UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1996
Commission File Number 033-64506
KEYSTONE INVESTMENTS, INC.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Exact name of registrants as specified in their charters)
Delaware 04-3071173 / 04-1504645
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
200 Berkeley Street, Boston, Massachusetts 02116-5034
(Address of principal executive offices) (Zip Code)
(617) 210-3200
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES X NO _.
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at June 30, 1996
- --------------------------------- -------------------------
Keystone Investments, Inc.:
Common Stock, $0.01 par value 4,983,304
Keystone Investment Management Company:
Common Stock, $0.01 par value 1,000
1 of 21
<PAGE>
KEYSTONE INVESTMENTS, INC.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
FORM 10-Q
For the Quarterly Period Ended June 30, 1996
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Part I: Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets at June 30, 1996 (unaudited)
and December 31, 1995.................................................... 3
Consolidated Statements of Operations (unaudited) for the
three months and the six months ended June 30, 1996 and 1995 ........... 4
Consolidated Statements of Cash Flows (unaudited) for the
six months ended June 30, 1996 and 1995..................................5
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
(unaudited) for the six months ended June 30, 1996.......................6
Notes to Unaudited Interim Consolidated Financial Statements.................7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations................................12
Part II: Other Information...............................................................17
Signatures..................................................................................21
</TABLE>
2
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
-------
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $33,716 $34,729
Short-term investments in an affiliated mutual fund 5,021 5,011
Receivables from affiliated mutual funds 1,452 1,423
Accounts receivable and accrued income 2,422 1,541
Prepaid expenses and other assets 2,162 2,605
------------- ---------------
Total current assets 44,773 45,309
Intangible assets, net 34,959 37,711
Fixed assets, net 2,555 2,201
Investments in affiliated mutual funds 2,084 733
Other investments 2,688 2,807
Deferred financing costs 4,908 5,136
Unamortized commissions (Note D) 32,870 29,512
Deferred charges and other assets 2,325 2,397
------------- ---------------
Total assets $127,162 $125,806
============= ===============
LIABILITIES
Current liabilities:
Accrued compensation $4,348 $7,063
Accrued interest 4,713 4,713
Accounts payable and other accrued expenses 5,647 6,058
Income taxes payable (Note C) 967 ---
Payable to affiliated mutual funds 1,097 2,648
------------- ---------------
Total current liabilities 16,772 20,482
Long-term debt:
Senior Secured Notes 145,000 145,000
Other liabilities 10,421 9,596
Deferred income taxes (Note C) 9,597 9,096
------------- ---------------
Total liabilities 181,790 184,174
STOCKHOLDERS' EQUITY (DEFICIT)
Total stockholders' equity (deficit) (Note E) (54,628) (58,368)
------------- ---------------
Total liabilities and stockholders' equity (deficit) $127,162 $125,806
============= ===============
</TABLE>
See notes to unaudited interim consolidated financial statements.
3
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1996 1995 1996 1995
------------ ------------ -------------- ----------
<S> <C> <C> <C> <C>
Revenues:
Mutual fund management fees $14,288 $13,139 $28,345 $25,982
Distribution fees (Note D) 14,158 12,057 29,322 22,775
Sales commissions 2,309 2,410 4,691 5,075
Transfer agent fees 5,132 4,920 10,239 9,921
Investment income 536 461 1,027 923
Other income 2,327 1,593 4,190 3,309
------------ ------------ -------------- ----------
Total revenues 38,750 34,580 77,814 67,985
------------ ------------ -------------- ----------
Expenses:
Compensation and employee benefits 12,119 10,318 24,469 20,805
Broker-dealer commissions (Note D) 9,422 10,651 18,756 20,668
Amortization and depreciation 1,665 1,683 3,316 3,366
Interest 3,534 3,542 7,070 7,085
Other 9,385 7,192 17,257 13,878
------------ ------------ -------------- ----------
Total expenses 36,125 33,386 70,868 65,802
------------ ------------ -------------- ----------
Income before provision for income taxes 2,625 1,194 6,946 2,183
Provision for income taxes (Note C) 1,203 561 3,182 1,068
------------ ------------ -------------- ----------
Net income $1,422 $633 $3,764 $1,115
============ ============ ============== ==========
Earnings per share (Note B) $0.26 $0.12 $0.69 $0.21
============ ============ ============== ==========
</TABLE>
See notes to unaudited interim consolidated financial statements.
4
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
Net cash flows from operating activities:
Net income $3,764 $1,115
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization and depreciation 3,316 3,366
Amortization of broker-dealer commissions 14,121 7,975
Deferred commissions (17,479) (4,866)
Changes in assets and liabilities:
Accrued compensation (2,715) (1,337)
Payable to affiliated mutual funds (1,551) (292)
Accounts receivable and accrued income (881) (222)
Accounts payable and other accrued expenses (411) (2,124)
Income taxes payable 967 (1,393)
Other liabilities 825 376
Deferred income taxes 501 (662)
Prepaid expenses and other current assets 443 (2,816)
Deferred charges and other assets 72 (1,081)
Other, net (133) (194)
------------ -----------
Net cash provided by (used in) operating activities 839 (2,155)
------------ -----------
Cash flows provided by (used in) investing activities:
Investments in affiliated mutual funds (1,200) (21)
Additions to fixed assets (688) (155)
Other, net --- 278
------------ -----------
Net cash provided by (used in) investing activities (1,888) 102
------------ -----------
Cash flows provided by (used in) financing activities:
Proceeds from exercise of employee stock options --- 173
Purchase of treasury stock (133) (2,167)
Issuance of treasury stock 169 951
------------ -----------
Net cash provided by (used in) financing activities 36 (1,043)
------------ -----------
Decrease in cash and cash equivalents (1,013) (3,096)
Cash and cash equivalents, beginning of period 34,729 28,826
------------ -----------
Cash and cash equivalents, end of period $33,716 $25,730
============ ===========
Supplemental disclosure of cash flow information:
Interest paid $7,070 $7,085
Income taxes paid $1,238 $2,867
</TABLE>
See notes to unaudited interim consolidated financial statements.
5
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
for the six-month period ended June 30, 1996
(in thousands)
(unaudited)
-------
<TABLE>
<CAPTION>
Treasury Total
Common Additional Net unrealized stock stockholders'
stock paid-in Accumulated gain on (at cost) equity
(Note E) capital deficit investments (Note E) (deficit)
--------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $53 $14,089 ($69,436) $358 ($3,432) ($58,368)
Net income, six months ended
June 30, 1996 --- --- 3,764 --- --- 3,764
Net unrealized loss on investments --- --- --- (60) --- (60)
Treasury stock purchased (7,990 shares) --- --- --- --- (133) (133)
Treasury stock issued (9,631 shares) --- --- --- --- 169 169
--------- ----------- ------------ ------------ ----------- ------------
Balance, June 30, 1996 $53 $14,089 ($65,672) $298 ($3,396) ($54,628)
========= =========== ============ ============ =========== ============
</TABLE>
See notes to unaudited interim consolidated financial statements.
6
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
A. General
The consolidated financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission and according to generally accepted accounting principles, and
reflect all adjustments consisting of normal recurring adjustments which,
in the opinion of management, are necessary to present fairly the results
of the interim periods presented. Certain 1995 amounts have been
reclassified to conform to current-year presentation. These financial
statements do not include all disclosures associated with annual financial
statements and, accordingly, should be read in conjunction with the notes
contained in the audited consolidated financial statements of Keystone
Investments, Inc. ("KI") and Subsidiaries (collectively, the "Company")
included in the Company's annual report on Form 10-K for the year ended
December 31, 1995.
B. Earnings Per Share
Earnings per share are based upon the weighted average number of common
shares and common share equivalents outstanding for the six-month periods
ended June 30, 1996 and 1995 of 5,434,304 and 5,344,247, respectively, and
for the three-month periods ended June 30, 1996 and 1995 of 5,470,416 and
5,341,594, respectively. Common share equivalents included in the
computation represent shares issuable upon assumed exercise of stock
options which have a dilutive effect in years when there are earnings.
Earnings per common share and common share equivalent assuming full
dilution have not been presented because there are no additional dilutive
common share equivalents.
C. Income Taxes
The Company files consolidated federal and state income tax returns. The
consolidated federal and state income tax provisions for the six-month
periods ended June 30, 1996 and 1995 include the following (in
thousands):
Federal State Total
1996
Current $ 1,815 $ 616 $ 2,431
Deferred 643 108 751
------- ------- -------
$ 2,458 $ 724 $ 3,182
======= ======= =======
1995
Current $ 1,103 $ 476 $ 1,579
Deferred (263) (248) (511)
-------- ------- --------
$ 840 $ 228 $ 1,068
======== ======= =======
7
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
C. Income Taxes - continued
Reconciliations between the actual income tax expense and income taxes
computed by applying the statutory federal income tax rate to income
before provision for income taxes for the six-month periods ended June
30, 1996 and 1995 are as follows:
1996 1995
---- ----
Computed tax at statutory rate 35.0% 34.0%
State income taxes, net of federal
income tax benefits 6.7 7.6
Goodwill amortization 1.1 4.0
Change in tax rate 1.2 ---
Other, net 1.8 3.3
---- ----
45.8% 48.9%
==== ====
Deferred income taxes are recorded based upon differences between the
financial reporting and tax bases of assets and liabilities and available
tax credit carryforwards. The tax effects of these temporary differences
at June 30, 1996 and December 31, 1995 are presented below (in thousands):
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
----------------------- ----------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Deferred broker-dealer commissions $ --- $ 12,445 $ --- $ 11,884
Net operating loss carryforwards 911 --- 1,103 ---
Compensation and employee benefits 1,922 --- 1,748 ---
Other, net 1,398 798 1,473 701
------ -------- ------- --------
4,231 13,243 4,324 12,585
Valuation allowance (585) --- (585) ---
-------- -------- ------- --------
$ 3,646 $ 13,243 $ 3,739 $ 12,585
======== ======== ======= ========
</TABLE>
8
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
D. Distribution Plans
Keystone Investment Distributors Company ("KIDC"), a wholly-owned
subsidiary of Keystone Investment Management Company ("KIMCO"), is the
principal underwriter for the two retail fund groups for which the Company
provides investment advisory services, the Keystone Funds and the Keystone
America Funds ("KAF Funds"). Sales commissions paid to brokers and dealers
on sales of the Keystone Funds and the KAF Funds are generally deferred to
the extent that KIDC expects to recover these commission payments from
future collections of distribution fees and contingent deferred sales
charges related to current-period sales.
Distribution fees in the consolidated statements of operations for the
six-month periods ended June 30, 1996 and June 30, 1995 respectively, are
net of service fee payments to brokers and dealers of $10.4 million and
$9.9 million; amortization of service fee prepayments of $0.4 million and
$0.1 million; and payments to a third party under two agreements for the
sale of rights to receive distribution fees and, for one of these
agreements, related contingent deferred sales charges of $1.1 million and
$0.2 million. Distribution fees for the six-month period ended June 30,
1995 are also net of $4.0 million in distribution fees paid by certain
Keystone Funds which were used to recover a $7.0 million settlement of a
lawsuit initiated by Chase Manhattan Bank, N.A. ("Chase"). Chase was the
purchaser under an agreement for the sale of distribution fee collection
rights (the "Chase Agreement").
Prior to November 1, 1995, KIDC expensed all broker-dealer commission
payments on sales of shares of the Funds for which KIDC had an obligation
under the Chase Agreement. Commencing November 1, 1995, KIDC began
deferring broker-dealer commission payments on sales of these Funds due to
the recovery of the settlement.
E. Common Stock
The total number of authorized shares of KI common stock ($.01 par value)
is 6,000,000. At June 30, 1996, 4,983,304 shares of KI common stock were
issued and outstanding and 324,791 shares were held in treasury.
9
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
E. Common Stock - continued
A summary of activity under the 1989 Stock Plan and the 1994 Stock Option Plan
for the six months ended June 30, 1996 is as follows:
1989 Stock Plan 1994 Stock Option Plan
--------------- ----------------------
Option
Price Per
Options Options Share
------- ------- ---------
Outstanding at
December 31, 1995 37,827 371,685
Granted --- 282,500 $17.50 & $18.75
Exercised (200) ---
Canceled (434) (22,785) $10.25-$13.00
Outstanding at
June 30, 1996 37,193 631,400 $10.25-$18.75
All options granted under the 1989 Stock Plan have an exercise price equal to
$1.00 per share.
Options representing 79,500 shares have been granted and options representing
96,900 shares were canceled in July 1996. All options granted in 1996, except
for options issued in July representing 20,000 shares, were issued with an
exercise price equal to the estimated fair value of such shares on the dates the
options were granted.
The Company purchased 69,449 shares of KI common stock and sold 26,123 shares of
KI common stock in July 1996 at the estimated fair value of the shares.
10
<PAGE>
KEYSTONE INVESTMENTS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS - continued
F. Summarized Financial Information of KIMCO and KI
The following tables set forth summarized financial information of KIMCO and
its wholly-owned subsidiaries (collectively referred to herein as "KIMCO and
Subsidiaries") and the parent company, KI, consolidated with two of its
wholly-owned subsidiaries with minimal operating activity and with KIMCO
accounted for on the equity basis (collectively referred to herein as "KI
and Subsidiaries") (in thousands):
<TABLE>
<CAPTION>
KIMCO and Subsidiaries KI and Subsidiaries
---------------------- -------------------
6/30/96 12/31/95 6/30/96 12/31/95
------- -------- ------- --------
<S> <C> <C> <C> <C>
Current assets $ 36,687 $ 39,277 $ 19,460 $ 17,014
Noncurrent assets 76,005 73,742 75,780 74,469
-------- -------- --------- ----------
Total assets $112,692 $113,019 $ 95,240 $ 91,483
======== ======== ========= ==========
Current liabilities $ 23,377 $ 26,685 $ 4,770 $ 4,779
Noncurrent liabilities 47,031 51,225 145,098 145,072
-------- -------- --------- ----------
Total liabilities 70,408 77,910 149,868 149,851
Total stockholders' equity
(deficit) 42,284 35,109 (54,628) (58,368)
-------- -------- --------- ----------
Total liabilities and
stockholders' equity (deficit) $112,692 $113,019 $ 95,240 $ 91,483
======== ======== ========= ==========
</TABLE>
KIMCO and Subsidiaries
For the Six Months Ended June 30,
---------------------------------
1996 1995
---------- -------
Total revenues $ 77,628 $ 67,863
Total expenses (65,106) (60,389)
-------- --------
Income before provision for
income taxes $ 12,522 $ 7,474
======== ========
Net income $ 7,035 $ 4,263
========= ========
KI and Subsidiaries
For the Six Months Ended June 30,
---------------------------------
1996 1995
-------- --------
Total revenues $ 186 $ 122
Total expenses (5,762) (5,413)
Equity in net income of
KIMCO (consolidated) 7,035 4,263
---------- ----------
Income (loss) before credit for
income taxes $ 1,459 $ (1,028)
========= =========
Net income $ 3,764 $ 1,115
========= =========
11
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
General
On August 19, 1993, the Company effected a recapitalization (the
"Recapitalization") whereby Company management became the beneficial owners of
all of the outstanding common stock of KI. In connection with the
Recapitalization, KI issued $145.0 million aggregate principal amount of 9 3/4%
senior secured notes due 2003 ("Senior Secured Notes") and used the proceeds
(together with cash on hand) to (i) retire all bank indebtedness and junior
subordinated indebtedness; (ii) redeem all common stock of KI owned by a
partnership ("KTLP") and certain common stock of KI owned by certain members of
management of the Company who had held interests in KTLP; and (iii) pay
transaction costs related to the issuance of the Senior Secured Notes.
The Company's largest sources of revenues are mutual fund investment advisory
and management fees, distribution fees paid under the Retail Funds' 12b-1 Plans
("Distribution Fees") and transfer agent fees received from funds offered to the
public ("Retail Funds"). Retail Fund investment advisory and management fees are
generally based upon average daily net assets and, for the fixed income funds,
also upon gross yields. Distribution Fees are based upon sales of shares of the
Retail Funds and Retail Fund assets under management. Transfer agent fees are
based primarily upon the number of shareholder accounts.
The Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30,
1995
Assets under management at June 30, 1996 were $12.0 billion, an increase of $1.3
billion, or 12%, from $10.7 billion at June 30, 1995. Retail Fund assets
increased $574 million due to net sales activity and market appreciation in the
second half of 1995. The remainder of the increase in total assets under
management included $343 million related to sales of a "wrap-fee" product
sponsored by a major broker-dealer, a $162 million increase in foreign market
mutual fund assets and a $108 million increase in private and institutional
account assets.
On July 11, 1996, three individuals with portfolio management responsibility for
small company growth funds, private accounts, a global equity fund and the
wrap-fee product resigned. At June 30, 1996, total assets under management for
which such individuals were responsible represented approximately 25% of the
Company's assets under management.
Commissionable sales of shares of the Retail Funds, which include the Keystone
Funds and the KAF Funds, totaled $388 million for the second quarter of 1996, an
increase of $132 million, or 52%, from $256 million for the second quarter of
1995. Total sales of the Retail Funds (including non-commissionable sales and
dividend reinvestments and net of commissions paid by investors) were $664
million in the second quarter of 1996, an increase of $267 million, or 67%, from
$397 million in the second quarter of 1995. Retail Fund redemptions totaled $781
million in the second quarter of 1996, an increase of $184 million, or 31%, from
$597 million in the second quarter of 1995.
12
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - continued
The Three Months Ended June 30, 1996 Compared to the Three Months Ended June 30,
1995 - continued
Revenues for the second quarter of 1996 were $38.8 million, an increase of $4.2
million, or 12%, from $34.6 million for the second quarter of 1995. Distribution
Fees increased $2.1 million primarily due to the recovery of the settlement paid
to Chase (see Note D to Unaudited Interim Consolidated Financial Statements).
Additionally, Distribution Fees paid by the Retail Funds were higher due to
higher assets.
Mutual fund management fees increased $1.1 million due to an increase in Retail
Fund asset levels (most notably a global equity fund and a small company growth
fund). Sales commissions decreased $0.1 million due to a sale on June 1, 1995 of
collection rights with respect to Distribution Fees arising from future sales
during a two-year period of Class B shares of the KAF Funds issued after June 1,
1995 and related contingent deferred sales charges ("Sale of Collection Rights")
(see Note D to Unaudited Interim Consolidated Financial Statements). Transfer
agent fees increased $0.2 million due to an increase in the number of
shareholder accounts. Investment income increased $0.1 million due to higher
balances in cash and cash equivalents. The $0.7 million increase in other income
included a $0.5 million increase in fees earned from the wrap-fee product and a
$0.1 million increase in fees earned from private and institutional accounts.
Expenses for the three months ended June 30, 1996 were $36.1 million, an
increase of $2.7 million, or 8%, from $33.4 million for the three months ended
June 30, 1995. Compensation and employee benefits increased $1.8 million due to
higher commissions earned by wholesalers on higher sales (including wrap-fee
sales) in 1996, changes in certain incentive compensation agreements, salary
increases and a decrease in the discount rate used to calculate retirement plan
expense.
Broker-dealer commission expense was $1.2 million lower in the second quarter of
1996 than in the second quarter of 1995 primarily due to the deferral of
commissions paid on sales of certain of the Keystone Funds which had been
expensed prior to November 1, 1995 (see Note D Unaudited Interim Consolidated
Financial Statements). A modification on July 1, 1995 in the method of
estimating amounts that will be recovered from future revenues and the Sale of
Collection Rights also contributed to this variance.
The $2.2 million increase in other expenses included increases in expenses
related to professional services and sales promotion (including expenses for
sales literature and marketing materials).
The Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30,
1995
Commissionable sales of shares of the Retail Funds totaled $751 million for the
six months ended June 30, 1996, an increase of $282 million, or 60%, from $469
million for the six months ended June 30, 1995. Total sales of the Retail Funds
(including non-commissionable sales and dividend reinvestments and net of
commissions paid by investors) were $1.3 billion in the first six months of
1996, an increase of $519 million, or 69%, from $750 million in the first six
months of 1995. Retail Fund redemptions totaled $1.6 billion in the first half
of 1996, an increase of $391 million, or 32%, from $1.2 billion in the first
half of 1995.
13
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - continued
The Six Months Ended June 30, 1996 Compared to the Six Months Ended June 30,
1995 - continued
Revenues for the first half of 1996 were $77.8 million, an increase of $9.8
million, or 14%, from $68.0 million for the first half of 1995. Distribution
Fees increased $6.5 million primarily due to the recovery of the settlement paid
to Chase (see Note D to Unaudited Interim Consolidated Financial Statements).
Additionally, Distribution Fees paid by the Retail Funds were higher due to
higher assets (most notably, in one small company growth fund).
Mutual fund management fees increased $2.4 million due to an increase in
Keystone Fund and KAF Fund asset levels (primarily in one small company growth
fund and one global equity fund). Sales commissions decreased $0.4 million due
principally to the Sale of Collection Rights. Transfer agent fees increased $0.3
million due to an increase in the number of shareholder accounts. Investment
income increased $0.1 million due to higher balances in cash and cash
equivalents. The $0.9 million increase in other income included higher fees
earned on increased wrap-fee account assets.
Expenses for the six months ended June 30, 1996 were $70.9 million, an increase
of $5.1 million, or 8%, from $65.8 million for the six months ended June 30,
1995. Compensation and employee benefits increased $3.7 million due to higher
commissions earned by wholesalers on higher Retail Fund and wrap-fee account
sales in the first half of 1996, changes in certain incentive compensation
agreements, salary increases and a decrease in the discount rate used to
calculate retirement plan expense.
Broker-dealer commission expense was $1.9 million lower in the first half of
1996 than in the first half of 1995 due to the deferral of commissions paid on
sales of certain of the Keystone Funds which had been expensed prior to November
1, 1995 (see Note D to Unaudited Interim Consolidated Financial Statements). A
modification on July 1, 1995 in the method of estimating amounts that will be
recovered from future revenues and the Sale of Collection Rights also
contributed to this decrease.
The $3.4 million increase in other expenses included increases in expenses
related to professional services, sales promotion, office services, recruitment
and occupancy.
The provision for income taxes for the first six months of 1996 of $3.2 million
included $2.4 million in current income taxes and $0.8 million in deferred
income taxes.
Capital Resources and Liquidity
Cash flows provided by operating activities for the six-month period ended June
30, 1996 totaled $0.8 million. Cash flows used in operating activities for the
first half of the 1995 totaled $2.2 million. Cash flows provided by (used in)
operating activities for the first six months of 1996 and 1995 reflect the
payment of certain expenses accrued during the previous year (most notably,
bonuses). Cash flows used in operating activities in the first half of 1995
included $7.0 million paid to Chase in settlement of a lawsuit initiated by
Chase and $4.0 million in recoveries of the settlement amount; the remainder of
the $7.0 million was recovered by October 31, 1995 (see Note D to the Unaudited
Interim Consolidated Financial Statements).
14
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - continued
Capital Resources and Liquidity - continued
Cash flows provided by (used in) operating activities in the first half of 1996
and 1995 included net cash flows from Distribution Fees and sales commissions
collected and retained less commissions paid to broker-dealers (excluding the
$7.0 million payment to Chase and recoveries thereof in 1995) of $11.9 million
and $14.5 million, respectively. The $2.6 million decrease was due primarily to
higher Keystone Fund sales in 1996 and, therefore, higher broker-dealer
commission payments offset partially by higher distribution fees on higher
Keystone Fund assets.
Net cash used in investing activities in the first half of 1996 of $1.9 million
included $1.2 million utilized to seed new Retail Funds and $0.7 million in
fixed asset additions which are primarily systems-related.
In the first half of 1995, $2.2 million in net cash flows were used to purchase
treasury stock principally from two retired senior executives.
As of June 30, 1996, the Company had $33.7 million in unrestricted cash and cash
equivalents, $5.0 million in short-term investments available to fund current
operations, and $3.9 million in accounts receivable and accrued income
(including $1.5 million in receivables from affiliated mutual funds). Current
liabilities totaled $16.8 million.
There were no significant cash commitments as of June 30, 1996 for capital
expenditures nor are there any significant capital expenditures anticipated for
the remainder of 1996. The Company leases most of its furniture and equipment as
well as its two main operating facilities.
The $145.0 million aggregate principal amount of the Senior Secured Notes
matures in 2003, with no prior mandatory repayments except under certain
circumstances (i.e., change of control or sale of assets).
The Company's capital resources and liquidity are affected by the level and mix
of sales of shares of the Keystone Funds and Class B shares of the KAF Funds
which are currently sold to investors at net asset value without an initial
sales charge using a "spread-load" pricing structure. In June 1995, the Company
entered into an agreement for the Sale of Collection Rights (see Note D to
Unaudited Interim Consolidated Financial Statements). The purchaser under this
agreement has committed to pay up to $75 million for the Collection Rights
depending upon the sales volume of KAF fund Class B shares during a two-year
period; such commitment will enable the Company to pay commissions on
approximately $1.9 billion of sales, thereby improving the Company's cash flow
and liquidity.
Ongoing access to retail distribution channels is essential to the Company's
future performance. Expenses associated with maintaining such access have been
increasing and the Company expects this trend to continue. Increases in such
expenses are expected to relate primarily to costs associated with retail
broker-dealers seeking to defray a portion of such retail broker-dealers' costs
of transfer agency services in connection with their clients' investments in the
Company's Retail Funds and costs associated with such retail broker-dealers'
promotional efforts with respect to the Company's Retail Funds, including sales
meetings, seminars and revenue sharing arrangements.
15
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - continued
Capital Resources and Liquidity - continued
Changes in economic or market conditions may affect the level of assets under
management and, therefore, mutual fund investment advisory and management fees,
managed account fees, Distribution Fees and administrative fees.
The Company expects that cash generated from operations will be adequate to
permit the Company to meet both its debt service requirements and working
capital needs.
16
<PAGE>
PART II. OTHER INFORMATION
Item: 1 Legal Proceedings. Not Applicable
Item: 2 Changes in Securities. Not Applicable
Item: 3 Defaults on Senior Securities. Not Applicable
Item: 4 Submission of Matters to a Vote of Security Holders. Not Applicable
Item: 5 Other Information. Not Applicable
Item: 6 Exhibits and Reports on Form 8-K.
(a) Exhibits Required by Item 601 of Regulation S-K
The following exhibits are filed as part of this Form 10-Q:
Exhibit No. Description
- ----------- ----------------------------------------------------
2.1 Securities Redemption Agreement among KI, KIMCO and KTLP(6)
2.2 Instructions from Selling Management Stockholders(4)
3.1(a)(i) Restated Certificate of Incorporation of KI(8)
3.1(a)(ii) Amendment to Certificate of Incorporation KI(9)
3.1(b)(i) Restated Certificate of Incorporation of KIMCO(3)
3.1(b)(ii) Amendment to Certificate of Incorporation of KIMCO(9)
3.2(a) By-Laws of KI, as amended(8)
3.2(b)(i) Amended and Restated By-Laws of KIMCO(3)
3.2(b)(ii) Amendment to KIMCO By-Laws(12)
4.1 Indenture among KI, KIMCO and Fleet Bank of Massachusetts,
N.A., as Trustee, dated August 19, 1993(5)
4.2 Pledge and Security Agreement among KI, KIMCO and Fleet Bank
of Massachusetts, N.A., as Collateral Agent, dated August 19,
1993(5)
10.3 Amended and Restated Stockholders' Agreement dated August 18,
1993(6)
10.4+ Purchase and Sale Agreement dated as of December 31, 1992
among KIDC, Citibank, N.A. ("Citibank") and Citicorp North
America, Inc. ("Citicorp")(4)
10.6 Office Lease for Premises located at 200 Berkeley Street,
Boston, Massachusetts by and between John Hancock Mutual Life
Insurance Company and KIMCO dated as of March 15, 1991, as
amended(2)
10.7 Lease for Premises Located at 101 Main Street, Cambridge,
Massachusetts by and between Riverfront Office Park Joint
Venture and KIRC dated as of February 9, 1990(2)
10.8++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and George S. Bissell(2)
10.9++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Albert H. Elfner, III(2)
17
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
----------------------------------------------
10.10++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Stephen J. Arpante(2)
10.11++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Edward F. Godfrey(2)
10.12++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Ralph J. Spuehler, Jr.(2)
10.13++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Roger T. Wickers(2)
10.14++ Split Dollar Agreement dated as of April 15, 1992 by and
between KI and Philip M. Byrne(2)
10.15++ Amendments to Split Dollar Agreements dated October 1994(7)
10.22(a)++ Keystone Group, Inc. 1989 Stock Plan(2)
10.22(b)++ First Amendment to the Keystone Group, Inc. 1989 Stock Plan(6)
10.23(a)++ Keystone Investments, Inc. Short-Term Management Incentive
Plan, as revised June 1996(1)
10.23(b)++ Keystone Investments, Inc. Short-Term Management Incentive
Plan for Senior Management, as revised June 1996(1)
10.24++ KIMCO Short-Term Incentive Plan for Investment Professionals,
as revised April 1995(12)
10.26++ Keystone Investments Annual Performance Bonus Plan, as revised
October 1995(12)
10.27 KI 1989 Employee Securities Purchase Plan A(2)
10.28 KI 1989 Employee Securities Purchase Plan B(2)
10.29 KI 1992 Employees Securities Purchase Plan C(2)
10.30++ KI Defined Benefit Pension Plan, effective January 1, 1990(4)
10.31++ KI 1994 Stock Option Plan(7)
10.32++ Compensatory Arrangement for Non-Employee KI Directors(7)
10.33 Purchase and Sale Agreement among KIDC, Citibank, and Citicorp
dated as of May 31, 1995(10)
10.34 Undertaking among KI, KIMCO, Citibank, and Citicorp dated as
of May 31, 1995(10)
10.35 Servicing Agreement among KIDC, Citibank, and Citicorp dated
as of May 31, 1995(10)
10.36 Collection Agency Agreement among KIDC, Citibank, Citicorp,
and Bankers Trust Company dated as of May 31, 1995(10)
10.37 Amendments No. 2 and 3 to Office Lease for Premises located
at 200 Berkeley Street, Boston, MA, by and between John
Hancock Mutual Life Insurance Company and Keystone Investment
Management Company, dated October 2, 1994 and August 25, 1995,
respectively (11)
10.38++ Keystone Investments, Inc. Deferred Profit Sharing Plan for
Key Executives dated May 1996(1)
10.39 Amendment to Amended and Restated Stockholders' Agreement
dated March 30, 1994(1)
27.00 Financial Data Schedule(1)
99.1 Statement of Policy re Officers' Stock Purchase Program(8)
18
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
----------------------------------------------
1 Filed herewith.
2 Incorporated herein by reference to the corresponding exhibit to the
Company's Form S-1 Registration Statement No. 33-64506 filed with the
Securities and Exchange Commission on June 16, 1993.
3 Incorporated herein by reference to the corresponding exhibit to the
Company's Amendment No. 1 to its Form S-1 Registration Statement No.
33-64506 filed with the Securities and Exchange Commission on July 28,
1993.
4 Incorporated herein by reference to the corresponding exhibit to the
Company's Amendment No. 2 to its Form S-1 Registration Statement No.
33-64506 filed with the Securities and Exchange Commission on August 11,
1993.
5 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
November 15, 1993.
6 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 1993 10-K filed with the Securities and Exchange
Commission on March 31, 1994.
7 Incorporated herein by reference to the corresponding exhibit to the
Company's 1994 Form 10-K filed with the Securities and Exchange
Commission on March 31, 1995.
8 Incorporated herein by reference to the corresponding exhibit to the
Company's Form S-8 Registration Statement No. 33-87780 filed with the
Securities and Exchange Commission on December 22, 1994.
9 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
May 15, 1995.
10 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
August 11, 1995.
11 Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
November 15, 1995.
12. Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-K filed with the Securities and Exchange Commission on
March 27, 1996.
+ Confidential treatment has been granted for portions of this document.
++ Management contract or compensatory plan or arrangement.
19
<PAGE>
Item: 6 Exhibits and Reports on Form 8-K. - continued
----------------------------------------------
(b) Reports on Form 8-K
No reports on Form 8-K were filed by Keystone Investments, Inc. or
Keystone Investment Management Company during the three-month period ended
June 30, 1996.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on their behalf this 9th
day of August, 1996 by the undersigned thereunto duly authorized.
Keystone Investments, Inc.
(Registrant)
s/Edward F. Godfrey
- --------------------------------------------------
Edward F. Godfrey
Senior Vice President, Chief Financial Officer and
Treasurer
s/John D. Rogol
- --------------------------------------------------
John D. Rogol
Vice President and Controller
Keystone Investment Management Company
(Registrant)
s/Edward F. Godfrey
- --------------------------------------------------
Edward F. Godfrey
Senior Vice President, Chief Financial Officer and
Treasurer
s/John D. Rogol
- --------------------------------------------------
John D. Rogol
Vice President and Controller
21
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 10549
______________________
EXHIBITS
TO
FORM 10-Q
under
THE SECURITIES EXCHANGE ACT OF 1934
KEYSTONE INVESTMENTS, INC.
KEYSTONE INVESTMENT MANAGEMENT COMPANY
(Exact names of registrants as specified in their charters)
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
2.1 Securities Redemption Agreement among KI, KIMCO and KTLP(6)
2.2 Instructions from Selling Management Stockholders(4)
3.1(a)(i) Restated Certificate of Incorporation of KI(8)
3.1(a)(ii) Amendment to Certificate of Incorporation KI(9)
3.1(b)(i) Restated Certificate of Incorporation of KIMCO(3)
3.1(b)(ii) Amendment to Certificate of Incorporation of KIMCO(9)
3.2(a) By-Laws of KI, as amended(8)
3.2(b)(i) Amended and Restated By-Laws of KIMCO(3)
3.2(b)(ii) Amendment to KIMCO By-Laws(12)
4.1 Indenture among KI, KIMCO and Fleet Bank of Massachusetts,
N.A., as Trustee, dated August 19, 1993(5)
4.2 Pledge and Security Agreement among KI, KIMCO and Fleet Bank of
Massachusetts, N.A., as Collateral Agent, dated August 19, 1993(5)
10.3 Amended and Restated Stockholders' Agreement dated
August 18, 1993(6)
10.4+ Purchase and Sale Agreement dated as of December 31, 1992 among
KIDC, Citibank, N.A. ("Citibank") and Citicorp North America, Inc.
("Citicorp")(4)
10.6 Office Lease for Premises located at 200 Berkeley Street, Boston,
Massachusetts by and between John Hancock Mutual Life Insurance
Company and KIMCO dated as of March 15, 1991, as amended(2)
10.7 Lease for Premises Located at 101 Main Street, Cambridge,
Massachusetts by and between Riverfront Office Park Joint Venture
and KIRC dated as of February 9, 1990(2)
10.8++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and George S. Bissell(2)
10.9++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Albert H. Elfner, III(2)
10.10++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Stephen J. Arpante(2)
10.11++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Edward F. Godfrey(2)
10.12++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Ralph J. Spuehler, Jr.(2)
10.13++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Roger T. Wickers(2)
10.14++ Split Dollar Agreement dated as of April 15, 1992 by and between
KI and Philip M. Byrne(2)
10.15++ Amendments to Split Dollar Agreements dated October 1994(7)
10.22(a)++ Keystone Group, Inc. 1989 Stock Plan(2)
10.22(b)++ First Amendment to the Keystone Group, Inc. 1989 Stock Plan(6)
10.23(a)++ Keystone Investments, Inc. Short-Term Management Incentive Plan,
as revised June 1996(1)
10.23(b)++ Keystone Investments, Inc. Short-Term Management Incentive Plan
for Senior Management, as revised June 1996(1)
10.24++ KIMCO Short-Term Incentive Plan for Investment Professionals, as
revised April 1995(12)
10.26++ Keystone Investments Annual Performance Bonus Plan, as revised
October 1995(12)
10.27 KI 1989 Employee Securities Purchase Plan A(2)
10.28 KI 1989 Employee Securities Purchase Plan B(2)
10.29 KI 1992 Employees Securities Purchase Plan C(2)
10.30++ KI Defined Benefit Pension Plan, effective January 1, 1990(4)
10.31++ KI 1994 Stock Option Plan(7)
10.32++ Compensatory Arrangement for Non-Employee KI Directors(7)
10.33 Purchase and Sale Agreement among KIDC, Citibank, and Citicorp
dated as of May 31, 1995(10)
10.34 Undertaking among KI, KIMCO, Citibank, and Citicorp dated as of
May 31, 1995(10)
10.35 Servicing Agreement among KIDC, Citibank, and Citicorp dated as of
May 31, 1995(10)
<PAGE>
EXHIBIT INDEX - continued
Exhibit No. Description
10.36 Collection Agency Agreement among KIDC, Citibank, Citicorp, and
Bankers Trust Company dated as of May 31, 1995(10)
10.37 Amendments No. 2 and 3 to Office Lease for Premises located at
200 Berkeley Street, Boston, MA, by and between John Hancock Mutual
Life Insurance Company and Keystone Investment Management Company,
dated October 2, 1994 and August 25, 1995, respectively(11)
10.38++ Keystone Investments, Inc. Deferred Profit Sharing Plan for Key
Executives dated May 1996(1)
10.39 Amendment to Amended and Restated Stockholder's Agreement dated
March 30, 1994(1)
27.00 Financial Data Schedule(1)
99.1 Statement of Policy re Officers' Stock Purchase Program(8)
- -------------------------------------------
1 Filed herewith.
2 Incorporated herein by reference to the corresponding exhibit to the Company's
Form S-1 Registration Statement No. 33-64506 filed with the Securities and
Exchange Commission on June 16, 1993.
3 Incorporated herein by reference to the corresponding exhibit to the Company's
Amendment No. 1 to its Form S-1 Registration Statement No. 33-64506 filed with
the Securities and Exchange Commission on July 28, 1993.
4 Incorporated herein by reference to the corresponding exhibit to the Company's
Amendment No. 2 to its Form S-1 Registration Statement No. 33-64506 filed with
the Securities and Exchange Commission on August 11, 1993.
5 Incorporated herein by reference to the corresponding exhibit to the Company's
Form 10-Q filed with the Securities and Exchange Commission on November 15,
1993.
6 Incorporated herein by reference to the corresponding exhibit to the Company's
Form 1993 10- K filed with the Securities and Exchange Commission on March 31,
1994.
7 Incorporated herein by reference to the corresponding exhibit to the Company's
1994 Form 10- K filed with the Securities and Exchange Commission on March 31,
1995.
8 Incorporated herein by reference to the corresponding exhibit to the Company's
Form S-8 Registration Statement No. 33-87780 filed with the Securities and
Exchange Commission on December 22, 1994.
9 Incorporated herein by reference to the corresponding exhibit to the Company's
Form 10-Q filed with the Securities and Exchange Commission on May 15, 1995.
10 Incorporated herein by reference to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
August 11, 1995.
<PAGE>
11 Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-Q filed with the Securities and Exchange Commission on
November 15, 1995.
12. Incorporated by reference herein to the corresponding exhibit to the
Company's Form 10-K filed with the Securities and Exchange Commission on
March 27, 1996.
+ Confidential treatment has been granted for portions of this document.
++ Management contract or compensatory plan or arrangement.
KEYSTONE INVESTMENTS, INC.
SHORT-TERM MANAGEMENT INCENTIVE PLAN
June 1980
Rev. June 1996
<PAGE>
SHORT-TERM MANAGEMENT INCENTIVE PLAN
I. PURPOSE: The purpose of The Keystone Investments, Inc. Management
Incentive Plan is to:
A. Provide an important building block in a total compensation
package that will enhance the company's ability to attract,
retain and motivate highly qualified professional talent in a
highly competitive industry.
B. Give clear emphasis to the pursuit and achievement of major
company goals and objectives.
C. Highlight the inter-relationship between personal contribution
and company success.
D. Allow deserving employees to share in the financial rewards of
that success.
II. ADMINISTRATION: The Chief Executive Officer of Keystone Investments is
the named Plan Administrator. It shall be his responsibility to
determine:
A. Eligible Participants
B. Performance Goals
C. Measurement Criteria
D. Performance Ratings
E. Amount and Timing of Payments
F. Variations on PAR Awards
III. FUNDING: The Plan will be funded by expense accruals which approximate
anticipated levels of payout, as determined by the Plan Administrator.
IV. ELIGIBILITY:
A. Plan participants include all officers of Keystone Investments,
its affiliates and subsidiaries who, except as noted below:
* Hold the title of Assistant Vice President or above.
* Occupy positions which, under the company's Position
Evaluation and Base Compensation Program, are evaluated at
400 points and above.
<PAGE>
B. Specifically excluded, however, are:
1. Members of Senior Management covered by the Keystone
Investments, Inc. Short-Term Management Incentive Plan for
Senior Management.
2. Sales and marketing personnel covered by sales incentive
programs or special compensation arrangements.
3. Investment professionals covered by investment performance
plans.
4. Other employees so designated by the Plan Administrator.
C. New employees, with less than a full year's service on December
31 of each year, will generally not be included for that year.
Exceptions may be granted if it is a condition of employment,
approved in writing by the Plan Administrator. In such cases,
awards will be pro-rated, depending on the number of months of
service in that year.
D. Employees who, for any reason, leave the company prior to
December 31 of any year, will generally not be included for that
year. Exceptions may be granted, under special circumstances,
only if approved in writing by the Plan Administrator on or prior
to the last day of employment. Such awards, if granted, will also
be pro-rated, depending upon the number of months of service in
that year.
V. PAYMENT:
All awards less than $50,000 shall be paid in full, in cash, at
an early date in the year immediately following the year of
performance.
If a participant's incentive award exceeds $50,000, up to 10% of
the total award may, in the Board's discretion, be paid in
company stock. This provision will not apply to incentive amounts
that exceed 100% of the participant's base salary. Participants
who have purchased company stock during the year may elect to
have such purchases applied to this provision. In certain
circumstances, Keystone's Board of Directors may waive this
provision.
2
<PAGE>
VI. PLAN OPERATION:
A. Basis of Awards - Awards will be determined annually on the basis
of the individual performance appraisal of the plan participant
and the corporate performance results of Keystone Investments,
Inc.
1. Individual Performance will be measured by the rating
achieved in the annual Performance Appraisal, prepared on
each employee and approved by the Corporate Compensation
Committee.
2. Corporate Performance will be based on a combined
evaluation by the CEO of corporate achievements vs.
pre-established annual goals and objectives relating to
the following factors:
FACTOR WEIGHT
------ ------
Earnings From Operations 60%
CEO Evaluation 40%
B. Calculation of Awards
1. PAR Awards are paid when both individual and corporate
performance are rated as "Meets Keystone's High
Standards". Such awards are calculated as a percentage of
the midpoint of the salary range established for each
position through the company's Position Evaluation and
Base Compensation Program. The percentages vary with the
level of each position as follows:
POSITION LEVEL PAR AWARD MAXIMUM AWARD
(IN JOB EVALUATION POINTS) (AS A % OF SALARY RANGE MIDPT)
- -------------------------- ----------------------------------
400 to 799 10% 22%
800 to 949 points 15% 33%
950 to 1400 points 20% 44%
Please see EXHIBIT II for noted Exceptions to this schedule.
3
<PAGE>
2. As individual and corporate performance vary above or
below the rating of "Meets Keystone's High Standards", the
incentive awards payments will vary from 0% to 220% of the
PAR award, as set forth in Exhibit I.
3. Rating scales for both individual and corporate
performance are as follows:
RATED NUMERICAL EQUIVALENT
PERFORMANCE CORPORATE INDIVIDUAL
----------- ------------------------
Exceptional 120 1
With Distinction 110 2
Meets Keystone's High Standards 100 3
Needs Improvement 90 4
Not Acceptable 80 5
4. In accordance with the rating scale and the grid, a
corporate rating of 100 and an individual rating of 3
represent "par performance". This results in an incentive
payment of 100% of the PAR award. Awards for varying
levels of corporate and for individual performance can be
similarly calculated.
4
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------- ---------------------------
Keystone Investments EXHIBIT I
MIP Payout Grid
Individual Rating
With Meets High Needs Not
Corporate Rating Exceptional Distinction Standards Improvement Acceptable
<S> <C> <C> <C> <C> <C> <C>
Exceptional 120 220 190 160 110 0
115 205 175 145 95 0
With Distinction 110 190 160 130 80 0
105 175 145 115 65 0
Meets High Standards 100 160 130 100 50 0
95 145 115 85 35 0
Needs Improvement 90 130 100 70 20 0
85 115 85 55 5 0
Not Acceptable 80 100 70 40 0 0
</TABLE>
KEYSTONE INVESTMENTS, INC.
SHORT-TERM MANAGEMENT INCENTIVE PLAN
FOR SENIOR MANAGEMENT
December 1993
Rev. June 1996
<PAGE>
SHORT-TERM MANAGEMENT INCENTIVE PLAN FOR SENIOR MANAGEMENT
I. PURPOSE: The purpose of The Keystone Investments, Inc. Short-Term
Management Incentive Plan for Senior Management is to:
A. Provide an important building block in a total compensation
package that will enhance the company's ability to attract,
retain and motivate highly qualified professional talent in a
highly competitive industry.
B. Give clear emphasis to the pursuit and achievement of major
company goals and objectives.
C. Highlight the inter-relationship between personal contribution
and company success.
D. Allow members of Senior Management to share in the financial
rewards of that success.
II. ADMINISTRATION: The Chief Executive Officer of Keystone Investments,
Inc. is the named Plan Administrator. It shall be his responsibility to
determine:
A. Eligible Participants
B. Performance Goals
C. Measurement Criteria
D. Performance Ratings
E. Amount and Timing of Payments
III. FUNDING: The Plan will be funded by expense accruals which approximate
anticipated levels of payout, as determined by the Plan Administrator.
IV. ELIGIBILITY:
A. Plan participants include all designated members of Senior
Management of Keystone Investments, Inc., its affiliates and
subsidiaries.
B. New members of Senior Management, with less than a full year's
employment on December 31 of each year, will generally not be
included for that year. Exceptions may be granted if it is a
condition of employment, approved in writing by the Plan
Administrator. In such cases, awards will be pro-rated, depending
on the number of months of service in that year.
<PAGE>
C. Members of Senior Management who, for any reason, leave the
company prior to December 31 of any year, will generally not be
included for that year. Exceptions may be granted, under special
circumstances, only if approved in writing by the Plan
Administrator on or prior to the last day of employment. Such
awards, if granted, will also be pro-rated, depending upon the
number of months of service in that year.
V. PAYMENT:
A. Form of Payment
1. All awards less than $50,000 shall be paid in full, in cash.
If a participant's incentive award exceeds $50,000, up to 10% of
the total award may, in the Board's discretion, be paid in
company stock. This provision will not apply to incentive amounts
that exceed 100% of the participant's base salary. Participants
who have purchased company stock during the year may elect to
have such purchases applied to this provision. In certain
circumstances, Keystone's Board of Directors may waive this
provision.
B. Time of Payment
Senior Management Short-Term Management Incentive Plan payments
shall be paid at an early date in the year immediately following
the year of performance; provided however that with respect to
any year for which an award is paid the Board of Directors shall
have the authority to determine that the award may be paid prior
to the end of the performance year.
VI. PLAN OPERATION:
A. Basis of Awards - Awards will be determined annually on the basis
of the individual performance appraisal of the plan participant
and the corporate performance results of Keystone Investments,
Inc.
1. Individual Performance will be measured by the rating
achieved in the annual Performance Appraisal, prepared on
each employee and approved by the Corporate Compensation
Committee.
2
<PAGE>
2. Corporate Performance will be based on a combined
evaluation by the CEO of corporate achievements vs.
pre-established annual goals and objectives relating to
the following factors:
FACTOR WEIGHT
------ ------
Earnings From Operations 60%
CEO Evaluation 40%
B. Calculation of Awards
1. PAR Awards are paid when both individual and corporate
performance are rated as "Meets Keystone's High
Standards". Such awards are calculated as a percentage of
the midpoint of the salary range established for each
position through the company's Position Evaluation and
Base Compensation Program. The percentages vary with the
level of each position as follows:
Par and Maximum Awards for Senior Management
PAR MAXIMUM
POSITION AWARD AWARD
- -------- ----- -------
(as a % of Salary Range Mid-Point)
Chairman & CEO - KII 70 154
President - KICO 60 132
President - KIDCO 60 132
Senior Vice President & 60 132
Chief Financial Officer
Senior Vice President - Legal 40 88
& General Counsel
President - KIRC 40 88
3
<PAGE>
2. As individual and corporate performance vary above or
below the rating of "Meets Keystone's High Standards", the
incentive awards payments will vary from 0% to 220% of the
PAR award, as set forth in the attached Exhibit I.
3. Rating scales for both individual and corporate
performance are as follows:
RATED NUMERICAL EQUIVALENT
PERFORMANCE CORPORATE INDIVIDUAL
----------- --------- ----------
Exceptional 120 1
With Distinction 110 2
Meets Keystone's High Standards 100 3
Needs Improvement 90 4
Not Acceptable 80 5
4. In accordance with the rating scale and the grid, a
corporate rating of 100 and an individual rating of 3
represent "par performance". This results in an incentive
payment of 100% of the PAR award. Awards for varying
levels of corporate and for individual performance can be
similarly calculated.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------- ---------------------------
Keystone Investments EXHIBIT I
MIP Payout Grid
Individual Rating
With Meets High Needs Not
Corporate Rating Exceptional Distinction Standards Improvement Acceptable
<S> <C> <C> <C> <C> <C> <C>
Exceptional 120 220 190 160 110 0
115 205 175 145 95 0
With Distinction 110 190 160 130 80 0
105 175 145 115 65 0
Meets High Standards 100 160 130 100 50 0
95 145 115 85 35 0
Needs Improvement 90 130 100 70 20 0
85 115 85 55 5 0
Not Acceptable 80 100 70 40 0 0
</TABLE>
Keystone Investments, Inc.
Deferred Profit Sharing Plan
for
Key Executives
Plan Document
May 1996
<PAGE>
Deferred Profit Sharing Plan
I. Purpose
The purpose of the Keystone Investments, Inc. Deferred Profit Sharing
Plan for Senior Executives (" the plan ") is to:
[bullet] Provide an important building block, in a total compensation
package, that will enhance the company's ability to attract,
motivate and retain highly qualified professional talent in a
highly competitive industry.
[bullet] More closely align total compensation opportunities with the
competitive market place.
[bullet] Induce plan participants to maintain long term employment
relationships with Keystone.
[bullet] Give clear emphasis to the pursuit and achievement of the
company's short and long term financial goals and objectives.
II. Type of Plan
The Deferred Profit Sharing Plan is a "non qualified" plan, and as such
is governed by the applicable provisions of the Internal Revenue Code of
1986, as amended. Among other things this requires that all deferred
amounts are:
[bullet] Held in the company's name until actually paid out.
[bullet] Subject to the demands of all general creditors of the company,
and therefore not the exclusive property of the plan
participants.
III. Plan Administration
The Chief Executive Officer of Keystone Investments, Inc. is the named
Plan Administrator. It shall be his responsibility to determine:
[bullet] Plan participants
[bullet] Performance goals
[bullet] Measurement criteria
[bullet] Share Allocation
[bullet] Amount and timing of awards
At his discretion, he shall seek the review and concurrence of the Board
of Directors, on any matter relating to Plan Administration.
<PAGE>
Deferred Profit Sharing Plan
Page 2
IV. Eligibility
Subject to the approval of the Plan Administrator, Plan Participants
shall include:
[bullet] Members of the Executive Committee
[bullet] Investment Group Heads
[bullet] Other Key Contributors
V. Funding
The Plan will be funded by a profit sharing pool, as follows:
[bullet] 3.5% of Earnings from Operations for Par Performance (when
operating profit meets the target set forth in the annual
budgeted P & L)
[bullet] The pool will be increased by 1/4 of 1% for each 1% by which
Earnings from Operations exceed Target
- Contributions to the pool will max out at 6% of Earnings
from Operations when earnings reach 110% of Target
- Further contributions to the pool will continue at the 6%
level as earnings exceed the 110% level
[bullet] The pool will be decreased by 1/4 of 1% for each 1% by which
Earnings from Operations fail to reach Target
- Contributions to the pool will diminish to 1% of Earnings
from Operations when earnings reach only 90% of Target
(the Threshold Level)
- No contributions will be made to the pool for performance
below the Threshold Level
<PAGE>
Deferred Profit Sharing Plan
Page 3
VI. Distribution of Shares and Payouts
The pool will be distributed among the participants on the basis of
shares held by each participant.
[bullet] The total number of shares outstanding will be divided into the
profit sharing pool to determine the per share value.
[bullet] A total of 6000 shares will be available for distribution each
year.
[bullet] The Plan Administrator will make annual determinations
concerning the allocation of shares among participants.
Such allocations:
- Will be made in advance of each Performance Year
- Need not be consistent on a year to year basis
The Plan Administrator may, at his discretion, withhold up to 20% of
available shares to provide after the fact rewards for exceptional
performance by specific plan participants.
Distributions will be deferred and paid out as detailed in paragraph
VII. below.
VII. Vesting
Each year's award will be recorded on a separate bookkeeping account for
each participant. Payments from the account will be deferred, and "cliff
vested" as follows:
[bullet] On the 3rd anniversary of the conclusion of each plan year, 60%
of that plan year's account balance will be cashed out. The
remaining 40% will be cashed out on the 5th anniversary.
[bullet] All awards must be cashed out when vested
Participants who leave the company prior to completion of the normal
vesting periods may cash out as follows:
[bullet] Participants who retire, go on permanent disability or are
terminated involuntarily may cash out all earned amounts in
their accounts at the time of termination, whether fully vested
or not
[bullet] Participants who voluntarily resign from the company will
forfeit all amounts in their accounts which have not vested
<PAGE>
Deferred Profit Sharing Plan
Page 4
VIII. Investment Selections
[bullet] Each Plan Participant's account will be deemed invested in one
or more Keystone mutual funds selected by the Plan
Administrator, from time to time. The Plan Administrator will
select and offer a minimum of three Keystone Funds.
[bullet] At the time the award is made, Plan Participants will designate
the manner in which their accounts will be deemed invested,
including the percentage to be allocated to each selected fund.
Any combination or use of one or all of the funds will be
permissible.
[bullet] At least once each year, at a time or times so designated by
the Plan Administrator, Plan Participants may reallocate their
account balances among and between the selected funds.
[bullet] The Plan Participants account balances will be adjusted from
time to time to reflect the investment performance of the funds
in which their accounts are deemed invested, including deemed
investment gains as well as deemed investment losses. In the
event the company elects to make investments in the funds to
mirror the Plan Participants investment selections, any income
or capital gains taxes incurred by the company as a result of
such investment shall be charged to the Plan Participants'
accounts.
IX. Change of Control
In the event of a change in control of the company before any deferred
compensation is fully paid out, the company may prefer to accelerate
payment to the participants in a lump sum.
[bullet] Such accelerated payments will be made only up to the level
permitted by Section 280 G of the Internal Revenue Code, with
the balance being paid out only if approved by the company
shareholders.
[bullet] If shareholder approval cannot be obtained, then the deferred
compensation will be paid out in normal course (i.e. no
acceleration).
X. Plan Termination
The company reserves the right to terminate or amend this plan, at any
time, with or without prior notification to the Plan Participants.
However, all commitments to Plan Participants, up to the time of
amendment or termination, will be honored.
<PAGE>
Deferred Profit Sharing Plan
Page 5
XI. Deferral Contracts
All Plan Participants will be required to enter into a signed Deferred
Compensation arrangement with the company, stating that they have read,
understand and agree to the terms and conditions of the Plan. Plan
Participants' interest in the Plan may not be assigned, transferred,
pledged on otherwise encumbered or disposed of.
<PAGE>
Keystone Investments, Inc.
Deferred Profit Sharing Plan
for
Key Executives
This form is to be executed annually by all participants in the Keystone
Investments, Inc. Deferred Profit Sharing Plan for Key Executives at a time in
advance of the performance year being measured.
I have received, read and understand and agree with the terms and conditions of
the Keystone Investments, Inc. Deferred Profit Sharing Plan Document, dated May
1996, as revised in July 1996.
I understand I have been selected to be a Plan Participant for the Performance
Year beginning January 1, 19____ and ending December 31, 19_____.
I further understand that my inclusion in the plan in any given year does not
automatically guarantee that I will be a participant in any other year.
- --------------------------
Signature
- --------------------------
Printed Name
- --------------------------
Date
AMENDMENT TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
WHEREAS, Keystone Group, Inc., the Keystone Group, Inc. Employee Voting
Trust, the Keystone Group, Inc. Management Stockholders' Voting Trust, the 1989
Collective Investment and Voting Trust, the Keystone Group, Inc. 1992 Employee
Voting Trust, the Keystone Group, Inc. 1992 Collective Investment and Voting
Trust, the Keystone Group, Inc. 1993 Option Share Voting Trust (collectively,
the "Voting Trusts"), the trustees of each of the Voting Trusts (collectively,
the "Trustees") and those certain officers and employees of Keystone Group, Inc.
and its subsidiaries, including their respective successors and assigns, who are
deemed to be parties hereto by reason of their ownership of an interest in one
or more of the Voting Trusts or otherwise, in each case together with any other
officers or employees of Keystone who after the date hereof may from time to
time execute an instrument of adherence thereto or any other document executed
for the purpose of making any such officer or employee a party hereto
(collectively, the "Management Stockholders" and individually a "Management
Stockholder"), are all of the parties to the Amended and Restated Stockholders'
Agreement dated as of November 6, 1989 as Amended and Restated as of August 17,
1993 (the "Agreement");
WHEREAS, Section 5.04 of the Agreement provides in part for the
amendment of the Agreement "only by a written consent signed by (i) the Company,
and (ii) holders of a majority of the shares of Common Stock held by the
Management Stockholders, or by Trusts for their benefit (which consent shall be
deemed validly given if by the Trustees);
WHEREAS, all of the parties to the Agreement wish to further amend the
Agreement and to give their consent to such amendment pursuant to the terms of
Section 5.04 of the Agreement;
NOW THEREFORE, the Agreement is hereby further amended as follows:
<PAGE>
WITNESSETH:
1. All capitalized terms used herein and not otherwise defined shall have
the meanings given to them in the Agreement.
2. Article II, Section 2.01, Subparagraph (a)(ii) is hereby revoked in its
entirety and the following substituted therefore:
"(ii) Transfer by any Management Stockholder to: (A) any other
Management Stockholder; (B) his or her spouse and/or issue; (C) a trust of which
he or she is the settlor and a trustee for the benefit of his or her spouse
and/or issue; (D) a trust of which he or she is the settlor and a trustee for
the benefit of one or more charitable organizations which qualify as such
pursuant to the Internal Revenue Code as amended from time to time; or (E) a
trust for the concurrent or sequential benefit of the Management Stockholders'
spouse, issue and one or more charitable organizations described in (D) above;
provided, that no such trust shall require or permit distribution of such Common
Stock or Trust Securities during the term of this Agreement except to one or
more charitable organizations as described in (D) above; and provided further
that, with respect to all transfers permitted pursuant to this subparagraph
(a)(ii), the transferee shall have entered into an enforceable written agreement
satisfactory to the Company providing that all Common Stock or Trust Securities
so transferred shall continue to be subject to all provisions of this Agreement
(including Section 4.01 hereof with respect to shares subject to a Repurchase
Option) as if such Common Stock or Trust Securities were still held by such
Management Stockholder; and"
IN WITNESS WHEREOF, the parties have executed this Amendment and hereby
consent to the same this 30th day of March, 1994.
KEYSTONE GROUP, INC.
-------------------------------
Name:
Title:
<PAGE>
MANAGEMENT STOCKHOLDERS:
-------------------------------
George S. Bissell
-------------------------------
Stephen J. Arpante
-------------------------------
Roger T. Wickers
-------------------------------
Albert H. Elfner, III
-------------------------------
Philip M. Byrne
-------------------------------
Edward F. Godfrey
-------------------------------
Ralph J. Spuehler, Jr.
-------------------------------
George S. Bissell, as Trustee of the
Keystone Group, Inc. Employee Voting
Trust, Keystone Group, Inc.
Management Stockholders' Voting
Trust, Keystone Group, Inc. 1992
Employee Voting Trust, 1989
Collective Investment Voting Trust,
Keystone Group, Inc. 1992 Collective
Investment and Voting Trust and
Keystone Group, Inc. 1993 Option
Share Voting Trust
<PAGE>
--------------------------------
Albert H. Elfner, III, as Trustee of
the Keystone Group, Inc. Employee
Voting Trust, Keystone Group, Inc.
Management Stockholders' Voting
Trust, Keystone Group, Inc. 1992
Employee Voting Trust, 1989
Collective Investment Voting Trust,
Keystone Group, Inc. 1992 Collective
Investment and Voting Trust and
Keystone Group, Inc. 1993 Option
Share Voting Trust
---------------------------------
Roger T. Wickers, as Trustee of the
Keystone Group, Inc. Employee Voting
Trust, Keystone Group, Inc.
Management Stockholders' Voting
Trust, Keystone Group, Inc. 1992
Employee Voting Trust, 1989
Collective Investment Voting Trust,
Keystone Group, Inc. 1992 Collective
Investment and Voting Trust and
Keystone Group, Inc. 1993 Option
Share Voting Trust
----------------------------------
Edward F. Godfrey, as Trustee of the
Keystone Group, Inc. Employee Voting
Trust, Keystone Group, Inc.
Management Stockholders' Voting
Trust, Keystone Group, Inc. 1992
Employee Voting Trust, 1989
Collective Investment Voting Trust,
Keystone Group, Inc. 1992 Collective
Investment and Voting Trust and
Keystone Group, Inc. 1993 Option
Share Trust
<PAGE>
----------------------------------
Ralph J. Spuehler, Jr., as Trustee
of the Keystone Group, Inc. Employee
Voting Trust, Keystone Group, Inc.
Management Stockholders' Voting
Trust, Keystone Group, Inc. 1992
Employee Voting Trust, 1989
Collective Investment Voting
Trust, Keystone Group, Inc. 1992
Collective Investment and Voting
Trust and Keystone Group, Inc. 1993
Option Share Trust
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<ARTICLE> 5
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<NAME> Keystone Investments, Inc.
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
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