KANSAS CITY SOUTHERN INDUSTRIES, INC.
EXHIBIT 13.1 FILE NO. 1-4717
FORM 10-K DECEMBER 31, 1993
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Years Ended December 31, 1993
Introduction. Kansas City Southern
Industries, Inc. ("KCSI" or "Company")
is a diversified holding company with
principal operations in Transportation
Services, Information & Transaction
Processing and Financial Asset
Management. This presentation is
intended to clarify and focus on results
of operations, liquidity and capital
structure of the Company and should be
read in conjunction with the
Consolidated Financial Statements and
Notes.
RESULTS OF OPERATIONS
Significant Developments. Consolidated
operating results during 1991-1993 were
affected by the following significant
developments:
MidSouth Acquisition. The Company
completed the acquisition of MidSouth
Corporation ("MidSouth"), a regional
railroad holding company headquartered
in Jackson, Mississippi, on June 10,
1993, pursuant to a definitive merger
agreement. The transaction was approved
by both Boards of Directors, MidSouth
shareholders and the Interstate Commerce
Commission. The agreement provided that
the holders of MidSouth Common stock
receive $20.50 per share in cash,
resulting in a value of all Common stock
and equivalents of approximately $219.3
million. At the date of closing, the
Company had previously acquired
approximately 22% of MidSouth
outstanding Common stock through open
market purchases and privately
negotiated transactions. Accordingly,
the purchase price for the acquisition
of the MidSouth common stock aggregated
approximately $213.5 million paid in
cash by the Company to holders of
MidSouth's common stock and in
connection with the exercise of certain
options held by MidSouth employees and
others.
The MidSouth acquisition, which was
accounted for as a purchase, represents
a significant transaction for the
Company. Results of operations of the
Company for the year ended December 31,
1993 include the operations of MidSouth
as a consolidated subsidiary effective
with the closing of the transaction.
Excluding the effect of additional tax
expense for federal tax rate increases
related to deferred accruals, the
transaction did not result in any
dilution in the Company's 1993 earnings.
At the date of closing, MidSouth had
approximately $55 million of operating
loss carryforwards. Annual utilization
of these loss carryforwards may be
limited by the Internal Revenue Code as
a result of a change in ownership.
Anticipated future tax benefits
associated with the loss carryforwards
were recorded as a reduction of recorded
intangibles.
The Company financed the MidSouth
acquisition with the $250 million credit
agreement, discussed below, and other
financing resources available to the
Company. In addition, as part of the
merger transaction, the Company
refinanced
substantially all of MidSouth's
indebtedness at more favorable interest
rates.
The MidSouth acquisition provides an
important East/West rail line, as a
complement to the Kansas City Southern
Railway Company's ("KCSR," a
wholly-owned subsidiary), predominantly
North/South route. This East/West rail
line, running from Dallas, Texas, to
Meridian, Mississippi, will allow the
Company to be more competitive in the
intermodal transportation market. In
addition, the acquisition adds a base of
MidSouth customers in the South Central
U.S. to KCSR's already strong traffic
base and presents opportunities for the
rerouting of certain commodity movements
over less circuitous routes. Effective
January 1, 1994, MidSouth was
operationally and administratively
merged into KCSR.
Vantage Computer Systems, Inc./The
Continuum Company, Inc. Effective
September 30, 1993, DST Systems, Inc.
("DST," a wholly-owned subsidiary)
completed the merger of its 90.5% owned
subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of
The Continuum Company, Inc.
("Continuum"). Vantage and its
wholly-owned subsidiary, Vantage P&C
Systems, Inc. provide policyholder
record keeping data processing and
software for the life and
property/casualty insurance industries.
DST and the minority shareholder of
Vantage received a total of four million
shares of Continuum stock 2,939,000
shares at closing and the remainder
after Continuum shareholder approval was
obtained in late 1993. As a result of
this transaction and additional
Continuum stock purchases, DST owned
approximately 24% of the outstanding
common stock of Continuum at December
31, 1993. In 1994, DST purchased
additional Continuum shares through
privately negotiated transactions.
Accordingly, DST currently owns
approximately 29% of Continuum's
outstanding common stock. In the initial
exchange, DST exchanged Vantage stock
with a book value of approximately $17
million for Continuum stock with a then
current market value of approximately
$62 million. DST accounted for the
initial exchange as a non-cash,
non-taxable exchange in investment basis
of Vantage for an investment in
Continuum. Accordingly, no
[Page 30]
gain recognition was associated with the
transaction. Vantage revenues for the
nine months ended September 30, 1993,
were $32.6 million and $38.7 million for
the year ended December 31, 1992.
Effective October 1, 1993, Vantage
results were no longer consolidated with
DST and Continuum earnings were included
in DST results on the equity basis.
Continuum is a publicly traded
international consulting and computer
services firm based in Austin, Texas,
which primarily serves the needs of life
and property and casualty insurance
companies for computer software and
services. Continuum has annual revenues
of approximately $250 million and assets
of approximately $160 million.
The Vantage/Continuum transaction will
allow DST to expand its presence in the
information processing market for the
insurance industry and combine the
strengths of both Vantage and Continuum.
Prior to the merger, Vantage's business
was primarily centered in the U.S.
domestic market while Continuum has a
significant international and domestic
presence. Subsequent to this
transaction, DST assumed all of the
North American operations data
processing functions for Continuum. DST
and Continuum reached agreement whereby
DST will make available the capabilities
of the Winchester Data Center for
Continuum processing requirements. In
addition, Continuum obtained the rights
to license DST's "Automated Work
Distributor" ("AWD"TM) product to
insurance companies worldwide.
DST 1993 Acquisitions. During 1993, DST
completed the acquisition of Clarke &
Tilley Ltd., (96% owned), a United
Kingdom company, which markets
investment management software primarily
for use in Europe and the Pacific Rim;
Corfax Benefit Systems, Ltd., (100%
owned), a Canadian company, which
processes shareowner transactions for
mutual funds and pension accounts in
Canada; DBS Systems Corporation, (60%
owned), a United States company, which
is developing a software billing system
for the direct broadcast satellite
industry; and Belvedere Financial
Systems, Inc. (100% owned) a United
States company, which develops and
markets portfolio accounting and
investment management systems. Each of
these transactions was accounted for as
a purchase. These acquisitions provide
DST with additions to its product base
and future opportunities for expansion
of its product lines into international
markets, especially Europe and Canada.
Janus Capital Corporation. Janus Capital
Corporation ("Janus") provides
management services to the Janus and
IDEX families of mutual funds, insurance
companies and other institutional
accounts. Assets under management grew
significantly from $3.1 billion at
December 31, 1990, to $22.2 billion at
December 31, 1993. Janus and IDEX Funds
shareholder accounts have also risen
from 337,000 at December 31, 1990 to 2.0
million at December 31, 1993. This
growth in funds under management and
shareholder accounts resulted in
significant revenue and operating income
growth.
1993 Tax Legislation. On August 10,
1993, President Clinton signed into law
the Omnibus Budget Reconciliation Act of
1993 ("the 1993 Tax Act"). This new tax
legislation changed numerous provisions
to the then existing tax law. The most
significant of these changes affect the
Company's Transportation Services
operations.
The new tax law increased the corporate
tax rate from 34% to 35%. Accordingly,
the Company's 1993 earnings include
additional income tax expense
attributable to the tax rate increase
retroactive to January 1, 1993. These
charges, which are included in the
provision for taxes on income, represent
$3.4 million ($.08 per share) related to
deferred tax accruals and $900,000 ($.02
per share) related to current year
earnings. In addition, the new tax law
included provisions for higher fuel tax
rates, which resulted in an additional
expense to Transportation operations
during 1993 of approximately $400,000.
Accounting Change Postretirement
Benefits. The Company adopted Statement
of Financial Accounting Standards No.
106 "Employers' Accounting for
Postretirement Benefits Other Than
Pensions," ("SFAS 106"), effective
January 1, 1993. SFAS 106 required the
Company to accrue, currently,
postretirement benefits provided to
retirees by the Company and its
Transportation subsidiaries. These
benefits relate primarily to
postretirement medical, life and other
benefits available to employees not
covered under collective bargaining
agreements.
The adoption of SFAS 106 resulted in a
charge to earnings in first quarter 1993
in the amount of $5.5 million, net of
applicable income taxes. The adoption of
SFAS 106 is not expected to have a
material effect on future annual
expenses of the Company.
Accounting Change Income Taxes. The
Company also adopted Statement of
Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ("SFAS
109"), effective January 1, 1993. SFAS
109 was issued as an amendment to
Statement of Financial Accounting
Standards No. 96, "Accounting for Income
Taxes," ("SFAS 96"). The adoption of
SFAS 109 resulted in a charge to
earnings in first quarter 1993 of
$970,000.
[Page 31]
As a result of the Company's previous
adoption of SFAS 96, the adoption of
SFAS 109 did not have a material impact
on the components of income tax expense
or the effective income tax rates
applicable to continuing operations
versus the U.S. federal income tax
statutory rate.
Stock Splits. On January 28, 1993, the
Company's Board of Directors authorized
a 2-for-1 split affected in the form of
a stock dividend in the Company's Common
stock paid March 17, 1993. Following the
split, the effective annual dividend is
$.30 per share on the Company's
outstanding Common stock.
On January 30, 1992, the Company's Board
of Directors authorized a 2-for-1 stock
split which was affected in the form of
a stock dividend in the Company's Common
stock paid March 17, 1992. The Company's
Board of Directors also authorized an
11% dividend increase on January 30,
1992, with respect to the Company's
outstanding Common stock also effective
March 17, 1992. The annual Common
dividend was increased to $.30 per share
from the then current $.27 per share, on
an after 1993 split basis.
Appropriate data in this report and the
accompanying Consolidated Financial
Statements and Notes were restated to
reflect the effect of both of these
2-for-1 stock splits.
Debt Securities Registration and
Offerings - 1993. The Company filed a
Registration Statement on Form S-3 with
the Securities and Exchange Commission
("SEC") on March 29, 1993, registering
$200 million in debt securities to be
offered in the form of Medium Term
Notes. Proceeds from the sale of the
debt securities are expected to be added
to the general funds of the Company and
used to principally repay debt and for
other general corporate purposes,
including working capital, capital
expenditures and acquisitions of and/or
investments in businesses or assets. On
June 24, 1993, pursuant to an Indenture
and Purchase Agreement, the Company
issued $100 million of debt securities
under this Registration Statement. The
transaction was comprised of Notes
bearing interest at a rate of 5.75% and
maturing in 1998. The net proceeds of
this transaction, along with certain
proceeds from the Company's $250 million
credit agreement, were used to refinance
certain MidSouth debt in July 1993.
On September 29, 1993, the Company filed
a Registration Statement, registering
$500 million in securities. The
securities may be offered in the form of
no par Common Stock, New Series
Preferred Stock $1 par value,
Convertible Debt Securities, Debt
Securities or Equipment Trust
Certificates (collectively, "the
Securities"). Net proceeds from the
sale of the Securities are expected to
be added to the general funds of the
Company and used principally for general
corporate purposes, including working
capital, capital expenditures and
acquisitions of or investments in
businesses and assets. The Company has
not yet sought to have the Registration
Statement declared effective by the SEC
and no securities have been issued.
$300 Million Debt Securities
Registration. On July 1, 1992, the
Company issued $100 million 77/8% Notes
due 2002 and $100 million 8.8%
Debentures due 2022 under a $300 million
debt securities registration with the
Securities and Exchange Commission. The
77/8% Notes are not redeemable prior to
their maturity in 2002, the 8.8%
Debentures are redeemable on or after
July 1, 2002, at a premium of 104.04%,
which declines to par on or after July
1, 2012. Proceeds from the debt offer
were used to repay borrowings under then
existing revolving credit agreements.
The Company used the remaining net
proceeds for general corporate purposes
including debt repayments, working
capital, capital expenditures,
acquisition of and/or investments in
businesses and assets and acquisition of
the Company's capital stock.
On March 3, 1993, the Company issued the
remaining $100 million of debt
securities as 65/8% Notes due 2005. The
Company used the net proceeds for
general corporate purposes, including
subsidiary debt repayments, working
capital, capital expenditures,
acquisitions of or investments in
businesses and assets, and acquisitions
of the Company's capital stock.
Series B Convertible Preferred Stock. On
October 1, 1993, KCSI transferred one
million shares of KCSI Series B
Convertible Preferred Stock (the "Series
B Preferred Stock") to the Kansas City
Southern Industries, Inc. Employee Plan
Funding Trust ("the Trust"), a grantor
trust established by KCSI. The purchase
price of the stock, based upon an
independent valuation, was $200 million,
which the Trust financed through KCSI.
The indebtedness of the Trust to KCSI is
repayable over 27 years with interest at
6% per year, with no principal payments
in the first three years. The Trust,
which is administered by an independent
bank trustee, and is consolidated into
the Company's financial statements, will
repay the indebtedness to KCSI utilizing
dividends and other income as well as
other cash obtained from KCSI. As the
debt is reduced, shares of the Series B
Preferred Stock, or shares of Common
stock acquired on conversion, will be
released and available for distribution
to various KCSI employee benefit plans,
including its ESOP, Stock Option Plan
and Stock Purchase Plans. [Page 32]
The Series B Preferred Stock, which has
a $10 per share (5%) annual dividend and
a $200 per share liquidation preference,
is convertible into Common stock at an
initial ratio of four shares of Common
stock for each share of Series B
Preferred Stock. The Series B Preferred
Stock is redeemable after 18 months at a
specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held
only by the Trust or its beneficiaries,
the employee benefit plans of KCSI. The
full terms of the Series B Convertible
Preferred Stock are set forth in a
Certificate of Designations approved by
the Board of Directors and filed in
Delaware.
$250 Million Revolving Credit Facility.
On December 8, 1992, the Company
established a credit agreement in the
amount of $250 million. This agreement
replaced the Company's then existing
$100 million credit agreement, which had
been in place since 1989. During 1993,
proceeds were used to fund the
acquisition of MidSouth and refinance
certain MidSouth indebtedness. Remaining
credit capacity under the facility is
intended for general corporate purposes.
At December 31, 1993, the Company had
$230 million of indebtedness outstanding
on this agreement.
Employees Stock Purchase Plan. In the
fourth quarter 1993, the Company
completed the eighth offering under the
Employees Stock Purchase Plan.
Approximately 221,000 shares of Company
Common stock were subscribed to under
this offering, which will be funded
through employee payroll deductions,
over a two year period, at a price of
$38.20 per share. In the fourth quarter
1992, the Company completed the seventh
offering under the Employees Stock
Purchase Plan. Approximately 248,000
shares of Company Common stock were
subscribed to under this offering, which
were funded through employee payroll
deductions at a price of $18.75 per
share.
Union Labor Negotiations. Collective
bargaining agreements with KCSR union
employees, representing approximately
83% of KCSR's workforce were completed
in 1992. These agreements allow
implementation of productivity
improvements and cost sharing
arrangements with contract employees.
Productivity improvements will be
realized by modification in the
operation of its trains with reduced
crew sizes. These productivity
improvements were necessary to enable
the railroad industry to remain
competitive with other modes of
transportation. These labor agreements
will be open for renegotiation at the
end of 1994 and in 1995. Labor
agreements representing approximately
87% of MidSouth's workforce, which were
in place at the date of acquisition,
will be open for renegotiation in
varying periods beginning in 1994.
As a result of completion of these labor
agreements, management believes the
Company is now adequately positioned to
compete effectively with railroads
contiguous to our lines as well as other
forms of transportation. However,
railroads remain restricted by
antiquated operating rules and prevented
from achieving optimum productivity.
KCSR and other railroads are burdened
with labor regulations which are more
expensive than non-rail industries
including our principal trucking
competitors. The Railroad Retirement Act
requires a 23.75% contribution by
railroads on eligible wages, while the
Social Security and Medicare Acts only
require a 7.65% employer contribution on
similar wage bases. Other programs, such
as The Federal Employees Liability Act
(FELA), compared to The Worker's
Compensation Law and unemployment
programs, are additional examples of
such labor regulations which are
competitively disadvantageous to the
railroad industry.
Principal Stockholders Transactions. The
following activity has occurred among
the Company's principal stockholders:
- - In early 1994, Warburg, Pincus
Capital Company, L.P. an affiliate of
E.M. Warburg Pincus & Co., a New York
based venture banking and investment
management firm, announced plans to
distribute 4 million shares of the
Company's Common stock to its limited
partners, including institutional
holders and pension funds. The general
partners of Warburg, Pincus & Co. intend
to continue to retain a significant
portion of the shares which they will
receive in the planned distribution.
- - In July 1993, Hallmark Cards,
Inc. sold approximately 2 million shares
of the Company's Common stock, which
represented approximately one-half of
Hallmark holdings in KCSI Common stock.
- - In late 1992, the Company
completed the purchase of approximately
1.1 million shares of KCSI Common stock
from several Deramus family trusts for
approximately $22 million. These
purchases represented substantially all
the remaining KCSI Common stock held by
the family.
Safety and Quality Programs. KCSR
continued implementation and emphasis of
important safety and quality programs
during 1993. Related benefits are
expected to be recurring in nature and
realizable over future years. In 1993,
the Company experienced a 31% reduction
in
[Page 33]
Federal Railroad Administration
reportable employee injuries, as
compared to 1992 and 28% and 33%
reductions in 1992 and 1991,
respectively, when compared to prior
years. "Safety" and "Quality" programs
comprise two important ongoing goals of
railroad management.
Management. George W. Edwards, Jr., was
elected Executive Vice President of the
Company, and President and Chief
Executive Officer of The Kansas City
Southern Railway Company on April 1,
1991. He was additionally elected to the
Company's Board of Directors in May
1991. Prior to joining KCSI, Mr. Edwards
was Chairman of the Board and Chief
Executive Officer of The United
Illuminating Company of New Haven,
Connecticut.
Senior Management Compensation.
Effective January 1, 1992, the
compensation package of the three
members of the KCSI Office of the Chief
Executive was revised with the intent of
providing long-term incentives which
closely parallel shareholder returns.
The Office of the Chief Executive is
comprised of:
Landon H. Rowland - President and CEO of
KCSI
George W. Edwards, Jr. - Executive Vice
President of KCSI, President and CEO of
KCSR
Thomas A. McDonnell - Executive Vice
President of KCSI, President and CEO of
DST Systems, Inc.
Messrs. Rowland, Edwards and McDonnell
entered into five year contracts,
freezing base compensation and
suspending annual incentive
compensation. These contracts also grant
restricted stock and stock options which
provide returns based upon appreciation
of the Company's market value.
Fuel Costs and Efficiency. Fuel costs
represent approximately 7% of KCSR's
operating expenses and have been
declining as diesel fuel prices have
decreased each of the past three years.
In recent years, KCSR has achieved
greater fuel efficiency through improved
operating practices related to train
schedules, balancing locomotive
horsepower availability with demand, and
additions of newer, more fuel efficient
locomotives. During the period
1989-1991, KCSR purchased a total of 46
new fuel efficient SD-60 locomotives for
$63 million. These acquisitions were
financed through privately placed
Equipment Trust Certificates. In
addition, during 1991, KCSR refurbished
16 GP40 locomotives as part of its fleet
modernization efforts.
KCSR Locomotive Power (MDA CHART #1)
These new locomotive purchases during
the period 1989-1991 have improved the
average age of KCSR's locomotive fleet.
These new fuel efficient locomotives
have additionally helped effect a
reduction in fuel gallons consumed per
gross ton mile since 1989.
The MidSouth acquisition has resulted in
increased traffic levels on the combined
KCSR/MidSouth rail system. The rail
industry as a whole, including
KCSR/MidSouth, suffers from a shortage
of available locomotive power to handle
increased traffic levels.
Output Technologies, Inc. DST's printed
output processing businesses, Output
Technologies, Inc. ("OTI") continued to
expand in 1993 and had 35 locations
throughout the U.S. at the end of 1993.
During 1993, OTI increased its earnings
contributions to DST consolidated
results and completed the internal
reorganization of its subsidiaries which
included renaming of certain
subsidiaries and merging of certain
operations. The overall objective of
this reorganization was a consolidation
of output related activities,
identification of businesses with the
OTI name and alignment into geographic
operating regions.
The OTI concept was launched in 1990
with the acquisition of companies which
perform commercial printing and graphics
design service, and joined other
wholly-owned subsidiaries of DST,
specializing in computer output
microfilm/microfiche and printing and
mailing of laser printed output. In
early 1991, DST formalized its
commitment to the printed output
processing services businesses with the
formation of Output Technologies, Inc.
as a holding company for subsidiaries in
this line of business.
In the past several years, OTI has
achieved further growth through
acquisitions and location expansion.
During 1991, OTI purchased all of the
capital stock of Mail Processing
Systems, Inc., (renamed Output
Technologies Eastern Region, Inc.) a
provider of laser printing and mailing
services with locations in Connecticut
and Massachusetts. In addition, in 1992,
OTI acquired certain assets and assumed
certain liabilities of Business
Services, Inc., (renamed Output
Technologies of Illinois, Inc.), a
provider of telecommunications and
fulfillment capabilities to a variety of
industries, primarily financial
services.
[Page 34]
Redemption of 12% Debentures. The
Company exercised its right of optional
redemption on October 1, 1991 with
respect to $57 million of the then
remaining $63 million outstanding
principal amount of its 12% debentures.
At December 31, 1991, the Company had
outstanding $4.7 million of the 12%
debentures which were not voluntarily
tendered. In 1992, the Company exercised
its right of optional redemption, and
subsequently redeemed, the entire $4.7
million remaining principal amount.
In conjunction with the redemption, the
Company recorded an extraordinary after
tax charge to 1991 earnings of $3.8
million or $.09 per Common share. This
charge resulted from the repurchase
premium and write off of unamortized
bond discount costs.
INDUSTRY SEGMENT RESULTS
The Company's major business activities
are classified as follows (in millions):
1993 1992 1991
Revenues
Transportation
Services $451.1 $369.2 $350.1
DST Systems, Inc. 342.2 270.5 211.1
Janus Capital Corp. 162.7 97.5 41.7
Eliminations,
Corporate & Other 5.1 4.2 7.3
Total $961.1 $741.4 $610.2
% Change
from Prior Year 29.6% 21.5% 15.6%
Operating Income
Transportation
Services $116.7 $ 75.3 $ 67.4
DST Systems, Inc. 31.2 17.8 26.8
Janus Capital Corp. 80.0 45.7 15.8
Eliminations,
Corporate & Other (15.8) (12.9) (11.7)
Total $212.1 $125.9 $ 98.3
% Change
from Prior Year 68.5% 28.1% 12.1%
Transportation Services. Transportation
Services operations are comprised
principally of KCSR and MidSouth (both
wholly-owned subsidiaries), which
account for more than 90% of
Transportation Services revenues.
KCSR Net Ton Miles (MDA CHART #2)
KCSR revenues have increased modestly
each year since 1989 despite downward
pressures on rates. Competition, since
deregulation, is the primary cause of
downward pressures on rates. In
addition, truck competition has eroded
the railroad industry's share of
transportation dollars because of
changing regulations, subsidized highway
improvement programs and favorable labor
regulations, thereby improving the
competitive position of trucks as an
alternative mode of surface
transportation for many commodities.
The modest growth experienced since 1989
resulted from volume increases, a
mixture of both general commodity and
coal trains. As economic conditions
improved in the United States during
1993, Transportation revenues also
increased. Assuming no major economic
deterioration occurs in the region
serviced by the Transportation
businesses, management expects moderate
growth during 1994.
KCSR 1993 revenues rose 3% compared to
1992. General commodity revenues,
excluding intermodal ("TOFC/COFC")
traffic, rose 5.5% on generally higher
traffic volumes. The higher traffic
volumes resulted, in part, from a
strengthening of U.S. economic
conditions, which have continued to rise
slowly from a recessionary period in
1990-1992. Higher traffic levels were
experienced in carloadings of farm
products, particularly corn & wheat,
[Page 35]
KCSR Revenues (MDA CHART #3)
non-metallic ores, lumber/wood -
pulp/paper, chemical and petroleum
shipments. Intermodal carloadings
declined 8% in 1993 as KCSR continues
the process of upgrading its current
"on-off ramp" loading facilities in
anticipation of greater intermodal
traffic in the future. Unit coal
revenues rose modestly in 1993 on
overall increased tonnage but were
adversely affected by variances in
length of haul and rates. While 1993
revenues rose, operating expenses
declined in 1993 compared to 1992.
Favorable expense variances were caused
by ongoing cost containment efforts,
lower fuel costs and lower expenses from
KCSR's continuing emphasis on safety,
but somewhat offset by increased costs
on higher traffic levels. The
combination of higher KCSR revenues and
lower expenses helped effect a 55%
increase in Transportation Services
operating income in 1993 compared to
1992. These cost containment initiatives
also helped effect a decline in KCSR's
Interstate Commerce Commission ("ICC")
operating ratio from 82.3% in 1992 to
77% in 1993. The ICC operating ratio is
a common efficiency measurement among
Class I railroads.
KCSR general commodities revenues
increased 7.2% during 1992 from 1991.
Revenue gains were experienced in the
transportation of farm products,
particularly soybeans and wheat,
pulp/paper products, lumber/wood
products and non-metallic mineral
shipments, but were somewhat offset by a
decline in carloadings of chemical and
petroleum products and lower TOFC/COFC
traffic. Additionally, general commodity
revenues increased 1.2% during 1991 from
1990 largely from increased carloadings
of non-metallic minerals, grain mill
products, pulpboard and petroleum coke,
but were substantially mitigated by
modest declines in overall farm
products, soda ash and other petroleum
and chemical products.
Transportation Services results also
benefitted in 1993 from revenue and net
income additions of MidSouth and
continuing favorable operations at the
Company's petroleum coke export facility
(Pabtex, Inc.), which experienced
increased volumes in 1993. MidSouth
contributed $67.8 million in revenues to
1993 Transportation Services results,
which surpassed comparative prior year
revenues on increased carloadings.
MidSouth's 1993 earnings, net of all
acquisition related expenses, were
positive after excluding the effect of
the federal income tax rate increase.
The flooding in the Midwest region of
the United States during 1993 did not
materially affect the Company's rail
transportation operations. KCSR's
trackage, facilities and physical
properties were not directly hampered by
the rising flood waters. However, many
of KCSR's interchange partners in the
Kansas City gateway were affected, which
resulted in congestion, rerouting of
certain traffic, and delays of commodity
movements, particularly for grain and
coal shipments. KCSR experienced revenue
declines, during third quarter 1993, in
certain commodities due to the inability
to interchange shipments with other
railroads. Overall the financial impact
was immaterial.
The following summarizes components of
KCSR's revenues (in millions per ICC
Form R-1):
1993 1992 1991
General
Commodities $ 222.2 $ 212.8 $198.6
Coal 106.2 105.5 106.5
Other 17.1 17.3 17.1
Total $ 345.5 $ 335.6 $322.2
Railroad Transportation operations are
constantly faced with substantial costs
related to fuel, labor and maintenance
of its roadbed.
KCSR Fuel (MDA CHART #4)
During 1993, 1992 and 1991, particularly
in the latter half of 1991, fuel prices
declined from levels experienced in
1990. These fuel price declines were, in
part, due to the resolution of
hostilities in the Persian Gulf War and
stabilization of relations in the Middle
East region in general and resulted in a
favorable impact on operating income of
$1.6, $1.5 and $1.3 million in
1993-1991, respectively. Current and
future years fuel costs have been and
will be negatively impacted
(approximately $800,000 per year)
because of the locomotive diesel fuel
tax imposed by the Omnibus Budget
Reconciliation Act of 1990 earmarked for
Deficit Reduction. Additionally, new
fuel taxes imposed by the 1993 Tax Act
negatively affected KCSR operating
income by approximately $400,000 in
1993. Control of fuel expenses is a
constant concern of management and fuel
savings (previously discussed) is a top
priority.
[Page 36]
A roadway improvement program was begun
by KCSR in 1986. This program was
implemented to upgrade the roadway in
order to reduce operating costs, improve
safety, increase the capabilities of
KCSR and increase quality of service to
customers. In 1990, KCSR completed
bridge and related modifications to
support unrestricted transportation of
double stack containers. Removal of
restrictions to the double stack
operation along with the addition of an
East/West MidSouth rail line will permit
KCSR to compete with other carriers in
the transcontinental intermodal markets.
KCSR intends to continue its aggressive
capital improvement program into 1995,
at which time its mainline, yards and
side tracks will have been rebuilt. In
addition, the MidSouth line will require
track and roadbed upgrade and expansion,
much of which is anticipated to be
completed over the next two years. This
roadway improvement program has been and
will continue to be funded with
internally generated cash flow.
Portions of roadway maintenance costs
are capitalized and other portions
expensed, as appropriate. Expenses
aggregated $40, $40 and $39 million for
1993-1991, respectively. Maintenance and
capital improvement programs are in
conformity with the Federal Railroad
Administration's track standards and are
accounted for in accordance with the
Interstate Commerce Commission's
accounting rules.
Information & Transaction Processing.
DST Systems, Inc. ("DST", a wholly-owned
subsidiary). DST revenues are increasing
because of customer base growth, new
lines of business and expanded products.
A significant amount of DST's net income
is derived from the operations of its
various joint ventures discussed in
"Unconsolidated Affiliates."
DST Revenues (MDA CHART #5)
During 1993, DST consolidated revenues
rose 27% from 1992, while DST's
contribution to KCSI earnings improved
50% to $22.9 million from $15.3 million
in 1992. This revenue and income
increase resulted from an increase in
mutual fund accounts serviced and the
absence of one-time expenses which
reduced 1992 results (discussed below).
Total mutual fund shareowner accounts
serviced rose to 28 million at December
31, 1993 from 22.4 million at December
31, 1992 resulting in higher mutual fund
processing and output services volume.
During 1993, Kemper Financial Services
("Kemper"), a DST customer, began
conversion of its mutual fund shareowner
processing, which will result in the
removal of its accounts from the DST
system. The total number of Kemper
accounts, approximately 2.5 million,
will be converted from the DST system in
stages by the end of 1994. In July 1993,
the first stage, which encompassed
500,000 Kemper accounts were converted
from the DST system. The remaining
accounts will be removed in 1994. The
loss of 500,000 accounts in 1993 was
offset by account growth from other
mutual fund customers and accordingly,
did not have a material financial
impact.
During 1992, DST experienced a 28%
increase in revenues; however, operating
income declined from 1991. Revenue
growth was generated by increased
overall business volumes and the
expanded contribution of OTI and
Vantage. The operating income decline
resulted from several items, which
negatively impacted 1992 earnings: (i)
lower weighted average billable monthly
balance of mutual fund shareowner
accounts serviced in 1992 as a result of
the loss of 2.7 million Vanguard
accounts in late 1991, even though DST
ended 1992 at 22.4 million shareowner
accounts; (ii) higher ESOP component of
employee benefit costs (1992-$12.7
million; 1991-$4.2 million) from
expanded headcount and additional ESOP
expense which resulted in lower ESOP
costs in 1993; (iii) start up and
development costs for DST's TRAC-2000
system for 401(K) plans and Vantage's
software for the property and casualty
insurance industry; and (iv) certain
building renovation costs.
The number of mutual fund accounts
serviced by DST increased to 22.4
million at December 31, 1992, versus
18.7 million at December 31, 1991. DST
experienced an overall decline in the
number of mutual fund accounts serviced
during 1991, from 20.4 million accounts
at December 31, 1990 to 18.7 million
accounts at December 31, 1991. This
account decrease is in large part a
result of the loss of the Vanguard group
of funds as a DST customer in September
1991, comprising approximately 2.7
million accounts and the removal of
800,000 broker based accounts of
Prudential Bache in late 1991. Excluding
the loss of the Vanguard and Prudential
Bache accounts, mutual fund accounts
serviced increased 1.8 million accounts
in 1991 when compared to 1990.
The financial institutions served by
DST, both mutual fund and insurance,
will continue to evaluate whether to
internalize or outsource their
technology needs. This process will have
both positive and negative effects on
DST's results; however, on an overall
basis, DST's customer base is expected
to grow.
[Page 37]
Beginning in 1991 and continuing into
1993, DST continued its focus on
internal and external expansion of its
service presence in the mutual fund,
insurance and financial services
industries. DST made a commitment to the
life and property/casualty insurance
industry business lines serviced by
Vantage. During 1992, Vantage business
volume increased as revenues rose 45%;
however, Vantage earnings declined from
1991 primarily due to the system
development costs for Vantage's software
for the property and casualty insurance
industry, discussed earlier, and a
contract termination fee received in
1991. The structure of DST's involvement
in the insurance industry changed during
1993 with the exchange of Vantage and
the resulting equity ownership in
Continuum. However, DST's total service
to the insurance industry increased as
DST continues to process the Vantage
policyholder accounts, has added
processing of all Continuum policyholder
accounts and other services as well as
gaining access to Continuum's market for
DST's AWDTM imaging product.
DST's printed output processing
businesses, Output Technologies, Inc.
("OTI") continued to expand in 1993.
Revenues rose 34% for the OTI group of
companies in 1993 from increased output
processing volumes and contributions
from new and expanded business lines.
These new and expanded business lines
have contributed to DST's growth during
the last three years and expanded its
product lines available to customers.
OTI's 1993 laser click volume was 669
million pages of printed output, an
increase of 45% over the 460 million
pages in 1992. OTI growth has been
achieved through acquisitions and
location expansion. In 1991, OTI
acquired all of the outstanding stock of
Mail Processing Systems, Inc., (renamed
Output Technologies Eastern Region,
Inc.) a financial printing and mailing
business, for $7.1 million and opened
several new U.S. locations through its
wholly-owned subsidiary United
Micrographics Systems, Inc., (renamed
Output Technologies Central Region,
Inc.) a provider of computer process
output microfilm and microfiche.
In the 1990-1992 period, DST
experienced significant improvement in
revenues and operating income over prior
years, as a result of mutual fund
account growth and lower system
development costs while expanding its
proprietary software services into new
areas (AWDTM and TA2000TM), increasing
its business lines in the output
processing area (microfilm, microfiche,
graphics design, printing), entering and
expanding the area of government
servicing and expanding its presence in
the life and property/casualty insurance
processing markets.
During 1993, DST continued marketing of
Automated Work Distributor, an
image-based clerical work management
system. The AWDTM System's image
technology can also be combined with
principles of an intelligent work
station. AWDTM was initially implemented
in several mutual fund transfer
agencies, but through expansion now
resides on more than 4,200 work stations
in companies throughout the world (a 75%
increase since December 31, 1992) and is
used to service approximately 53% of the
mutual fund shareowner accounts on DST's
system. AWDTM is also used in industries
such as insurance, banking and health
care. Concurrent with the Continuum
transaction, Continuum and DST signed a
licensing agreement whereby Continuum
will market the AWDTM product for use in
insurance industry applications. The
Continuum agreement provides DST access
to additional international markets for
its AWDTM products.
Financial Asset Management
Janus Assets Under Management (MDA CHART
#6)
Janus Capital Corporation. ("Janus," an
81% owned subsidiary). Janus operations
experienced significant growth, with
operating income in 1993, 1992 and 1991
comprising 38%, 36% and 17%,
respectively, of the Company's
consolidated operating income. From 1985
to 1990, revenues and net income grew,
but not in proportion to assets under
management due to product mix and higher
administrative costs. In 1989, Janus
increased its marketing and staffing
expenditures to heighten awareness of
the Janus funds and their performance
records. These increased expenditures
essentially offset the growth of 1989
revenues from assets under management.
In 1990, Janus realized the first full
year of benefits from its 1989 marketing
campaign. Assets under management
increased $1.3 billion in 1990, $5.6
billion in 1991 and $6.8 billion in 1992
and $6.7 billion in 1993. Janus
continued to reap significant benefits
from these ongoing marketing efforts in
terms of record fund sales and market
appreciation during 1993 and 1992.
While Janus experienced significant
growth during 1993, much of that growth
occurred in the first half of 1993.
During the third and fourth quarters of
1993, growth in assets under management
slowed. Total fund sales were $3.3
billion during the second half of 1993
versus $5.5 billion during the first six
months of 1993, while fund redemptions
increased to $2.2 billion versus $1.6
billion, respectively. Janus has
increased expenditures to provide
quality service to its shareholders
through the use of advanced
[Page 38]
technology and extensive personnel
training programs. Assets under
management totaled a record $22.2
billion at December 31, 1993.
The following table highlights Janus'
assets under management and revenues:
1993 1992 1991
Assets Under Management
(in billions):
Janus No-Load Funds$ 17.0 $11.7 $ 6.0
IDEX Load Funds 1.2 1.0 .7
WRL Insurance
Products Funds 1.2 .8 .4
Institutional and Separately
Managed Accounts 2.1 1.3 1.0
Cash Equivalent Fund .7 .7 .6
Total $ 22.2 $15.5 $ 8.7
Janus Revenues
(in millions) $162.7 $97.5 $41.7
During 1993, Janus continued to expand
the distribution channels of the Janus
funds by participating in "Schwabs'
Mutual Fund OneSource" service of
Charles Schwab as well as a similar
program offered by Fidelity Investments.
In addition, Janus introduced two new
Janus fund portfolios; Janus Mercury
Fund, an equity fund; Janus Federal Tax
Exempt Fund, a tax exempt income fund;
and the Janus Aspen Series, which
consists of six portfolios funded
through variable annuity contracts, such
as the Janus Retirement Advantage.
During 1992, Janus introduced three new
mutual funds; Janus Enterprise Fund, an
equity fund; Janus Balanced Fund, a
combination equity/fixed income fund and
Janus Short-Term Bond Fund, a short-term
income fund.
Janus has expanded its assets under
management by marketing advisory
services directly to pension plan
sponsors, insurance, banking and
brokerage firms for their proprietary
investment products. These relationships
generated approximately $920 million and
$340 million in new assets in 1993 and
1992, respectively.
Janus revenues and operating income
increases are a direct result of
increases in assets under management and
Janus processing services. Assets under
management and shareholder accounts have
grown in recent years from a combination
of new money investments or fund sales
and market appreciation. Fund sales have
risen in response to marketing efforts,
favorable fund performance and the
current popularity of no-load mutual
funds. Market appreciation has resulted
from increases in stock investment
values. However, a decline in the stock
and bond markets and/or an increase in
the rate of return of alternative
investments could negatively impact
Janus revenues and operating income. In
addition, the mutual fund market, in
general, faces increasing competition as
the number of mutual funds continues to
increase, marketing and distribution
channels become more creative and
complex, and investors place greater
emphasis on published fund
recommendations and investment category
rankings. These factors could also
affect Janus and negatively impact
revenues and operating income.
Eliminations, Corporate & Other. The
"Eliminations, Corporate and Other"
consists of unallocated holding company
operating expenses, intercompany
eliminations, and miscellaneous other
investment activities. Modest
fluctuations of these unallocated
expenses have occurred from 1991 to
1993.
Unconsolidated Affiliates. Earnings from
Unconsolidated Affiliates consist
principally of DST's equity in the
earnings of Investors Fiduciary Trust
Company ("IFTC", a 50% owned affiliate),
Boston Financial Data Services, Inc.
("BFDS," a 50% owned affiliate), The
Continuum Company, Inc. ("Continuum," a
29% owned affiliate), Midland Data
Systems, Inc., and Midland Loan Services
L.P. (collectively "Midland," 45-50%
owned affiliates) and Argus Health
Systems, Inc., ("Argus," a 50% owned
affiliate).
IFTC experienced substantial growth in
assets under custody ($93 billion - 1991
to $125 billion - 1993). DST's equity in
IFTC earnings was $6.0, $4.8 and $4.8
million from 1991 to 1993, respectively.
IFTC earnings are influenced by mutual
fund industry growth and interest rate
fluctuations. IFTC earnings grew
steadily from 1989-1991; however, in
1992, IFTC earnings declined even though
assets under custody continued to grow.
The 1992 earnings decline resulted from
interest rate fluctuations and losses on
certain foreign currency investments. At
December 31, 1992, IFTC had liquidated
its portfolio regarding the foreign
currency investments. 1993 net income
was essentially unchanged when compared
to 1992. While IFTC assets under custody
grew, results were reduced by a change
in the fiduciary fee arrangement between
IFTC and its parent companies and lower
investment earnings. Excluding the
change in fiduciary fees, IFTC results
were improved over 1992.
During 1991, IFTC increased its
ownership interest in United Missouri
Bank ("UMB") to approximately 5%. IFTC,
which initiated its investment position
in 1987, uses UMB's
[Page 39]
correspondent banking and securities
processing facilities in support of
IFTC's custody, portfolio accounting,
trustee and shareowner services to the
mutual fund industry. IFTC continues to
own approximately 5% of UMB.
BFDS provides full service transfer
agency functions for open and closed end
mutual funds and corporations utilizing
DST's proprietary systems. In addition,
it performs remittance processing
functions. In 1993, BFDS contributed
$2.1 million in earnings to DST through
increases in mutual fund and corporate
shareowner accounts processed, efficient
operating practices and expanded
services.
As discussed earlier, Continuum became a
DST equity affiliate when DST exchanged
its interest in Vantage for an equity
interest in Continuum. Continuum
contributed positively to DST's 1993
earnings in unconsolidated affiliates
since completion of the merger
transaction. Management expects that
Continuum will provide significant
increases in equity earnings during
1994. Midland has been awarded contracts
with the Resolution Trust Corporation
("RTC") for operation of an Asset
Management System and a Control Totals
Module System for use by the RTC.
Midland also provides commercial loan
processing services, whose volumes have
increased as commercial loans serviced
have grown (none in 1990 to 12,000 in
1993). Midland contributions to
unconsolidated affiliates' earnings
declined significantly in 1993 from
1992. This decline in earnings stems
from a continuing 1993 trend of lower
margins on loan securitizations and
delays on the receipt of certain loan
processing work for the RTC. DST's
combined equity in Midland earnings was
$.8, $4.3 and $.9 million in 1991-1993,
respectively. Management believes
opportunities exist in Midland's
business lines and is focusing attention
on the expansion of Midland's loan
services capabilities to the private
sector as a complement to loan
processing work for the RTC.
Argus, which provides insurance
processing services to the health care
industry through a pharmaceutical claims
processing system, also experienced
volume and income growth in 1993.
Pharmacy claims processed have grown
steadily (31 million claims in 1991 to
78 million claims in 1993). Increased
claims volume lead to income growth;
DST's equity in Argus earnings was
$1.2, $1.7 and $2.3 million in
1991-1993, respectively.
Interest Expense. Interest expense
amounts increased significantly in 1993
compared to 1991-1992 levels. Interest
expense rose to $51.2 million in 1993
from $33.1 and $32.1 million in 1992 and
1991, respectively. This rise in
interest expense is primarily
attributable to borrowings required to
finance the MidSouth acquisition, but
somewhat offset by the refinancing of
debt at subsidiary levels, including
MidSouth, with more favorable borrowing
rates. Additional borrowings in 1993
where primarily $200 million in public
debt offerings and $230 million from the
Company's revolving credit agreement.
Interest expense in 1992 increased from
proceeds of the Company's $200 million
Note and Debenture offer somewhat offset
by a decline in short-term interest
rates, redemption of the 12% Debentures
and repayment of working capital credit
lines. 1991 interest expense increased
over 1990 primarily as a result of
additional borrowings on the Company's
$100 million credit agreement, and
purchase of 24 new SD-60 locomotives for
$32.2 million, offset somewhat by a
decline in short-term interest rates
during 1991 and redemption of $58
million of the Company's 12% Debentures
in the fourth quarter of 1991.
LIQUIDITY
Operating Cash Flow. The Company's cash
flow from operations has historically
been positive, and traditionally
sufficient to fund operations, KCSR
roadway capital improvements, DST
systems development and operating
capacity costs, and debt service.
External sources of cash, principally
negotiated bank debt, public debt and
sale of investments, have historically
been used to fund acquisitions, new
ventures, investments, equipment
additions and Company stock purchases.
The following table summarizes operating
cash flow information (in millions):
1993 1992 1991
Net income $ 90.5 $ 63.8 $41.9
Depreciation and
amortization 97.2 74.2 59.3
Change in working
capital items (37.7) (34.8) 5.4
Deferred income
taxes 29.6 2.6 4.8
Other 9.6 17.1
Net operating
cash flow $189.2 $122.9 $111.4
[Page 40]
1989-1990 cash flows fluctuated from the
disposition of non-core businesses and
non-recurring Transportation Services
transactions. However, cash flows have
risen steadily in each year from 1991 to
1993. 1993 operating cash flows
increased 54% from 1992 to $189.2
million. This increase primarily related
to higher net income, increased non-cash
depreciation and amortization, (MidSouth
and DST acquisitions along with KCSR
road property additions), and increased
deferred income taxes. 1992 operating
cash flows of $122.9 million increased
10% over 1991 from increased net income,
higher depreciation and amortization
primarily related to DST equipment
acquisitions, increases in non-cash
expense accruals but offset by changes
in working capital items, primarily
increased accounts receivable on higher
revenues. 1991 cash flows from
operations increased significantly from
1990 related to reduced cash income tax
payments, deferred income tax timing
items, increased depreciation on KCSR
locomotive purchases, increased
intangible amortization on DST
acquisitions, and changes in working
capital items. The increased operating
cash flows, in 1991 compared to 1990,
also resulted from changes in working
capital items related to increases in
accounts payable and other accrued
liabilities, principally at DST and
Janus, somewhat offset by increases in
accounts receivable at DST. These
fluctuations were primarily caused by
new business line growth, increased
revenues in 1991 compared to 1990 and
timing of payments to vendors.
Net Cash Flow from Operations as
Compared to Net Income (MDA CHART #7)
Financing and Investing Cash Flows.
These cash flows include: (i) new
financings of $100, $283 and $447
million in 1991-1993, respectively; (ii)
repayment of indebtedness in the amounts
of $172, $215 and $231 million in
1991-1993, respectively, and (iii) cash
dividends of $12 million in 1991, and
$13 million each in 1992 and 1993.
Proceeds from issuance of debt in 1993
were used for the MidSouth acquisition
($214 million), Continuum stock
purchases ($20 million), refinancing of
MidSouth indebtedness ($129 million),
and subsidiary refinancing and working
capital ($84 million).
Proceeds from issuance of debt in 1992
were used for operating cash
requirements ($42 million), repayment of
bank credit lines ($90 million),
repurchase of KCSI capital stock ($31
million), MidSouth Common stock
investment ($26 million), subsidiary
indebtedness financing ($65 million),
operating growth and business expansion
at DST ($29 million).
Proceeds from issuance of long-term debt
in 1991 were used for operating cash
requirements ($41 million), business
expansion, acquisition and operating
growth at DST ($22 million) and Southern
Leasing Corporation growth ($37
million).
Repayment of indebtedness includes
scheduled maturities, refinancings and,
in 1991 and 1992, early redemption of
$58 million and $4.7 million
respectively, of the Company's 12%
Debentures.
CAPITAL STRUCTURE
Capital Requirements. The Company has
traditionally funded capital
expenditures in Transportation Services
using Equipment Trust Certificates for
major purchases of Railway locomotive
and rolling stock, and intermediate bank
term loans for other equipment, and DST
and Janus operations. Conversely,
capital improvements for roadway track
structure have historically been funded
with cash flow from operations. The
MidSouth acquisition will require the
Company to complete a capital
improvement program for MidSouth
roadbed, locomotives and facilities.
This program will upgrade and expand
MidSouth's track to handle greater
traffic levels at higher train speeds
and will be completed over the next five
year period with a large majority of
these upgrades completed during the next
two years. The Company currently
anticipates the cost of this five year
capital program will be approximately
$150 million, 50% of which was planned
by MidSouth management prior to the
acquisition. Subsequent to completion
of the
[Page 41]
MidSouth acquisition and debt
refinancing, the Company funded
MidSouth capital requirements with
historical funding sources and intends
to continue to do so in the future.
These same sources were used in funding
1993 capital programs ($182 million,
excluding the MidSouth acquisition
assets) and are expected to be used in
funding 1994 capital programs, currently
estimated at $255 million.
Funding requirements for the KCSR
long-term roadway improvement program,
expected to be completed in 1995, will
use significant portions of KCSR's
operating cash flow. KCSR purchased 24
new SD-60 locomotives during 1991 for
$32 million, which were financed through
issuance of privately placed Equipment
Trust Certificates. Arrangements are
currently in place to acquire 12
locomotive units (approximately $5
million) scheduled for early 1994
delivery and will be funded using
historical financing sources. DST
capacity additions were added through
master lease agreements during 1991 in
order to meet additional processing
capacity requirements. In 1993 and 1992,
DST purchased data processing equipment
in the amount of $26 and $27 million,
respectively, through bank term
financing. Additionally, in 1993, DST
entered into a sale/leaseback
transaction of certain mainframe
computer equipment in the amount of
$16.6 million. Should DST's processing
volumes continue the growth experienced
in the past few years, a physical
expansion of DST's Winchester Data
Center and acquisition of additional
data processing equipment will be
necessary to accommodate this growth.
Southern Leasing Corporation ("SLC")
will fund growth in its portfolio
through SLC credit lines and Company
financing arrangements. Janus' growth
does not require significant capital
requirements and is typically funded
with existing cash flows.
Debt to Debt + Equity Ratio (MDA CHART
#8)
Capital. Debt as a percent of total debt
plus equity ("debt ratio") increased
from 47% at December 31, 1991 to 49% at
December 31, 1992 and to 60% at
December 31, 1993. During 1991, the debt
ratio declined from 1990, principally
from redemption of the Company's 12%
Debentures and increases in
stockholders' equity. During 1992, debt
increased ($200 million Note and
Debenture Offer), but was partially
offset by stockholders' equity
increases. The MidSouth acquisition,
completed in 1993, added significant
amounts of new indebtedness to the
Company's balance sheet and raised the
relative debt ratios above management's
established goals. These higher debt
amounts were expected as the Company
fully absorbs MidSouth operations.
Management intends to reduce the
relative debt ratios in future years
through profitable operations, which
generate positive cash flows for debt
retirement and increases in total net
worth.
Components of capital are shown as
follows
(in millions):
1993 1992 1991
Current debt $ 63.5 $ 62.0 $ 43.7
Long-term debt 776.2 387.0 317.1
Total debt 839.7 449.0 360.8
Stockholders'
equity 562.7 462.4 411.8
Total debt
plus equity $ 1,402.4 $911.4 $772.6
Debt as a percent of
total debt plus
equity 60% 49% 47%
In 1993, 1992 and 1991, the Company
repurchased $9.5, $30.9 and $6.6
million, respectively, of its Capital
stock in accordance with the stock
repurchase and stock option plans
approved by the Company's Board of
Directors.
Minority Purchase Agreements. Agreements
between KCSI and certain Janus minority
owners contain, among other provisions,
mandatory stock purchase provisions
whereby under certain circumstances,
KCSI would be required to purchase the
minority interest of Janus. If such
provisions became effective as of
December 31, 1993, KCSI would be
required to purchase the respective
minority interest for approximately $160
million; the purchase price
determinations are based on a multiple
of earnings. In the event such
provisions became effective, KCSI would
be required to meet such commitments.
Overall Liquidity. In 1991-1993, the
Company continued to grow and strengthen
its relative position in the
Transportation Services, Information &
Transaction Processing and Financial
Asset Management businesses. The Company
believes it has adequate liquid
resources, which include sufficient
lines of credit and businesses which are
positive cash flow generators to meet
future operating, capital and debt
service requirements.
[Page 42]
OTHER
Inflation. Inflation has not had a
significant impact on the Company's
operations in the past three years.
Generally accepted accounting principles
require the use of historical costs.
Replacement cost and related
depreciation expense, on a replacement
cost basis, of the Company's property
would be substantially higher than the
historical costs reported. The increase
in expenses from these fixed costs,
coupled with variable cost increases due
to significant inflation, would be
difficult to recover through price
increases given the competitive
environments of the Company's three
principal subsidiaries, KCSR, DST and
Janus.
SWEPCO Litigation. As was previously
reported, KCSR is a defendant in a
lawsuit filed in the District Court of
Bowie County, Texas by Southwestern
Electric Power Company ("SWEPCO").
SWEPCO has alleged that KCSR is required
to reduce SWEPCO's coal transportation
rate due to changed circumstances that
allegedly create a "gross inequity"
under the provisions of the existing
coal transportation contract among
SWEPCO, KCSR and the Burlington-Northern
Railroad. Although the suit is pending,
KCSR and SWEPCO are negotiating for an
agreement to settle the major issues
which are the subject of this
litigation. Management is confident that
the matter will be concluded without
material adverse effect on the financial
condition or future results of
operations of the Company.
Environmental Matters. Also previously
reported was the naming of KCSR as a
"potentially responsible party" by the
Louisiana Department of Environmental
Quality in a state environmental
proceeding involving a location near
Bossier City, Louisiana, which was the
site of a wood preservative treatment
plant (Lincoln Creosoting). KCSR is a
former owner of part of the land in
question. This matter was the subject of
a trial in the United States District
Court in Shreveport, Louisiana which was
concluded in July of 1993. The Court
found that Joslyn Manufacturing Company,
an operator of the plant, is required to
indemnify KCSR for damages arising out
of plant operations. (KCSR's potential
liability is as a property owner rather
than as a generator or transporter of
contaminants.) The case has been
appealed to the United States Court of
Appeals for the Fifth Circuit.
On January 18, 1994, the Environmental
Protection Agency ("EPA") published a
list of potential sites that may be
placed on the Federal Comprehensive
Environmental Response, Compensation &
Liability Act, ("CERCLA", also known as
the superfund law), national priority
list. The Lincoln Creosoting site was
included. Since major remedial work has
been performed at this site by Joslyn
and KCSR has been held by the Federal
Court to be entitled to indemnity for
such costs, it would appear that KCSR
should not incur significant remedial
liability. At this time, it is not
possible to meaningfully evaluate the
potential consequences of remediation at
the site, since the EPA has made no
announcement other than listing of the
Lincoln Creosoting site for "potential"
inclusion on the national list.
Continuing Management Focus On Core
Business. Pursuant to the Company's
strategic plans, KCSI management
continued its focus on the Company's
core businesses of Transportation
Services, Information & Transaction
Processing, and Financial Asset
Management during 1993. This continuing
focus was evidenced by strategic
decisions intended to exploit the
strength of the Company's business lines
and capabilities, provide for future
growth opportunities and to achieve the
Company's strategic financial
objectives. 1991, 1992, 1993 and future
years have been and will be affected by
the following:
-The strategies developed by KCSI
management are to:
- - Drive our strongest businesses.
- - Capitalize on advantages of location
and technology leadership.
- - Leverage earnings with productivity
gains for ourselves and our customers.
- - Tie new directions to present market
and technical strengths.
- - In 1991, KCSI purchased the facility
improvements of Pabtex, Inc., a
petroleum coke and coal bulk export
handling facility located in Port
Arthur, Texas with deep water access to
the Gulf of Mexico. The purchase of this
facility will allow KCSR opportunities
for future expansion of the petroleum
coke and coal export business.
- -In 1992, the Company purchased 530
acres of land adjacent to the Company's
Pabtex coal and petroleum coke storage,
barge and ship loading facility in Port
Arthur, Texas. The 530 acres includes
4,000 linear feet of deep water frontage
on the Sabine-Neches Waterway, which has
direct access to the Gulf of Mexico via
the Intercoastal Waterway. This
acquisition increases the Transportation
Service's deep water access in the Port
Arthur, Texas area and will permit a
[Page 43]
doubling of capacity of the Pabtex coal
and coke facility and development of
additional port operations in KCSR's
service area.
The Company owns 1,025 acres of property
located on the waterfront in the Port
Arthur, Texas area, which includes
22,000 linear feet of deep water
frontage and three docks. Port Arthur is
an uncongested port with direct access
to the Gulf of Mexico. Approximately 75%
of this property is available for
development.
- - The Transportation Services management
team, which was restructured in 1991, is
committed to growth in its service area
and intends to expand through short-line
rail acquisitions and strategic joint
ventures. This commitment is evidenced
by the following acquisition activity
during 1992 and 1993:
- - The June 1993 completion of the
acquisition of MidSouth Corporation, an
1,100 mile regional railroad company,
previously discussed in this
management's discussion and analysis
section. The Company has historically
been a North/South railroad. This
acquisition provides the Company an
East/West rail line, which presents the
opportunity to be a significant
competitor in the intermodal
transportation market.
- - In May 1992, the KCSR signed an
agreement with the Santa Fe Railway to
purchase portions of its rail line in
the Dallas, Texas area. The sale
consists of approximately 90 miles of
track and an 80 acre piggyback
intermodal facility. The agreement is
being implemented in phases over a two
year period. Phase I of this agreement
was completed in late 1993. Phase II is
anticipated to be completed in second
quarter 1994. The agreement will gain
KCSR direct access to the Dallas/Ft.
Worth markets for the first time in the
Company's history.
- - In April 1992, KCSR signed a letter of
intent for the purchase of all of the
capital stock of the Graysonia,
Nashville & Ashdown Railway ("GNA") from
Holnam, Inc. The GNA, which was
wholly-owned by Holnam, connects with
KCSR at Ashdown, Arkansas and extends 32
miles east. The purchase price also
includes industrial real estate.
Acquisition of the GNA received ICC
approval and was merged into KCSR in
June 1993.
These acquisitions fit within the
strategic business plan for extension of
KCSR rail property in increasing our
excellent traffic and industry base.
- - The recent formation, expansion, and
internal reorganization of OTI provides
a greater variety and number of products
which DST businesses can offer.
- -DST's strategic merger of Vantage with
Continuum, as discussed earlier, will
increase the opportunities in the
insurance industry in both domestic and
international markets.
- - In 1991, DST began evaluating the
feasibility of marketing its products
outside the United States and also
products that would serve foreign
markets in DST's product lines. DST
acquired a 50% interest in Talisman
Services during 1991. Talisman is a
European software company whose primary
product is a multi-currency financial
accounting package. In 1992, DST formed
DST Systems International B.V. as a
holding company for certain of its
non-U.S. operations and a marketing unit
for DST's software. Also in 1992, DST,
together with State Street Bank and
Clarke and Tilley, Ltd. (a United
Kingdom software firm), formed Clarke
and Tilley Data Services ("CTDS"). CTDS
is developing a unit trust accounting
system for the U.K. and Luxembourg
markets, combining DST workflow
management and image technology and
Clarke & Tilley unit trust software.
During 1993, DST completed the
acquisition of Clarke & Tilley, Ltd.,
(96% owned), which markets investment
management software primarily for use in
Europe and the Pacific Rim, and Corfax
Benefit Systems, Ltd., (100% owned), a
Canadian company, which processes
shareowner transactions for mutual funds
and pension accounts in Canada. These
strategic acquisitions provide DST with
future growth opportunities for
expansion of its products into
international markets, especially Europe
and Canada.
- - KCSI has been committed to the mutual
fund industry since 1962 and intends to
continue and expand that commitment in
seeking strong mutual fund growth
through Janus and growth of its mutual
fund servicing businesses. During 1993,
Janus introduced three new fund
products: Janus Mercury Fund, an equity
fund; Janus Federal Tax Exempt Fund, a
tax exempt income fund; and the Janus
Aspen Series, which are annuity
products. During 1992, Janus introduced
three new mutual funds: Janus Enterprise
Fund, an equity fund; Janus Balanced
Fund, a combination equity/fixed income
fund and Janus Short-Term Bond Fund, a
short-term income fund.
[Page 44]
- - In 1992, KCSI purchased an 18% interest
in Berger Associates, Inc. ("Berger").
Berger provides investment management
services to the Berger One Hundred,
Berger One Hundred One and Berger Small
Company Growth mutual funds.
- - In January 1993, the Company's Board of
Directors authorized a 2-for-1 Common
stock split effected in the form of a
stock dividend as of March 17, 1993.
In January 1992, the Company's Board of
Directors authorized an increase in its
annual dividend with respect to the
Company's Common stock and also
authorized a 2-for-1 split effected in
the form of a stock dividend in the
Company's Common stock as of March 17,
1992.
- - KCSI management intends to apply cash
flows primarily as follows:
- - Strategic and operating needs of
Transportation Services, Information &
Transaction Processing and Financial
Asset Management businesses to the
enhancement of KCSI market leadership
positions.
- - Reduce debt.
- - Repurchase KCSI Common stock to the
extent
possible.
- - Improve the cash return to KCSI
stockholders.
The dividend will be reviewed annually
and adjustments considered that are
consistent with growth in real earnings
and prevailing business conditions.
Focus on the Company's core business
operations including the items mentioned
above are expected to present growth
opportunities in future years.
Strategic Study. The Company's Board of
Directors have recently undertaken a
comprehensive study, with the assistance
of outside consultants, of the strategic
options available to further increase
value to the Company's stockholders.
This study will include evaluation of a
wide range of alternatives, with the
objective of identifying opportunities
for reinvestment of earnings,
alternatives for financing of capital
requirements, and methods of increasing
the return on the Company's investment
in its various business segments. The
alternatives being studied range from
operational improvements to asset
redeployments.
[Page 45]
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Millions, Except per Share Amounts
Years Ended December 31
1993 1992 1991
OperationsRevenues $ 961.1 $741.4 $610.2
Costs and expenses 749.0 615.5 511.9
Operating income 212.1 125.9 98.3
Equity in net earnings of
unconsolidated affiliates
(Notes 4, 13) 14.1 11.1 7.7
Interest expense (51.2) (33.1) (32.1)
Pretax Pretax income 175.0 103.9 73.9
Income tax provision (Note 7) 69.0 35.2 26.0
Income before minority interest 106.0 68.7 47.9
Minority Minority interest in
consolidated earnings (Note 9) 9.0 4.9 2.2
Income before accounting changes
and extraordinary item 97.0 63.8 45.7
Accounting Cumulative effect of changes in accounting (6.5)
Changes for income taxes and postretirement benefits,
net of taxes (Notes 7, 10)
ExtraordinaryDebt retirement, net of taxes (Note 6) (3.8)
Item
Net income $90.5 $63.8 $41.9
Per Primary earnings per share (Note 1)
Share Before cumulative effect of accounting
Data changes and extraordinary item $2.16 $1.43 $1.08
Cumulative effect-accounting changes (.14)
Extraordinary item-debt retirement (.09)
Total $2.02 $1.43 $ .99
Weighted average primary Common
shares outstanding
(in thousands) 44,728 44,31 42,116
Dividends per share
Preferred $1.00 $1.00 $1.00
Common $ .30 $ .30 $ .27
See accompanying notes to consolidated financial statements.
[Page 46]
CONSOLIDATED BALANCE SHEETS
Dollars in Millions at December 31
1993 1992 1991
ASSETS
Current Cash and equivalents $ 6.6 $ 15.4 $ 44.0
Assets Accounts receivable,
net (Note 5) 194.7 147.4 102.8
Inventories 48.3 26.7 29.6
Other current assets (Note 5) 86.1 56.9 56.0
Total 335.7 246.4 232.4
Investments Held for operating
purposes (Note 4) 174.5 155.8 114.7
Properties Cost 1,792.0 1,312.0 1,209.9
Accumulated depreciation
and amortization (599.4) (543.8) (543.7)
Net (Note 5) 1,192.6 768.2 666.2
Other Intangibles and other
assets (Notes 2, 5) 214.2 78.0 78.6
Total assets $ 1,917.0$1,248.4$1,091.9
LIABILITIES & STOCKHOLDERS EQUITY
Current Debt due within one
year (Note 6) $ 63.5 $ 62.0 $ 43.7
LiabilitiesAccounts and wages payable 70.9 55.3 37.8
Accrued liabilities (Note 5) 154.0 101.3 119.0
Total 288.4 218.6 200.5
Other Long-term debt (Note 6) 776.2 387.0 317.1
Liabilities Deferred income
taxes (Note 7) 184.7 101.4 98.8
Other deferred credits 99.1 77.9 62.9
Contingencies (Notes 6, 7, 9, 11, 12)
Total 1,060.0 566.3 478.8
Minority Consolidated subsidiaries
(Note 9) 5.9 1.1 .8
Interest
Stockholders $25 par, 4% noncumulative,
Preferred stock 6.1 6.3 6.9
Equity $1 par, Series B convertible,
Preferred stock (Note 8) 1.0
No par Common stock 30.9 30.0 30.3
Capital surplus 303.9 89.5 106.4
Retained earnings 439.0 361.4 310.6
Shares held in trust (Note 8) (200.0)
ESOP deferred compensation (18.2) (24.8) (42.4)
Net Worth Stockholders equity
(Notes 6, 8) 562.7 462.4 411.8
Total liabilities and
stockholders equity $ 1,917.0$1,248.4$1,091.9
[Page 47]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
Years Ended December 31
1993 1992 1991
CASH FLOWS PROVIDED BY (USED FOR):
Operating Net income $ 90.5 $63.8 $41.9
Activities Adjustments to net income:
Depreciation and amortization 97.2 74.2 59.3
Deferred income taxes 29.6 2.6 4.8
Equity in undistributed earnings(12.6) (8.6) (7.7)
Employee benefit expenses not
requiring operating cash 10.1 19.5 6.0
Changes in working capital items:
Accounts receivable (29.1) (40.6) (17.9)
Inventories (14.5) 3.0 (9.8)
Accounts payable 20.3 17.3 8.8
Accrued liabilities 12.1 (16.2) 16.0
Other working capital items, net(26.5) 1.7 8.3
Other, net 12.1 6.2 1.7
Net 189.2 122.9 111.4
Investing Property acquisitions (159.2) (154.9) (79.6)
Activities Proceeds from
disposal of property 14.6 12.6 9.7
Investments in affiliates (31.8) (16.6) (2.5)
Purchase of companies,
net of cash acquired (197.8) (28.5) (4.4)
Proceeds from disposal of
other investments 3.9 16.4 60.1
Other, net (24.4) (7.0) (2.2)
Net (394.7) (178.0) (18.9)
Financing Proceeds from issuance
of long-term debt 446.5 283.2 100.1
Activities Repayment of long-term debt (231.4) (214.6) (172.1)
Proceeds from stock plans 7.3 7.0 6.4
Stock repurchased (9.5) (30.9) (6.6)
Cash dividends paid (12.9) (13.0) (11.6)
Other, net (3.3) (5.2) 2.4
Net 196.7 26.5 (81.4)
Cash and Net increase (decrease) (8.8) (28.6) 11.1
EquivalentsAt beginning of year 15.4 44.0 32.9
At end of year (Note 3) $ 6.6 $ 15.4 $44.0
[Page 48]
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY
Dollars in Millions
Years Ended December 31
1993 1992 1991
Preferred $25 par, 4% noncumulative, 840,000 shares
Stock authorized, 649,736 shares issued
Beginning of year $ 6.3 $ 6.9 $ 6.9
Preferred stock repurchased (.2) (.6)
End of year 6.1 6.3 6.9
$1 par, 2,000,000 shares authorized, none issued
$1 par, Series A, 150,000 shares authorized, none issued
$1 par, Series B convertible, 1,000,000 shares authorized
and issued, $200 per share liquidation preference,
convertible to Common at a ratio of 4 to 1,
issued in 1993 1.0
Common No par, 100,000,000 shares authorized,
Stock 48,402,192 shares issued
Beginning of year 30.0 30.3 30.1
Options exercised and
stock subscribed .9 .8 .5
Common stock repurchased (1.1) (.3)
End of year 30.9 30.0 30.3
Capital Beginning of year 89.5 106.4 106.8
Surplus Options exercised and
stock subscribed 22.4 9.4 6.0
Stock repurchased (9.3) (26.3) (6.4)
Series B convertible
preferred stock issued 199.0
Other 2.3
End of year 303.9 89.5 106.4
Retained Beginning of year 361.4 310.6 280.3
Earnings Net income 90.5 63.8 41.9
Dividends
Preferred stock (.2) (.3) (.3)
Common stock (12.7) (12.7) (11.3)
End of year, including equity in unconsolidated
affiliates of $53.2;
$42.9; and $34.3 439.0 361.4 310.6
Shares HeldSeries B convertible
preferred stock (200.0)
In Trust
ESOP Beginning of year (24.8) (42.4) (48.4)
Deferred Contribution accruals 6.6 17.6 6.0
Compensation End of year (18.2) (24.8) (42.4)
Total Stockholders equity
(Notes 6, 8) $ 562.7 $462.4 $ 411.8
Shares Preferred (in thousands) 243 252 277
Outstanding Common (in thousands) 42,798 41,616 20,984
[Page 49]
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc.
("Company" or "KCSI") is a diversified
holding company, which comprises
businesses engaged in Transportation
Services, Information & Transaction
Processing, and Financial Asset
Management. Note 13 further describes
the operations of the Company.
The accounting and financial reporting
policies of the Company conform with
generally accepted accounting
principles. Use of the term "Company" as
described in this financial section
means Kansas City Southern Industries,
Inc. as a holding company and all of its
consolidated subsidiary companies.
Significant accounting and reporting
policies are described below.
Principles of Consolidation. The
consolidated financial statements
include all majority owned subsidiaries.
All significant intercompany accounts
and transactions have been eliminated.
The equity method of accounting is used
for all entities in which the Company or
its subsidiaries have significant
influence but not more than 50% voting
control interest; the cost method of
accounting is generally used for
investments of less than 20% voting
control interest.
Cash Equivalents. Short-term liquid
investments with a maturity of generally
three months or less are considered cash
equivalents. Carrying value approximates
market value due to the short-term
nature of these investments.
Inventories. Inventories held for resale
are valued at the lower of average cost
or market; materials and supplies
inventories for transportation
operations are valued at average cost.
Properties and Depreciation. Properties
are stated at cost. Additions and
renewals constituting a unit of property
are capitalized and all properties are
depreciated over the estimated remaining
life of such assets. Ordinary
maintenance and repairs are charged to
expense as incurred.
The cost of transportation equipment and
road property normally retired, less
salvage, is charged to accumulated
depreciation. Conversely, the cost of
industrial and rental property retired,
and the cost of transportation property
abnormally retired, together with
accumulated depreciation thereon, are
eliminated from the property accounts
and the related gains or losses are
reflected in earnings.
Depreciation for transportation
operations is computed using composite
straight-line rates for financial
statement purposes. The Interstate
Commerce Commission ("ICC") approves the
depreciation rates used by Kansas City
Southern Railway ("KCSR"). KCSR
evaluates depreciation rates for
properties and equipment and implements
ICC approved rates. The revised rates
did not and will not have a material
effect on operating results. Unit
depreciation methods, employing both
accelerated and straight-line rates, are
employed in other business segments.
Accelerated depreciation is used for
income tax purposes. The ranges of
annual depreciation rates for financial
statement purposes are:
Transportation
Road and structures 1%-19%
Rolling stock & equipment 1%-47%
Other equipment 2%- 6%
Industrial and rental property 2%-25%
Capitalized leases 5%-17%
The Company periodically evaluates the
recoverability of its operating
properties. If it is determined that the
carrying value of properties exceeds the
discounted value of future estimated
cash flows over the remaining productive
lives of the assets, such excess is
charged to earnings.
Software Development. The Company's
Information & Transaction Processing
subsidiary, DST Systems, Inc., ("DST"),
expenses as incurred development and
maintenance expenditures for its
proprietary software.
Intangibles. Intangibles principally
represent the excess of cost over the
fair value of net underlying assets of
acquired companies using purchase
accounting and are amortized using the
straight-line method over periods
ranging from 5-40 years.
Income Taxes. Deferred income tax
effects of transactions reported in
different periods for financial
reporting and income tax return purposes
are recorded by the liability method.
This method gives consideration to the
future tax consequences of the deferred
income tax items and immediately
recognizes changes in income tax laws
upon enactment. The income statement
effect is derived from changes in
deferred income taxes on the balance
sheet.
Historically, provision has not been
made for possible deferred tax
liabilities for unremitted earnings of
corporate unconsolidated affiliates for
which the Company's interest is
accounted for under the equity method,
as those earnings have been and are
expected to continue to be reinvested.
[Page 50]
Beginning in 1993, on a prospective
basis, deferred tax liabilities are
provided on the portion of unremitted
earnings from such affiliates which
would not qualify for dividend exclusion
had the earnings been distributed. The
cumulative amount of unremitted earnings
through December 31, 1993 was $59.1
million. Tax expense, should these
earnings be remitted to the Company in
the form of dividends, would amount to
$4.1 million at currently enacted tax
rates. Deferred taxes actually provided
through December 31, 1993 were $.8
million.
Treasury Stock. The excess of par over
cost of the Preferred shares held in
Treasury is credited to capital surplus.
Common shares held in Treasury are
accounted for as if they were retired
and the excess of cost over the stated
amount of such shares is charged to
capital surplus.
Stock Plans. Proceeds received from the
exercise of stock options or
subscriptions are credited to the
appropriate capital accounts in the year
they are exercised.
The Leveraged Employee Stock Ownership
Plans' ("ESOP") loan principal payments
are accounted for as employee benefit
expense, interest payments are recorded
as interest expense, and quarterly
dividends paid from retained earnings on
the ESOP stock are used to partially
service the ESOP loan. Because the ESOP
loan is guaranteed by KCSI, the
borrowings are reported as long-term
debt and corresponding amounts,
representing "ESOP deferred
compensation", are reduced as the
related compensation expense is
recognized by the Company.
Earnings per Share. On January 28, 1993,
the Company authorized a 2-for-1 stock
split effected in the form of a stock
dividend paid March 17, 1993.
On January 31, 1992, the Company
authorized a 2-for-1 stock split
effected in the form of a stock dividend
paid March 17, 1992. Appropriate share
and per share data have been restated to
reflect both of these stock splits.
The Company uses the Primary method for
computing Earnings Per Share. The
difference between the Primary and
Fully-Diluted methods is not material.
Note 2. Mergers and Acquisitions
The Company completed the acquisition of
MidSouth Corporation ("MidSouth") on
June 10, 1993 pursuant to a definitive
merger agreement. The transaction was
approved by both Boards of Directors,
MidSouth shareholders and the Interstate
Commerce Commission. The merger
agreement provided that holders of
MidSouth common stock receive $20.50 per
share in cash. The purchase price for
the acquisition of the MidSouth common
stock aggregated approximately $213.5
million paid in cash by KCSI to holders
of MidSouth's common stock and in
connection with the exercise of certain
options held by MidSouth employees and
others. Liabilities were assumed in the
amount of $306.9 million.
The MidSouth transaction, which was
accounted for as a purchase, represents
a significant transaction for the
Company. Results of operations of the
Company for the year ended December 31,
1993 include the operations of MidSouth
as a consolidated subsidiary effective
with the closing of the transaction.
Adjustments were recorded to appropriate
asset and liability balances based upon
the fair value of such assets and
liabilities. Based upon these
adjustments, the total purchase price
exceeded the fair value of the
underlying net assets by a total of
approximately $98.3 million and is being
amortized over a period of 40 years.
Additional assets are being depreciated
over lives ranging from 5-35 years.
Certain unaudited pro forma financial
information regarding results of
operations assuming the MidSouth
transaction had been completed on
January 1, 1993 and 1992, respectively,
follows (in millions, except per share
amounts):
Years Ended December 31
1993 1992
Revenues $ 1,010.2 $ 856.1
Income before cumulative
effect of accounting
changes 98.5 67.9
Net income 93.4 67.9
Primary Earnings Per Share:
Before cumulative effect
of accounting changes $ 2.19 $ 1.53
After cumulative effect
of accounting changes 2.08 1.53
During second quarter 1993, DST
completed the acquisitions of Clarke &
Tilley Ltd., (96.25% owned), a United
Kingdom company, which markets
investment management software primarily
for use in Europe and the Pacific
[Page 51]
Rim; Corfax Benefit Systems, Ltd., (100%
owned), a Canadian company, which
processes shareowner transactions for
mutual funds and pension accounts in
Canada; and DBS Systems Corporation,
(60% owned), a United States company,
which is developing a software billing
system for the direct broadcast
satellite industry. During the third
quarter 1993, DST acquired Belvedere
Financial Systems, Inc., (100% owned),
which develops and markets portfolio
accounting and investment management
systems. Each of these transactions was
accounted for as a purchase. The total
purchase price exceeded the fair value
of the underlying net assets, and will
be amortized over a period of 7-20
years. Cash paid for these transactions
was approximately $15.3 million and
liabilities assumed were $10.3 million.
Effective September 30, 1993, DST
completed the merger of its 90.5% owned
subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of
The Continuum Company, Inc.
("Continuum"). DST and the minority
stockholder of Vantage received a total
of 4 million shares of Continuum stock
2,939,000 shares at closing and the
remainder after Continuum stockholder
approval. As a result of this
transaction and through additional
purchases of Continuum stock, DST owned
approximately 24% of the outstanding
common stock of Continuum at December
31, 1993. In 1994, DST purchased
additional Continuum shares through
privately negotiated transactions.
Accordingly, DST currently owns
approximately 29% of Continuum's
outstanding common stock. In the initial
exchange, DST exchanged Vantage stock
with a book value of approximately $17
million for Continuum stock with a then
current market value of approximately
$62 million. DST accounted for the
initial exchange as a non-cash,
non-taxable exchange in investment basis
of Vantage for an investment in
Continuum. Accordingly, no gain
recognition was associated with the
transaction.
Continuum is a publicly traded
international consulting and computer
services firm based in Austin, Texas,
which primarily serves the needs of
life, and property and casualty
insurance companies for computer
software and services.
During 1991, DST purchased all of the
capital stock of Mail Processing
Systems, Inc. for $7.1 million. The
purchase price was structured in the
form of $2.2 million in cash and $4.9
million in short-term notes payable and
other liabilities in the amount of $4.9
million were assumed. The acquisition
was accounted for as a purchase.
Note 3. Supplemental Cash Flow
Disclosures
Supplemental Disclosures of Cash Flow
Information. (in millions):
1993 1992 1991
Cash payments
Interest (net of
capitalized) $ 47.4 $ 34.4 $37.6
Income taxes 24.1 27.1 12.9
Supplemental Schedule of Noncash
Investing and Financing Activities. As
described in greater detail in Note 6,
the Company issued $200 million in Notes
and Debentures in 1992, and $200 million
in Notes in 1993. As part of these
transactions, the Company incurred $3.2
million and $2.5 million, respectively,
in discount and underwriting fees which
were transferred directly
to the underwriter. The discount and
underwriting fees represent non-cash
amounts, which will be amortized over
the respective terms of the Notes and
Debentures.
In 1992 and 1993, DST acquired mainframe
computer equipment for its Winchester
Data Center in the amounts of $17 and
$21 million, respectively. This
equipment was financed through bank term
loans which were transferred directly
from the lender to the equipment
manufacturer and accordingly required no
direct outlay of cash.
In 1993, DST entered into a
sale/leaseback of certain mainframe
computer equipment. As part of this
transaction, the buyer assumed certain
debt obligations related to the computer
equipment in the amount of $16.6
million, which provided no cash flow to
DST.
In 1991, KCSR acquired locomotives which
were financed through issuance of
Equipment Trust Certificates ("ETCs") in
the amount of $32.2 million, the
proceeds of which were transferred
directly by the Trustee to the equipment
manufacturer. Accordingly, this
transaction required no direct cash
outlay by KCSR.
Property acquired under capital leases
was $1.3, $1.4, and $3.1 million for
1993, 1992 and 1991, respectively. Such
acquisitions require no direct outlay of
cash.
[Page 52]
Note 4. Investments
Investments held for operating purposes include investments in unconsolidated
affiliates as follows (in millions):
Percentage Ownership Carrying Value
Company Name December 31, 1993 1993 1992 1991
Boston Financial Data Services, Inc. (i) 50% $ 11.4 $ 8.7 $ 8.6
Investors Fiduciary Trust Co. (i), (v) 50% 50.2 47.6 42.9
Argus Health Systems, Inc. (i) 50% 6.1 3.3 1.6
Midland (i) (iii) 45-50% 3.2 3.4 .7
The Continuum Company, Inc. (i), (vi) 24% 37.1
First of Michigan Capital Corp. (i) 21% 7.6 7.2 6.9
MidSouth Corporation (iv) 26.2
Berger Associates, Inc. 18% 1.2 1.2
Partnerships 1.5 2.3 5.8
Equipment Finance Receivables
(Southern Leasing Corp.) (ii) 42.8 33.1 34.9
Other 20.5 29.6 20.4
Market Valuation Allowances (7.1) (6.8) (7.1)
Total (vii) $174.5 $155.8 $ 114.7
(i) owned by DST Systems, Inc. (wholly-owned subsidiary) or a subsidiary of DST
(ii) fair market value based upon rates currently offered was approximately
$43.6 million at December 31, 1993
(iii) Midland is comprised of Midland Data Systems, Inc. (50% owned) and
Midland Loan Services, L.P. (45% owned)
(iv)in 1993 the Company completed its purchase of MidSouth which is now
consolidated
(v) includes $2.1 million of unrealized appreciation on "available for sale"
securities
(vi)fair market value based upon a quoted share price was approximately $89
million at December 31, 1993
(vii) fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value
Transactions Between Unconsolidated
Affiliates. Boston Financial Data
Services, Inc. ("BFDS") is a corporate
joint venture of DST and State Street
Boston Corporation, the parent of State
Street Bank and Trust Company. BFDS
performs shareholder accounting
services for companies using State
Street Bank and Trust Company as their
transfer agent and DST's data processing
services, mutual fund recordkeeping and
shareholder accounting systems, and
securities transfer system.
Investors Fiduciary Trust Co. ("IFTC")
is a corporate joint venture of DST and
Kemper Financial Services, Inc. IFTC
provides transfer agent and custodial
services primarily to the mutual fund
industry and utilizes DST's portfolio
accounting, securities transfer, and
mutual fund systems. DST received
advance payments from IFTC for services
to be provided in the subsequent fiscal
year. At December 31, 1993, 1992 and
1991; these advance payments amounted to
$4, $3 and $8 million, respectively.
Argus Health Systems, Inc. ("Argus") is
a corporate joint venture of DST which
provides pharmaceutical claims
processing services for the health care
industry.
Argus uses DST's data processing
services. DST received cash advances
from Argus totalling $5 million as of
December 31, 1993.
Midland Data Systems, Inc. ("MDS") is a
corporate joint venture of DST, which
has been awarded contracts with the
Resolution Trust Corporation ("RTC") for
the operation (using DST's Winchester
Data Center) of an Asset Management
System and a Control Totals Module
System for use by the RTC. In 1992,
Midland Loan Services
L.P. ("MLS") was formed to provide
comprehensive commercial loan servicing
for assets, performing and
non-performing loans, and related asset
management services for governmental and
institutional clients. MDS is the
Corporate General Partner of MLS.
DST revenues associated with the above
unconsolidated affiliates were $74, $50
and $42 million for 1993-1991,
respectively. Accounts receivable
include amounts due from unconsolidated
affiliates of $16, $13, and $9 million
for 1993-1991, respectively, for
services provided by DST in the ordinary
course of business and payable at usual
trade terms.
[Page 53]
The Continuum Company, Inc.
("Continuum") became an equity affiliate
of DST during 1993 when DST exchanged
its interest in Vantage, as discussed in
Note 2. Subsequent to this transaction,
DST and Continuum reached an agreement
whereby DST will provide all of
Continuum's North American operations
data processing requirements through use
of DST's Winchester Data Center. During
1993, DST revenues associated with this
agreement were approximately $1 million.
Financial Information. Combined
financial information
of all unconsolidated affiliates,
principally DST related, which the
Company and its subsidiaries account for
on the equity method is as follows (in
millions):
1993 1992 1991
Investment in unconsolidated affiliates $ 126.3 $ 77.9 $ 67.8
Equity in net assets of unconsolidated
affiliates 117.3 69.8 60.4
Dividends and distributions received
from unconsolidated affiliates 1.5 2.5 .2
Financial condition:
Current assets $1,047.7 $ 826.4 $740.9
Non-current assets 150.1 69.6 42.4
Assets $1,197.8 $ 896.0 $783.3
Current liabilities $ 856.8 $ 693.6 $625.8
Non-current liabilities 122.9 56.1 34.3
Equity of stockholders and partners 218.1 146.3 123.2
Liabilities and equity $1,197.8 $ 896.0 $783.3
Operating results:
Revenues $ 383.8 $ 272.6 $255.8
Costs and expenses 354.1 246.8 239.4
Net income $ 29.7 $ 25.8 $ 16.4
Other. Interest income on cash and
equivalents was $1.8, $4.6, and $5.9
million for 1993-1991, respectively.
MidSouth Corporation. At December 31,
1992, the Company had acquired
approximately 16% of MidSouth's Common
stock. In 1993, the Company completed
its acquisition of MidSouth (see Note
2).
Note 5. Other Balance Sheet Captions
Accounts Receivable.Accounts receivable include the following allowances
(in millions):
1993 1992 1991
Accounts receivable $ 199.0 $ 152.4 $ 107.3
Allowance for doubtful accounts (4.3) (5.0) (4.5)
Accounts receivable, net $ 194.7 $ 147.4 $ 102.8
Doubtful account expense $ 2.1 $ 1.6 $ 1.5
Other Current Assets.Other current assets include the following items
(in millions):
1993 1992 1991
Maturities of Equipment Finance Receivables
(Southern Leasing Corp.) $ 25.6 $ 22.9 $ 25.9
Deferred taxes 23.8 9.8 14.2
Marketable Investments (cost approximates market) 19.0 8.8
Other 17.7 15.4 15.9
Total $ 86.1 $ 56.9 $ 56.0
[Page 54]
Properties. Properties and related accumulated depreciation and
amortization are summarized below (in millions):
1993 1992 1991
Properties, at cost
Transportation
Road properties $ 1,075.3 $ 684.0 $ 650.1
Equipment, including $12.9, $12.6 and
$30.7 financed under capital leases 355.6 338.4 340.0
Land and Facilities 67.2 59.0 51.8
DST, including $5.6, $3.9 and $3.8 equipment
financed under capital leases 262.8 208.1 155.6
Janus, including $1.6, $1.5 and $.1 equipment
financed under capital leases 21.7 12.8 2.8
Corporate and Other 9.4 9.7 9.6
Total $ 1,792.0 $ 1,312.0 $ 1,209.9
1993 1992 1991
Accumulated depreciation and amortization
Transportation
Road properties $ 264.2 $ 251.6 $ 244.0
Equipment, including $8.6, $8.1 and $25.5
for capital leases 174.8 168.0 200.6
Facilities 20.2 18.4 16.4
DST, including $3.7, $1.7 and $.2 for
equipment capital leases 128.5 98.9 78.4
Janus, including $.5, $.2 and $.1 for
equipment capital leases 7.2 3.0 .9
Corporate and Other 4.5 3.9 3.4
Total $ 599.4 $ 543.8 $ 543.7
Net Properties $ 1,192.6 $ 768.2 $ 666.2
Intangibles and Other Assets. Intangibles and other assets include the following
items (in millions):
1993 1992 1991
Intangibles $ 194.6 $ 74.8 $ 81.7
Accumulated amortization (31.3) (16.6) (11.9)
Net 163.3 58.2 69.8
Other assets 50.9 19.8 8.8
Total $ 214.2 $ 78.0 $ 78.6
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
1993 1992 1991
Prepaid freight charges due
other railroads $ 32.2 $ 27.4 $ 17.5
Current interest payable
on indebtedness 18.9 11.9 8.7
Other 102.9 62.0 92.8
Total $ 154.0 $ 101.3 $ 119.0
[Page 55]
Note 6. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):
1993 1992 1991
KCSI
Competitive Advance & Revolving Credit
Facilities, with reducing commitments
through December 8, 1997 $ 231.0 $ 85.0
Rate: Below Prime
Notes and Debentures, due July 8, 1998
to July 1, 2022 400.0 $ 200.0 4.7
Unamortized discount (2.6) (1.6)
Rate: 5.75% to 8.8%
ESOP secured term loan, due serially to
February 28, 1998 22.8 26.5 29.9
Rate: 7.6%
Transportation Services
Equipment trust indebtedness, due serially to
February 1, 2006 67.8 80.8 95.2
Rate: 7.15% - 15.0%
Short-term renewable lease financing working
capital lines 32.6 29.0 45.8
Rate: Below prime - 6.95%
Subordinated and senior notes, and industrial
revenue bonds, due
June 1, 1994 to May 1, 2004 15.3 20.4 23.4
Rate: 7.13% - 12.95%
DST
ESOP secured term loan, repaid in 1993 3.9 18.3
Secured and unsecured term loans, promissory
and mortgage notes, various
maturities to June 2005 58.2 68.7 35.8
Rate: 4.55% to 10.5%
Other
Miscellaneous subsidiary obligations, due
June 1994 to June 1998 14.6 21.3 22.7
Rate: Prime - 23.2%
Total 839.7 449.0 360.8
Less debt due within one year 63.5 62.0 43.7
Long-term debt $ 776.2 $387.0 $317.1
KCSI $250 Million Credit Agreement. On
December 8, 1992, the Company
established a credit agreement in the
amount of $250 million. A commitment fee
of 1/4% per annum is required on the
unused portion. This agreement replaced
the Company's then existing $100 million
credit agreement, which had been in
place since 1989. The revolving credit
commitment reduces to $188 million on
June 8, 1996; $125 million on December
8, 1996; $63 million on June 8, 1997,
and final maturity is due December 8,
1997. Proceeds have been used, in part,
to fund acquisition of MidSouth
Corporation and refinance certain
MidSouth indebtedness and for general
corporate purposes.
Among other provisions, the agreement
limits subsidiary indebtedness, sale of
assets, coverage ratios and requires
minimum consolidated net worth of $375
million plus 50% of net income after
December 31, 1992.
Public Debt Transactions. On July 1,
1992, the Company issued $100 million
77/8% Notes due 2002 and $100 million
8.8% Debentures due 2022 under a $300
million debt securities registration
with the Securities and Exchange
Commission. The 77/8% Notes are not
redeemable prior to their maturity in
2002, the 8.8% Debentures are redeemable
on or after July 1, 2002 at a premium of
104.04%, which declines to par on or
after July 1, 2012. Proceeds from the
debt offer have been used to repay
borrowings under then existing revolving
credit agreements. The Company used the
remaining net proceeds for general
corporate purposes including debt
repayments, working capital, capital
expenditures, acquisition of or
investments in businesses and assets and
acquisition of the Company's capital
stock.
On March 3, 1993, the Company issued
$100 million of 65/8% Notes due 2005
under the remaining 1992 registration
with the Securities and Exchange
Commission. The notes are not redeemable
prior to maturity. Proceeds were used
for debt repayment by DST and Southern
Credit Corporation, working capital,
capital expenditures,
[Page 56]
acquisition of or investments in
businesses, and assets and acquisition
of the Company's capital stock.
On June 24, 1993, the Company issued
$100 million of 5.75% Notes due in 1998
under a $200 million 1993 debt
securities registration with the
Securities and Exchange Commission. The
Notes are not redeemable prior to
maturity. The net proceeds were used to
refinance certain MidSouth debt.
This debt was issued at a total discount
of $2.8 million which will be amortized
over the respective debt maturities on a
straight-line basis, which is not
materially different from the interest
method.
KCSI 12% Debentures. The Company
redeemed $58.5 million of its 12%
Debentures, originally issued in 1985,
in 1991 and redeemed the remaining $4.7
million on April 1, 1992 through a
combination of its right of optional
redemption and a tender offer.
The early redemption of these debentures
resulted in a 1991 extraordinary after
tax charge to earnings of $3.8 million
or 9 cents per Common share.
KCSI ESOP. In 1988, the Company
established a $39 million leveraged ESOP
(see Stockholders' Equity Note 8).
Related indebtedness is repayable over
ten years, and guaranteed by the
Company.
Among other provisions, the KCSI ESOP
loan agreement requires minimum
consolidated tangible net worth
(stockholders' equity plus deferred
income taxes less intangibles) of $250
million.
Railway Indebtedness. KCSR has purchased
rolling stock under conditional sales
agreements, equipment trust certificates
and capitalized lease obligations, which
equipment has been pledged as collateral
for the related indebtedness.
Credit Lines. Unused lines of credit at
December 31, 1993 follow (in millions):
Commitment Lines of Credit
Fee Total Unused
KCSI 1/4% $ 300.0 $69.0
DST Systems, Inc. None 17.0 15.5
Southern Credit
Corporation 3/8% 25.0 2.4
Total $342.0 $86.9
Other Agreements, Provisions and
Restrictions.
As previously noted, the Company and
several of its consolidated subsidiaries
have debt agreements containing
restrictions on dividends, loans,
advances and transfers of assets to the
parent company, limits on guarantees and
leasing commitments, and maintenance of
minimum levels of working capital. At
December 31, 1993, the Company was in
compliance with provisions and
restrictions of these agreements.
Unrestricted retained earnings at
December 31, 1993 were $97.2 million.
Guarantees. The Company and its
subsidiaries are guarantors of $2.1
million principal indebtedness of
partnerships and other entities
involving the Company or its
subsidiaries. These guarantees represent
"off balance sheet" contingent
liabilities.
Leases and Debt Maturities. The Company
and its subsidiaries lease
transportation equipment, and office and
other operating facilities under various
capital and operating leases. Rental
expenses under operating leases were
$33, $25, and $17 million for the years
1993-1991, respectively.
Minimum annual payments and present
value thereof, under existing capital
leases, other debt maturities and
minimum annual rental commitments under
noncancellable operating leases are as
follows (in millions):
Capital Leases
Minimum Net
Lease Less Present Other
Operating
Payments Interest Value Debt Total Leases
1994 $ 3.9 $ .9 $ 3.0 $ 60.5 $ 63.5 $ 47.1
1995 2.2 .8 1.4 35.4 36.8 38.8
1996 1.9 .4 1.5 22.6 24.1 30.0
1997 1.1 .2 .9 10.9 11.8 19.4
1998 .6 .2 .4 110.7 111.1 10.4
Later years 2.5 .6 1.9 590.5 592.4 46.0
Total $12.2 $ 3.1 $ 9.1 $830.6 $839.7 $191.7
Fair Value of Long-Term Debt. Based upon
the borrowing rates currently available
to the Company and its subsidiaries for
indebtedness with similar terms and
average maturities, the fair value of
long-term debt was approximately $903
million and $463 million at December 31,
1993 and 1992, respectively.
[Page 57]
Note 7. Income Taxes
The Company adopted, effective January
1, 1993, Statement of Financial
Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes."
SFAS 109 was issued in February 1992 as
an amendment to Statement of Financial
Accounting Standards No. 96, "Accounting
for Income Taxes," ("SFAS 96"). The
Company had previously adopted SFAS 96
effective January 1, 1988. The adoption
of SFAS 109 resulted in a $970,000
charge to earnings in the first quarter
of 1993.
Under the liability method specified by
SFAS 109, the deferred tax liability is
determined based on the difference
between the financial statement and tax
basis of assets and liabilities as
measured by the enacted tax rates which
will be in effect when these differences
reverse. Deferred tax expense is the
result of changes in the liability for
deferred taxes. The principal difference
between the Company's assets and
liabilities recorded for financial
statement and tax return purposes is
accumulated depreciation.
Tax Expense. Income tax expense
attributable to continuing operations,
consists of the following components (in
millions):
1993 1992 1991
Current
Federal $31.7 $25.4 $16.4
State and local 3.2 1.8 2.9
Total current 34.9 27.2 19.3
Deferred
Federal 24.5 6.9 6.2
Federal enacted
rate change 3.4
State and local 6.2 1.1 .5
Total deferred 34.1 8.0 6.7
Total income
tax expense $69.0 $35.2 $26.0
Deferred Taxes. Deferred taxes are
recorded based upon differences between
the financial statement and
tax basis of assets and liabilities and
available tax credit carryovers.
Temporary differences which give rise to
a significant portion of deferred tax
expense (benefit) applicable to
continuing operations are as follows (in
millions):
1993 1992 1991
Depreciation $19.5 $9.0 $ 3.0
Deferred revenue (1.6) (.4) (2.0)
Deferred gain on asset dispositions 1.2 .3 .6
Alternative minimum tax carryover (.3) 1.4 .1
Other expenses for financial
reporting purposes not currently
deductible for tax purposes 9.0 (2.7) 4.3
Other, net .1 (.7) .2
Total $27.9 $6.9 $ 6.2
[Page 58]
The deferred tax liabilities and
deferred tax (assets) recorded on the
Consolidated Balance Sheets at
December 31, 1993 and January 1, 1993,
respectively, follow (in millions):
December 31, 1993January 1, 1993
Liabilities:
Depreciation $242.5 $121.8
Assets:
NOL and AMT credit carryovers (23.2)
Book reserves not currently
deductible for tax (23.2) (17.7)
Deferred compensation and other
employee benefits (14.4) (5.1)
Deferred revenue (4.7) (2.7)
Vacation accrual (2.8) (2.1)
Other, net (4.6) (2.6)
Gross deferred tax
assets (72.9) (30.2)
Net deferred tax
liability $169.6 $ 91.6
Management has determined, based upon
the Company's history of prior earnings
and its expectations for the future,
that taxable income of the Company will,
more likely than not, be sufficient to
recognize fully the above gross deferred
tax assets.
Tax Rates. Differences between the
Company's effective income tax rates
applicable to continuing operations and
the 35% and 34% U.S. federal income tax
statutory rates for 1993 and prior
years, respectively, are as follows (in
millions):
1993 1992 1991
Income tax expense using the
statutory rate in effect $61.2 $35.4 $25.1
Tax effect of:
Unremitted earnings of equity investees (3.7) (3.0) (2.6)
Cumulative effect of enacted 1% federal tax rate
increase on deferred accruals 3.4
Other, net (1.3) (.1) .1
Federal income tax expense 59.6 32.3 22.6
State and local income tax expense 9.4 2.9 3.4
Total $69.0 $35.2 $26.0
Effective tax rate 39.4% 33.9% 35.2%
Tax Carryovers. At December 31, 1993,
the Company had $6.6 million of
alternative minimum tax credit
carryover. This credit can be carried
forward indefinitely and is available on
a "tax return basis" to reduce future
federal income taxes payable. The
MidSouth Corporation generated $3.3
million of the above alternative minimum
tax credit prior to its acquisition by
the Company.
The amount of federal net operating loss
carryover generated by the MidSouth
Corporation prior to its acquisition was
$55 million with expiration dates
beginning in the year 2001. The use of
preacquisition net operating losses and
tax credit carryovers is subject to
limitations imposed by the Internal
Revenue Code. The Company does not
anticipate that these limitations will
affect utilization of the carryovers
prior to their expiration.
Tax Examinations. Examinations of the
consolidated federal income tax returns
by the Internal Revenue Service ("IRS")
have been completed for the years
1984-1987 (and years 1980-1985 for a
former subsidiary)
[Page 59]
and the IRS has proposed $19.1 million
in tax assessments for these years. In
addition, other taxing authorities have
also completed examinations principally
through 1988, and have proposed
additional tax assessments aggregating
$7.1 million, before benefit for federal
income tax deductions related thereto.
Since most of these asserted tax
deficiencies represent temporary
differences, subsequent payments of
taxes will not require additional
charges to income tax expense. In
addition, accruals have been made for
interest (net of tax benefit) for
estimated settlement of the proposed tax
assessments. Thus, management believes
that final settlement of these matters
will have no material effect on the
accompanying financial statements.
Note 8. Stockholders' Equity
Stock Option Plans. Employee Stock
Option Plans established in 1978, 1983
and 1987 provide for the granting of
options to purchase up to 2,800,000
(pre-splits) shares of the Company's
Common stock by officers and other
designated employees. In addition, the
Company established a 1991 plan which
authorized 2% of the outstanding shares
available for grant; the Board of
Directors amended the 1991 plan in
November 1991, to provide for the
granting of two million shares in lieu
of the 2% of outstanding shares. In
addition, the Company established a 1993
Directors' Stock Option Plan with a
maximum of 120,000 shares for grant.
Shares authorized for the 1991 Plan were
adjusted for the stock split to
4,000,000 and the Plan was amended to
increase the number of shares authorized
by 3,400,000 shares for a total of 7.4
million shares. Such options have been
granted at 100% of the average market
price of the Company's stock on the date
of grant and may not be exercised sooner
than one year, nor longer than ten years
following the date of the grant, except
that options outstanding for six months
or more, with limited rights, become
immediately exercisable upon certain
defined circumstances constituting a
change in control of the Company.
The Plans include provisions for stock
appreciation rights ("SARs") and limited
rights ("LRs"), but, in 1987,
substantially all outstanding SARs and
related options were exchanged for
"bonus" options and LRs. In addition,
special stock options, SARs and LRs,
exercisable only upon certain defined
circumstances constituting a change in
control of the Company, were granted to
certain officers and directors of the
Company. All outstanding options include
LRs. Relevant information is summarized
below:
1993 1992 1991
Stock Options:
Outstanding at January 1 5,527,648 2,341,934 1,410,696
Exercised (1,987,848) (796,360) (240,136)
Cancelled/Expired (4,000) (18,500) (133,593)
Granted 400,000 1,236,750 134,000
Effect of Stock Splits 2,763,824 1,170,967
Outstanding at December 31 3,935,800 5,527,648 2,341,934
Exercisable at December 31 2,851,400 3,567,248 1,370,484
Exercise Price, December 31:
for all outstanding options$8.7969 to $41.5625 $8.50 to $22.66 $17.00 to $27.50
for exercisable options $8.7969 to $22.6563 $8.50 to $13.06 $17.00 to $23.75
Shares available for future grants at
December 31, 1993 aggregated 4,899,096.
Employee Stock Ownership Plan ("ESOP").
In 1987 and 1988, KCSI and DST
established leveraged ESOP plans, which
collectively purchased $69 million of
KCSI Common stock from Treasury at a
then current market price of $49 per
share. The indebtedness, which was
guaranteed by KCSI and DST, is repayable
over ten years.
During 1990, the KCSI and DST ESOP plans
were merged into one plan known as the
KCSI ESOP. This
[Page 60]
merger did not change any substantial
terms, repayment provisions or
guarantees of the individual components
of indebtedness.
Employee benefit expense aggregated
$8.1, $18.1 and $6.6 million in
1993-1991, respectively, for the ESOP.
Interest incurred on the indebtedness
was $1.8, $2.8 and $3.5 million in
1993-1991, respectively. Dividends used
to reduce principal balances on the
indebtedness were $.8, $1.0 and $.6
million in 1993-1991, respectively.
Employee Plan Funding Trust. On October
1, 1993, KCSI transferred one million
shares of KCSI Series B Convertible
Preferred Stock (the "Series B Preferred
Stock") to the Kansas City Southern
Industries, Inc. Employee Plan Funding
Trust ("the Trust"), a grantor trust
established by KCSI. The purchase price
of the stock, based upon an independent
valuation, was $200 million, which the
Trust financed through KCSI. The
indebtedness of the Trust to KCSI is
repayable over 27 years with interest at
6% per year, with no principal payments
in the first three years. The Trust,
which is administered by an independent
bank trustee and consolidated into the
Company's financial statements, will
repay the indebtedness to KCSI utilizing
dividends and other investment income as
well as other cash obtained from KCSI.
As the debt is reduced, shares of the
Series B Preferred Stock, or shares of
Common stock acquired on conversion,
will be released and available for
distribution to various KCSI employee
benefit plans, including its ESOP, Stock
Option Plan and Stock Purchase Plans.
No principal payments have been made and
accordingly, no shares have been
released or are available for
distribution to these plans.
The Series B Preferred Stock, which has
a $10 per share (5%) annual dividend and
a $200 per share liquidation preference,
is convertible into Common stock at an
initial ratio of four shares of Common
stock for each share of Series B
Preferred Stock. The Series B Preferred
Stock is redeemable after 18 months at a
specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held
only by the Trust or its beneficiaries,
the employee benefit plans of KCSI. The
full terms of the Series B Convertible
Preferred Stock are set forth in a
Certificate of Designations approved by
the Board of Directors and filed in
Delaware.
Treasury Stock. The Company issued
1,187,224, 1,020,514 and 347,378 shares
of Common stock from Treasury, in
1993-1991, respectively, to fund the
exercise of options and subscriptions
under various employee stock option and
purchase plans. Treasury stock
previously acquired had been accounted
for as if retired. The Company purchased
5,443, 1,575,410 and 247,476 shares in
1993-1991, respectively. In fourth
quarter 1992, the Company completed the
purchase of 1,110,560 shares of KCSI
Common stock from several Deramus family
trusts for approximately $22 million.
These purchases represent substantially
all the KCSI Common stock held by the
family. KCSI expects these shares to be
used primarily to fund obligations under
existing employee stock purchase, option
and other plans.
Stock Purchase Plan. The Plan,
established in 1977, provides to
substantially all full-time employees of
the Company, certain subsidiaries and
certain other affiliated entities, the
right to subscribe to an aggregate of
7.6 million shares of Common stock. The
purchase price for shares under any
stock offering is to be 85% of the
average market price on either the
exercise date or the offering date,
whichever is lower, but in no event less
than $.98 per share.
In December 1992, the Company completed
the seventh offering under the stock
purchase plan. The purchase price under
this offering at 85% of the average
market price on the offering date was
$18.75. Employees of the Company
subscribed to 247,254 shares under this
offering.
The Company completed the eighth
offering under the stock purchase plan
in December, 1993. The purchase price
under this offering at 85% of the
average market price on the offering
date was $38.20. Employees of the
Company subscribed to 220,576 shares
under this offering. At December 31,
1993, there were 4,026,111 shares
available for future offerings.
Restricted Stock. The Company issued
7,300 and 144,500 shares of restricted
stock, in 1993 and 1992, respectively,
to senior management executives of KCSI
and certain subsidiaries at then current
market prices ranging between $14.86 -
$41.5625 per share. These shares vest
ratably over a five year period.
[Page 61]
Note 9. Minority Interest
Purchase Agreements. Agreements between
KCSI and Janus minority owners, contain
among other provisions, mandatory stock
purchase provisions whereby under
certain circumstances, KCSI would be
required to purchase the minority
interest. If all such provisions became
effective as of December 31, 1993, KCSI
would be required to purchase the
minority interest for approximately $160
million; the purchase price
determination is based on a multiple of
earnings.
Note 10. Profit Sharing and Other
Postretirement Benefits
Profit Sharing. Qualified profit sharing
plans are maintained for most employees
not included in collective bargaining
agreements. Contributions for the
Company and its subsidiaries are made at
the discretion of the Boards of
Directors in amounts not to exceed the
maximum allowable for federal income tax
purposes. Profit sharing expense was
$4.6, $3.8, and $2.6 million in the
years 1993-1991, respectively.
Other Postretirement Benefits. The
Company adopted Statement of Financial
Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits
Other Than Pensions", ("SFAS 106"),
effective January 1, 1993. The Company
and its Transportation subsidiaries
provide certain medical, life and other
postretirement benefits other than
pensions to its retirees. The medical
and life plans are available to
employees not covered under collective
bargaining arrangements, who have
attained age 60 and rendered ten years
of service. Individuals employed as of
December 31, 1992 were excluded from a
specific service requirement. The
medical plan is contributory and
provides benefits for retirees, their
covered dependents and beneficiaries.
Benefit expense begins to accrue at age
40. The medical plan was amended
effective January 1, 1993 to provide for
annual adjustment of retiree
contributions and also contains,
depending on the plan coverage selected,
certain deductibles, copayments,
coinsurance and coordination with
Medicare. The life insurance plan is
non-contributory and covers retirees
only. The Companys' policy, in most
cases, is to fund benefits payable under
these plans as the obligations become
due. However, certain plan assets do
exist with respect to life insurance
benefits.
The following table displays a
reconciliation of the plans' obligations
and assets at December 31 and January 1,
1993, (in millions):
December 31,January 1,
1993 1993
Accumulated postretirement
benefit obligation:
Retirees $ 8.0 $ 7.7
Fully eligible active
plan participants .9 .7
Other active plan
participants 2.0 1.6
Plan assets (1.3) (1.3)
Accrued postretirement
benefit obligation $ 9.6 $ 8.7
Net periodic postretirement benefit cost
for 1993 included the following
components (in millions):
Service cost $ .2
Interest cost .6
Return on plan assets (.1)
Net periodic postretirement
benefit cost $ .7
The entire accumulated postretirement
benefit obligation was charged to
earnings in first quarter 1993 in the
amount of $5.5 million, net of
applicable income taxes. The Companys'
health care costs are limited to the
increase in the Consumer Price Index
("CPI") with a maximum annual increase
of 5%. Accordingly, health care costs in
excess of the CPI limit will be borne by
the plan participants, and therefore
assumptions regarding health care cost
trend rates are not applicable.
[Page 62]
The assumed annual increase in the CPI
is 4% and 3% at January 1 and December
31, 1993, respectively. Life insurance
plan assets represent bank funds on
deposit, with an expected rate of return
of 6.5%. The discount rate assumed in
determining the accumulated
postretirement benefit obligation was 8%
and 7% at January 1 and December 31,
1993, respectively, and the assumed
salary increase was 5%. The adoption of
SFAS 106 is not expected to have a
material effect on future annual
expenses of the Company.
Prior to January 1, 1993, the Company
recognized the cost of these benefits on
a "pay as you go" basis. For 1992-1991,
the cost of these benefits totalled
$722,000 and $784,000, respectively.
Note 11. Litigation
SWEPCO Litigation. As was previously
reported, KCSR is a defendant in a
lawsuit filed in the District Court of
Bowie County, Texas by Southwestern
Electric Power Company ("SWEPCO").
SWEPCO has alleged that KCSR is required
to reduce SWEPCO's coal transportation
rate due to changed circumstances that
allegedly create a "gross inequity"
under the provisions of the existing
coal transportation contract among
SWEPCO, KCSR and the Burlington-Northern
Railroad. Although the suit is pending,
KCSR and SWEPCO are negotiating for an
agreement to settle the major issues
which are the subject of this
litigation. Management is confident that
the matter will be concluded without
material adverse effect on the financial
condition or future results of
operations of the Company. SWEPCO is the
largest single customer of KCSR.
Litigation Reserves. In the opinion of
management, claims or lawsuits
incidental to the business of the
Company and its subsidiaries have been
adequately provided for in the
consolidated financial statements.
Note 12. Control
Subsidiaries. The Company and certain of
its subsidiaries have entered into
agreements with joint venture partners
whereby, upon defined circumstances
constituting a change in control of the
Company, such joint venture partners
have the right to either purchase from
the Company or sell to the Company their
entire equity interest in such joint
ventures.
DST and certain of its joint venture
affiliates, are parties to certain
processing and agency agreements that
provide for optional termination of such
agreements by their clients and or
purchase at net book value by the other
joint venture partner in the event of a
change in control of DST or the
respective other joint venture partners.
In connection with its acquisition of an
interest in Janus, the Company entered
into an agreement, which provides for
preservation of a measure of management
autonomy at the subsidiary level and for
rights of first refusal on the part of
minority stockholders, Janus and the
Company with respect to certain sales of
Janus stock by the minority
stockholders. The agreement also
requires the Company to purchase the
shares of minority stockholders in
certain circumstances. In addition, in
the event of a "change of ownership" of
the Company, as defined in the
agreement, the Company may be required
to sell its stock of Janus to the
minority stockholders or to purchase
such holders' Janus stock. Purchase and
sales transactions under the agreement
are to be made generally at a formula
price, based on a multiple of the net
earnings of Janus, as defined therein.
See Note 9 for further details.
Janus has entered into employment
contracts with certain key employees.
The contracts require minimum annual
salaries and additional compensation in
the form of bonuses and deferred
compensation based on individual
performance as well as the current and
future financial performance of Janus.
In addition, in the event of employee
termination or change in control of
Janus, as defined, Janus would be liable
for payment of additional compensation
to these key employees. The deferred
compensation, for which $15.9 million
has been accrued, is payable after
December 31, 1996.
[Page 63]
Under the Investment Company Act of
1940, certain changes in ownership of
Janus may result in termination of its
investment advisory agreements with the
mutual funds and other accounts it
manages, requiring approval of fund
shareholders and other account holders
to obtain new agreements.
Employees. The Company and certain of
its subsidiaries have entered into
agreements with employees whereby, upon
defined circumstances constituting a
change in control of the Company or
subsidiary, certain stock options become
exercisable, certain benefit
entitlements are automatically funded
and such employees are entitled to
specified cash payments upon termination
of employment.
Assets. The Company and certain of its
subsidiaries have established trusts to
provide for the funding of corporate
commitments and entitlements of
officers, directors, employees and
others in the event of a specified
change in control of the Company or
subsidiary. Assets held in such trusts
at December 31, 1993 were immaterial.
Depending upon the circumstances at the
time of any such change in control, the
most significant factor of which would
be the highest price paid for KCSI
Common stock by a party seeking to
control the Company, funding of the
Company's trusts could be very
substantial.
Debt. Certain loan agreements and debt
instruments entered into or guaranteed
by the Company and its subsidiaries
provide for default in the event of a
specified change in control of the
Company or particular subsidiaries of
the Company.
Preferred Stock Purchase Rights. On May
16, 1986, the Company's Board of
Directors declared a dividend
distribution of one Series A Preferred
share purchase right ("Right") for each
outstanding share of Common stock, no
par value, of the Company. The
distribution was payable on May 27, 1986
to stockholders of record on that date.
Each Right entitles the registered
holder thereof to purchase from the
Company one two-hundredth of a share of
New Series Preferred stock, Series A, $1
par value of the Company at an exercise
price of $50 per Right, subject to
adjustment.
The Rights are not exercisable or
transferable apart from the Common
shares, until the earlier of the tenth
day after the public announcement that a
person or a group has acquired
beneficial ownership of 20% or more of
the Common shares or the tenth day after
a person commences, or announces an
intention to commence a tender or
exchange offer, the consummation of
which would result in the beneficial
ownership by a person or group of 30% or
more of the Common shares. The Rights do
not have voting or dividend rights. The
exercise price and the number of Series
A Preferred shares or other securities
or property issuable upon exercise of
the Rights are subject to adjustment in
the event of certain occurrences to
prevent dilution. Furthermore, in
connection with certain business
combinations resulting in an acquisition
of the Company, dispositions of more
than 50% of Company assets or earning
power and specified "self-dealing"
transactions, a Right becomes the right
to buy shares of Common stock of the
acquiring company (or of the Company in
reverse acquisitions where the Company
survives and in "self-dealing"
transactions) having a market value of
two times the exercise price of the
Right. The Rights may be redeemed at
$.0125 per Right prior to the time that
a person or group acquires beneficial
ownership of 20% or more of the Common
shares. The Rights expire on May 27,
1996.
The Series A Preferred shares
purchasable upon exercise of the Rights
will have a cumulative quarterly
dividend rate equal to $10 per share or
400 times the dividend declared on the
Common shares for such quarter,
whichever is greater. In the event of
any merger, consolidation or other
transaction in which the Common shares
are exchanged, each Series A Preferred
share will be entitled to receive 400
times the amount and type of
consideration received per Common share.
In the event of a liquidation, the
holders of Series A Preferred shares
will be entitled to receive $100 per
share. The Series A Preferred shares
will be redeemable, upon providing
required notice, under certain
circumstances, at the Company's option,
in whole but not in part, at a
redemption price equal to 400 times the
then current market price of a Common
share. Each Preferred share will have
one vote on all matters submitted to a
vote of the stockholders of the Company,
voting together as a class with the
Company's Preferred stock, $25 par
value, and the Common shares. When
dividends on the Series A Preferred
shares are in arrears for six quarters,
the holders of the Series A Preferred
shares will have the right to elect two
directors at the next meeting of
stockholders at which directors are
elected. The vote of holders of
two-thirds of the Series A Preferred
shares, voting together as a class, will
be required for any amendment to the
Company's Certificate of Incorporation
[Page 64]
which would materially and adversely
alter or change the powers, preferences
or special rights of such shares.
Bank Holding Company Act. Because of the
Company's indirect 50% ownership of
Investors Fiduciary Trust Company and
certain amendments to the Bank Holding
Company Act of 1956, any "company"
(which may include a corporation,
partnership, trust, association or
similar organization) which acquires
ownership of enough shares of the
Company's Common stock or Preferred
stock to cause it to "control the
Company," may become a "bank holding
company." This may result in the
acquiring company violating the Bank
Holding Company Act of 1956 and in the
Company being prohibited from continuing
to hold its indirect interest in
Investors Fiduciary Trust Company. The
Federal Reserve Board, or its staff, may
make determinations or interpretations
with respect to whether presumptions of
"control" which may arise with respect
to ownership levels of 10% (5% in
certain circumstances) are rebutted or
confirmed. The Company has obtained such
interpretations with respect to certain
of its major shareholders, including its
ESOP. Failure to obtain a favorable
determination or interpretation in
advance of reaching such ownership
levels may result in the adverse
consequences described above.
Note 13. Industry Segments
The Company's three major business
activities are classified as follows:
Transportation Services. The Company
operates a Class I Common Carrier
railroad system through its wholly-owned
subsidiary, The Kansas City Southern
Railway Company. As a common carrier,
the Railway's customer base is comprised
of utilities and a wide range of
companies in the petro-chemical,
agricultural and paper processing
industries. The railroad system operates
primarily from the Midwest part of the
United States to the Gulf of Mexico and,
with the addition of the MidSouth
Corporation, a regional railroad holding
company, on an East-West axis from
Dallas, Texas to Birmingham, Alabama.
Also included in this industry segment
are transportation related real estate,
leasing and support services
subsidiaries. Transportation revenues
include $60, $64 and $66 million,
respectively, for the years 1993 through
1991 from Southwestern Electric Power
Company, the only customer which
accounted for more than 10% of
Transportation Services revenues in
those years.
Information & Transaction Processing.
DST, (a wholly-owned subsidiary) its
subsidiaries and affiliates, design,
develop and operate proprietary software
systems for the mutual fund, securities
transfer, portfolio accounting, loan
processing, asset management and
insurance industries among others and
provides administrative and transfer
agent services using DST's proprietary
systems. In addition to data processing,
subsidiaries of DST also provide various
output processing services including
computer output microfilm/microfiche,
laser printing and mailing, and are
involved in certain real estate
ventures. DST operates throughout the
United States with its base of
operations in the Midwest and, through
certain of its subsidiaries and
affiliates, internationally in Canada,
Europe, Africa and the Pacific Rim.
Financial Asset Management. Janus (an
81% owned subsidiary) manages
investments for mutual funds and private
accounts. Janus operates throughout the
United States with headquarters in
Denver, Colorado. Assets under
management at December 31, 1993, 1992
and 1991 were $22.2, $15.5, and $8.7
billion, respectively.
Eliminations, Corporate & Other.
Unallocated holding company expenses,
intercompany eliminations, and
miscellaneous investment activities are
reported in the "Eliminations, Corporate
and Other" industry segment.
Segment Financial Information. During
1992, the Company completed the process
of realigning certain subsidiaries
between segments. While these
realignments were, overall, immaterial
for financial reporting purposes, all
amounts in 1991 were reclassified to
reflect the current method of
presentation. Sales between segments are
not material and therefore not
disclosed. Industry segment financial
information follows (in millions):
[Page 65]
Segment Financial Information, dollars in millions, years ended December 31,
JanusEliminations,
Transportation DST CapitalCorporate &
ServicesSystems, Inc.Corp. OtherConsolidated
1993
Revenues $ 451.1 $ 342.2 $162.7 $ 5.1 $ 961.1
Costs & expenses 334.4 311.0 82.7 20.9 749.0
Operating income 116.7 31.2 80.0 (15.8) 212.1
Equity in net earnings of
unconsolidated
affiliates 1.9 12.0 .2 14.1
Interest expense (32.2) (10.9) (.7) (7.4) (51.2)
Pretax income 86.4 32.3 79.3 (23.0) 175.0
Income taxes 38.5 10.0 30.7 (10.2) 69.0
Income before
minority interest 47.9 22.3 48.6 (12.8) 106.0
Minority interest (.6) 9.6 9.0
Income before accounting
changes $47.9 $ 22.9 $ 39.0 (12.8) 97.0
Cumulative effect of accounting changes (6.5) (6.5)
Net income $(19.3) $ 90.5
Depreciation & amortization
expense $46.4 $ 43.4 $ 5.5 $ 1.9 $ 97.2
Capital
expenditures $108.9* $ 63.9* $ 9.2 $ .1 $ 182.1
1992
Revenues $369.2 $270.5 $ 97.5 $ 4.2 $ 741.4
Costs & expenses 293.9 252.7 51.8 17.1 615.5
Operating income 75.3 17.8 45.7 (12.9) 125.9
Equity in net earnings
of unconsolidated
affiliates (.1) 11.6 (.4) 11.1
Interest expense (12.3) (9.1) (.3) (11.4) (33.1)
Pretax income 62.9 20.3 45.4 (24.7) 103.9
Income taxes 23.0 5.0 21.2 (14.0) 35.2
Income before
minority interest39.9 15.3 24.2 (10.7) 68.7
Minority interest 4.9 4.9
Net income $39.9 $15.3 $19.3 $(10.7) $63.8
Depreciation & amortization
expense $35.9 $34.4 $ 3.4 $ .5 $74.2
Capital
expenditures $107.5 $56.5 $10.0 $ .1 $174.1
1991
Revenues $350.1 $211.1 $41.7 $ 7.3 $610.2
Costs & expenses 282.7 184.3 25.9 19.0 511.9
Operating income 67.4 26.8 15.8 (11.7) 98.3
Equity in net earnings
of unconsolidated
affiliates (.2) 8.2 (.3) 7.7
Interest expense (12.0) (7.6) (12.5) (32.1)
Pretax income 55.2 27.4 15.8 (24.5) 73.9
Income taxes 18.4 6.9 6.9 (6.2) 26.0
Income before
minority interest36.8 20.5 8.9 (18.3) 47.9
Minority interest .3 1.9 2.2
Income from continuing
operations 36.8 20.2 7.0 (18.3) 45.7
Extraordinary item (3.8) (3.8)
Net income $36.8 $20.2 $ 7.0 $(22.1) $41.9
Depreciation & amortization
expense $36.1 $20.9 $ 1.6 $ .7 $59.3
Capital
expenditures $91.5 $31.1 $ 1.6 $ .1 $124.3
*Exclusive of property additions from acquisitions
[Page 66]
Segment Financial Information, dollars in millions, years ended December 31,
JanusEliminations,
Transportation DST CapitalCorporate &
ServicesSystems, Inc.Corp. OtherConsolidated
1993
ASSETS
Current assets $ 174.3 $ 115.0 $39.9 $ 6.5 $ 335.7
Investments held for operating
purposes 46.3 125.6 .2 2.4 174.5
Properties, net of
depreciation 1,039.3 134.3 14.4 4.6 1,192.6
Intangible and
other assets 139.0 53.9 17.7 3.6 214.2
Total assets $1,398.9 $ 428.8 $72.2 $ 17.1 $ 1,917.0
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 176.6 $ 88.8 $14.0 $ 9.0 $ 288.4
Long-term debt 577.9 146.0 .9 51.4 776.2
Deferred income taxes 196.8 (12.1) 184.7
Other 41.1 9.3 26.0 28.6 105.0
Net worth 406.5 184.7 31.3 (59.8) 562.7
Total liabilities &
stockholders' equity $1,398.9 $ 428.8 $72.2 $ 17.1 $ 1,917.0
1992
ASSETS
Current assets $ 109.4 $ 91.6 $24.3 $ 21.1 $ 246.4
Investments held for operating
purposes 40.8 78.3 .2 36.5 155.8
Properties, net of
depreciation 643.5 109.2 9.8 5.7 768.2
Intangible and
other assets 5.4 57.0 8.9 6.7 78.0
Total assets $ 799.1 $ 336.1 $43.2 $ 70.0 $ 1,248.4
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 115.2 $ 83.0 $ 9.0 $ 11.4 $ 218.6
Long-term debt 157.9 72.6 1.1 155.4 387.0
Deferred income taxes 108.7 (7.3) 101.4
Other 38.6 12.6 19.5 8.3 79.0
Net worth 378.7 167.9 13.6 (97.8) 462.4
Total liabilities &
stockholders' equity $ 799.1 $ 336.1 $43.2 $ 70.0 $ 1,248.4
1991
ASSETS
Current assets $ 128.8 $ 69.2 $17.0 $ 17.4 $ 232.4
Investments held for operating
purposes 39.7 68.5 2.5 4.0 114.7
Properties, net of
depreciation 580.8 77.2 1.9 6.3 666.2
Intangible and
other assets 4.6 61.2 9.9 2.9 78.6
Total assets $ 753.9 $ 276.1 $31.3 $ 30.6 $ 1,091.9
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 121.3 $ 62.0 $16.7 $ .5 $ 200.5
Long-term debt 144.7 54.0 118.4 317.1
Deferred income taxes 99.7 .1 (1.0) 98.8
Other 41.1 15.3 2.8 4.5 63.7
Net worth 347.1 144.7 11.8 (91.8) 411.8
Total liabilities &
stockholders' equity $ 753.9 $ 276.1 $31.3 $ 30.6 $ 1,091.9
[Page 67]
Note 14. Quarterly Financial Data (Unaudited)
Quarterly financial data follows (in millions, except per share amounts):
1993
Fourth Third Second First
Quarter Quarter QuarterQuarter
Operations Revenues $261.5 $253.3 $231.7 $214.6
Costs and expenses 199.2 194.9 185.3 169.6
Operating income 62.3 58.4 46.4 45.0
Equity in net earnings
of unconsolidated
affiliates 4.9 2.3 4.0 2.9
Interest expense (14.9) (13.8) (11.8) (10.7)
Pretax Pretax income 52.3 46.9 38.6 37.2
Income taxes 19.7 21.1 14.9 13.3
Income before
minority interest 32.6 25.8 23.7 23.9
Minority Minority interest 2.5 2.5 2.2 1.8
Income before cumulative
effect of accounting
changes 30.1 23.3 21.5 22.1
Accounting Change Cumulative effect of changes in
accounting for income taxes and
postretirement benefits (6.5)
Net income $ 30.1 $ 23.3 $ 21.5 $ 15.6
Per Share Primary earnings per share:
Data Income before cumulative effect
of accounting
changes $ .67 $ .52 $ .48 $ .49
Cumulative effect-
accounting changes (.14)
Total $ .67 $ .52 $ .48 $ .35
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Preferred - High $ 16 $ 16 $ 16 $15 1/4
Ranges - Low 14 3/4 15 14 13 1/2
Common - High 51 1/2 42 3/4 42 33 1/4
- Low 41 7/8 37 30 1/2 23 7/16
[Page 68]
1992
Fourth Third Second First
Quarter Quarter Quarter Quarter
Operations Revenues $199.0 $189.5 $177.8 $175.1
Costs and expenses 165.1 155.6 148.0 146.8
Operating income 33.9 33.9 29.8 28.3
Equity in net earnings of
unconsolidated
affiliates 2.6 2.3 3.5 2.7
Interest expense (8.3) (9.0) (8.1) (7.7)
Pretax Pretax income 28.2 27.2 25.2 23.3
Income taxes 9.5 9.4 8.4 7.9
Income before
minority interest 18.7 17.8 16.8 15.4
Minority Minority interest 1.5 1.6 1.0 .8
Net income $ 17.2 $ 16.2 $ 15.8 $ 14.6
Per Share Primary earnings per share:
Data Income from continuing
operations $ .39 $ .36 $ .35 $ .33
Total $ .39 $ .36 $ .35 $ .33
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $.075 $.075 $ .075 $ .075
Stock Price Preferred - High $ 15 $15 1/2 $14 1/2 $14 1/4
Ranges - Low 13 1/2 14 13 1/2 13 1/2
Common - High 24 7/8 20 7/8 19 3/16 19 9/16
- Low 18 9/16 17 1/8 16 5/16 14 5/8
[Page 69]
REPORTS
Management Report on Responsibility for
Financial Reporting
The accompanying financial statements
and related notes of Kansas City
Southern Industries, Inc. and its
consolidated subsidiaries were prepared
by management in conformity with
generally accepted accounting principles
appropriate in the circumstances. In
preparing the financial statements,
management has made judgments and
estimates based on currently available
information. Management is responsible
for not only the financial information
but also all other information in this
Annual Report. Representations contained
elsewhere in this Annual Report are
consistent with the financial statements
and supplementary financial information
contained in the Financial Section.
The Company has a formalized system of
internal accounting controls designed to
provide reasonable assurance that assets
are safeguarded and that its financial
records are reliable. Management
monitors the system for compliance, and
the Company's internal auditors measure
its effectiveness and recommend possible
improvements thereto. In addition, as
part of their audit of the consolidated
financial statements, the Company's
independent accountants, who are
selected by the stockholders, review and
test the internal accounting controls on
a selective basis to establish the
extent of their reliance thereon in
determining the nature, extent and
timing of audit tests to be applied.
The Board of Directors pursues its
oversight role in the area of financial
reporting and internal accounting
control through its Audit Committee.
This committee, composed solely of
non-management directors, meets
regularly with the independent
accountants, management and internal
auditors to monitor the proper discharge
of responsibilities relative to internal
accounting controls and to evaluate the
quality of external financial reporting.
Report of Independent Accountants
To the Board of Directors and
Stockholders of Kansas City Southern
Industries, Inc.
In our opinion, the accompanying
consolidated balance sheets and the
related consolidated statements of
income, of changes in stockholders'
equity and of cash flows present fairly,
in all material respects, the financial
position of Kansas City Southern
Industries, Inc. and its subsidiaries at
December 31, 1993, 1992 and 1991, and
the results of their operations and
their cash flows for the years then
ended in conformity with generally
accepted accounting principles. These
financial statements are the
responsibility of the Company's
management; our responsibility is to
express an opinion on these financial
statements based on our audits. We
conducted our audits of these statements
in accordance with generally accepted
auditing standards which require that we
plan and perform the audit to obtain
reasonable assurance about whether the
financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the amounts and disclosures
in the financial statements, assessing
the accounting principles used and
significant estimates made by
management, and evaluating the overall
financial statement presentation. We
believe that our audits provide a
reasonable basis for the opinion
expressed above.
As discussed in Notes 7 and 10 to the
financial statements, the Company
changed its method of accounting for
income taxes and other postretirement
benefits in 1993 to conform with
Statements of Financial Accounting
Standards Nos. 109 and 106.
/s/ Price Waterhouse
PRICE WATERHOUSE
Kansas City, Missouri
February 24, 1994
[Page 70]