000, as compared to $1.6 million for the three months
ended March 31, 1999, were derived from the Segment's hardware leasing
activities.
Costs and expenses
Investments and Other Segment costs and expenses increased $0.4 million to $4.7
million for the three months ended March 31, 2000 as compared to $4.3 million
for the three months ended March 31, 1999, primarily as a result of additional
real estate activities.
Depreciation and amortization
Investments and Other Segment depreciation and amortization totaled $2.1 million
and $1.9 million for the three months ended March 31, 2000 and 1999,
respectively.
Income from operations
The segment's income from operations totaled $1.4 million and $2.0 million for
the three months ended March 31, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flow from operating activities totaled $52.7 million for the
three months ended March 31, 2000. Operating cash flows for the three months
ended March 31, 2000 were primarily impacted by net income of $56.2 million,
depreciation and amortization of $31.6 million, a decrease in accounts payable
and accrued liabilities of $17.3 million and a net increase in accounts
receivable and other current assets of $2.8 million.
Cash flows used in investing activities totaled $39.2 million for the three
months ended March 31, 2000. The Company expended $32.0 million during the three
months for capital additions. Investments and advances to unconsolidated
affiliates totaled $27.1 million. During the three months ended March 31, 2000,
the Company received $15.3 million from the sale of investments in
available-for-sale securities.
17
Cash flows used in financing activities totaled $29.7 million for the three
months ended March 31, 2000. The Company also received proceeds from the
exercise of stock options of $3.1 million for the three months ended March 31,
2000. The Company maintains $110 million in bank lines of credit for working
capital requirements and general corporate purposes, of which $60 million
matures May 2000 and $50 million matures March 2001. The Company also maintains
a $125 million revolving credit facility with a syndicate of U.S. and
international banks which is available through December 2001. Net borrowings
under these facilities totaled $9.3 million for the three months ended March 31,
2000, bringing total borrowings under these facilities to $30.0 million.
During the quarter ended March 31, 2000, DST announced a new share repurchase
program, which authorized the repurchase of an additional 4,000,000 shares of
DST common stock. Of the additional 4,000,000 shares to be repurchased, 960,000
shares will provide shares to meet expected additional share requirements under
various DST option, incentive and benefit plans. The balance of the additional
shares will be repurchased from time to time and will be used for general
corporate purposes. During the quarter ended March 31, 2000, no shares were
repurchased under this program.
During the quarter ended March 31, 2000, DST purchased 530,000 shares of its
common stock under its previously announced 4,175,000 share repurchase program
for $34.5 million. As of March 31, 2000, DST has purchased 1,370,000 shares
since the program commenced. The shares purchased will be utilized for DST's
stock award and stock option programs.
During the fourth quarter 1999 and the first quarter 2000, the Company entered
into forward stock purchase agreements for the repurchase of up to 4.0 million
shares of its common stock as a means of securing potentially favorable prices
for future purchases of its stock. During the three months ended March 31, 2000,
no shares were purchased by the Company under this agreement. As of March 31,
2000, the cost to settle the agreements would be approximately $249.3 million
for 4.0 million shares of common stock. The agreements contain provisions which
allow the Company to elect a net cash or net share settlement in lieu of
physical settlement of the shares through September 2002.
The Company believes that its existing cash balances and other current assets,
together with cash provided by operating activities and, as necessary, the
Company's bank and revolving credit facilities, will suffice to meet the
Company's operating and debt service requirements and other current liabilities
for at least the next 12 months. Further, the Company believes that its longer
term liquidity and capital requirements will also be met through cash provided
by operating activities and bank credit facilities, as well as the Company's
$125 million revolving credit facility described above.
OTHER
Comprehensive income. The Company's comprehensive income totaled $67.5 million
and $28.6 million for the three months ended March 31, 2000 and 1999,
respectively. Comprehensive income consists of net income of $56.2 million and
$33.6 million for the three months ended March 31, 2000 and 1999, respectively,
and other comprehensive income of $11.3 million for the three months ended March
31, 2000 and other comprehensive losses of $5.0 million for the three months
ended March 31, 1999. Other comprehensive income consists of unrealized gains
(losses) on available-for-sale securities, net of deferred taxes,
reclassifications for gains included in net income and foreign currency
translation adjustments.
USCS Merger Integration Costs. In December 1998, DST's management approved plans
which include initiatives to integrate the operations of certain DST and USCS
subsidiaries and consolidate certain facilities. Total accrued integration costs
of $16.9 million were recorded in the fourth quarter of 1998, of which
18
$0.7 million, $12.8 million and $3.4 million related to the Financial Services,
Output Solutions, and Customer Management Segments, respectively.
The Company utilized $0.1 million in the quarter ended March 31, 2000. Of the
remaining accrued integration costs of $5.2 million at March 31, 2000, $0.1
million, $3.5 million, and $1.6 million relate to the Financial Services, Output
Solutions, and Customer Management Segments, respectively.
The accrued costs relate primarily to employee severance benefits which are
expected to be paid in 2000 and to facilities that will be closed. Lease
payments on closed facilities and abandoned equipment have terms which end in
2000 through 2003. Location closures are planned to occur through 2000 once
arrangements have been made to process continuing business at other facilities.
Five of the locations have been closed as of March 31, 2000. The costs of
transitioning the continuing business have not been accrued.
DST expects that other integration costs will be incurred in the future which
cannot be accrued under current accounting rules and are dependent on management
decisions. Such costs could include, among other things, additional employee
costs, relocation costs and integration costs of moving to common internal
systems. Although precise estimates cannot be made, management does not believe
such costs will have a materially adverse effect on the Company's consolidated
results of operations, liquidity or financial position.
Seasonality. Generally, the Company does not have significant seasonal
fluctuations in its business operations. Processing and output volumes for
mutual fund customers are usually highest during the quarter ended March 31 due
primarily to processing year-end transactions and printing and mailing of year
end statements and tax forms during January. The Company has historically added
operating equipment in the last half of the year in preparation for processing
year-end transactions which has the effect of increasing costs for the second
half of the year. Software license revenues and operating results are dependent
upon the timing, size, and terms of the license.
19
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.
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
March 31, 2000 was approximately $1.4 billion. The impact of a 10% change in
fair value of these investments would be approximately $89.7 million to
comprehensive income. As discussed under "Comprehensive Income" 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
At March 31, 2000, the Company had $65.5 million of long-term debt, of which
$34.4 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. As
currency exchange rates change, translation of the financial results of
international operations into U.S. dollars does not now materially affect, and
has not historically materially affected, the consolidated financial results of
the Company.
The Company's international subsidiaries use the local currency as the
functional currency. The Company translates all assets and liabilities at
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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is from time to time a party to litigation arising in the ordinary
course of its business. Currently, there are no legal proceedings that
management believes would have a material adverse effect upon the consolidated
results of operations or financial condition of the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
If a stockholder desires to have a proposal included in DST's Proxy Statement
for next year's annual meeting of stockholders, the Corporate Secretary of DST
must receive such proposal on or before November 30, 2000, and the proposal must
comply with the applicable SEC regulations and with the procedures set forth in
DST's by-laws.
21
Item 5. Other Information
The following table presents operating data for the Company's operating business
segments:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Financial Services Operating Data
Mutual fund shareowner accounts processed (millions)
U.S. 61.0 56.4
Canada 3.1 2.4
United Kingdom (1) 2.3 2.0
TRAC-2000 mutual fund accounts (millions) (2) 3.8 3.4
TRAC-2000 participants (millions) 1.3 1.3
IRA mutual fund accounts (millions) (2) 15.2 14.0
Portfolio Accounting System portfolios 2,044 1,988
Automated Work Distributor workstations 62,100 57,700
Customer Management Operating Data
Video/broadband/satellite TV subscribers processed (millions) 40.1 39.1
For the Three Months
Ended March 31,
2000 1999
--------------- ---------------
Output Solutions Operating Data
Images produced (millions) 1,835 1,566
Items mailed (millions) 485 410
(1) Processed by EFDS, an unconsolidated affiliate of the Company
(2) Included in U.S. mutual fund shareowner accounts processed
</TABLE>
22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit Number Document
3.1 DST Systems, Inc. Amended Delaware
Certificate of Incorporation as of
May 9, 2000
10.30 DST Systems, Inc. 1995 Stock Option and
Performance Award Plan, amended and
restated as of May 9, 2000
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
January 28, 2000, reporting the announcement of financial results for the
quarter ended and year ended December 31, 1999.
The Company filed under Item 5 of Form 8-K, the Company's Form 8-K dated
March 24, 2000, announcing a new Company program to repurchase shares for
use under various option and benefit plans and for general corporate
purposes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, and in the capacities indicated, on May 15, 2000.
DST Systems, Inc.
/s/ Kenneth V. Hager
Kenneth V. Hager
Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
23
STATE OF DELAWARE
CERTIFICATE OF AMENDMENT
OF CERTIFICATE OF INCORPORATION
DST Systems, Inc., a corporation organized and existing under and by virtue of
the General Corporation Law of the State of Delaware.
DOES HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of DST Systems, Inc.
resolutions were duly adopted setting forth a proposed amendment of the
Certificate of Incorporation of said corporation, declaring said amendment to be
advisable and calling a meeting of the stockholders of said corporation for
consideration thereof. The resolution setting forth the proposed amendment is as
follows:
WHEREAS, the Board deems it in the best interests of the
Corporation that Article Fourth of the Corporation's Amended
Certificate of Incorporation, filed with the Secretary of the State of
Delaware on August 31, 1995 (the "Certificate"), be amended to read as
follows:
FOURTH. The aggregate number of shares of stock which
the Corporation shall have authority to issue is 310,000,000
shares, divided into classes and with par values as follows:
Number of Shares Par Value
Class in Class Per Share
Common Stock 300,000,000 $0.01
Preferred Stock 10,000,000 $0.01
RESOLVED, that upon approval by the Corporation's
stockholders of the amendment, the officers of the Corporation
are hereby authorized and directed to execute all documents,
file all papers, pay all expenses and take all other actions
as they deem necessary or desirable with respect to the
amendment.
SECOND: That thereafter, pursuant to resolution of its Board of Directors, a
special meeting of the stockholders of said corporation was duly called and held
upon notice in accordance with Section 228 of the General Corporation Law of the
State of Delaware at which meeting the necessary number of shares as required by
statute were voted in favor of the amendment.
THIRD: That said amendment was duly adopted in accordance with the provisions of
Section 242 of the General Corporation Law of the State of Delaware.
FOURTH: That the capital of said corporation shall not be reduced under or by
reason of said amendment.
IN WITNESS WHEREOF, said DST Systems, Inc. has caused this certificate to be
signed by Robert C. Canfield, an Authorized Officer, this 9th day of May, 2000.
By: /s/ Robert C. Canfield
Robert C. Canfield
Senior Vice President,
General Counsel, and Secretary
DST SYSTEMS, INC.
1995 STOCK OPTION AND PERFORMANCE AWARD PLAN,
AMENDED AND RESTATED AS OF 05/09/2000
Section 1. Purpose.
The purposes of the DST Systems, Inc. 1995 Stock Option and Performance
Award Plan (the "Plan") are to generate an increased incentive for Employees of
the Company to contribute to the Company's future success, to secure for the
Company and its stockholders the benefits inherent in equity ownership by
Employees of the Company and to enhance the ability of the Company and its
Affiliates to attract and retain exceptionally qualified Employees upon whom, in
large measure, the sustained progress, growth and profitability of the Company
depend. By encouraging Employees of the Company and its Affiliates to acquire a
proprietary interest in the Company's growth and performance, the Company
intends to more closely align the interests of the Company's Employees,
management and stockholders and motivate Employees to enhance the value of the
Company for the benefit of all stockholders.
Section 2. Definitions.
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" means (i) any Person that directly, or
through one (1) or more intermediaries, controls, or
is controlled by, or is under common control with,
the Company, (ii) any entity in which the Company has
an equity interest of at least fifty percent (50%),
and (iii) any entity in which the Company has any
other significant equity interest, as determined by
the Committee.
(b) "Award" means any Option, Stock Appreciation Right,
Limited Right, Performance Share, Performance Unit,
Restricted Stock, Shares, Dividend Equivalent, or any
other right, interest, or option relating to Shares
granted pursuant to the provisions of the Plan.
(c) "Award Agreement" means any written agreement,
contract, or other instrument or document evidencing
any Award granted hereunder and signed by both the
Company and the Participant or by both the Company
and an Outside Director.
(d) "Board" means the Board of Directors of the Company.
(e) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
(f) "Committee" means the Compensation Committee of the
Board, or such other committee designated by the
Board, authorized to administer the Plan under
Section 3 hereof. The Committee shall consist of not
less than three (3) directors, each of whom is a
Disinterested Person within the meaning of Rule 16b-3
and an outside director within the meaning of Code
Section 162(m). Until the date of completion of the
Public Offering, the KCSI Compensation and
Organization Committee shall serve as the Committee
authorized to administer this Plan.
(g) "Company" means DST Systems, Inc., a Delaware
corporation.
(h) "Dividend Equivalent" means any right granted
pursuant to Section 13(f) hereof.
(i) "Employee" means any management employee or employee
with long standing service with the Company or of any
Affiliate, as determined by the Committee, regularly
employed for more than twenty (20) hours per week and
more than five (5) months per year.
(j) "Exchange Act" means the Securities and Exchange Act
of 1934, as amended, or any successors thereto, and
the rules and regulations promulgated thereunder, all
as shall be amended from time to time.
(k) "Fair Market Value" means, with respect to any
property, the market value of such property
determined by such methods or procedures as shall be
established from time to time by the Committee.
(l) "Incentive Stock Option" means an Option granted
under Section 6 hereof that is intended to meet the
requirements of Section 422 of the Code or any
successor provision thereto.
(m) "KCSI" means Kansas City Southern Industries, Inc.,
a Delaware corporation.
(n) "Limited Right" means any right granted to a
Participant pursuant to Section 7(b)
hereof.
(o) "Non-Qualified Stock Option" means an Option granted
under Section 6 hereof that is not intended to be an
Incentive Stock Option, and an Option granted to an
Outside Director pursuant to Section 9 hereof.
(p) "Option" means an Incentive Stock Option or
Non-Qualified Stock Option.
(q) "Outside Director" means a member of the Board wh
is not an Employee of the Company or of any
Affiliate.
(r) "Participant" means an Employee who is selected to
receive an Award under the Plan.
(s) "Performance Award" means any Award of
Performance Shares or Performance Units pursuant
to Section 8 hereof.
(t) "Performance Period" means that period established by
the Committee at the time any Performance Award is
granted or at any time thereafter during which any
performance goals specified by the Committee with
respect to such Award are to be measured.
(u) "Performance Share" means any grant pursuant to
Section 8 hereof of a unit valued by reference to a
designated number of Shares.
(v) "Performance Unit" means any grant pursuant to
Section 8 hereof of (i) a bonus consisting of cash or
other property the amount or value of which, and/or
the entitlement to which, is conditioned upon the
attainment of any performance goals specified by the
Committee, or (ii) a unit valued by reference to a
designated amount of property other than Shares.
(w) "Person" means any individual, corporation,
partnership, association, joint-stock company, trust,
unincorporated organization, or government or
political subdivision thereof.
(x) "Public Offering" means a public offering of Shares
of the Company which results in a reduction of KCSI's
ownership of Shares to less than eighty percent
(80%).
(y) "Rule 16b-3" means Rule 16b-3 promulgated by the
Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, or any
successor rule or regulation thereto.
(z) "Shares" means shares of the common stock of the
Company, one cent ($.01) par value.
(aa) "Stock Appreciation Right" means any right
granted to a Participant pursuant to Section
7(a) hereof.
(ab) "Stockholders Meeting" means the annual meeting of
stockholders of the Company in each year.
(ac) "Restricted Stock" means any Share issued with the
restriction that the holder may not sell, transfer,
pledge, or assign such Share and with such other
restrictions as the Committee, in its sole
discretion, may impose (including, without
limitation, any restriction on the right to
vote such Share, and the right to receive any
cash dividends), which restrictions may lapse
separately or in combination upon such conditions
and at such time or times, in installments or
otherwise, as the Committee may deem appropriate,
and which restriction shall provide that the Shares
subject to such restriction shall be forfeited if
the restriction does not lapse prior to such date
or such event as the Committee may deem appropriate.
(ad) "Restricted Stock Award" means an award of
Restricted Stock under Section 8A hereof.
Section 3. Administration.
The Plan shall be administered by the Committee. Subject to applicable
law and the terms of the Plan, the Committee shall have full power and authority
to: (i) designate Participants; (ii) determine the type or types of Awards to be
granted to each Participant hereunder; (iii) determine the number of Shares to
be covered by or with respect to which payments, rights, or other matters are to
be calculated in connection with each Award; (iv) determine the terms and
conditions of any Award; (v) determine whether, to what extent, and under what
circumstances Awards may be settled or exercised in cash, Shares, other
securities, other Awards, or other property, or canceled, forfeited, or
suspended, and the method or methods by which Awards may be settled, exercised,
canceled, forfeited, or suspended; (vi) determine whether, to what extent and
under what circumstances cash, Shares, other securities, other Awards, other
property and other amounts payable with respect to an Award under this Plan
shall be deferred either automatically or at the election of the Participant or
the Committee; (vii) interpret and administer the Plan and any instrument or
agreement relating to, or Award made under, the Plan; (viii) establish, amend,
suspend or waive such rules and regulations and appoint such agents as it shall
deem appropriate for the proper administration of the Plan; and (ix) make any
other determination and take any other action that the Committee deems necessary
or desirable for administration of the Plan. Subject to the terms of the Plan
(including without limitation Section 11 hereof), the Committee shall also have
the authority to grant Awards in replacement of Awards previously granted under
this Plan or any other compensation plan of the Company or an Affiliate. Unless
otherwise expressly provided in the Plan, all determinations, designations,
interpretations, and other decisions of the Committee shall be final, conclusive
and binding upon all Persons, including the Company, any Participant, any
stockholder, and any Employee of the Company or of any Affiliate. All
determinations of the Committee shall be made by a majority of its members. The
Committee, in its discretion, may delegate its authority and duties under the
Plan to the Chief Executive Officer and/or to other officers of the Company
under such conditions and/or limitations as the Committee may establish;
provided, however, that only the Committee may select and grant Awards, or
otherwise take any action with respect to Awards, to Participants who are (i)
officers or directors of the Company for purposes of Section 16 of the Exchange
Act; or (ii) Participants who are "covered employees" under Section 162(m) of
the Code.
Section 4. Shares Subject to the Plan.
(a) Subject to adjustment as provided in Section 4(c),
a total of Twelve Million (12,000,000) Shares shall be
available for the grant of Awards under the Plan. Any
Shares issued hereunder may consist, in whole or in part,
of authorized and unissued shares or treasury shares. If any
Shares subject to any Award granted hereunder are forfeited
or such Award otherwise terminates without the issuance
of such Shares or of other consideration in lieu of such
Shares, the Shares subject to such Award, to the extent of
any such forfeiture or termination, shall again be
available for grant under the Plan. In addition, to the
extent permitted by Section 422 of the Code, any Shares
issued by, and any Awards granted by or that become
obligations of, the Company through or as the result of the
assumption of outstanding grants or the substitution of
Shares under outstanding grants of an acquired company
shall not reduce the Shares available for grants under the
Plan (except in the case of Awards granted to
Participants who are officers or directors of the Company to
the extent required by Section 16 of the Exchange Act).
(b) For purposes of this Section 4,
(i) If an Award (other than a Dividend Equivalent) is
denominated in Shares, the number of Shares covered
by such Award, or to which such Award relates, shall
be counted on the date of grant of such Award against
the aggregate number of Shares available for granting
Awards under the Plan;
(ii) Dividend Equivalents and Awards not denominated in
Shares shall be counted against the aggregate number
of Shares available for granting Awards under the
Plan in such amount and at such time as the Committee
shall determine under procedures adopted by the
Committee consistent with the purposes of the Plan;
and
(iii) Awards that operate in tandem with (whether granted
simultaneously with or at a different time from), or
that are substituted for, other Awards or awards
under other Company plans may be counted or not
counted under procedures adopted by the Committee in
order to avoid double counting.
(c) In the event that the Committee shall determine that
any dividend or other distribution (whether in the form
of cash, Shares, or other securities or property), stock
split, reverse stock split, merger, reorganization,
consolidation, recapitalization, split-up, spin-off,
repurchase, exchange of shares, issuance of warrants
or other rights to purchase Shares or other securities of
the Company, or other transaction or event affects the
Shares such that an adjustment is determined by the
Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended
to be made available under the Plan, then the Committee may:
(i) make adjustments in the aggregate number and class of
shares or property which may be delivered under the Plan and
may substitute other shares or property for delivery under
the Plan, including shares of another entity which is
a party to any such merger, reorganization, consolidation
or exchange of shares; and (ii) make adjustments in the
number, class and option price of shares or property subject
to outstanding Awards and Options granted under the Plan,
and may substitute other shares or property for
delivery under outstanding Awards and Options, including
shares of another entity which is a party to any such merger,
reorganization, consolidation or exchange of shares, as
may be determined to be appropriate by the Committee in its
sole discretion, provided that the number of Shares subject
to any Award or Option shall always be a whole number. The
preceding sentence shall not limit the actions which may be
taken by the Committee under Section 10 of the Plan. No
adjustment shall be made with respect to Awards of Incentive
Stock Options that would cause the Plan to violate Section
422 of the Code.
Section 5. Eligibility.
Any Employee shall be eligible to be selected as a Participant.
Notwithstanding any other provision of the Plan to the contrary, no Participant
may be granted an Option, Limited Right, Stock Appreciation Right, Performance
Shares, Shares or Restricted Stock with respect to a number of Shares in any one
(1) calendar year which, when added to the Shares subject to any other Option,
Limited Right, Stock Appreciation Right, Performance Shares, Shares or
Restricted Stock granted to such Participant in the same calendar year shall
exceed Four Hundred Thousand (400,000) Shares. If an Option, Limited Right,
Stock Appreciation Right, or Performance Share is cancelled, the cancelled
Option, Limited Right, Stock Appreciation Right or Performance Share continues
to count against the maximum number of Shares for which an Option, Limited
Right, Stock Appreciation Right or Performance Share may be granted to a
Participant in any calendar year. All Shares specified in this Section 5 shall
be adjusted to the extent necessary to reflect adjustments to Shares required by
Section 4(c) hereof. No Participant may be granted Performance Units in any one
(1) calendar year which when added to all other Performance Units granted to
such Participant in the same calendar year shall exceed 300% of the
Participant's annual base salary as of the first day of such calendar year (or,
if later, as of the date on which the Participant becomes an Employee);
provided, however, that no more than $1,000,000 of annual base salary may be
taken into account for purposes of determining the maximum amount of Performance
Units which may be granted in any calendar year to any Participant.
Section 6. Stock Options.
Options may be granted hereunder to Participants either alone or in
addition to other Awards granted under the Plan. Options may be Incentive Stock
Options within the meaning of Section 422 of the Code or Non-Qualified Stock
Options (i.e., stock options which are not Incentive Stock Options), or a
combination thereof. Any Option granted to a Participant under the Plan shall be
evidenced by an Award Agreement in such form as the Committee may from time to
time approve. Any such Option shall be subject to the following terms and
conditions and to such additional terms and conditions, not inconsistent with
the provisions of the Plan, as the Committee shall deem desirable:
(a) Option Price. The purchase price per Share purchasable under
an Option shall be determined by the Committee; provided,
however, that such purchase price shall not be less than one
hundred percent (100%) of the Fair Market Value of the Share
on the effective date of the grant of the Option (or, if the
Committee so determines, in the case of any Option
retroactively granted in tandem with or in substitution for
another Award or any outstanding Award granted under any other
plan of the Company, on the effective date of grant of such
other Award or award under another Company plan).
(b) Option Term. The term of each Option shall be fixed by the
Committee in its sole discretion;except as provided below
for Incentive Stock Options.
(c) Exercisability. Options shall be exercisable at such time or
times and subject to such exercise acceleration conditions (if
any) as determined by the Committee at or subsequent to grant;
except as otherwise provided in Section 10(a).
(d) Method of Exercise. Subject to the other provisions of
the Plan and any applicable Award Agreement, any Option may
be exercised by the Participant in whole or in part atsuch
time or times, and the Participant may make payment of the
option price in such form or forms as the Committee shall
determine, including, without limitation, payment by delivery
of cash, Shares, Restricted Stock, or other consideration
(including, where permitted by law and the Committee, Awards)
having a Fair Market Value on the exercise date equal to the
total option price, or by any combination of cash, Shares,
Restricted Stock and other consideration as the Committee may
specify in the applicable Award Agreement; provided, however,
that if Restricted Stock is surrendered to pay the option
price, an equal number of shares issued as a result of the
option exercise shall be subject to the same restrictions.
(e) Incentive Stock Options. In accordance with rules and
procedures established by the Committee, the aggregate Fair
Market Value (determined as of the time of grant) of the
Shares with respect to which Incentive Stock Options held by
any Participant are exercisable for the first time by such
Participant during any calendar year under the Plan (and under
any other benefit plans of the Company or of any parent or
subsidiary corporation of the Company as defined in Section
424 of the Code) shall not exceed One Hundred Thousand Dollars
($100,000) or, if different, the maximum limitation in effect
at the time of grant under Section 422 of the Code, or any
successor provision, and any regulations promulgated
thereunder. The option price per Share purchasable under an
Incentive Stock Option shall not be less than one hundred
percent (100%)of the Fair Market Value of the Share on the
date of grant of the Option. Each Incentive Stock Option shall
expire not later than ten (10) years from its date of grant.
No Incentive Stock Option shall be granted to any Participant
if at the time the Option is granted such Participant owns
stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company,
its parent or its subsidiaries unless (i) the option price per
Share is at least one hundred and ten percent (110%) of the
Fair Market Value of the Share on the date of grant, and (ii)
such Option by its terms is not exercisable after the
expiration of five (5) years from the date such Option is
granted. The terms of any Incentive Stock Option granted
hereunder shall comply in all respects with the provisions of
Section 422 of the Code, or any successor provision, and any
regulations promulgated thereunder.
(f) Form of Settlement. In its sole discretion, the Committee may
provide at the time of grant that the Shares to be issued upon
an Option's exercise shall be in the form of Shares subject to
restrictions as the Committee may determine, or other similar
securities, or may reserve the right so to provide after the
time of grant.
(g) Reload Options. If and to the extent the Committee expressly
provides, at the time of grant or later, that the Participant
shall have the right to receive reload options with respect to
Non-Qualified Stock Options, the Participant shall receive
reload options in accordance with and subject to the following
terms and conditions:
(i) Grant of the Reload Option; Number of Shares; Price.
Subject to paragraph (ii) of this Subsection and,
except as provided in paragraph (viii) hereof, to the
availability of Shares to be optioned to the
Participant under the Plan (including the limitations
set forth in Section 5), if a Participant has an
Option (the "original option") with reload rights and
pays for the exercise of the original option by
surrendering Shares or Restricted Stock (whether by
means of delivering Shares or Restricted Stock
previously held by the optionee or by delivering
Shares or Restricted Stock simultaneously acquired on
exercise of the original option), the Participant
shall receive a new Option ("reload option") for the
number of Shares or Restricted Shares so surrendered
at an option price per Share equal to the Fair Market
Value of a Share on the date of the exercise of the
original option.
(ii) Conditions to Grant of Reload Option. A reload option
will not be granted: (A) if the Fair Market Value of
a Share on the date of exercise of the original
option is less than the exercise price of the
original option; or (B) if the Participant is no
longer an Employee of the Company or an Affiliate.
(iii) Term of Reload Option. The reload option shall expire
on the same date as the original option, or at such
later date as the Committee may provide.
(iv) Type of Option. The reload option shall be a Non-
Qualified Stock Option.
(v) Additional Reload Options. Except as expressly
provided by the Committee (at the time of the grant
of the original option or reload option or later),
reload options shall not include any right to
subsequent reload options.
(vi) Date of Grant, Vesting. The date of grant of the
reload option shall be the date of the exercise of
the original option. The reload options shall be
exercisable in full beginning from date of grant,
except as otherwise provided by the Committee.
(vii) Stock Withholding; Grants of Reload Options. If and
to the extent permitted by the Committee, if the
other requirements of this Subsection are satisfied,
and if Shares are withheld or Shares surrendered for
tax withholding pursuant to Section 13(g), a reload
option will be granted for the number of Shares
surrendered as payment for the exercise of the
original option plus the number of Shares surrendered
or withheld to satisfy tax withholding.
(viii) Share Limits. Reload options shall not be counted
against or as a reduction from the number of shares
available for grant under Section 4 hereof because
such grants are a substitute for Shares transferred
to or withheld by the Company.
(ix) Other Terms and Conditions. In connection with reload
options for officers who are subject to Section 16 of
the Exchange Act, the Committee may at any time
impose any limitations which, in the Committee's sole
discretion, are necessary or desirable in order to
comply with Section 16(b) of the Exchange Act and the
rules and regulations thereunder, or in order to
obtain any exemption therefrom. Except as otherwise
provided in this Subsection, all the provisions of
the Plan shall apply to reload options.
Section 7. Stock Appreciation and Limited Rights.
(a) Stock Appreciation Rights may be granted hereunder to
Participants either alone or in addition to other Awards
granted under the Plan and may, but need not, relate to a
specific Option granted under Section 6. The provisions of
Stock Appreciation Rights need not be the same with respect to
each recipient. Any Stock Appreciation Right related to a
Non-Qualified Stock Option may be granted at the same time
such Option is granted or at any time thereafter before
exercise or expiration of such Option. Any Stock Appreciation
Right related to an Incentive Stock Option must be granted at
the same time such Option is granted and must have a grant
price equal to the option price of such Option. In the case of
any Stock Appreciation Right related to any Option, the Stock
Appreciation Right or applicable portion thereof shall
terminate and no longer be exercisable upon the termination or
exercise of the related Option, except that a Stock
Appreciation Right granted with respect to less than the full
number of Shares covered by a related Option shall not be
reduced until the exercise or termination of the related
Option exceeds the number of Shares not covered by the Stock
Appreciation Right. Any Option related to any Stock
Appreciation Right shall no longer be exercisable to the
extent the related Stock Appreciation Right has been
exercised. Any Stock Appreciation Right related to an Option
shall be exercisable to the extent, and only to the extent,
that the related Option is exercisable. The Committee may
impose such other conditions or restrictions on the
exercise of any Stock Appreciation Right as it shall deem
appropriate. Subject to the terms of the Plan and any
applicable Award Agreement, a Stock Appreciation Right granted
under the Plan shall confer on the holder thereof a right to
receive, upon exercise thereof, the excess of (i) the Fair
Market Value of one (1) Share on the date of exercise or with
respect to any right related to an Option other than an
Incentive Stock Option, at any time during a specified
period before or after the date of exercise as determined by
the Committee over (ii) the grant price of the right as
specified by the Committee, which shall not be less than the
Fair Market Value of one (1) Share on the date of grant of the
Stock Appreciation Right (or, if the Committee so determines,
in the case of any Stock Appreciation Right retroactively
granted in tandem with or in substitution for another Award or
any outstanding award granted under any other plan of the
Company, on the date of grant of such other Award or award)
multiplied by the number of Shares as to which the holder is
exercising the Stock Appreciation Right. Subject to the terms
of the Plan and any applicable Award Agreement, the terms and
conditions of any Stock Appreciation Right shall be as
determined by the Committee. The Committee may impose such
conditions or restrictions on the exercise of any Stock
Appreciation Right as it may deem appropriate.
(b) Limited Rights may be granted hereunder to Participants only
with respect to an Option granted under Section 6 hereof or a
stock option granted under another plan of the Company. The
provisions of Limited Rights need not be the same with respect
to each recipient. Any Limited Right related to a Non-
Qualified Stock Option may be granted at the same time such
Option is granted or at any time thereafter before exercise or
expiration of such Option. Any Limited Right related to an
Incentive Stock Option must be granted at the same time such
Option is granted. A Limited Right shall terminate and no
longer be exercisable upon termination or exercise of the
related Option, except that a Limited Right granted wit
respect to less than the full number of Shares covered by a
related Option shall not be reduced until the exercise or
termination of the related Option exceeds the number of Shares
not covered by the Limited Right. Any Option related to any
Limited Right shall no longer be exercisable to the extent
the related Limited Right has been exercised. Any Limited
Right shall be exercisable to the extent, and only to the
extent, the related Option is exercisable and only during the
three (3) month period immediately following a Change in
Control of the Company (as defined in Section 10 hereof). The
Committee may impose such other conditions or restrictions on
the exercise of any Limited Right as it shall deem
appropriate. Subject to the terms of the Plan and any
applicable Award Agreement, a Limited Right granted under the
Plan shall confer on the holder thereof a right to receive,
upon exercise thereof, an amount equal to the excess of (i)
the Fair Market Value of one (1) Share on the date of exercise
or if greater and only with respect to any Limited Right
related to an Option other than an Incentive Stock Option, the
highest price per Share paid in connection with any Change in
Control of the Company, over (ii) the option price of the
related Option, multiplied by the number of Shares as to which
the holder is exercising the Limited Right. The amount payable
to the holder shall be paid by the Company in cash. Subject to
the terms of the Plan and any applicable Award Agreement, the
terms and conditions of any Limited Right shall be as
determined by the Committee. The Committee may impose such
conditions or restrictions on the exercise of any Limited
Right as it may deem appropriate.
Section 8. Performance Awards.
Performance Awards may be issued hereunder to Participants in the form
of Performance Shares or Performance Units, for no cash consideration or for
such minimum consideration as may be required by applicable law, either alone or
in addition to other Awards granted under the Plan. The value represented by a
Performance Share or Unit shall be payable to, or upon the exercise by, the
Participant holding such Award, in whole or in part, following achievement of
such performance goals during such Performance Period as determined by the
Committee. Except as provided in Section 10, Performance Awards will be paid
only after the end of the relevant Performance Period. Performance Awards may be
paid in cash, Shares, Restricted Stock, Options, other property or any
combination thereof, in the sole discretion of the Committee at the time of
payment. The length of the Performance Period, the performance criteria or
levels to be achieved for each Performance Period, and the amount of the Award
to be distributed shall be conclusively determined by the Committee. Performance
Awards may be paid in a lump sum or in installments following the close of the
Performance Period or, in accordance with procedures established by the
Committee, on a deferred basis. Notwithstanding the foregoing, an Award
Agreement may condition the vesting or exercise of a Performance Award on any
combination of the achievement of one or more performance goals and/or the
completion of a specified period of service as the Committee shall determine at
the time of grant. To the extent determined by the Committee, when making
Performance Awards the Committee shall adopt performance goals, certify
completion of such goals and comply with any other Code requirements necessary
to be in compliance with the performance-based compensation requirements of Code
Section 162(m). Performance goals for Performance Awards may be based, in whole
or in part, on one or more of the following performance-based criteria or such
other criteria as the Committee may determine: (i) attainment during the
Performance Period of a specified price per share of the Company's common stock;
(ii) attainment during the Performance Period of a specified rate of growth or
increase in the amount of growth in the price per share of the Company's common
stock; (iii) attainment during the Performance Period of a specified level of
the Company's earnings or earnings per share of the Company's common stock; (iv)
attainment during the Performance Period of a specified rate of growth or
increase in the amount of growth of the Company's earnings or earnings per share
of the Company's common stock; (v) attainment during the Performance Period of a
specified level of the Company's cash flow or cash flow per share of the
Company's common stock; (vi) attainment during the Performance Period of a
specific rate of growth or increase in the amount of growth of the Company's
cash flow or cash flow per share of the Company's common stock; (vii) attainment
during the Performance Period of a specified level of the Company's return on
equity; (viii) attainment during the Performance Period of a specific rate of
growth or increase in the amount of growth of the Company's return on equity;
(ix) attainment during the Performance Period of a specified level of the
Company's return on assets; or (x) attainment during the Performance Period of a
specific rate of growth or increase in the amount of growth of the Company's
return on assets.
Section 8A. Restricted Stock.
(a) Issuance. Restricted Stock Awards may be issued hereunder to
Participants, for no cash consideration or for such minimum
consideration as may be required by applicable law, either
alone or in addition to other Awards granted under the Plan.
The provisions of Restricted Stock Awards need not be the same
with respect to each recipient. The granting of Restricted
Stock shall take place on the date the Committee decides to
grant the Restricted Stock, or if the Restricted Stock Award
provides that the grant of Restricted Stock is conditioned
upon the achievement of performance goals specified in the
Restricted Stock Award, on a date established by the Committee
following the achievement of such performance goals.
(b) Registration. Any Restricted Stock issued hereunder may be
evidenced in such manner as the Committee in its sole
discretion shall deem appropriate, including, without
limitation, book-entry registration or issuance of a stock
certificate or certificates. In the event any stock
certificate is issued in respect of shares of Restricted Stock
awarded under the Plan, such certificate shall be registered
in the name of the Participant, shall bear an appropriate
legend referring to the terms, conditions, and restrictions
applicable to such Award, and shall be held in escrow by the
Company.
(c) Forfeiture. A Restricted Stock Award may condition the grant
of Restricted Stock and/or the lapse of any restriction or
restrictions on Restricted Stock on any combination of the
achievement of one or more performance goals and/or the
completion of a specified period of service as the Committee
shall determine at the time the Restricted Stock Award is
made. To the extent determined by the Committee, when making
Restricted Stock Awards the Committee shall adopt performance
goals, certify completion of such goals and comply with any
other Code requirements necessary to be in compliance with the
performance-based compensation requirements of Code Section
162(m). Performance goals for Restricted Stock Awards may be
based, in whole or in part, on one or more of the following
performance-based criteria or such other criteria as the
Committee may determine: (i) attainment during the Performance
Period of a specified price per share of the Company's common
stock; (ii) attainment during the Performance Period of a
specified rate of growth or increase in the amount of growth
in the price per share of the Company's common stock; (iii)
attainment during the Performance Period of a specified level
of the Company's earnings or earnings per share of the
Company's common stock; (iv) attainment during the Performance
Period of a specified rate of growth or increase in the amount
of growth of the Company's earnings or earnings per share of
the Company's common stock; (v) attainment during the
Performance Period of a specified level of the Company's cash
flow or cash flow per share of the Company's common stock;
(vi) attainment during the Performance Period of a specific
rate of growth or increase in the amount of growth of the
Company's cash flow or cash flow per share of the Company's
common stock; (vii) attainment during the Performance Period
of a specified level of the Company's return on equity; (viii)
attainment during the Performance Period of a specific rate of
growth or increase in the amount of growth of the Company's
return on equity; (ix) attainment during the Performance
Period of a specified level of the Company's return on assets;
or (x) attainment during the Performance Period of a specific
rate of growth or increase in the amount of growth of the
Company's return on assets.
As soon as practicable following the lapse of the
restrictions on Restricted Stock, unrestricted Shares,
evidenced in such manner as the Committee shall deem
appropriate, shall be issued to the grantee.
Except as otherwise determined by the Committee at
the time of grant, upon termination of employment for any
reason before the restriction lapses, all shares of Restricted
Stock still subject to restriction shall be forfeited by the
Participant (who shall sign any document and take any other
action required to assign such shares back to the Company) and
reacquired by the Company.
Section 9. Outside Directors' Options.
(a) Grant of Options. Immediately prior to the Public Offering,
and when an Outside Director first takes a position on the
Board after the Public Offering, the Outside Director shall
receive an Option to purchase Shares ("Initial Options"). On
the date of each Stockholders' Meeting, each Outside Director
shall automatically be granted an Option to purchase Shares
("Annual Options"); provided, however, that an Outside
Director shall not be entitled to receive and shall not be
granted any Annual Options on the date of any particular
Stockholders' Meeting if he will not continue to serve as an
Outside Director immediately following such Stockholders'
Meeting. An Outside Director who first takes a position on the
Board at the annual Stockholders' Meeting shall be entitled to
receive the Initial Options plus the Annual Options. All such
Options shall be Non-Qualified Stock Options. The number of
Shares to be subject to the Initial Option and Annual Option
grants shall be determined from time to time by the Committee.
The price at which each Share covered by such Options may be
purchased shall be one hundred percent (100%) of the fair
market value of a Share on the date the Option is granted.
Fair market value for purposes of this Section 9 shall be
deemed to be the average of the high and low prices of the
Shares as reported on the New York Stock Exchange Composite
Transactions tape on the day the Option is granted or, if no
sale of Shares shall have been made on that day, the next
preceding day on which there was a sale of Shares. For
purposes of Options granted immediately prior to the Public
Offering, the Fair Market Value of the Shares subject to such
Options shall be the offering price at which Shares are first
sold in the Public Offering.
(b) Exercise of Options. Except as set forth in this Section 9,
all Shares subject to an Option granted to an Outside Director
shall become exercisable as follows: fifty percent (50%) on
the day preceding the date of the first Stockholders' Meeting
after the date of the grant of the Option; twenty-five percent
(25%) on the day preceding the date of the second Stockholders'
Meeting after the date of grant of the Option; and the
remaining twenty-five percent (25%) on the day preceding the
third Stockholders' Meeting after the date of grant of the
Option. However, no Option shall be exercisable more than ten
(10) years after the date of grant. Options may be exercised
by an Outside Director during the period that: (i) the Outside
Director remains a member of the Board; (ii) for a period of
one (1) year after ceasing to be a member of the Board by
reason of death; (iii) for the remaining term of the Option in
the event of an Outside Director's disability; (iv) for the
remaining term of the Option if the Outside Director retires
(as defined below) from the Board; or (v) for a period of
ninety (90) days after ceasing to be a member of the Board for
reasons other than retirement, death or disability; however,
only those Options exercisable at the date the Outside
Director ceases to be a member of the Board shall remain
exercisable. All Options held by an Outside Director shall
become exercisable immediately prior to termination of the
Outside Director's service on the Board by reason of an
Outside Director's death, disability or retirement, except
that Options shall not be exercisable earlier than six (6)
months from the date of grant to the extent required by
Section 16(b) of the Exchange Act. For purposes of this
Section 9, "retire" or "retirement" shall mean discontinuance
of service as a director after the director has reached age
sixty (60) and has at least five (5) years or more of service
on the Board. Notwithstanding any provision herein to the
contrary, no Option hereunder shall be exercisable more than
ten (10) years after the date of grant. All Options shall
immediately become exercisable in the event of a Change in
Control, as hereinafter defined, except that Options shall not
be exercisable earlier than six (6) months from the date of
grant if required for exemption under Rule 16(b)-3 under the
Exchange Act.
If a former Outside Director shall die holding an
Option that has not expired and has not been fully exercised,
the Option shall remain exercisable until the later of one (1)
year after the date of death or the end of the period in which
the former Outside Director could have exercised the Option
had he not died, but in no event shall the Option be
exercisable more than ten (10) years after the date of grant.
In the event of the death of an Outside Director or former
Outside Director, his Options shall be exercisable only to the
extent that they were exercisable at his date of death and
only by the executor or administrator of the Outside
Director's estate, by the person or persons to whom the
Outside Director's rights under the Option shall pass under
the Outside Director's will or the laws of descent and
distribution, or by a beneficiary designated in writing in
accordance with Section 13(a) hereof.
(c) Payment. An Option granted to an Outside Director shall be
exercisable only upon payment to the Company of the full
purchase price of the Shares with respect to which the Option
is being exercised. Payment for the Shares shall be in United
States dollars, payable in cash or by check or by delivery of
Shares having a Fair Market Value on the exercise date equal
to the total option price, or by any combination of cash and
Shares.
Section 10. Change in Control.
(a) In order to maintain the Participants' rights in the event of
any Change in Control of the Company, as hereinafter defined,
the Committee, as constituted before such Change in Control,
may, in its sole discretion, as to any Award, either at the
time an Award is made hereunder or any time thereafter, take
any one (1) or more of the following actions: (i) provide for
the purchase by the Company of any such Award, upon the
Participant's request, for an amount of cash equal to the
amount that could have been attained upon the exercise of such
Award or realization of the Participant's rights had such
Award been currently exercisable or payable; (ii) make such
adjustment to any such Award then outstanding as the Committee
deems appropriate to reflect such Change in Control; or (iii)
cause any such Award then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving
corporation after such Change in Control. In the event of a
Change of Control, there shall be an automatic acceleration of
any time periods relating to the exercise or realization of
any such Award and all performance award standards shall be
deemed satisfactorily completed without any action required by
the Committee so that such Award may be exercised or realized
in full on or before a date fixed by the Committee, except no
Award shall be exercisable earlier than six (6) months after
the date of grant to the extent required by Section 16 of the
Exchange Act. The Committee may, in its discretion, include
such further provisions and limitations in any agreement
documenting such Awards as it may deem equitable and in the
best interests of the Company.
(b) For purposes of this Plan, a "Change in Control" shall be
deemed to have occurred if (i) for any reason at any time
less than seventy-five percent (75%) of the members of the
Board of Directors of the Company shall be individuals who
fall into any of the following categories: (A) individuals who
were members of such Board on September 1, 1995; or (B)
individuals whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least
seventy-five percent (75%) of the members of the Board then
still in office who were members of such Board on September 1,
1995; or (C) individuals whose election, or nomination for
election by the Company's stockholders, was approved by a vote
of at least seventy-five percent (75%) of the members of the
Board then still in office who were elected in the manner
described in (A) or (B) above, or (ii) any "person" (as such
term is used in Sections 13(d) and 14(d)(2) of the Exchange
Act) shall have become, according to a public announcement or
filing, without the prior approval of the Board of Directors
of the Company, the "beneficial owner" (as defined in Rule 13
(d)-3 under the Exchange Act) directly or indirectly, of
securities of the Company representing forty percent (40%) or
more (calculated in accordance with Rule 13(d)-3) of the
combined voting power of the Company's then outstanding voting
securities (such "person" hereafter referred to as a "Major
Stockholder"); or (iii) the stockholders of the Company shall
have approved a merger, consolidation or dissolution of the
Company or a sale, lease, exchange or disposition of all or
substantially all of the Company's assets, or a Major
Stockholder shall have proposed any such transaction, unless
such merger, consolidation, dissolution, sale, lease, exchange
or disposition shall have been approved by at least seventy-
five percent (75%) of the members of the Board of Directors of
the Company who are individuals falling into any combination
of the following categories: (A) individuals who were members
of such Board of Directors on September 1, 1995, or (B)
individuals whose election or nomination for election by the
Company's stockholders was approved by at least seventy-five
percent (75%) of the members of the Board of Directors then
still in office who are members of the Board of Directors on
September 1, 1995, or (C) individuals whose election, or
nomination for election by the Company's stockholders was
approved by a vote of at least seventy-five percent (75%) of
the members of the Board then still in office who were elected
in manner described in (A) or (B) above.
Section 11. Amendments and Termination.
The Board may amend, alter, suspend, discontinue, or terminate the
Plan, but no amendment, alteration, suspension, discontinuation, or termination
shall be made that would materially impair the rights of an optionee or
Participant under an Award theretofore granted, without the optionee's or
Participant's consent. In addition, the Board may consider for each amendment
whether the approval of stockholders is desirable or is necessary for the
amendment to be effective.
The Committee may amend the terms of any Award theretofore granted,
prospectively or retroactively, and may also substitute new Awards for Awards
previously granted under this Plan or for awards granted under any other
compensation plan of the Company or an Affiliate to Participants, including
without limitation previously granted Options having higher option prices, but
no such amendment or substitution shall materially impair the rights of any
Participant without his consent.
The Committee shall be authorized, without the Participant's consent,
to make adjustments in Performance Award criteria or in the terms and conditions
of other Awards in recognition of events that it deems in its sole discretion to
be unusual or nonrecurring that affect the Company or any Affiliate or the
financial statements of the Company or any Affiliate, or in recognition of
changes in applicable laws, regulations or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to prevent
the dilution or enlargement of benefits or potential benefits under the Plan.
The Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem desirable to carry it into effect. In the event the Company shall assume
outstanding employee benefit awards or the right or obligation to make future
such awards in connection with the acquisition of another corporation or
business entity, the Committee may, in its discretion, make such adjustments in
the terms of Awards under the Plan as it shall deem appropriate.
Section 12. Termination of Employment and Noncompetition.
The Committee shall have full power and authority to determine whether,
to what extent and under what circumstances any Award shall be canceled or
suspended and shall promulgate rules and regulations to (i) determine what
events constitute disability, retirement, termination for an approved reason and
termination for cause for purposes of the Plan, and (ii) determine the treatment
of a Participant under the Plan in the event of his death, disability,
retirement, or termination for an approved reason. If a Participant's employment
with the Company or an Affiliate is terminated for cause, all unexercised,
unearned, and/or unpaid Awards, including, but not by way of limitation, Awards
earned, but not yet paid, all unpaid dividends and dividend equivalents, and all
interest accrued on the foregoing shall be canceled or forfeited, as the case
may be, unless the Participant's Award Agreement provides otherwise. In
addition, but without limitation, all outstanding Awards to any Participant
shall be canceled if the Participant, without the consent of the Committee,
while employed by the Company or after termination of such employment, becomes
associated with, employed by, renders services to, or owns any interest in
(other than any nonsubstantial interest, as determined by the Committee), any
business that is in competition with the Company or any Affiliate, or with any
business in which the Company or any Affiliate has a substantial interest as
determined by the Committee or such officers or committee of senior officers to
whom the authority to make such determination is delegated by the Committee.
Section 13. General Provisions.
(a) Nonassignability. No Award shall be assignable or transferable
by a Participant or an Outside Director otherwise than by will
or by the laws of descent and distribution; provided, however,
that a Participant or Outside Director may, pursuant to a
written designation of beneficiary filed with and approved by
the Committee prior to his death, designate a beneficiary to
exercise the rights of the Participant with respect to any
Award upon the death of the Participant or Outside Director.
Each Award shall be exercisable during the lifetime of the
Participant or the Outside Director, only by the Participant
or the Outside Director or, if permissible under applicable
law, by the guardian or legal representative of the
Participant or Outside Director.
(b) Terms. Except for Options granted pursuant to Section 9, the
term of each Award shall be for such period of months or years
from the date of its grant as may be determined by the
Committee; provided, however, that in no event shall the term
of any Incentive Stock Option or any Stock Appreciation or
Limited Right related to any Incentive Stock Option exceed a
period of ten (10) years from the date of its grant.
(c) Rights to Awards. No Employee, Participant or other Person
shall have any claim to be granted any Award under the Plan,
and there is no obligation for uniformity of treatment of
Employees, Participants, or holders or beneficiaries of Awards
under the Plan.
(d) No Cash Consideration for Awards. Awards shall be granted for
no cash consideration or for such minimal cash consideration
as may be required by applicable law.
(e) Restrictions. All certificates for Shares delivered under the
Plan pursuant to any Award shall be subject to such
stock-transfer orders and other restrictions as the Committee
may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any
stock exchange upon which the Shares are then listed, and any
applicable Federal or state securities law, and the Committee
may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such
restrictions.
(f) Dividend Equivalents. Subject to the provisions of this Plan
and any Award Agreement, the recipient of an Award (including,
without limitation, any deferred Award) may, if so determined
by the Committee, be entitled to receive, currently or on a
deferred basis, interest or dividends, or interest or dividend
equivalents, with respect to the number of Shares covered by
the Award, as determined by the Committee, in its sole
discretion, and the Committee may provide that such amounts
(if any) shall be deemed to have been reinvested in additional
Shares or otherwise reinvested.
(g) Withholding. The Company shall be authorized to withhold from
any Award granted, payment due or shares or other property
transferred under the Plan the amount of income, withholding
and payroll taxes due and payable in respect of an Award,
payment or shares or other property transferred hereunder and
to take such other action as may be necessary in the opinion
of the Company to satisfy all obligations for the payment of
such taxes. The Company may require the Participant or Outside
Director to pay to it such tax prior to and as a condition of
the making of such payment or transfer of Shares or property
under the Plan. In accordance with any applicable
administrative guidelines it establishes, the Committee may
allow a Participant to pay the amount of taxes due or payable
in respect of an Award by withholding from any payment of
Shares due as a result of such Award, or by permitting the
Participant to deliver to the Company, Shares having a fair
market value, as determined by the Committee, equal to the
amount of such taxes.
(h) Deferral of Awards. At the discretion of the Committee,
payment of a Performance Dividend Equivalent or any portion
thereof may be deferred by a Participant until such time as
the Committee may establish. All such deferrals shall be
accomplished by the delivery on a form provided by the Company
of a written, irrevocable election by the Participant prior to
such time payment would otherwise be made. Further, all
deferrals shall be made in accordance with administrative
guidelines established by the Committee to ensure that such
deferrals comply with all applicable requirements of the Code
and its regulations. Deferred payments shall be paid in a lump
sum or installments, as determined by the Committee. The
Committee may also credit interest, at such rates to be
determined by the Committee, on cash payments that are
deferred and credit Dividend Equivalents on deferred payments
denominated in the form of Shares.
(i) No Limit on Other Compensation Arrangements. Nothing contained
in this Plan shall prevent the Company or any Affiliate from
adopting other or additional compensation arrangements,
subject to stockholder approval if such approval is required
and such arrangements may be either generally applicable or
applicable only in specific cases.
(j) Governing Law. The validity, construction, and effect
of the Plan and any rules and regulations relating to
the Plan shall be determined in accordance with the laws
of the State of Delaware and applicable Federal law.
(k) Severability. If any provision of this Plan or any Award is or
becomes or is deemed to be invalid, illegal or unenforceable
in any jurisdiction, or as to any Person or Award, or would
disqualify the Plan or any Award under any law deemed
applicable by the Committee, such provision shall be construed
or deemed amended to conform to applicable laws, or if it
cannot be construed or deemed amended without, in the
determination of the Committee, materially altering the intent
of the Plan or the Award, it shall be stricken and the
remainder of the Plan and any such Award shall remain in full
force and effect.
(l) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in
the employ of the Company or any Affiliate. Further, the
Company or an Affiliate may at any time terminate the
employment of a Participant, free from any liability, or any
claim under the Plan, unless otherwise expressly provided in
the Plan or in any Award Agreement.
(m) No Trust or Fund Created. Neither the Plan nor any Award shall
create or be construed to create a trust or separate fund of
any kind or a fiduciary relationship between the Company or
any Affiliate and a Participant or any other Person. To the
extent that any Person acquires a right to receive payments
from the Company or any Affiliate pursuant to an Award, such
right shall be no greater than the right of any unsecured
general creditor of the Company or any Affiliate.
(n) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee
shall determine whether cash, other securities, or other
property shall be paid or transferred in lieu of any
fractional Shares, or whether such fractional Shares or any
rights thereto shall be canceled, terminated, or otherwise
eliminated.
(o) Headings. Headings are given to the Sections and subsections
of the Plan solely as a convenience to facilitate reference.
Such headings shall not be deemed in any way material or
relevant to the construction or interpretation of the Plan or
any provision thereof.
(p) With respect to persons subject to Section 16 of the Exchange
Act, transactions under this Plan are intended to comply with
all applicable conditions of Rule 16b-3. To the extent any
provision of this Plan or action by the Committee fails to so
comply, the Committee may deem, for such persons, such
provision or action null and void to the extent permitted by
law.
Section 14. Effective Date of Plan.
The Plan shall be effective as of September 1, 1995.
Section 15. Term of Plan.
No Award shall be granted pursuant to the Plan after August 31, 2005,
but any Award theretofore granted may extend beyond that date.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule, submitted as Exhibit 27.1 to Form 10-Q, contains summary
financial information extracted from the consolidated condensed balance sheet
and statement of income of DST Systems, Inc., Commission file no. 1-14036, and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000714603
<NAME> DST Systems, Inc.
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 73
<SECURITIES> 0
<RECEIVABLES> 328
<ALLOWANCES> 0
<INVENTORY> 11
<CURRENT-ASSETS> 452
<PP&E> 899
<DEPRECIATION> 555
<TOTAL-ASSETS> 2,359
<CURRENT-LIABILITIES> 259
<BONDS> 52
0
0
<COMMON> 1
<OTHER-SE> 1,502
<TOTAL-LIABILITY-AND-EQUITY> 2,359
<SALES> 0
<TOTAL-REVENUES> 340
<CGS> 0
<TOTAL-COSTS> 277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> 88
<INCOME-TAX> 32
<INCOME-CONTINUING> 56
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 56
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.87
</TABLE>
