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 September 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 October 31, 1994
Common Stock, $.01 per share par value 43,501,845 Shares
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
SEPTEMBER 30, 1994
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
September 30, 1994 and December 31, 1993 2
Consolidated Condensed Statements of Income -
Three and Nine Months Ended September 30, 1994 and 1993 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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 2.Changes in the Rights of the Company's Security Holders 18
Item 6.Exhibits and Reports on Form 8-K 18
SIGNATURES 19
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
SEPTEMBER 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.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
September 30, December 31,
1994 1993
ASSETS
Current Assets:
Cash and equivalents $ 29.1 $ 6.6
Accounts receivable, net 216.2 194.7
Inventories 52.0 48.3
Other current assets 81.2 86.1
Total current assets 378.5 335.7
Investments (held for operating purposes) 210.1 174.5
Properties (net of $666.0 and $599.4 accumulated
depreciation and amortization, respectively) 1,359.3 1,192.6
Intangibles and Other Assets 174.5 214.2
Total assets $2,122.4 $1,917.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 5 7.5 $ 63.5
Accounts and wages payable 91.9 70.9
Other accrued and current liabilities 144.6 154.0
Total current liabilities 294.0 288.4
Other Liabilities:
Long-term debt 855.5 776.2
Deferred income taxes 209.8 184.7
Other deferred credits and liabilities 99.8 99.1
Total other liabilities 1,165.1 1,060.0
Minority Interest 9.8 5.9
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock .4 30.9
Capital surplus 338.8 303.9
Retained earnings 516.7 439.0
Shares held in trust (200.0) (200.0)
ESOP deferred compensation (9.5) (18.2)
Total stockholders' equity 653.5 562.7
Total liabilities and stockholders' equity $2,122.4 $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 Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues $273.4 $253.3 $805.7 $699.6
Costs and expenses 216.3 194.9 633.8 549.8
Operating Income 57.1 58.4 171.9 149.8
Equity in net earnings of
unconsolidated affiliates 6.8 2.3 17.9 9.2
Interest expense (15.2) (13.8) (39.7) (36.3)
Pretax income 48.7 46.9 150.1 122.7
Provision for taxes on income 18.4 21.1 56.1 49.3
Income before minority interest 30.3 25.8 94.0 73.4
Minority interest 1.7 2.5 6.0 6.5
Income before cumulative effect of
accounting changes 28.6 23.3 88.0 66.9
Cumulative effect of changes in
accounting for income taxes and
postretirement benefits,
net of taxes (6.5)
Net Income 28.6 23.3 88.0 60.4
Less-dividends on preferred stock .1 .1 .2 .2
Net Income Applicable to
Common Stockholders $ 28.5 $ 23.2 $ 87.8 $60.2
Computation of Primary Earnings per Common Share
Average Primary Common
Shares Outstanding
(in thousands) 45,092 44,977 45,112 44,695
Primary Earnings per Common Share:
Income before cumulative effect of
accounting changes $ .64 $ .52 $ 1.95 $1.49
Cumulative effect of
accounting changes (.14)
Total $ .64 $ .52 $ 1.95 $1.35
Cash Dividends Paid:
Per Common share $ .071/2 $ .071/2 $ .221/2 $ .221/2
Per Preferred share $ .25 $ .25 $ .75 $ .75
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Nine Months
Ended September 30,
1994 1993
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $88.0 $60.4
Adjustments to net income:
Depreciation and amortization 86.3 69.5
Deferred income taxes 31.4 22.6
Equity in undistributed earnings (17.6) (8.3)
Changes in working capital items:
Accounts receivable (20.7) (16.6)
Inventories (3.7) (13.3)
Other current assets 1.6 (38.4)
Accounts payable 23.3 (1.4)
Other accrued and current liabilities .8 30.0
Other, net (1.9) 13.7
Net 187.5 118.2
INVESTING ACTIVITIES:
Property acquisitions (216.2) (103.8)
Proceeds from disposal of property 15.7 10.9
Purchase of companies, net of cash acquired (1.0) (197.4)
Investment acquisitions (23.0) (8.7)
Proceeds from disposal of investments 4.5 3.9
Other, net 4.4 (7.7)
Net (215.6) (302.8)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 148.0 536.3
Repayment of long-term debt (70.4) (332.6)
Proceeds from stock plans 3.8 4.1
Stock repurchased (10.2) (7.4)
Cash dividends paid (10.0) (9.7)
Other, net (10.6) .6
Net 50.6 191.3
CASH AND EQUIVALENTS
Net increase 22.5 6.7
At beginning of year 6.6 15.4
At end of period $29.1 $22.1
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
SEPTEMBER 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 September 30, 1994 and December 31, 1993, the
results of operations for the three and nine months ended September 30, 1994
and 1993, and cash flows for the nine months ended September 30, 1994 and
1993.
2. The results of operations for the three and nine months ended September
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, $52.0 million at September 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 September 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
September 30, December 31,
1994 1993
Current assets $1,090.8 $1,047.7
Non-current assets 139.8 150.1
Assets $1,230.6 $1,197.8
Current liabilities $ 876.2 $ 856.8
Non-current liabilities 99.4 122.9
Equity of stockholders and partners 255.0 218.1
Liabilities and equity $1,230.6 $1,197.8
Investment in unconsolidated affiliates $ 162.6 $ 126.3
Operating Results
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues:
IFTC $ 11.0 $ 13.2 $ 32.2 $ 37.9
All others 138.7 45.4 423.8 168.3
Total Revenues $ 149.7 $ 58.6 $ 456.0 $ 206.2
Costs and expenses:
IFTC $ 7.7 $ 10.5 $ 23.1 $ 31.1
All others 125.5 42.1 389.3 159.8
Total Costs and Expenses $ 133.2 $ 52.6 $ 412.4 $ 190.9
Net Income:
IFTC $ 3.3 $ 2.7 $ 9.1 $ 6.8
All others 13.2 3.3 34.5 8.5
Total Net Income $ 16.5 $ 6.0 $ 43.6 $ 15.3
Equity in Earnings:
IFTC $ 1.6 $ 1.3 $ 4.5 $ 3.4
All others 5.2 1.0 13.4 3.7
Total Equity in Earnings $ 6.8 $ 2.3 $ 17.9 $ 7.1
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):
Nine Months
Ended September 30,
1994 1993
Interest paid $55.8 $ 40.2
Income taxes paid 3.8 18.5
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 nine months of 1994 and 1993, the Registrant recorded
expenses of $3.2 million and $3.0 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 $200 million in debt securities in the first nine months
of 1993. As part of these transactions, the Registrant incurred $2.5 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 first nine months of 1993, the Registrant and DST completed several
transactions with respect to acquisitions and dispositions 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 September 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 by IC. On October 24,
1994, however, the Registrant and IC jointly announced that they mutually
agreed to terminate the Letter of Intent dated July 19, 1994. The Registrant
and IC were not able to reach a definitive agreement on a number of issues.
As a result of the mutual termination of the Letter of Intent and negotiations
with IC, the Registrant will continue to operate as it is currently structured
with its core Transportation and Financial Services businesses.
10. On July 19, 1994, the Registrant also announced that DST and Kemper
Financial Services, Inc. ("Kemper") had entered into a letter of intent for
the acquisition of their jointly owned affiliate IFTC by State Street Boston
Corporation ("State Street"). On September 27, 1994, the Registrant announced
that DST and Kemper entered into a definitive agreement with State Street for
the sale to State Street of IFTC Holdings, Inc., which wholly owns IFTC.
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 common stock 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. Based upon the
initial transaction terms, DST anticipates recording a gain on sale of an
equity investment and after consideration of appropriate tax effects the net
gain was expected to be $15 million when the IFTC transaction is completed.
The actual gain recognized, however, is dependent upon the number of shares of
State Street stock to be received, the price of State Street stock and timing
of closing of the transaction, at which time the gain to be recorded could be
less than that stated above. Completion of the transaction is expected in
fourth quarter 1994 or first quarter 1995 depending upon the timing of
regulatory approval.
11. In third quarter 1994, the Registrant's Board of Directors authorized
redemption of the Common stock "Rights" issued pursuant to its Rights Plan in
1986. The Board action terminates the exercisability of such Rights and
resulted in a payment on September 20, 1994 of one and one-quarter cents
($.0125) per share to Common stockholders of record on August 26, 1994,
amounting to approximately $540,000 in the aggregate.
12.On October 14, 1994, the Registrant completed the acquisition of a
controlling interest in Berger Associates, Inc. ("Berger"). Berger is the
investment advisor of The Berger One Hundred Fund, The Berger One Hundred and
One Fund and The Berger Small Company Growth Fund, as well as to private and
other accounts, (collectively, "Berger Funds"). Berger currently has a total
of approximately $3 billion in assets under management. At closing, the
Registrant made the initial purchase payment of $32.7 million, in cash,
pursuant to a Stock Purchase Agreement, (the "Agreement"), after receipt of an
affirmative vote of the Berger Funds shareholders regarding the transaction.
The acquisition had previously been approved by both of the Boards of
Directors of the Registrant and Berger. The Agreement also provides for
additional purchase price payments contingent upon attaining certain levels of
assets under management as defined in the Agreement, of which $14.8 million in
cash was made in October 1994.
The acquisition, which will be accounted for as a purchase, increased the
Registrant's ownership in Berger from approximately 18% to over 80%.
Adjustments to appropriate asset and liability balances will be recorded based
upon an as yet uncompleted analysis of the fair market value of such assets
and liabilities. It is anticipated that the transaction will create
intangibles as the purchase price exceeds the fair value of underlying assets.
These intangible amounts will be amortized over their estimated economic life
based upon an as yet uncompleted economic life analysis. The financial
statements of Berger will be consolidated into the Registrant effective with
the closing of the transaction. Assuming the transaction had been completed
on January 1, 1994, the addition of Berger's revenues and net income,
including adjustments to reflect the effects of the acquisition, on a pro
forma basis, as of and for the nine months ended September 30, 1994, would
have had an immaterial effect on the consolidated results of the Registrant.
13. 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 as
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,
private and other accounts through Janus Capital Corporation ("Janus"),
an 81% owned subsidiary and Berger Associates, Inc. ("Berger") an over
80% owned subsidiary, effective with the October 14, 1994 acquisition of
a controlling interest in Berger.
Corporate and Other - Primarily general administrative and corporate
operations of the Registrant and other minor subsidiaries.
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.
Results of Operations
Segment revenues and operating income comparisons follow (dollars in
millions):
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues:
Transportation Services $130.3 $120.5 $377.0 $323.2
DST Systems, Inc. 98.8 90.2 297.4 254.2
Janus Capital Corp. 45.2 42.6 133.5 117.1
Eliminations, Corporate & Other (.9) -- (2.2) 5.1
Total $273.4 $253.3 $805.7 $699.6
Operating Income:
Transportation Services $ 34.2 $ 31.7 $ 93.6 $ 79.4
DST Systems, Inc. 5.4 7.5 27.0 23.9
Janus Capital Corp. 21.2 23.1 59.8 56.5
Eliminations, Corporate & Other (3.7) (3.9) (8.5) (10.0)
Total $ 57.1 $ 58.4 $171.9 $149.8
The Registrant reported third quarter 1994 earnings of $28.6 million, (64
cents per share), a 23% increase over the $23.3 million, (52 cents per share)
earned in third quarter 1993. Third quarter 1993 earnings, however, included
additional income tax expense related to the 1993 federal income tax rate
increase of $3.4 million or 8 cents per share, related to deferred tax
amounts. Excluding these tax charges from prior year results, third quarter
1994 earnings improved 7% over comparable 1993. Third quarter 1994 earnings,
at 64 cents per share, represent the highest third quarter results in the
Registrant's history. Consolidated operating income declined slightly to
$57.1 million while revenues rose 8% to $273.4 million. Third quarter results
were also affected by an increase in earnings of unconsolidated affiliates and
higher interest expense on expanded debt levels and increased rates.
For the nine months ended September 30, 1994, earnings of $88 million or $1.95
per share increased 31% over income before accounting changes and 44% 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
nine months of 1994 rose to $805.7 million, while operating income rose 15% to
$171.9 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 and increases in the federal income tax rate discussed above.
Third quarter and year to date 1994 periods also include non-cash acquisition
related intangible amortization expenses amounting to $2.7 million and $8
million, respectively, versus $1.7 million and $4 million, respectively in
third quarter and year to date 1993.
TRANSPORTATION SERVICES
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues $130.3 $120.5 $377.0 $323.2
Costs and expenses 96.1 88.8 283.4 243.8
Operating income 34.2 31.7 93.6 79.4
Unconsolidated affiliates (.1) (.1) (.1) 1.9
Interest expense (12.0) (9.7) (32.6) (20.7)
Pretax income 22.1 21.9 60.9 60.6
Income taxes 9.0 12.4* 25.1 27.8*
Income before accounting changes $13.1 $ 9.5 $ 35.8 $ 32.8
*Includes $4.0 million for federal income tax rate increases related to
deferred tax balances.
Transportation Services, comprised principally of KCSR, reported third quarter
earnings of $13.1 million, a 38% increase over third quarter 1993 on an 8%
increase in revenues and an 8% improvement in operating income. Third quarter
1993 results, however, included an additional income tax charge of $4 million
related to federal tax rate increases applicable to deferred tax amounts.
Excluding this charge from prior year results, third quarter 1994 earnings
declined slightly from comparable 1993.
KCSR (which includes MidSouth Corporation effective with the June 1993
acquisition) third quarter revenues rose 7% compared to 1993. 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 50% from third quarter
1993. The improvement in intermodal traffic is primarily attributable to
North/South traffic on the original KCSR route and the purchase of the Zacka
Junction, Texas intermodal facility from Santa Fe Railway in servicing the
Kansas City/Dallas traffic corridor. In mid-November 1994, KCSR plans
initiation of intermodal service in the Dallas/Atlanta, East/West traffic
corridor in conjunction with the Norfolk Southern Railway interchange at
Meridian, Mississippi. This intermodal traffic will utilize the MidSouth
track acquired in June 1993. Lower traffic levels were experienced primarily
in the farm products area, as weak export grain shipments continued 1994
trends, and pulp/paper products, which were somewhat affected by the Soo Line
strike, which is now ended. Unit coal revenues rose 9% in third quarter 1994,
even though overall unit coal tonnage declined including the absence of
shipments to a Monticello, Texas utilities electric generating plant ("Tumco")
served by KCSR (the Tumco plant shut down in late 1993 and is anticipated to
reopen in fourth quarter 1995). This revenue improvement is attributable to a
combination of length of haul and rates as certain electric generating plants
served by KCSR increased receipt of coal tonnage in third quarter 1994.
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 operating expenses increased in third quarter 1994 commensurate with
increased traffic levels, both general commodity and unit coal. Operating
income was also negatively affected by the acceleration of the track and
structure upgrading program related to the MidSouth property acquired in June
1993. Increased car hire expenses in third quarter 1994 were caused by higher
usage of intermodal rail equipment to handle improved TOFC/COFC traffic,
however, traffic congestion and severe weather conditions, which affected
operating expenses in the first half of 1994, eased in third quarter 1994.
Overall Transportation Services third quarter results also benefitted from
continued favorable operations of both Pabtex (petroleum coke and coal export
facility) and Southern Leasing Corporation on higher volumes. Transportation
results were also negatively affected in third quarter 1994 from increased
interest expense compared to prior year on a combination of higher
indebtedness and rates.
For the first nine months of 1994, Transportation Services contribution to
Registrant consolidated results improved 9% from prior year, however, year to
date 1993 results also include the additional income tax expense for federal
rate increases discussed above. Excluding this additional tax expense from
comparable 1993, Transportation Services results declined 3%. These lower
results are partially attributable to lost unit coal revenue from the Tumco
plant 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 Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues $98.8 $90.2 $297.4 $254.2
Costs and expenses 93.4 82.7 270.4 230.3
Operating income 5.4 7.5 27.0 23.9
Unconsolidated affiliates 6.4 2.2 17.6 7.1
Interest expense (3.5) (2.7) (10.9) (8.0)
Pretax income 8.3 7.0 33.7 23.0
Income taxes 2.9 2.4 10.3 7.4
Minority interest (.8) (.2) (1.1) (.3)
Income before accounting changes $ 6.2 $ 4.8 $ 24.5 $ 15.9
DST recorded third quarter 1994 earnings contribution to the Registrant's
consolidated earnings of $6.2 million, a 29% improvement over the $4.8 million
in third quarter 1993. Third quarter revenues rose 10% to $98.8 million as
DST's mutual fund shareowner accounts serviced reached a record 31.4 million
accounts at September 30, 1994, an increase of 12% 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 199 million in third quarter 1994 versus 167 million
in comparable prior year. DST operating income, however, declined 28% to $5.4
million in third quarter 1994. 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 third quarter 1994. These operating
margin improvements were, however, decreased by lower results from DST's
developmental and international business units described in greater detail as
follows:
During 1993, DST began an expansion of certain of its product offerings and
geographic presence. It expanded its Portfolio Accounting product
offerings with the acquisitions of Clarke & Tilley, Ltd. ("Clarke &
Tilley", a United Kingdom entity) and Belvedere Financial Systems,
("Belvedere"). Clarke and Tilley develops and distributes investment
accounting software, primarily in Europe, South Africa and Australia.
Belvedere develops and markets a core investment accounting product (the
Global Portfolio System) that has potential applicability worldwide.
DST expanded its mutual fund product offerings with the 1993 acquisition of
Corfax Benefit Systems, Ltd. ("Corfax", a Canadian Company), and the
formation of Clarke & Tilley Data Services, Ltd. ("CTDS", a United Kingdom
entity). Corfax develops and distributes mutual fund shareowner
accounting software and provides pension administration processing
services. CTDS is developing a unit trust accounting system for the U.K.
unit trust and Luxembourg markets incorporating DST work management
technology.
Additionally, DST has expanded its marketing and product support activities
for its image-based work management product (Automated Work Distributor,
"AWD") internationally through both direct marketing efforts and The
Continuum Company, who distributes AWD to the insurance industry
marketplace. DST also formed DBS Systems Inc., a 60% owned subsidiary,
which is developing software to provide billing services for DirecTV, a
commercial direct broadcast satellite system.
These business units have invested in expanded product development and
marketing expenditures during the third quarter and year to date 1994 periods,
which have reduced DST operating margins for the third quarter 1994 as
compared to the third quarter of 1993. In addition, since a higher percentage
of revenues from these entities (except DBS and CTDS) is currently derived
from software licensing activities compared to other DST businesses, operating
results will be more affected by the level of software license activities.
Collectively, DST's developmental and international business units recorded
net losses of $3 million and $6.1 million on revenues of $8.8 million and
$24.1 million in third quarter and year to date 1994 periods, respectively,
versus net losses of $900,000 and $1.3 million on revenues of $5 million and
$5.6 million in third quarter and year to date 1993 periods, respectively. It
is anticipated that these operations will continue to experience losses into
1995 as development activities progress in establishing these new and expanded
product lines, however, results can be affected by the timing of software
licensing discussed above. Excluding these developmental and international
results from DST core business operations, DST's operating margins improved in
both third quarter and year to date 1994 periods compared to 1993.
Equity in DST's unconsolidated affiliates earnings improved in third 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 third 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 nine months of 1994, DST's earnings contribution to consolidated
Registrant results rose 54% to $24.5 million as revenues rose 17% to $297.4
million and operating income increased 13% to $27 million. Third quarter and
year to date 1994 revenues rose even without Vantage Computer Systems, Inc.
revenues, of $11.8 million and $32.6 million, respectively, which are included
in 1993 results.
FINANCIAL ASSET MANAGEMENT
JANUS CAPITAL CORP.
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues $ 45.2 $ 42.6 $133.5 $117.1
Costs and expenses 24.0 19.5 73.7 60.6
Operating income 21.2 23.1 59.8 56.5
Interest expense (.3) (.1) (1.1) (.4)
Pretax income 20.9 23.0 58.7 56.1
Income taxes 8.2 9.1 22.9 21.7
Minority interest 2.5 2.7 7.1 6.8
Income before accounting changes $ 10.2 $ 11.2 $ 28.7 $ 27.6
Janus operations contributed $10.2 million to consolidated Registrant third
quarter results, a decline of 9% compared to the prior year, while revenues
rose 6% to $45.2 million. The Janus managed funds recorded net sales (fund
sales net of redemptions) for the nine month period ending September 30, 1994.
However the market decline in the first nine months of 1994 caused a reduction
in the value of assets under management, which, when combined with net sales,
resulted in assets under management of $22.6 billion on September 30, 1994, up
slightly from $22.2 billion at December 31, 1993. Total shareowner accounts
remained stable at 2 million at September 30, 1994. While Janus revenues rose
6% in third quarter 1994 on increased assets under management, operating
expenses also rose 23% (primarily related to marketing, promotional and system
expansion expenses) and resulted a decline in third quarter 1994 operating
income compared to prior year.
For the nine months ended September 30, 1994, Janus contributed $28.7 million
to Registrant consolidated results, 4% above the $27.6 million in prior year
as revenues rose 14% to $133.5 million.
ELIMINATIONS, CORPORATE & OTHER
Three Months Nine Months
Ended September 30, Ended September 30,
1994 1993 1994 1993
Revenues $ (.9) $ -- $(2.2) $ 5.1
Costs and expenses 2.8 3.9 6.3 15.1
Operating loss (3.7) (3.9) (8.5) (10.0)
Unconsolidated affiliates .5 .2 .4 .2
Interest income (expense) .6 (1.3) 4.9 (7.2)
Pretax income (loss) (2.6) (5.0) (3.2) (17.0)
Income tax (benefits) (1.7) (2.8) (2.2) (7.6)
Income (loss) before cumulative
effect of accounting changes (.9) (2.2) (1.0) (9.4)
Cumulative effect of accounting
changes, net of tax (6.5)
Net income (loss) $ (.9) $ (2.2) $(1.0) $(15.9)
Eliminations, Corporate & Other results for both third quarter and year to
date 1994 periods were significantly improved over prior year periods
primarily as a result of the effect of elimination of intercompany interest
income and expense at the consolidated level as KCSI Holding Company has
allocated incurred indebtedness to subsidiary operations while overall KCSI
Holding Company operating expenses remained below prior year levels.
TRENDS AND OUTLOOK
The Registrant reported record earnings of 64 cents per share for third
quarter 1994. DST reported improved third quarter results while absorbing
developmental and international losses, Janus earnings remained stable in
volatile equity markets and in the face of multiple Federal Reserve interest
rate adjustments and Transportation Services continue to experience increased
traffic levels, challenges associated with the merger of the KCSR/MidSouth
rail systems and acceleration of the MidSouth roadway upgrading program.
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 throughout 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, while DST plans to continue to absorb costs
associated with product development of its Belvedere, DBS and International
business units. (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. Berger operations join the KCSI
consolidated group of companies effective with the October 14, 1994
acquisition of a controlling interest in Berger by the Registrant. Berger
earnings are expected to have an immaterial effect to KCSI consolidated
results in fourth quarter 1994. (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 have eased since
first 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.
Export grain traffic is expected to improve somewhat in fourth quarter 1994.
As previously discussed in the Notes to Consolidated Condensed Financial
Statements included with this Form 10-Q, DST and Kemper have entered into a
definitive agreement for the acquisition of their jointly owned affiliate
IFTC. Upon completion of the transaction, which is subject to regulatory
approvals, DST anticipates recognizing a net gain for financial reporting
purposes, and appropriate tax expense, including deferred tax amounts, which
is anticipated to produce an increased overall consolidated effective tax
rate. Completion of the transaction is expected in fourth quarter 1994 or
first quarter 1995 depending upon the timing of regulatory approval.
As disclosed in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, agreements between the Registrant and certain minority
stockholders, of the Registrant's 81% owned subsidiary Janus Capital
Corporation ("Janus"), contain among other provisions, mandatory stock
purchase provisions whereby under certain circumstances, KCSI would be
required to purchase the minority interest. The Registrant has been informed
that certain of these minority stockholders may desire to make effective these
mandatory stock purchase provisions for a portion of their ownership
interests.
Liquidity and Capital Resources
Summary cash flow data is as follows (in millions):
Nine Months
Ended September 30,
1994 1993
Cash flows provided by (used for):
Operating activities $ 187.5 $ 118.2
Investing activities (215.6) (302.8)
Financing activities 50.6 191.3
Net increase in cash and equivalents 22.5 6.7
Cash and equivalents at beginning of year 6.6 15.4
Cash and equivalents at end of period $ 29.1 $ 22.1
During the first nine months of 1994, the Registrant's cash position improved
from $6.6 million at December 31, 1993 to $29.1 million at September 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 nine months of 1994 of $187.5 million improved $69.3
million when compared to prior year. The improvement in operating cash flows
is attributable to increased earnings, higher depreciation and amortization,
increased deferred taxes and changes in working capital items.
During the first nine 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. The KCSR/MidSouth roadway program is
expected to be completed at the end of 1994, accordingly, future years capital
expenditures are expected to decline from levels experienced in the last
several years. The MidSouth portion of the roadway program, which was
originally planned for completion in 1995 was accelerated during 1994 to
accommodate increasing traffic levels. The reduction in capital spending is
anticipated to provide additional cash flow for other uses such as debt
repayment. 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 $42 million was unused and
available at September 30, 1994 and proceeds available with respect to the
Registrant's $200 million Medium Term Notes, of which $100 million were issued
at September 30, 1994. In early October, the Registrant entered into
additional credit agreements totalling $100 million, a portion of which was
used to finance the acquisition of a controlling interest in Berger
Associates, Inc., discussed earlier. The Registrant believes these positive
operating cash flows and available financing resources are sufficient to fund
working capital and other requirements for the remainder of 1994.
The Registrant's debt ratio (debt as a percent of total debt plus equity)
improved in the first nine months of 1994 from 59.9% at December 31, 1993 to
58.3% at September 30, 1994. While consolidated debt increased in the first
nine months of 1994, total equity also increased from a combination of net
income and a decrease in ESOP deferred compensation related to principal
payments on the Registrant's Employee Stock Ownership Plan indebtedness in
first quarter 1994 and resulted in a decline in the debt ratio. As a result
of the completion of the Berger acquisition and the possible mandatory stock
purchase of Janus minority stockholders, previously discussed, both of which
have or would require additional financing proceeds, it is anticipated that
the Registrant's debt ratio will increase in fourth quarter 1994.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1, Footnote 13 to the financial statements of this Form 10-Q is
hereby incorporated herein by reference.
Item 2. Changes in the Rights of the Company's Security Holders
In third quarter 1994, the Registrant's Board of Directors authorized
redemption of the Common stock "Rights" issued pursuant to its Rights Plan in
1986. The Board action terminates the exercisability of such Rights and
resulted in a payment on September 20, 1994 of one and one-quarter cents
($.0125) per share to Common stockholders of record on August 26, 1994,
amounting to approximately $540,000 in the aggregate.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - Acquisition Agreement dated September 27, 1994 among
State Street Boston Corporation, DST Systems, Inc. and Kemper Financial
Services, Inc.
Exhibit 27.1 - Financial Data Schedule
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 the Registrant's wholly-owned subsidiary DST
Systems, Inc. ("DST") and Kemper Financial Services, Inc. ("Kemper")
entered into a letter of intent for the acquisition of their jointly owned
affiliate Investors Fiduciary Trust Company ("IFTC") by State Street Boston
Corporation ("State Street").
The Registrant filed a Form 8-K dated September 27, 1994 under items 5 and
7 reporting that DST together with Kemper entered into a definitive
agreement with State Street for the sale to State Street of IFTC Holdings,
Inc. ("Holdings"), which wholly owns IFTC, DST and Kemper each own 50% of
Holdings.
The Registrant filed a Form 8-K dated October 14, 1994 under items 5 and 7
reporting that the Registrant had completed the acquisition of Berger
Associates, Inc. and that the Registrant and Illinois Central Corporation
mutually agreed to terminate the Letter of Intent between them dated July
19, 1994.
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
November 14, 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)