Kansas City Southern Industries, Inc.
Exhibit 99.1 File No. 1-4717
Form 10-K December 31, 1993
Financial Statements
Investors Fiduciary Trust Company
Years ended December 31, 1993, 1992 and 1991
with Report of Independent Auditors
Investors Fiduciary Trust Company
Financial Statements
Years ended December 31, 1993, 1992 and 1991
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income and Retained Earnings . . . . . . . . . 3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements. . . . . . . . . . . . . . . . 6
Report of Independent Auditors
The Board of Directors and Stockholder
Investors Fiduciary Trust Company
We have audited the accompanying balance sheets of Investors Fiduciary Trust
Company (the Company) as of December 31, 1993 and 1992, and the related
statements of income and retained earnings and cash flows for each of the
three years in the period ended December 31, 1993. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Investors Fiduciary Trust
Company at December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
January 12, 1994
/s/ Ernst & Young
1
Investors Fiduciary Trust Company
Balance Sheets
December 31
1993 1992
(In Thousands)
Assets
Cash and due from banks $ 73,449 $ 63,183
Federal funds sold 70,000 65,000
Trading securities 82,012 24,259
Available-for-sale -securities 559,113
Short-term investments 348,799
Investment securities 174,847
Interest receivable and other assets 30,886 38,128
Total assets $815,460 $714,216
Liabilities and stockholder s equity
Deposits:
Noninterest-bearing demand $525,801 $349,208
Money market 71,533 135,120
Time 74,334 85,409
Total deposits 671,668 569,737
Borrowings under repurchase agreements 39,570 57,395
Accounts payable and accrued liabilities 25,226 11,436
Total liabilities 736,464 638,568
Stockholder s equity:
Common stock, $10 par value; 60,000 shares
authorized and outstanding 600 600
Capital surplus 12,064 12,064
Retained earnings 62,726 62,984
75,390 75,648
Net unrealized gain on
available-for-sale securities 3,606
Total stockholder s equity 78,996 75,648
Total liabilities and
stockholder s equity $815,460 $714,216
See accompanying notes.
2
Investors Fiduciary Trust Company
Statements of Income and Retained Earnings
Year ended December 31
1993 1992 1991
(In Thousands)
Interest and dividend income:
Federal funds sold and short-term
investments $14,951 $14,715 $22,873
Mortgage-backed securities 8,386 102,510
Corporate debt securities 2,682 5,283 5,990
U.S. municipalities and foreign
government issues 977 4,271 1,332
Trading securities 1,639 3,716
Equity securities 1,744 1,922 2,244
Total interest and dividend income 30,379 40,759 44,949
Interest expense:
Money market deposits 2,522 4,670 9,682
Time deposits 8,559 10,406 10,209
Borrowings under repurchase
agreements 1,752 2,492 3,470
Total interest expense 12,833 17,568 23,361
Net interest and dividend income 17,546 23,191 21,588
Other income:
Fiduciary fees 29,250 33 ,868 29,766
Gain on sale of investment securities 600 5,082 71
Gain (loss) from trading activities 152 (716)
Other 2,133 2,422 2,704
32,135 40,656 32,541
Other expenses:
Servicing and processing expenses 14,803 17,140 14,590
Salaries and employee benefits 13,097 12,253 11,439
General and administrative expenses 5,130 5,116 4,873
Operating expenses 1,702 2,109 3,310
Occupancy expenses 1,032 1,134 1,164
Provision for investment security
losses (150) 936 1,220
Foreign currency exchange rate losses 552 11,066 1,491
36,166 49,754 38,087
Income before income taxes 13,515 14,093 16,042
Provision for income taxes:
Current 3,008 5,016 5,055
Deferred 1,066 (450) (1,064)
4,074 4,566 3,991
Net income 9,441 9,527 12,051
Retained earnings at beginning
of year 62,984 64,291 52,540
Distributions (9,699) (10,834) (300)
Retained earnings at end of year $62,726 $62,984 $64,291
See accompanying notes.
3
Investors Fiduciary Trust Company
Statements of Cash Flows
Year ended December 31
1993 1992 1991
(In Thousands)
Operating activities
Net income $ 9,441 $ 9,527 $12,051
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 942 1,305 1,311
Deferred income tax expense (benefit) 1,066 (450) (1,064)
Increase in unrealized foreign
currency exchange rate losses
5,360 3,102
Provision for investment security losses (150) 936 1,220
(Gain ) loss on trading activities (152) 716
Gain on sale of investment securities (600) (5,082) (71)
Purchases of trading securities (187,242) (74,813)
Proceeds from sales and maturities
of trading securities
129,981 91,876
Discount accretion and premium
amortization, net (9,903) (8,624) (14,342)
Changes in assets and liabilities, net:
Decrease (increase) in interest
receivable and other assets 6,020 5,820 (6,285)
(Decrease) increase in accounts payable
and accrued liabilities 6,139 (5,920) 3,036
Net cash provided by (used in)
operating activities (44,458) 20,651 (1,042)
Investing activities
Proceeds from maturities and
sales of investment securities
94,166 139,538 76,912
Purchases of investment securities (136,417) (119,798) (119,063)
Proceeds from maturities of
short-term investments 1,793,021 1,839,337 1,580,698
Purchases of short-term investments(1,766,441) (2,046,893) (1,479,419)
Net cash provided by (used in)
investing activities (15,671) (187,816) 59,128
4
Investors Fiduciary Trust Company
Statements of Cash Flows (continued)
Year ended December 31
1993 1992 1991
(In Thousands)
Financing activities
Net increase in demand and
money market deposits $113,006 $ 91,174 $ 41,791
Net increase (decrease) in time deposits (11,075) (34,426) 19,493
Net increase (decrease) in borrowings
under repurchase agreements (17,825) 2,146 19,572
Capital contribution from parent 300
Cash dividends paid (8,711) (3,725) (300)
Net cash provided by financing activities 75,395 55,469 80,556
Net increase (decrease) in cash and
cash equivalents 15,266 (111,696) 138,642
Cash and cash equivalents at
beginning of year 128,183 239,879 101,237
Cash and cash equivalents at end of year $143,449 $128,183 $239,879
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 12,386 $ 19,137 $22,997
Income taxes (net of refunds) $ 1,429 $ 5,748 $ 5,545
See accompanying notes.
5
Investors Fiduciary Trust Company
Notes to Financial Statements
December 31, 1993, 1992 and 1991
1. Accounting Policies
Investors Fiduciary Trust Company (the Company) is regulated under the banking
laws of the state of Missouri and by the Federal Deposit Insurance Corporation
(FDIC).
Ownership
The Company is a wholly-owned subsidiary of IFTC Holdings, Inc., which is
owned 50% each by DST Systems, Inc. (DST) and Kemper Financial Services, Inc.
(KFS). During the years ended December 31, 1993 and 1992, the Company paid
cash dividends of $8,711,000 and $3,725,000 and dividends-in-kind (in the form
of investment securities) of $988,000 and $7,109,000, respectively, to IFTC
Holdings, Inc. Such dividends-in-kind were recorded at the net book value of
the securities at the time of the transaction.
Accounting Changes
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. The Company adopted the provisions of the new standard in its
financial statements effective January 1, 1993. As permitted by the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The change did not have a material effect
on the current year financial statements.
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. As permitted under the Statement, the Company
has elected to adopt the provisions of the new standard as of December 31,
1993. In accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting principle. The
cumulative effect as of December 31, 1993 of adopting SFAS No. 115 was not
material. The ending balance of stockholder s equity was increased by
$3,606,000 (which is net of $2,360,000 in deferred income taxes) to reflect
the net unrealized holding gain on securities classified as available-for-sale
previously carried at amortized cost or lower of cost or market and the net
unrealized loss on interest rate swap agreements which were designated as a
hedge of certain available-for-sale securities at the time of adoption of SFAS
No. 115 (see Note 7).
6
1. Accounting Policies (continued)
Trading Securities
Trading securities are held for resale in anticipation of short-term market
movements. Trading securities, which are stated at fair value, consisted of
certain U.S. government and federal agency debt securities at December 31,
1993. Trading securities at December 31, 1992 consisted of foreign
denominated debt securities. Gains and losses, both realized and unrealized,
are included in gain (loss) from trading activities in the accompanying
statement of income and retained earnings.
Available-For-Sale Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. The
Company had no held-to-maturity securities at December 31, 1993.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities not classified as trading are classified as available-for-
sale. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of income taxes, reported in a separate
component of stockholder s equity.
The cost of debt securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-backed securities, over the estimated life of the security.
Such amortization and accretion are included in interest income. The cost of
securities sold is based on the specific identification method.
Short-Term Investments and Investment Securities
Upon adoption of SFAS No. 115 at December 31, 1993, the Company reclassified
securities previously classified as held for investment of $559,113,000 to the
available-for-sale portfolio.
7
1. Accounting Policies (continued)
Prior to the adoption of SFAS No. 115, short-term investments were stated at
amortized cost, which approximated fair value. Investment securities (i.e.,
securities which the Company had the ability and general intention to hold for
long-term purposes) were stated at amortized cost. Additionally, equity
securities, excluding money market preferred equities, were stated at the
lower of aggregate cost or fair value.
Provision for Investment Security Losses
The provision for investment security losses charged to earnings is an amount
which, based on management s estimate, is necessary to maintain a general
valuation allowance sufficient to absorb possible credit losses within the
Company s investment portfolio. These provisions are made based on the
results of continuing reviews by management of the investment portfolio which
include analysis of issuer financial data and assessment of an issuer s
ability to continue to meet its obligations.
Borrowings Under Repurchase Agreements
The Company enters into sales of securities under agreements to repurchase
(repurchase agreements). Fixed-coupon repurchase agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as
a liability in the balance sheets. The dollar amount of securities underlying
the agreements remains in the asset accounts. Repurchase agreements mature
in less than one year from the original date of sale.
Income Taxes
The results of operations of the Company are included in the consolidated
federal and state income tax returns of its parent, IFTC Holdings, Inc.
Income tax expense or benefit of the Company is calculated as if it were
reporting its income and expenses as a separate entity. Tax-related balances
due to or from IFTC Holdings, Inc. for the years ended 1993 and 1992 are not
material.
For the years ended 1993, 1992 and 1991, the amount of actual income tax
expense differs from the expense that would result from applying federal
statutory tax rates to pretax income due principally to state taxes, the
dividends received deduction and tax-exempt interest.
8
1. Accounting Policies (continued)
At December 31, 1993, deferred income tax assets and liabilities amounted to
$652,000 and $2,498,000, respectively, due to temporary differences in the
determination of income for financial statement purposes and income tax
purposes. Such temporary differences relate principally to the timing of
taxability of certain dividend income, gains on forward exchange contracts,
unrealized gains and losses on securities resulting from the adoption of SFAS
No. 115 (amounting to deferred liabilities of $2,360,000) and interest rate
swap agreements and depreciation. The Company did not record any valuation
allowances against deferred tax assets at December 31, 1993.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, due from banks, federal funds sold and investments in tax-exempt
money market mutual funds. Generally, federal funds are sold for one-day
periods.
Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheets, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash, cash equivalents and short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
9
1. Accounting Policies (continued)
Trading and available-for-sale securities: Fair values for trading and
available-for-sale securities are based on quoted market prices, where
available, and are recognized in the balance sheet. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Investment securities (prior to the adoption of SFAS No. 115): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices were not available, fair values were
based on quoted market prices of comparable instruments.
Interest rate swap agreements: Fair values for interest rate swap
agreements are based on pricing models or formulas using current
assumptions.
Deposit liabilities: The fair values disclosed for noninterest-bearing
demand deposits and money market deposits are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates of deposit to a schedule of expected monthly
cash flows on time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements approximate their fair values.
Reclassifications
Certain amounts for 1992 and 1991 have been reclassified to conform to the
current year presentation.
10
2. Investment Securities
The amortized cost and fair values (carrying value) of available-for-sale
securities at December 31, 1993, are as follows:
Gross Gross (Carrying
Amortized Unrealized Unrealized Value)
Cost Gains Losses Fair Value
(In Thousands)
Mortgage-backed securities $ 98,819 $ 3,474 $ (273) $102,020
Corporate debt securities 283,705 809 (80) 284,434
U.S. governments 29,910 1 (2) 29,909
U.S. municipalities 55,575 153 (1) 55,727
Total debt securities 468,009 4,437 (356) 472,090
Equity securities 79,849 7,217 (43) 87,023
Total available-for-
sale securities $547,858 $ 11,654 $ (399) $559,113
The amortized cost (carrying value) and fair values of investment securities
at December 31, 1992, are as follows:
(Carrying
Value) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
Mortgage-backed securities $ 106,606 $ 5,869 $ (276) $ 112,199
Corporate debt securities 37,605 565 (1,838) 36,332
U.S. municipalities and
foreign government issues 2,876 34 (11) 2,899
Total debt securities 147,08 76,468 (2,125) 151,430
Equity securities 27,760 8,416 (208) 35,968
Total investment securities $ 174,847 $ 14,884 $ (2,333) $ 187,398
2. Investment Securities (continued)
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1993 and investment debt securities at December 31,
1992, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
1993 1992
Cost Fair Value Cost Fair Value
(In Thousands)
Due in one year or less $291,893 $292,118 $ 6,029 $ 6,063
Due in one year through
five years 57,1525 7,590 22,150 22,196
11
Due in five years through
10 years 4,221 4,317 10,760 9,437
Due after 10 years 15,982 16,103 1,752 1,743
369,248 370,128 40,691 39,439
Mortgage-backed securities 98,819 102,020 106,606 112,199
Total debt securities
before allowance $468,067 $472,148 $147,297 $151,638
Proceeds from sales of investment securities during 1993 and 1992 were
$63,357,000 and $71,735,000, respectively. Proceeds from calls or tenders of
investment securities during 1993 and 1992 were $3,122,000 and $5,419,000,
respectively. Gross gains realized on sales, calls and tenders during 1993
and 1992 were $1,433,000 and $5,083,000, respectively. Gross losses realized
on sales, calls and tenders during 1993 and 1992 were $833,000 and $1,000,
respectively.
Proceeds from sales of trading securities during 1993 and 1992 were
$48,920,000 and $33,863,000, respectively. Gross gains realized on sales
during 1993 and 1992 were $384,000 and $12,000, respectively. Gross losses
realized on sales during 1993 and 1992 were $232,000 and $347,000,
respectively.
The fair value of securities pledged to secure time deposits was $518,000 and
$1,196,000 at December 31, 1993 and 1992, respectively. The fair value of
securities pledged to secure borrowings under repurchase agreements was
$41,402,000 and $57,539,000 at December 31, 1993 and 1992, respectively. The
fair value of securities and cash pledged to the Depository Trust Company as a
requirement to utilize its securities settlement system was $3,716,000 at
December 31, 1993.
12
2. Investment Securities (continued)
In addition, certain interest rate swap agreements require the Company to
maintain eligible collateral with fair values aggregating $4,243,000 and
$5,218,000 in 1993 and 1992, respectively.
The table below provides an analysis of changes in the allowance for security
losses for the three years ended December 31, 1993:
1993 19921991
(In Thousands)
Allowance, beginning of year $ 208 $1,372 $ 152
Provision for investment
security losses (150) 936 1,220
Charge-offs, net of recoveries (2,100)
Allowance, end of year $ 58 $ 208 $ 1,372
3. Deposits
The carrying amounts and fair values of deposits consisted of the following at
December 31, 1993 and 1992. For deposits with no defined maturities, SFAS
No. 107 defines fair value as the amount payable on demand:
1993 1992
Carrying Carrying
Value Fair Value Value Fair Value
(In Thousands)
Noninterest-bearing demand $525,801 $525,801 $349,208 $349,208
Money market accounts 71,533 71,533 135,120 135,120
Time 74,334 76,880 85,409 88,516
Total deposits $671,668 $674,214 $569,737 $572,844
13
4. Commitments
The Company leases office space and certain equipment from DST. Rental
expense paid to DST amounted to $1,032,000 in 1993, $1,084,000 in 1992 and
$1,144,000 in 1991. The Company s leases expire on December 31, 1997. Future
annual minimum rentals under noncancelable leases are as follows:
Year ending
December 31
1994 $601,000
1995 608,000
1996 616,000
1997 620,000
5. Employee Benefit Plan
The Company s full-time employees participate in a noncontributory, trusteed
profit-sharing plan after completing one year of service. The plan is
administered by the plan s advisory committee, and the assets of the plan are
commingled with the assets of the DST Profit-Sharing Plan.
The Company s contributions to the profit-sharing plan are approved by the
Board of Directors and were $836,000 plus forfeitures in 1993, $810,000 plus
forfeitures in 1992 and $720,000 plus forfeitures in 1991.
6. Related Parties
A significant portion of the Company s fiduciary fees and noninterest-bearing
deposit liability arise from its capacity as trustee for various investment
products sponsored by KFS and from other mutual fund clients serviced by DST.
Effective January 1, 1993, KFS and DST revised their methods of allocating
certain trustee fee income to the Company, which resulted in lower net income
for 1993 in the approximate amount of $4,200,000. The Company incurred DST
and KFS fees for servicing, processing and advisory services of approximately
$7,989,000 in 1993, $11,388,000 in 1992 and $10,853,000 in 1991. Amounts
prepaid to DST for processing services were $4,000,000 at December 31, 1993.
14
6. Related Parties (continued)
DST provides transfer agent services to certain mutual fund clients of the
Company. Amounts paid to DST for these services equal the amount received by
the Company from the mutual fund clients and are not presented in the
accompanying statements of income and retained earnings. Amounts paid to DST
for these services were $13,618,000 in 1993, $4,384,000 in 1992 and $1,801,000
in 1991.
Kemper Service Company (KSC), a wholly-owned subsidiary of KFS, provides
transfer agent services to certain mutual fund clients of the Company.
Amounts paid to KSC for these services equal the amount received by the
Company from the mutual fund clients and are not presented in the accompanying
statements of income and retained earnings. Amounts paid to KSC for these
services were $66,470,000 in 1993, $61,147,000 in 1992 and $54,184,000 in
1991.
Janus Service Corporation (JSC), an affiliate of DST, provides transfer agent
services to certain mutual fund clients of the Company. Amounts paid to JSC
for these services equal the amount received by the Company from the mutual
fund clients and are not presented in the accompanying statements of income
and retained earnings. The amount paid to JSC for these services was
$28,003,000 in 1993, $17,416,000 in 1992 and $6,549,000 in 1991.
Midland Loan Services, L.P., which is an investee of DST, maintains
noninterest-bearing demand deposits and money market demand deposits of the
Company. Such deposits amounted to $5,745,000 and $91,033,000 at December 31,
1993 and 1992, respectively.
7. Interest Rate Swap Agreements
Prior to 1993, the Company entered into interest rate swap agreements with
various investment banking firms, and designated such contracts as liability
hedges designed to extend the duration of certain short-term repricing
liabilities in order to reduce the impact of changes in interest rates on the
Company s cost of funds. These agreements, which expire from 1994 to 1997,
require the Company to make fixed-rate payments with an average rate of 9.45%
in exchange for LIBOR-based interest payments on notional amounts aggregating
to $56,000,000. Payments associated with the swap agreements are made on a
net basis and have been recorded as an adjustment to interest expense.
Effective December 31, 1993, in connection with the adoption of SFAS No. 115,
as described in Note 1, the Company designated substantially all of such
contracts for use, prospectively, as hedges of certain available-for-sale
assets. The fair value of the
15
7. Interest Rate Swap Agreements (continued)
Company s liabilities under these contracts amounts to $5,289,000. This
amount, net of deferred income taxes of $2,091,000, has been included in the
separate component of stockholder s equity at December 31, 1993, in connection
with the adoption of SFAS No. 115. Net payments made under the terms of these
contracts in the future will be accounted for as an adjustment of interest
income, and changes in the value of the contracts, together with the changes
in the value of the related available-for-sale assets, will be included in the
separate component of stockholder s equity, as provided by SFAS No. 115.
The Company is exposed to credit risk in the event of default by the
counterparties to the extent of any receivable amounts that have been recorded
in the balance sheets and market risk as a result of potential future
decreased in LIBOR. The Company was in a net payable position at December 31,
1993.
8. Borrowings Under Repurchase Agreements
Information regarding borrowings under repurchase agreements is presented
below (in thousands):
Year ended December 31, 1993
Weighted
Maximum Average
Weighted Average Outstanding Balance at Rate at
Average Balance at any December 31, December 31,
Rate Outstanding Month End 1993 1993
3.63% $48,214 $55,787 $39,570 3.47%
Year ended December 31, 1992
Weighted
Maximum Average
Weighted Average Outstanding Balance at Rate at
Average Balance at any December 31, December 31,
Rate Outstanding Month End 1992 1992
4.44% $56,299 $59,059 $57,395 3.59%
16