FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 556-0303
(Registrant's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1994
Common Stock, $.01 per share par value 43,489,438 Shares
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1994
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
June 30, 1994 and December 31, 1993 2
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1994 and 1993 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1994 and 1993 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1.Legal Proceedings 18
Item 6.Exhibits and Reports on Form 8-K 18
SIGNATURES 19
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1994
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations, although the Registrant
believes that the disclosures are adequate to enable a reasonable
understanding of the information presented. It is suggested that these
Consolidated Condensed Financial Statements be read in conjunction with the
financial statements and the notes thereto included in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993.
The Registrant has announced several transactions, which, if completed, would
significantly change the composition of the Registrant as it is currently
structured. Accordingly, the Consolidated Condensed Financial Statements
should also be read in conjunction with Note 9 included in this Form 10-Q.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
June 30, December 31,
1994 1993
ASSETS
Current Assets:
Cash and equivalents $ 9.9 $ 6.6
Accounts receivable, net 232.5 194.7
Inventories 47.6 48.3
Other current assets 85.2 86.1
Total current assets 375.2 335.7
Investments (held for operating purposes) 208.2 174.5
Properties (net of $637.9 and $599.4
accumulated depreciation and
amortization, respectively) 1,326.8 1,192.6
Intangibles and Other Assets 176.9 214.2
Total assets $2,087.1 $1,917.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 54.3 $ 63.5
Accounts and wages payable 83.7 70.9
Other accrued and current liabilities 147.7 154.0
Total current liabilities 285.7 288.4
Other Liabilities:
Long-term debt 867.3 776.2
Deferred income taxes 198.1 184.7
Other deferred credits and liabilities 100.3 99.1
Total other liabilities 1,165.7 1,060.0
Minority Interest 8.0 5.9
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock .4 30.9
Capital surplus 338.8 303.9
Retained earnings 492.0 439.0
Shares held in trust (200.0) (200.0)
ESOP deferred compensation (10.6) (18.2)
Total stockholders' equity 627.7 562.7
Total liabilities and
stockholders' equity $2,087.1 $1,917.0
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $267.2 $231.7 $532.3 $446.3
Costs and expenses 208.6 185.3 417.5 354.9
Operating Income 58.6 46.4 114.8 91.4
Equity in net earnings of
unconsolidated affiliates 5.1 4.0 11.1 6.9
Interest expense (9.5) (11.8) (24.5) (22.5)
Pretax income 54.2 38.6 101.4 75.8
Provision for taxes on income 20.1 14.9 37.7 28.2
Income before minority interest 34.1 23.7 63.7 47.6
Minority interest 2.3 2.2 4.3 4.0
Income before cumulative effect of
accounting changes 31.8 21.5 59.4 43.6
Cumulative effect of changes in
accounting for income taxes and
postretirement benefits,
net of taxes (6.5)
Net Income 31.8 21.5 59.4 37.1
Less-dividends on preferred stock .1 .1 .1 .1
Net Income Applicable to
Common Stockholders $ 31.7 $ 21.4 $ 59.3 $ 37.0
Computation of Primary Earnings per Common Share
Average Primary Common
Shares Outstanding(in thousands) 45,196 44,561 45,129 44,569
Primary Earnings per Common Share:
Income before cumulative effect of
accounting changes $ .70 $ .48 $ 1.31 $ .97
Cumulative effect of
accounting changes (.14)
Total $ .70 $ .48 $ 1.31 $ .83
Cash Dividends Paid:
Per Common share $.071/2 $.071/2 $ .15 $ .15
Per Preferred share $ .25 $ .25 $ .50 $ .50
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months
Ended June 30,
1994 1993
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $59.4 $37.1
Adjustments to net income:
Depreciation and amortization 55.6 42.1
Deferred income taxes 19.6 2.0
Equity in undistributed earnings (10.8) (5.9)
Changes in working capital items:
Accounts receivable (37.8) 5.7
Inventories .7 (5.6)
Other current assets (1.0) (32.8)
Accounts payable 15.9 (.7)
Other accrued and current liabilities 11.7 31.9
Other, net (3.6) 8.4
Net 109.7 82.2
INVESTING ACTIVITIES:
Property acquisitions (155.6) (59.8)
Proceeds from disposal of property 7.7 8.6
Purchase of companies, net of cash acquired (199.2)
Investment acquisitions (24.5) (11.4)
Proceeds from disposal of investments .2 3.9
Other, net 2.1 (2.7)
Net (170.1) (260.6)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 131.8 317.5
Repayment of long-term debt (45.6) (121.1)
Proceeds from stock plans 2.5 .7
Stock repurchased (10.1) (4.3)
Cash dividends paid (6.6) (6.4)
Other, net (8.3) (.5)
Net 63.7 185.9
CASH AND EQUIVALENTS
Net increase 3.3 7.5
At beginning of year 6.6 15.4
At end of period $ 9.9 $22.9
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1994
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Registrant, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
interim closing procedures) necessary to present fairly the financial position
of Kansas City Southern Industries, Inc. ("Registrant" or "KCSI") and its
subsidiary companies as of June 30, 1994 and December 31, 1993, the results of
operations for the three and six months ended June 30, 1994 and 1993, and cash
flows for the six months ended June 30, 1994 and 1993.
2. The results of operations for the three and six months ended June 30,
1994 and 1993 are not necessarily indicative of the results to be expected for
the full year 1994, nor the results experienced for the full year 1993.
3. The accompanying financial statements have been prepared consistent with
accounting principles described more fully in Note 1 of the Registrant's 1993
Annual Report to Stockholders.
4. The Registrant's inventories, $47.6 million at June 30, 1994 and $48.3
million at December 31, 1993, principally represent material and supplies
related to rail transportation and DST's output processing operations. Other
components of inventories are immaterial.
5. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method of accounting include all entities in
which the Registrant or its subsidiaries have significant influence but not
more than 50% control. Investments in unconsolidated affiliates (joint
ventures) at June 30, 1994, include the equity interests of DST Systems, Inc.
("DST") in Boston Financial Data Services, Inc. ("BFDS"), Investors Fiduciary
Trust Company ("IFTC"), The Continuum Company, Inc. ("Continuum"), Argus
Health Systems, Inc. ("Argus"), Midland Data Systems, Inc. and Midland Loan
Services, L.P.(collectively "Midland"), First of Michigan Capital Corporation,
and certain other venture operations plus the Registrant's interests in other
companies. Among other provisions, the joint venture agreements contain
"change of control" provisions affecting the rights of the partners to acquire
the other partners' equity interests in the event of circumstances which would
result in a change of control.
Combined condensed financial information of unconsolidated affiliates is shown
below (dollars in millions):
Financial Condition
June 30, December 31,
1994 1993
Current assets $1,038.4 $1,047.7
Non-current assets 163.3 150.1
Assets $1,201.7 $1,197.8
Current liabilities $ 834.1 $ 856.8
Non-current liabilities 128.7 122.9
Equity of stockholders and partners 238.9 218.1
Liabilities and equity $1,201.7 $1,197.8
Investment in unconsolidated affiliates $ 156.2 $ 126.3
Operating Results
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues:
IFTC $ 19.0 $ 12.5 $ 29.2 $ 24.7
All others 141.7 63.0 285.1 122.9
Total Revenues $ 160.7 $ 75.5 $ 314.3 $ 147.6
Costs and expenses:
IFTC $ 16.1 $ 10.5 $ 23.4 $ 20.6
All others 131.2 60.0 263.8 117.7
Total Costs and Expenses $ 147.3 $ 70.5 $ 287.2 $ 138.3
Net Income:
IFTC $ 2.9 $ 2.0 $ 5.8 $ 4.1
All others 10.5 3.0 21.3 5.2
Total Net Income $ 13.4 $ 5.0 $ 27.1 $ 9.3
Equity in Earnings:
IFTC $ 1.4 $ 1.1 $ 2.9 $ 2.1
All others 3.7 1.7 8.2 2.7
Total Equity in Earnings $ 5.1 $ 2.8 $ 11.1 $ 4.8
6. For purposes of the Statement of Cash Flows, the Registrant considers all
short-term investments with an original maturity of generally three months or
less to be cash equivalents. Other required supplementary disclosures follow:
a. Cash Flow Information (in millions):
Six Months
Ended June 30,
1994 1993
Interest paid $28.6 $ 21.0
Income taxes paid (refunded) (1.0) 15.7
b. Noncash Investing and Financing Activities:
In the first quarter of 1994, the Registrant issued approximately 235,000
shares of Common stock under the Seventh Offering of the Employees Stock
Purchase Plan. These shares, totalling a purchase price of approximately $4.4
million, were subscribed and paid for, through employee payroll deductions, in
1993.
During the first six months of 1994 and 1993, the Registrant recorded expenses
of $2.1 million and $2.0 million, respectively, related to its existing ESOP.
These charges, which were non-cash in nature, had the effect of decreasing
retained earnings and ESOP deferred compensation with no overall effect upon
stockholders' equity.
The Registrant issued $100 million in debt securities in first quarter 1993.
As part of this transaction, the Registrant incurred $1.5 million in discount
and underwriting fees which were transferred directly to the underwriters.
These discount and underwriting fees represent non-cash amounts, which will be
amortized over the respective term of the indebtedness.
In the second quarter of 1993, the Registrant and DST completed several
acquisitions of businesses, which are more fully described in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993.
7. In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6 ("SOP 93-6") "Employers Accounting for
Employee Stock Ownership Plans", which became effective for fiscal years
beginning after December 15, 1993. The Registrant's ESOP shares are
grandfathered under the provisions of SOP 93-6 and accordingly, the
Registrant's accounting policies and procedures as described in the Annual
Report on Form 10-K for the year ended December 31, 1993 were not affected by
SOP 93-6. SOP 93-6 does, however, require additional disclosures regarding
the Registrant's ESOP plan as follows, (in millions at June 30, 1994):
Number of Common shares allocated to
plan participants 4.6
Cost of unallocated ESOP shares $11.1
8. On May 19, 1994, the Registrant amended its certificate of incorporation
to set a par value for the Common stock. The amendment established a par
value of $.01 per Common share, which had previously been no par, and had the
effect of reallocating amounts between categories within stockholders' equity
but had no overall effect upon the total amount of stockholders' equity.
9. On July 19, 1994, the Registrant announced that it had entered into a
letter of intent with Illinois Central Corporation ("IC") for acquisition of
the Registrant's Transportation Services operations.
The acquisition will be accomplished by a merger of IC and the Registrant
immediately following a spin-off, by the Registrant to its stockholders, of
the stock of a subsidiary ("Newco") holding the Registrant's financial asset
management and information & transaction processing businesses. The
acquisition, which is subject to receipt of a favorable Internal Revenue
Service ruling, the negotiation of definitive agreements and a stockholder
vote of both companies, is expected to be completed in the first half of 1995.
Since the definitive agreements remain to be negotiated, there can be no
assurance that a transaction will ultimately be consummated.
The letter of intent also calls for the assumption by IC of approximately $930
million of the Registrant's debt, of which approximately $660 million is
directly associated with the Registrant's Transportation Services segment and
$35 million currently is unallocated debt of the Registrant and provide $6
million to purchase the Registrant's $25 par value Preferred stock. The
assumption of $930 million of debt by IC allows the Registrant to incur
additional debt to repurchase options on KCSI stock, currently amounting to
approximately 3.5 million shares and to establish a preliminary capital
structure for Newco appropriate for a company of its type.
The transaction contemplates, assuming all other conditions are met, that the
Registrant stockholders will receive on a tax-free basis, stock in Newco and a
distribution of approximately 21.2 million shares of IC common stock,
representing .4883 shares of IC common stock for each share of the Registrant
stock held.
Newco will be principally comprised of DST, Janus Capital Corporation, Berger
Associates, Inc., which the Registrant seeks to increase its ownership to over
80%, pursuant to a separately negotiated agreement, and Southern Leasing
Corporation ("SLC"). DST will continue to own all of its subsidiaries, joint
venture interests and investments, including but not limited to, Output
Technologies, Inc.; Argus Health Systems, Inc.; Boston Financial Data
Services, Inc.; and The Continuum Company, Inc.
Additionally, on July 19, 1994, the Registrant announced that DST and Kemper
Financial Services, Inc. had entered into a letter of intent for the
acquisition of their jointly owned affiliate IFTC by State Street Boston
Corporation ("State Street").
Upon closing of the IFTC transaction, which is subject to regulatory approvals
and other conditions, DST will receive approximately 2.8 million shares of
State Street in a tax-free exchange (representing an approximate 4% ownership
interest in State Street). DST recognized equity earnings from IFTC of $4.8
million for the year ended December 31, 1993 and will recognize a net gain of
at least $15 million when the IFTC transaction is completed, which is expected
to close in fourth quarter 1994.
The Registrant's Board of Directors also authorized redemption of the Common
stock "Rights" issued pursuant to its Rights Plan in 1986. The Board action
terminates the exercisability of such Rights and will result in a payment of
one and one-quarter cents ($.0125) per share to Common stockholders of record
on August 26, 1994, payable September 20, 1994, amounting to approximately
$540,000 in the aggregate.
10.LITIGATION. The Registrant has had no significant changes in its
outstanding litigation from that previously reported in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993 other than
noted below.
SWEPCO Litigation
As was previously disclosed in the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993, KCSR was a defendant in a lawsuit filed in
the District Court of Bowie County, Texas by Southwestern Electric Power
Company ("SWEPCO"). In that case, SWEPCO alleged that KCSR was required to
reduce SWEPCO's coal transportation rate due to changed circumstances
allegedly creating a "gross inequity" under the provisions of the coal
transportation contract existing among SWEPCO, KCSR and the Burlington
Northern Railroad. SWEPCO is KCSR's largest single customer. KCSR and SWEPCO
have settled this litigation and the case against KCSR has been dismissed.
This matter was concluded, as predicted, without material adverse effect on
the financial condition or future results of operations of the Registrant.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Kansas City Southern Industries, Inc. (the "Registrant") is a Delaware
corporation, organized in 1962, which engages in supervising the operations of
its subsidiaries and providing certain managerial, legal and financial
services to its subsidiaries.
The Registrant's business activities by industry segment and principal
subsidiary companies are:
Transportation Services - Operating a Class I Common Carrier Railroad
system through the Registrant's 100% owned subsidiary The Kansas City
Southern Railway Company and its affiliated trucking and other
subsidiaries ("KCSR") along with other subsidiaries supporting the
transportation segment.
Information & Transaction Processing - DST Systems, Inc., ("DST") a 100%
owned subsidiary, together with its subsidiaries and joint ventures
(principally The Continuum Company, Inc., Boston Financial Data Services,
Inc., Investors Fiduciary Trust Company, Argus Health Systems, Inc.,
Midland Data Services, Inc. and Midland Loan Services L.P.), designs,
maintains and operates proprietary on-line shareowner accounting and
record keeping data processing systems, primarily for mutual funds,
financial services institutions and insurance companies. In addition to
data processing, subsidiaries of DST also provide computer output
microfilm/microfiche, printing and graphic design services.
Financial Asset Management - Management of investments for mutual funds
and private accounts through Janus Capital Corporation ("Janus"), an 81%
owned subsidiary.
Corporate and Other - Primarily general administrative and corporate
operations of the Registrant and other minor subsidiaries.
The Registrant has announced several transactions, which, if completed, would
significantly change the composition of the Registrant as it is currently
structured. Accordingly, the information contained in this management's
discussion and analysis of financial condition and results of operations
should be read in conjunction to the notes to consolidated condensed financial
statements included in this Form 10-Q and the current reports on Form 8-K
filed by the Registrant dated July 19, 1994.
Results of Operations
Segment revenues and operating income comparisons follow (dollars in
millions):
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues:
Transportation Services $123.4 $108.0 $246.7 $202.7
DST Systems, Inc. 101.2 83.4 198.6 164.0
Janus Capital Corp. 43.7 39.7 88.3 74.5
Eliminations, Corporate & Other (1.1) .6 (1.3) 5.1
Total $267.2 $231.7 $532.3 $446.3
Operating Income:
Transportation Services $ 31.4 $ 25.2 $ 59.4 $ 47.7
DST Systems, Inc. 9.6 8.0 21.6 16.4
Janus Capital Corp. 19.6 18.1 38.6 33.4
Eliminations, Corporate & Other (2.0) (4.9) (4.8) (6.1)
Total $ 58.6 $ 46.4 $114.8 $ 91.4
The Registrant reported second quarter 1994 earnings of $31.8 million, (70
cents per share), a 46% increase over the $21.5 million, (48 cents per share)
earned in second quarter 1993. Consolidated earnings were improved from
higher earnings of each of the primary business segments, Transportation, DST
Systems, Inc. ("DST") and Janus Capital Corporation ("Janus"). Second quarter
1994 results were also positively affected by the reversal of certain KCSI
Holding Company employment tax and interest expense accruals resulting from
the favorable outcome of long standing employment tax issues. This one-time
item resulted in a positive impact to second quarter and year to date 1994
results of 6 cents per share at KCSI Holding Company and had an immaterial
effect on the Transportation Services segment. Consolidated operating income
rose 26% to $58.6 million while revenues rose 15% to $267.2 million. Second
quarter results were also affected by an increase in earnings of
unconsolidated affiliates and overall lower interest expense related to
accrual reversals noted above. These earnings, at 70 cents per share for
second quarter 1994, represent the highest quarterly earnings in the
Registrant's history.
For the six months ended June 30, 1994, earnings of $59.4 million or $1.31 per
share increased 35% over income before accounting changes and 58% over total
per share earnings in comparable prior year. Year to date 1993 results
include a charge of $6.5 million (14 cents per share) related to the adoption
of Statement of Financial Accounting Standards Nos. 106 and 109 for
postretirement benefits and income taxes. Consolidated revenues for the first
six months of 1994 rose to $532.3 million, while operating income rose 26% to
$114.8 million. Year to date results were also affected by higher
unconsolidated affiliate earnings primarily related to DST's equity in The
Continuum Company, Inc. ("Continuum"), which became a DST affiliate in late
1993.
Second quarter and year to date 1994 periods also include non-cash acquisition
related intangible amortization expenses amounting to $2.7 million and $5.3
million, respectively, versus $1.3 million and $2.2 million, respectively in
second quarter and year to date 1993.
TRANSPORTATION SERVICES
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $123.4 $108.0 $246.7 $202.7
Costs and expenses 92.0 82.8 187.3 155.0
Operating income 31.4 25.2 59.4 47.7
Unconsolidated affiliates 1.2 2.0
Interest expense (9.0) (6.4) (20.6) (11.0)
Pretax income 22.4 20.0 38.8 38.7
Income taxes 9.4 8.3 16.1 15.4
Income before accounting changes $ 13.0 $ 11.7 $ 22.7 $ 23.3
Transportation Services, comprised principally of KCSR, reported second
quarter earnings of $13 million, an 11% increase over second quarter 1993 on a
14% increase in revenues and a 25% improvement in operating income.
KCSR (which includes MidSouth Corporation effective with the June 1993
acquisition) second quarter revenues rose 29% compared to 1993. When
including MidSouth in prior year results, overall revenues declined slightly
in second quarter 1994, primarily from lower coal revenues discussed below.
General Commodity revenues showed improvement from higher carloadings in the
chemicals and petroleum products, metallic ores and food products areas along
with TOFC/COFC intermodal traffic, where carloadings rose 55% from second
quarter 1993. Lower traffic levels were experienced primarily in the farm
products area as weak export grain shipments continued 1994 trends. Including
MidSouth in prior year statistics, overall general commodity carloadings rose
5% in second quarter 1994 over prior year. Unit coal revenues, however,
declined 24% in second quarter 1994, from a decline in overall unit coal
tonnage including the absence of shipments to the Tumco electric generating
plant served by KCSR (the Tumco plant shut down in late 1993 and is scheduled
to reopen in fourth quarter 1995). Excluding consideration of the Tumco plant
previously discussed, unit coal revenues, which tend to fluctuate from quarter
to quarter, are expected to equalize on an annual basis compared to prior
year.
KCSR second quarter 1994 results also benefitted from lower operating expenses
from cost control measures and reductions in unit coal shipments. Traffic
congestion and severe weather conditions, which increased car hire and related
operating expenses in first quarter 1994, eased somewhat in second quarter
1994 resulting in lower operating expenses.
Overall Transportation Services second quarter results also benefitted from
continued favorable operations of both Pabtex (petroleum coke and coal export
facility) and Southern Leasing Corporation on higher volumes. However,
certain expenses, related to the MidSouth acquisition, primarily interest,
depreciation and amortization, were higher in second quarter 1994 compared to
prior year.
For the first six months of 1994, Transportation Services contribution to
Registrant consolidated results declined 3% from prior year, primarily as a
result of weakness in second quarter 1994 coal traffic, including the lost
revenue related to Tumco, and absence of a one-time after tax gain of $1.3
million on sale of real estate included in 1993 results.
INFORMATION & TRANSACTION PROCESSING
DST SYSTEMS, INC.
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $101.2 $ 83.4 $198.6 $164.0
Costs and expenses 91.6 75.4 177.0 147.6
Operating income 9.6 8.0 21.6 16.4
Unconsolidated affiliates 5.2 2.8 11.2 4.9
Interest expense (3.8) (2.7) (7.4) (5.3)
Pretax income 11.0 8.1 25.4 16.0
Income taxes 3.2 2.4 7.4 5.0
Minority interest (.1) (.1) (.3) (.1)
Income before accounting changes $ 7.9 $ 5.8 $ 18.3 $ 11.1
DST recorded second quarter 1994 earnings contribution to the Registrant's
consolidated earnings of $7.9 million, a 36% improvement over the $5.8 million
in second quarter 1993. Second quarter revenues rose 21% to $101.2 million as
DST's mutual fund shareowner accounts serviced reached a record 31 million
accounts at June 30, 1994, an increase of 11% over the 28 million accounts at
December 31, 1993. Overall mutual fund industry growth has caused the
increase in shareholder accounts serviced and resulted in higher mutual fund
processing and output services volumes. DST's output services operations,
Output Technologies, Inc. ("OTI") business volumes improved as OTI printed
page volume was 177 million in second quarter 1994 versus 152 million in
comparable prior year. DST operating income rose 20% to $9.6 million in
second quarter 1994. Increased operating income coupled with improved
earnings from unconsolidated affiliates produced an improved contribution to
Registrant consolidated results.
DST's core business operations continued to experience improvements in both
revenue growth and operating margins in second quarter 1994. These operating
margin improvements are, however, somewhat decreased by lower results from
DST's subsidiaries Belvedere Financial Systems, Inc. ("Belvedere" which
develops and markets portfolio accounting and investment management systems)
and DBS Systems Corp. ("DBS" which is developing a software billing system for
the direct broadcast satellite industry). Both Belvedere and DBS which were
acquired in 1993 are in the development stages of their respective product
lines. Additionally, DST's international operations; Corfax Benefit Systems,
Ltd., (a Canadian company, which processes pension accounts and mutual fund
shareowner transactions), and Clarke & Tilley, Ltd., Clarke & Tilley Data
Services and DST Systems International B.V. (U.K. entities, which market
investment management software, develop unit trust shareowner accounting
systems, and market DST's AWD product internationally, respectively) reported
lower results in second quarter 1994 compared to prior year from increased
development related activities.
Equity in DST's unconsolidated affiliates earnings improved in second quarter
1994 compared to prior year. These favorable results are due to the recording
of earnings from The Continuum Company, Inc., which became a DST affiliate in
late 1993, along with favorable second quarter operating results of Boston
Financial Data Services, Inc.; Argus Health Systems, Inc.; and Investors
Fiduciary Trust Company, all on increased business volumes.
For the first six months of 1994, DST's earnings contribution to consolidated
Registrant results rose 65% to $18.3 million as revenues rose 21% to $198.6
million and operating income increased 32% to $21.6 million. Second quarter
and year to date 1994 revenues rose even without Vantage Computer Systems,
Inc. revenues, which are included in 1993 results.
FINANCIAL ASSET MANAGEMENT
JANUS CAPITAL CORP.
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $ 43.7 $ 39.7 $ 88.3 $ 74.5
Costs and expenses 24.1 21.6 49.7 41.1
Operating income 19.6 18.1 38.6 33.4
Interest expense (.4) (.1) (.8) (.3)
Pretax income 19.2 18.0 37.8 33.1
Income taxes 7.4 6.8 14.7 12.6
Minority interest 2.4 2.3 4.6 4.1
Income before accounting changes $ 9.4 $ 8.9 $ 18.5 $ 16.4
Janus operations contributed $9.4 million to consolidated Registrant second
quarter results, up 6% compared to the prior year, while revenues rose 10% to
$43.7 million. The Janus managed funds recorded net sales (fund sales net of
redemptions) for the six month period ending June 30, 1994. However the
market decline in the first half of 1994 caused a reduction in the value of
assets under management, which, when combined with net sales, resulted in
assets under management of $21.5 billion on June 30, 1994, down slightly from
$22.2 billion at December 31, 1993. Total shareowner accounts remained stable
at 2 million at June 30, 1994.
For the six months ended June 30, 1994, Janus contributed $18.5 million to
Registrant consolidated results, 13% above the $16.4 million in prior year as
revenues rose 19% to $88.3 million.
ELIMINATIONS, CORPORATE & OTHER
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993 1994 1993
Revenues $ (1.1) $ .6 $(1.3) $ 5.1
Costs and expenses .9 5.5 3.5 11.2
Operating loss (2.0) (4.9) (4.8) (6.1)
Unconsolidated affiliates (.1) (.1)
Interest income (expense) 3.7 (2.6) 4.3 (5.9)
Pretax income (loss) 1.6 (7.5) (.6) (12.0)
Income tax (benefits) .1 (2.6) (.5) (4.8)
Income (loss) before cumulative
effect of accounting changes 1.5 (4.9) (.1) (7.2)
Cumulative effect of accounting
changes, net of tax (6.5)
Net income (loss) $ 1.5 $ (4.9) $ (.1) $(13.7)
Eliminations, Corporate & Other results for both second quarter and year to
date 1994 periods were significantly improved over prior year periods
primarily as a result of (i) the reversal of certain employment related tax
and interest accruals (amounting to approximately 6 cents per share),
resulting from the favorable outcome (finalized in second quarter 1994) of
long standing tax disputes regarding the status of KCSI Holding Company
employees under the Railroad Retirement Tax Act; (ii) the absence in 1994 of
charges related to an increase in Missouri State Corporate tax rates and
expenses for taxes withheld on stock option exercises which reduced comparable
1993 results.
TRENDS AND OUTLOOK
The Registrant reported record earnings for second quarter 1994. Second
quarter 1994 earnings at 70 cents per share represent the highest quarterly
earnings in the Registrant's history. DST reported improved second quarter
results and Janus earnings remained stable in recently volatile financial
markets. The Registrant's railroad operations continue to experience
increased traffic levels and challenges associated with the merger of the KCSR
and MidSouth rail systems. These challenges are being managed and
improvements were experienced in second quarter 1994 and further improvements
are expected.
A current outlook for the remainder of 1994 in the Registrant's three core
businesses is as follows; (a) Information & Transaction Processing - DST is
expected to continue growth trends exhibited in first half of 1994. DST's
growth will depend upon growth in the domestic and U.K. mutual fund and
insurance markets, and domestic markets in pharmaceutical claims and other
financial services areas it serves. (b) Financial Asset Management - Janus
earnings and assets under management have remained relatively stable during
1994, in spite of volatile market conditions. Janus' growth will be largely
dependent upon prevailing financial market conditions. (c) Transportation
Services operations have been or will continue to be affected by: - (i)
KCSR/MidSouth rail transportation operations may continue to experience
temporary traffic congestion, (associated with increased traffic levels and
the roadway improvement program) although congestion related difficulties
eased in second quarter 1994, (ii) lost unit coal revenues associated with the
Tumco electric generating plant and (iii) in recent months, even though
overall carloadings are increasing, export grain carloadings have declined as
a result of the 1993 Midwest flooding, while domestic grain has remained
stable.
Liquidity and Capital Resources
Summary cash flow data is as follows (in millions):
Six Months
Ended June 30,
1994 1993
Cash flows provided by (used for):
Operating activities $109.7 $ 82.2
Investing activities (170.1) (260.6)
Financing activities 63.7 185.9
Net increase in cash and equivalents 3.3 7.5
Cash and equivalents at beginning of year 6.6 15.4
Cash and equivalents at end of period $ 9.9 $ 22.9
During the first six months of 1994, the Registrant's cash position increased
from $6.6 million at December 31, 1993 to $9.9 million at June 30, 1994. The
increased cash position was caused primarily by increased operating cash flows
and proceeds from long-term debt in excess of repayments but somewhat offset
by cash used for property and investment acquisitions. Operating cash flows
for the first six months of 1994 of $109.7 million improved $27.5 million when
compared to prior year. The improvement in operating cash flows is
attributable to increased earnings, higher depreciation and amortization, and
deferred taxes somewhat offset by changes in working capital items.
During the first six months of 1994 cash was invested in KCSR road property
additions, (related principally to KCSR/MidSouth capital improvement programs)
and growth related property additions at DST and Janus. Cash was also used
for investment acquisitions, principally DST purchases of additional Continuum
stock in first quarter 1994. Financing cash flows were generated through
issuance of long-term debt in excess of repayments. Debt proceeds were used
at KCSR for working capital, KCSR equipment and rolling stock, DST for working
capital and Continuum stock purchases and Southern Leasing for leasing
portfolio growth. Other cash was used for debt repayment and cash dividends
to stockholders. The Registrant also made principal payments totalling $9.6
million with respect to the Registrant's Employee Stock Ownership Plan
("ESOP") indebtedness in first quarter 1994.
Cash flow from operations are expected to increase during the remainder of
1994 from positive operating income, which has historically resulted in
favorable cash flows. Investing activities will continue to use significant
amounts of cash for KCSR's continuing roadway capital improvement program.
The Registrant anticipates that the KCSR/MidSouth roadway program will be
funded by KCSR operating cash flow. However, in connection with the
Registrant's recently announced signing of a letter of intent with Illinois
Central Corporation ("IC"), as discussed in the notes to financial statements
herewith, the Registrant will be reviewing its capital improvement programs in
future months. It is anticipated that the Registrant's Transportation capital
improvement program will be significantly reduced in light of the proposed
transaction, thereby freeing cash flow for other as yet undefined uses.
Investing cash flows will also be used for expansion of DST's Winchester Data
Center to meet continuing customer growth demands. The Data Center expansion,
which is currently under construction, is expected to require approximately
$23 million and is anticipated to be completed in the latter half of 1995. In
addition to operating cash flows, the Registrant has available financing
arrangements at subsidiary levels, remaining proceeds from $350 million in
various credit agreements, of which $46 million was unused and available at
June 30, 1994 and proceeds available with respect to the Registrant's $200
million Medium Term Notes, of which $100 million were issued at June 30, 1994.
The Registrant believes these positive operating cash flows and available
financing resources are sufficient to fund working capital and other
requirements for the remainder of 1994.
The Registrant's debt ratio (debt as a percent of total debt plus equity)
improved in the first six months of 1994 from 59.9% at December 31, 1993 to
59.5% at June 30, 1994. While consolidated debt increased in the first half
of 1994, total equity also increased from a combination of net income and a
decrease in ESOP deferred compensation related to principal payments on the
Registrant's Employee Stock Ownership Plan indebtedness in first quarter 1994
and resulted in a decline in the debt ratio.
Other
As disclosed in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, the Registrant's Board of Directors have undertaken a
comprehensive study, with the assistance of outside consultants, of the
Registrant's strategic possibilities.
The Registrant's recent announcements, as indicated in the Form 8-K dated July
19, 1994, filed with the Securities and Exchange Commission, essentially bring
to completion this strategic study. This study resulted in four major
developments:
* A joint announcement by the Registrant and Illinois Central Corporation
("IC") of entering into a letter of intent providing for the combination of
the IC with the Registrant and its wholly-owned subsidiary The Kansas City
Southern Railway and certain Transportation related assets for
approximately 21.2 million shares of IC common stock, in a tax-free
exchange, and the assumption of approximately $930 million of Registrant
indebtedness.
* In conjunction with the Registrant/IC transaction, noted above, the
intended spin-off to Registrant stockholders of a yet unnamed New Financial
Services Holding Company ("Newco"). Newco will principally consist of DST,
Janus Capital Corporation, Berger Associates, Inc. (as noted below) and
Southern Leasing Corporation.
* The announcement that DST and Kemper Financial Services, Inc. entered into
a letter of intent for the acquisition of Investors Fiduciary Trust Company
("IFTC") by State Street Boston Corporation ("State Street"). In exchange
for its 50% interest in IFTC, DST will receive approximately 2.8 million
shares of State Street in a tax-free exchange (representing an approximate
4% ownership interest in State Street).
* The proposed acquisition by the Registrant of a controlling interest in
Berger Associates, Inc., which has been approved by the Boards of Directors
of the Berger Funds. Closing of the transaction, which is subject to
approval by the Berger Funds shareholders, is anticipated in fourth quarter
1994. Assuming approval by these shareholders, for which proxy statements
have been distributed, an initial payment at closing of approximately $33
million will be required pursuant to a Stock Purchase Agreement dated July
6, 1994.
Completion of the Registrant/IC transaction is subject to negotiation of
definitive agreements between the Registrant and IC, the receipt of a
favorable Internal Revenue Service ("IRS") ruling and approval of the
transaction by stockholders of both the Registrant and IC. It is anticipated
that the transaction will be completed in the first half of 1995.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1, Footnote 10 to the financial statements of this Form 10-Q is
hereby incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
None
b) Reports on Form 8-K
The Registrant filed a Form 8-K dated July 19, 1994, under items 5
and 7 reporting (i) that the Registrant and Illinois Central
Corporation ("IC") entered into a letter of intent for the merger of
the Registrant with and into IC following a spin-off of the
Registrant's non-transportation operations and (ii) that DST and
Kemper Financial Services, Inc. entered into a letter of intent for
the acquisition of their jointly owned affiliate Investors Fiduciary
Trust Company by State Street Boston Corporation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on
August 9, 1994.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Comptroller
(Principal Accounting Officer)