KANSAS CITY SOUTHERN INDUSTRIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Years Ended December 31, 1994
Introduction. Kansas City Southern Industries, Inc. ("KCSI" or
"Company") is a diversified holding company with principal operations in
Transportation Services, Information & Transaction Processing and
Financial Asset Management. This presentation is intended to clarify and
focus on results of operations, liquidity and capital structure of the
Company and should be read in conjunction with the Consolidated
Financial Statements and Notes.
RECENT ANNOUNCEMENTS
DST Public Offering. In January 1995, the Company announced that the
KCSI Board of Directors have authorized development of a plan for a
public offering by DST Systems, Inc. ("DST," a wholly-owned subsidiary)
of approximately 51% of DST's common equity.
The purpose of the offering would be to obtain better market recognition
of DST's performance and to obtain proceeds for the retirement of debt
including debt owed KCSI and general corporate purposes. Payments
received by KCSI from DST for debt retirement may be used by KCSI to
reduce its debt, to repurchase KCSI common stock and for general
corporate purposes. Any such offering would be made only pursuant to a
prospectus filed as part of a DST registration statement with the
Securities and Exchange Commission ("SEC"). Any repurchases of KCSI
common stock would occur only after public announcement and in
compliance with SEC regulations.
Sale of Investors Fiduciary Trust Company. On July 19, 1994, the Company
announced that DST and Kemper Financial Services, Inc. ("Kemper") had
entered into a letter of intent for acquisition of their jointly owned
affiliate Investors Fiduciary Trust Company ("IFTC") by State Street
Boston Corporation ("State Street"). On September 27, 1994, the Company
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.
On January 31, 1995, DST completed the sale of its 50% interest in IFTC
Holdings to State Street. At closing, DST received 2,986,111 shares of
State Street common stock in a tax free exchange (representing an
approximate 4% ownership interest in State Street). As a result of this
transaction, DST recognized a net gain of $4.7 million in first quarter
1995. With the closing of the transaction, IFTC ceases to be an
unconsolidated affiliate of DST and no further equity in earnings of
IFTC will be recorded by DST. DST recognized equity in earnings from
IFTC of $6.5, $4.8 and $4.8 million in 1994, 1993 and 1992,
respectively. If State Street continues its prior history with respect
to the payment of dividends, DST will record dividend income on any
dividends from State Street.
Kemper Transactions. In early March 1995, DST signed a definitive
agreement to purchase substantially all of the assets and business
operations of Supervised Service Company, Inc., ("SSC"), a subsidiary of
Kemper. SSC, headquartered in Kansas City, Missouri, provides mutual
fund transfer agency services to non-Kemper mutual fund companies
(approximately 250,000 accounts), financial institutions and financial
services firms. In conjunction with and subject to the SSC transaction,
DST also agreed to enter into long-term contracts with Kemper to provide
mutual fund shareholder system services and portfolio accounting system
services for the Kemper Mutual Funds. Kemper is the investment advisor
to the Kemper Mutual Fund Group. As a result of these transactions, DST
expects to continue to process approximately 2 million Kemper accounts,
which had been anticipated to be converted from the DST system in 1995.
The SSC transaction is subject to regulatory approval.
RESULTS OF OPERATIONS
Significant Developments. Consolidated operating results during
1992-1994 were affected by the following significant developments:
Proposed Transportation Transaction. On July 19, 1994, the Company
announced that it had entered into a letter of intent with Illinois
Central Corporation ("IC") for merger of the Company's Transportation
Services operations with IC. On October 24, 1994, however, the Company
and IC jointly announced that they mutually agreed to terminate the
letter of intent. The Company 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 Company will continue to operate its core
Transportation business as it is currently structured. In
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addition, the Company recognized expenses related to this proposed
transaction, which reduced 1994 net income by $.04 per share. Pursuant
to the letter of intent with IC, the Company is unable to enter into
certain types of business combinations, prior to October 1995, without
payment of a fee to IC of $25 million.
Berger Acquisition. On October 14, 1994, the Company completed the
acquisition of a controlling interest in Berger Associates, Inc.
("Berger"). Berger is the investment advisor to 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 had a total of approximately $3 billion in
assets under management at December 31, 1994. The Company made payments
of $47.5 million, in cash, pursuant to a Stock Purchase Agreement, (the
"Agreement"). The Agreement also provides for additional purchase price
payments, totalling approximately $62.4 million, contingent upon Berger
attaining certain levels (up to $10 billion) of assets under management,
as defined in the Agreement, over a five year period.
The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% (acquired in 1992)
to over 80%. Adjustments to appropriate asset and liability balances
have been recorded based upon estimated fair values of such assets and
liabilities. The transaction resulted in the recording of intangibles as
the purchase price exceeded the fair value of underlying tangible
assets. The intangible amounts will be amortized over their estimated
economic life of 15 years, subject to completion of an economic life
analysis. The financial statements of Berger were consolidated into the
Company 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 year
ended December 31, 1994, would have had an immaterial effect on the
consolidated results of the Company.
Janus Compensation Arrangements Termination/Berger Stock Bonus. In
fourth quarter 1994, the Company recorded certain one time charges to
earnings from its Financial Asset Management business unit.
These one time items resulted from the early termination of employment
and earnings related compensation arrangements for certain Janus Capital
Corporation ("Janus") key employees, in late 1994 and early 1995, and
for establishment of additional minority stock ownership of Berger for
key Berger employees.
The Janus compensation arrangements, which began in 1991, permitted
individuals to earn units which vested over time, based upon Janus
earnings. These arrangements were scheduled to be fully vested at the
end of 1996. The Company negotiated the early termination of the
arrangements, which resulted in payments, by Janus, of $48 million in
cash, of which approximately $21 million had been previously accrued.
Termination of the arrangements resulted in a net reduction in Janus'
1994 contribution to KCSI's consolidated earnings of $13.6 million or
$.30 per share. By terminating this program, future years will benefit
from a decline in Janus operating expenses, amounting to approximately
$8 million pretax annually, based upon 1994 earnings.
The Berger stock transaction established minority stock ownership for
certain key employees and resulted in a one time pretax increase in
Berger's operating expenses of $1.8 million. The additional minority
stock provides ownership incentive to key employees for future growth of
Berger and had been anticipated in the acquisition discussed earlier.
Combined, the Janus and Berger transactions reduced KCSI's consolidated
1994 earnings by $.32 per share.
Completion of the Kansas City Southern Railway Track and Structure
Rebuilding Program/Acceleration of MidSouth Corporation Rebuilding
Program. During 1994, The Kansas City Southern Railway Company ("KCSR,"
a wholly-owned subsidiary) reached conclusion of the major portions of a
rail track and structure program which first began in 1986. In addition,
as part of the MidSouth Corporation ("MidSouth") acquisition, a planned
upgrade of the existing MidSouth roadbed was added to the program.
Increased traffic levels on both the original KCSR route and the newly
acquired MidSouth, however, accentuated the need to accelerate the
MidSouth portion of the program. By the end of 1994, KCSR had
essentially completed the MidSouth upgrade program thereby improving the
capacity, efficiency and safety of the East/West MidSouth route, now
called the KCSR Eastern Division. Accordingly, Transportation Services
capital expenditures for 1994 were $208 million versus $109 in 1993.
Acceleration of the MidSouth program and completion of the KCSR program,
as scheduled, will result in a reduction of railway capital expenditures
over the next several years. Additional cash flow available due to the
reduction of capital expenditures is expected to be used for repayment
of debt and general corporate purposes beginning in 1995.
DST Business Developments. DST's core business operations continued to
experience improvements in both revenue growth and profitability in
1994. DST's mutual fund shareowner accounts serviced continued to grow
in 1994 rising 15% from 1993, even in a difficult year for many mutual
funds. This
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growth in shareowner accounts also lead to an increase of 20% in the
volume of pages printed by DST's output processing businesses. While
improved core business volumes resulted in revenue and profitability
growth, these improvements were, however, unfavorably impacted by
combined operating and net losses 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 increased its Portfolio Accounting product
offerings with the acquisitions of Clarke & Tilley, Ltd. ("Clarke &
Tilley," a United Kingdom entity) and Belvedere Financial Systems,
("Belvedere"). Clarke & Tilley develops and distributes investment
accounting software, primarily in Europe, South Africa and Australia.
Belvedere develops and markets an investment accounting product (the
Global Portfolio System) that has potential applicability worldwide.
DST also 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 50% owned United Kingdom entity; State Street owns the other
50%). 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. and Luxembourg
markets incorporating DST work management technology.
Additionally, DST has expanded marketing and product support activities
for its image-based work management product (Automated Work
DistributorTM, "AWD(R)") internationally, using direct marketing and The
Continuum Company, which distributes AWD(R) to the insurance industry.
DST also acquired DBS Systems Inc., a 60% owned subsidiary, which has
developed software to provide billing services for DirecTVTM, a
commercial direct broadcast satellite system.
These business units invested in expanded product development and
marketing expenditures during 1994, which reduced DST profitability for
1994 as compared to 1993. In addition, when compared with DST core
businesses a higher percentage of revenues from these developmental
businesses (except DBS and CTDS) is currently derived from software
licensing activities. Therefore, operating results will be more
affected by the timing of software license activities.
These acquisitions provide DST with additions to its product base and
future opportunities for further expansion of its product lines into
international markets but may require additional investment.
Even considering the operating and net losses of these developmental
businesses, however, DST recorded the highest earnings in its history in
1994.
KCSR Equipment Trust Certificates. In late 1994, KCSR completed the
private placement of financing for locomotives and rolling stock using
Equipment Trust Certificates ("ETC's"). The ETC's were placed for an
aggregate of $54.7 million representing 31 locomotives, 625 boxcars and
300 covered hoppers, which had been placed in service during 1993 and
1994. The financing represents 85% of equipment value, bears interest at
a rate of 8.56% and matures in 2006.
MidSouth Acquisition. The Company completed the acquisition of MidSouth,
a regional railroad holding company headquartered in Jackson,
Mississippi, on June 10, 1993. The purchase price for the acquisition
of the MidSouth common stock aggregated approximately $213.5 million,
paid in cash. The MidSouth acquisition was accounted for as a purchase.
Results of operations of the Company for the year ended December 31,
1993 include the operations of MidSouth as a consolidated subsidiary
effective with the closing of the transaction. Excluding the effect of
additional tax expense for federal tax rate increases related to
deferred accruals applicable to 1993, the transaction did not result in
any dilution in the Company's 1993 or 1994 earnings. As a result of this
acquisition the Company acquired operating loss carryforwards of which
$57 million remained at December 31, 1994. Annual utilization of these
loss carryforwards may be limited by the Internal Revenue Code as a
result of a change in ownership. Anticipated future tax benefits
associated with the loss carryforwards were recorded as a reduction of
recorded intangibles.
The Company financed the MidSouth acquisition with the $250 million
credit agreement, discussed below, and other available financing
resources. In addition, as part of the merger transaction, the Company
refinanced substantially all of MidSouth's indebtedness at more
favorable interest rates.
The MidSouth acquisition provides an important East/West rail line, as a
complement to KCSR's predominantly North/South route. This East/West
line, running from Dallas, Texas, to Meridian, Mississippi, will allow
the Company to be more competitive in the transcontinental intermodal
transportation market, among others. In mid-November 1994, KCSR began
dedicated through train service between Dallas, Texas and Atlanta,
Georgia for intermodal traffic. This new dedicated service was initiated
in conjunction with Norfolk Southern Railway Company ("NS") which
interchanges with KCSR at Meridian, Mississippi for transport of
intermodal traffic to destinations on the NS in the Southeastern and
Eastern United States. This intermodal route competes directly with
truck carriers along the Interstate 20 corridor and offers service times
which are competitive with both truck and other rail carriers.
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Acquisition of the MidSouth also adds customers in the South Central
U.S. to KCSR's already strong traffic base and presents opportunities
for the rerouting of certain commodity movements over less circuitous
routes. Effective January 1, 1994, MidSouth was operationally and
administratively merged into KCSR.
Vantage Computer Systems, Inc./The Continuum Company, Inc. Effective
September 30, 1993, DST Systems, Inc. ("DST," a wholly-owned subsidiary)
completed the merger of its 90.5% owned subsidiary, Vantage Computer
Systems, Inc. ("Vantage"), into a subsidiary of The Continuum Company,
Inc. ("Continuum"). Vantage and its wholly-owned subsidiary, Vantage
P&C Systems, Inc. provide policyholder record keeping data processing
and software for the life and property/casualty insurance industries. In
the transaction, DST received approximately 3.6 million shares of
Continuum stock. As a result of this transaction and additional
Continuum stock purchases, DST owned approximately 24% of the
outstanding common stock of Continuum at December 31, 1993. In 1994, DST
purchased additional Continuum shares through privately negotiated
transactions. At December 31, 1994, DST owned approximately 29% of
Continuum's outstanding common stock (5.5 million shares). In the
initial exchange, DST exchanged Vantage stock with a book value of
approximately $17 million for Continuum stock with a then current market
value of approximately $62 million. DST accounted for the initial
exchange as a non-cash, non-taxable exchange in investment basis of
Vantage for an investment in Continuum. Accordingly, no gain recognition
was associated with the transaction. Vantage revenues for the nine
months ended September 30, 1993, were $32.6 million and $38.7 million
for the year ended December 31, 1992. Effective October 1, 1993, Vantage
results were no longer consolidated with DST and Continuum earnings were
included in DST results on the equity basis.
Continuum is a publicly traded international consulting and computer
services firm based in Austin, Texas, which primarily serves the needs
of life and property and casualty insurance companies for computer
software and services.
The Vantage/Continuum transaction allows DST to expand its presence in
the information processing market for the insurance industry and combine
the strengths of both Vantage and Continuum. Prior to the merger,
Vantage's business was primarily centered in the U.S. domestic market
while Continuum has a significant international and domestic presence.
Subsequent to this transaction, DST assumed all of the North American
operations data processing functions for Continuum. DST and Continuum
reached agreement whereby Continuum uses the capabilities of DST's
Winchester Data Center for its processing requirements. In addition,
Continuum obtained the rights to license DST's "Automated Work
DistributorTM" ("AWD(R)") product to insurance companies worldwide.
1993 Tax Legislation. On August 10, 1993, President Clinton signed into
law the Omnibus Budget Reconciliation Act of 1993 ("the 1993 Tax Act").
This new tax legislation changed numerous provisions to the then
existing tax law. The most significant of these changes affect the
Company's Transportation Services operations.
The new tax law increased the corporate tax rate from 34% to 35%.
Accordingly, the Company's 1993 earnings include additional income tax
expense attributable to the tax rate increase retroactive to January 1,
1993. These charges, which are included in the provision for taxes on
income, represent $3.4 million ($.08 per share) related to deferred tax
accruals and $900,000 ($.02 per share) related to 1993 earnings. In
addition, the new tax law included provisions for higher fuel tax rates,
which resulted in an additional expense to Transportation operations
during 1993 of approximately $400,000.
Accounting Change Postretirement Benefits. The Company adopted Statement
of Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," ("SFAS 106"), effective
January 1, 1993. SFAS 106 required the Company to accrue, currently,
postretirement benefits provided to retirees by the Company and its
Transportation subsidiaries. These benefits relate primarily to
postretirement medical, life and other benefits available to employees
not covered under collective bargaining agreements.
The adoption of SFAS 106 resulted in a charge to earnings in first
quarter 1993 in the amount of $5.5 million, net of applicable income
taxes. The adoption of SFAS 106 is not expected to have a material
effect on future annual expenses of the Company.
Accounting Change Income Taxes. The Company also adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes,"
("SFAS 109"), effective January 1, 1993. SFAS 109 was issued as an
amendment to Statement of Financial Accounting Standards No. 96,
"Accounting for Income Taxes," ("SFAS 96"). The adoption of SFAS 109
resulted in a charge to earnings in first quarter 1993 of $970,000.
As a result of the Company's previous adoption of SFAS 96, the adoption
of SFAS 109 did not have a material impact on the components of income
tax expense or the effective income tax rates applicable to continuing
operations versus the U.S. federal income tax statutory rate.
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Stock Splits. In both 1992 and 1993, the Company's Board of Directors
authorized 2-for-1 splits effected in the form of stock dividends in the
Company's Common stock. The Company's Board of Directors also authorized
an 11% dividend increase in January 1992, with respect to the Company's
outstanding Common stock. The annual Common dividend was increased to
$.30 per share from the then current $.27 per share, on an after 1993
split basis.
Appropriate data in this report and the accompanying Consolidated
Financial Statements and Notes were restated to reflect the effect of
both of these 2-for-1 stock splits.
Debt Securities Registration and Offerings 1993 and 1992. On June 24,
1993, the Company issued $100 million of debt securities comprised of
Notes bearing interest at a rate of 5.75% and maturing in 1998. The net
proceeds of this transaction, along with certain proceeds from the
Company's $250 million credit agreement, were used to refinance certain
MidSouth debt in July 1993.
On September 29, 1993, the Company filed a Registration Statement,
registering $500 million in securities. The securities may be offered in
the form of Common Stock, New Series Preferred Stock $1 par value,
Convertible Debt Securities, or other Debt Securities (collectively,
"the Securities"). Net proceeds from the sale of the Securities are
expected to be added to the general funds of the Company and used
principally for general corporate purposes, including working capital,
capital expenditures and acquisitions of or investments in businesses
and assets. The Company has not yet sought to have the Registration
Statement declared effective by the SEC and no securities have been
issued.
On July 1, 1992, the Company issued $100 million 7.875% Notes due 2002
and $100 million 8.8% Debentures due 2022. The 7.875% Notes are not
redeemable prior to their maturity in 2002, and the 8.8% Debentures are
redeemable on or after July 1, 2002, at a premium of 104.04%, which
declines to par on or after July 1, 2012. Proceeds from the debt offer
were used to repay borrowings under then existing revolving credit
agreements. The Company used the remaining net proceeds for general
corporate purposes, including debt repayments, working capital, capital
expenditures, acquisition of and/or investments in businesses and assets
and acquisition of the Company's capital stock.
On March 3, 1993, the Company issued $100 million of debt securities as
6.625% Notes due 2005. The Company used the net proceeds for general
corporate purposes, including subsidiary debt repayments, working
capital, capital expenditures, acquisitions of or investments in
businesses and assets, and acquisitions of the Company's capital stock.
Series B Convertible Preferred Stock. On October 1, 1993, KCSI
transferred one million shares of KCSI Series B Convertible Preferred
Stock (the "Series B Preferred Stock") to the Kansas City Southern
Industries, Inc. Employee Plan Funding Trust ("the Trust"), a grantor
trust established by KCSI. The purchase price of the stock, based upon
an independent valuation, was $200 million, which the Trust financed
through KCSI. The indebtedness of the Trust to KCSI is repayable over 27
years with interest at 6% per year, with no principal payments in the
first three years. The Trust, which is administered by an independent
bank trustee, and is consolidated into the Company's financial
statements, will repay the indebtedness to KCSI utilizing dividends and
other income as well as other cash obtained from KCSI. As the debt is
reduced, shares of the Series B Preferred Stock, or shares of Common
stock acquired on conversion, will be released and available for
distribution to various KCSI employee benefit plans, including its ESOP,
Stock Option Plan and Stock Purchase Plans.
The Series B Preferred Stock, which has a $10 per share (5%) annual
dividend and a $200 per share liquidation preference, is convertible
into Common stock at an initial ratio of four shares of Common stock for
each share of Series B Preferred Stock. The Series B Preferred Stock is
redeemable after 18 months at a specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held only by the Trust or its
beneficiaries, the employee benefit plans of KCSI. The full terms of the
Series B Convertible Preferred Stock are set forth in a Certificate of
Designations approved by the Board of Directors and filed in Delaware.
KCSI Credit Agreements. During 1994, the Company established or
increased credit agreements with several lending institutions. These new
or expanded credit lines increased the Company's borrowing ability by
$150 million to $450 million. These agreements bear interest rates below
prime. In 1994, these agreements were utilized to finance the Berger
acquisition and subsidiary working capital requirements. Remaining
credit capacity under these agreements is intended for general corporate
purposes. At December 31, 1994, the Company had an aggregate of $115
million of indebtedness outstanding on these agreements.
On December 8, 1992, the Company established a credit agreement in the
amount of $250 million. This agreement replaced the Company's then
existing $100 million credit agreement, which had been in place since
1989. During 1993, proceeds were used to fund the acquisition of
MidSouth and refinance certain MidSouth indebtedness. Remaining credit
capacity under the facility is intended for general corporate
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purposes. At December 31, 1994, the Company had $200 million of
indebtedness outstanding on this agreement.
Employee Stock Purchase Plan. In the fourth quarter 1993, the Company
initiated the eighth offering under the Employee Stock Purchase Plan.
Approximately 221,000 shares of Company Common stock were subscribed to
under this offering, which will be funded through employee payroll
deductions, over a two year period, at a price of $38.20 per share. In
the fourth quarter 1992, the Company initiated the seventh offering
under the Employee Stock Purchase Plan. Approximately 248,000 shares of
Company Common stock were subscribed to under this offering, which were
funded through employee payroll deductions at a price of $18.75 per
share. In January 1994, a total of approximately 234,000 shares of
Common stock were issued from treasury to employees under the seventh
offering.
Union Labor Negotiations. Collective bargaining agreements with KCSR
union employees, representing approximately 85% of KCSR's workforce were
executed in 1992. These agreements allowed for implementation of
productivity improvements and cost sharing arrangements with contract
employees. Productivity improvements have been realized by modifications
in the operation of trains with reduced crew sizes. These productivity
improvements were necessary to enable the railroad industry to remain
competitive with other modes of transportation. These labor agreements
reopened for negotiation at the end of 1994 for most bargaining unions
while others reopen for negotiation in varying periods beginning in
1995. KCSR management is currently in the process of meeting with unions
representing its employees through the National Railway Labor
Conference, along with other Class I railroads, seeking to negotiate
issues on a national level. Discussions with these unions are in the
very early stages.
As a result of the labor agreements executed in 1992, management
believes the Company is better positioned to compete effectively with
railroads contiguous to its lines as well as other forms of
transportation. However, railroads remain restricted by antiquated
operating rules and are thus prevented from achieving optimum
productivity.
KCSR and other railroads continue to be affected by labor regulations
which are more burdensome than those governing non-rail industries
including its principal trucking competitors. The Railroad Retirement
Act requires up to a 23.75% contribution by railroads on eligible wages,
while the Social Security and Medicare Acts only require a 7.65%
employer contribution on similar wage bases. Other programs, such as The
Federal Employees Liability Act (FELA), when compared to worker's
compensation laws vividly illustrate the competitive disadvantage placed
upon the rail industry by federal labor regulations.
Principal Stockholders Transaction. The following activity occurred
among the Company's principal stockholders:
* In early 1994, Warburg, Pincus Capital Company, L.P. an affiliate
of E.M. Warburg Pincus & Co., ("Warburg") a New York based venture
banking and investment management firm, distributed 4 million
shares of the Company's Common stock, held by Warburg, to its
limited partners, including institutional holders and pension
funds.
Safety and Quality Programs. KCSR continued implementation and emphasis
of important safety and quality programs during 1994. Related benefits
are expected to be recurring in nature and realizable over future years.
In 1994, however, the Company experienced a doubling of Federal Railroad
Administration reportable employee injuries compared to 1993. This
significant increase in injuries is primarily attributable to the merger
of the MidSouth into KCSR, (MidSouth statistics are not included prior
to 1994). While overall employee injuries increased in 1994, associated
operating expenses did not rise in the same proportion as the number of
injuries. This is primarily a result of KCSR's active safety programs
coupled with the lesser severity of 1994 injuries. In 1993, the Company
experienced a 31% reduction in employee injuries, as compared to 1992
and a 28% reduction in 1992 compared to 1991. "Safety" and "Quality"
programs comprise two important ongoing goals of railroad management and
accordingly, 1995 employee injuries are anticipated to decline from 1994
levels and associated expenses are not anticipated to have a material
impact on operating results for 1995.
Output Technologies, Inc. DST's output processing businesses, Output
Technologies, Inc. ("OTI") continued to experience growth trends in
1994. OTI printed 802 million pages of output in 1994, up 20% from the
669 million pages in 1993, resulting in improved earnings. During 1993,
OTI completed the internal reorganization of its subsidiaries which
included renaming of certain subsidiaries and merging of certain
operations. The overall objective of the 1993 reorganization was a
consolidation of output related activities, identification of businesses
with the OTI name and alignment into geographic operating regions.
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INDUSTRY SEGMENT RESULTS
The Company's major business activities are classified as follows (in
millions):
1994 1993 1992
Revenues
Transportation
Services $ 508.5 $ 451.1 $ 369.2
Information &
Transaction
Processing 404.3 342.2 270.5
Financial Asset
Management 188.3 162.7 97.5
Eliminations,
Corporate & Other (3.2) 5.1 4.2
Total $ 1,097.9 $ 961.1 $ 741.4
% Change
from Prior Year 14.2% 29.6% 21.5%
Operating Income
Transportation
Services $ 124.9 $ 116.7 $ 75.3
Information &
Transaction
Processing 34.7 31.2 17.8
Financial Asset
Management 53.1 80.0 45.7
Eliminations,
Corporate & Other (10.2) (15.8) (12.9)
Total $ 202.5 $ 212.1 $ 125.9
% Change
from Prior Year (4.5%) 68.5% 28.1%
Transportation Services. Transportation Services operations are
comprised principally of KCSR (a wholly-owned subsidiary), which
accounts for more than 90% of Transportation Services revenues.
KCSR revenues have increased modestly each year in the 1990-1993 period
principally from volume increases in both general commodity and coal
trains despite downward pressure on rates. In 1994, however, KCSR
revenues rose significantly. Higher 1994 revenues resulted from
additional revenues of the MidSouth acquisition and operating synergies
created by the combination. As domestic economic conditions improved in
1994, KCSR carloading volumes also increased.
(MDA Graph #1)
In general, competition, most directly from over the road truck
transportation, is the primary cause of downward pressure on rates as
trucks have eroded the railroad industry's share of transportation
dollars. Changing regulations, subsidized highway improvement programs
and favorable labor regulations have improved the competitive position
of trucks as an alternative mode of surface transportation for many
commodities. In recent years, railroad industry management has sought
avenues for improving its competitive positions and forged alliances
with truck companies in order to provide faster, safer and more
efficient service to its customers. KCSR has joined this industry trend
in entering into agreements with several truck companies and initiation
of through train intermodal service between Dallas, Texas and Atlanta,
Georgia in conjunction with Norfolk Southern Railway Company. This new
intermodal service began in mid-November 1994.
Assuming no major economic deterioration occurs in the region serviced
by the Transportation businesses, management expects moderate growth
during 1995.
KCSR 1994 revenues, including full year MidSouth for comparative
purposes, rose 3% from 1993. General commodity carloadings rose 6% for
1994 from increased intermodal traffic (which experienced a 69% and 46%
improvement in fourth quarter and year to date, respectively), but were
somewhat offset by lower unit coal carloadings discussed below.
Carloadings of chemicals, petroleum and food products were also higher
in 1994 but were somewhat offset by a decline in export grain traffic,
which was weak for much of 1994. Reduced pulp/paper carloadings were
attributable to the Soo Line strike, which had a disproportionate effect
on KCSR. The increased intermodal traffic is the result of improved
volumes in the Kansas City/Dallas route and initiation of through train
service over the Dallas/Atlanta route in conjunction with Norfolk
Southern in late 1994. Unit coal revenues declined 4%
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in 1994 compared to prior year. Coal revenues and carloadings declined
in large part as a result of the absence of shipments to a Texas
(Monticello) utilities electric generating plant served by KCSR. This
plant accounted for 2.2 million net tons and 247 unit coal trains in
1993, which were temporarily lost to KCSR because of a smoke stack
collapse at the plant. The Monticello plant is expected to be back on
line in late 1995.
(MDA Graph #2)
Improved traffic levels also translated into increased operating
expenses in 1994. Increased expenses were experienced in salaries &
wages (train & enginemen), car hire (intermodal equipment usage and
system congestion), maintenance of equipment (intermodal traffic) and
interest expense (related to the MidSouth acquisition). Even though
operating expenses were higher in 1994, KCSR was able to reduce its
Interstate Commerce Commission ("ICC") operating ratio from 77% in 1993
to 76.2% in 1994. The ICC operating ratio is a common efficiency
measurement among Class I railroads.
KCSR 1993 revenues rose 3% compared to 1992. General commodity revenues,
excluding intermodal traffic, rose 5.5% on generally higher traffic
volumes. The higher traffic volumes resulted, in part, from a
strengthening of U.S. economic conditions, which continued to rise
slowly from a recessionary period in 1990-1992. Higher traffic levels
were experienced in carloadings of farm products, particularly corn &
wheat, non-metallic ores, lumber/wood pulp/paper, chemical and
petroleum shipments. Intermodal carloadings declined 8% in 1993 as KCSR
was in the process of upgrading its "on-off ramp" loading facilities in
anticipation of greater intermodal traffic, which was experienced in
1994. Unit coal revenues rose modestly in 1993 on overall increased
tonnage but were adversely affected by variances in length of haul and
rates. While 1993 revenues rose, operating expenses declined in 1993
compared to 1992. Favorable expense variances were caused by cost
containment efforts, lower fuel costs and lower expenses from KCSR's
continuing emphasis on safety, but somewhat offset by increased costs on
higher traffic levels. The combination of higher KCSR revenues and lower
expenses helped effect a 55% increase in Transportation Services
operating income in 1993 compared to 1992. These cost containment
initiatives also helped effect a decline in KCSR's ICC operating ratio
from 82.3% in 1992 to 77% in 1993.
Transportation Services results also benefitted in 1993 from revenue and
net income additions of MidSouth and favorable operations at Pabtex,
Inc., which experienced increased volumes in 1993. MidSouth contributed
$67.8 million in revenues to 1993 Transportation Services results,
which surpassed comparative prior year revenues on increased
carloadings. MidSouth's 1993 earnings, net of all acquisition related
expenses, were positive after excluding the effect of the federal income
tax rate increase.
The flooding in the Midwest region of the United States during 1993 did
not materially affect the Company's rail transportation operations.
KCSR's trackage, facilities and physical properties were not directly
hampered by the rising flood waters. However, many of KCSR's interchange
partners in the Kansas City gateway were affected, which resulted in
congestion, rerouting of certain traffic, and delays of commodity
movements, particularly for grain and coal shipments. KCSR experienced
revenue declines, during third quarter 1993, in certain commodities due
to the inability to interchange shipments with other railroads. Overall,
the financial impact was immaterial.
(MDA Graph #3)
KCSR general commodities revenues increased 7.2% during 1992 from 1991.
Revenue gains were experienced in the transportation of farm products,
particularly soybeans and wheat, pulp/paper products, lumber/wood
products and non-metallic mineral shipments, but were somewhat offset by
a decline in carloadings of chemical and petroleum products and lower
intermodal traffic.
The following summarizes components of KCSR's revenues (in millions per
ICC Form R-1):
1994 1993* 1992*
General Commodities $350.0 $222.2 $212.8
Coal 101.7 106.2 105.5
Other 20.8 17.1 17.3
Total $472.5 $345.5 $335.6
*Excludes MidSouth information
[Page 35]
Railroad Transportation operations are constantly faced with substantial
costs related to fuel, labor and maintenance of equipment and of its
roadbed.
KCSR locomotive fuel usage represented 7% of railroad operating costs in
1994. Fuel costs are affected by traffic levels, efficiency of
operations and equipment, and petroleum market conditions. Although
diesel fuel prices have stabilized in recent years, control of fuel
expenses is a constant concern of management and fuel savings is a top
priority.
A roadway improvement program was begun by KCSR in 1986. This program
was implemented to upgrade the roadway in order to reduce operating
costs, improve safety, increase the capabilities of KCSR and increase
quality of service to customers. In 1990, KCSR completed bridge and
related modifications to support unrestricted transportation of double
stack containers. Removal of restrictions to the double stack operation
along with the addition of an East/West MidSouth rail line have
permitted KCSR to compete more effectively with other carriers in the
transcontinental intermodal markets. In 1994, KCSR accelerated the
remaining portions of its program on the original KCSR route and also
those related to the upgrade and expansion of the MidSouth track and
roadbed. Acceleration of this program resulted in increased capital
spending. By the end of 1994, both the KCSR and MidSouth track had been
essentially rebuilt and MidSouth traffic capability was expanded by the
additions of new track sidings. Acceleration of the program became
necessary to handle the increased business volumes at faster train
speeds, which became evident in the East/West traffic corridor, while
still improving safety. The roadway program has been and will continue
to be funded with internally generated cash flows. While certain
portions of the program will continue into 1995, future years capital
expenditures are anticipated to decline significantly from prior year
levels. Cash flow made available by the reduction in capital spending is
anticipated to be used for debt repayment and other general corporate
purposes.
Portions of roadway maintenance costs are capitalized and other portions
expensed, as appropriate. Expenses aggregated $43, $40, and $40 million
for 1994, 1993 and 1992, respectively. Maintenance and capital
improvement programs are in conformity with the Federal Railroad
Administration's track standards and are accounted for in accordance
with the Interstate Commerce Commission's accounting rules.
Information & Transaction Processing.
DST Systems, Inc. ("DST," a wholly-owned subsidiary). DST revenues have
been increasing because of customer base growth, new lines of business
and expanded products. A significant amount of DST's net income is
derived from the operations of its various joint ventures discussed in
"Unconsolidated Affiliates."
(MDA Graph #4)
DST's contribution to KCSI's consolidated results rose 40% to $32
million in 1994 compared to prior year, while 1994 revenues rose 18%
from 1993. These improved results are reflective of the growth trends
experienced by DST throughout 1994 as mutual fund shareowner accounts
serviced reached a record 32.1 million. Output Technologies, Inc.
business volumes increased and earnings from DST's unconsolidated
affiliates rose significantly over 1993. Increased earnings from
unconsolidated affiliates are due to a full year of earnings from
Continuum along with improved earnings from DST's other affiliates. DST
also continued to process approximately 2 million accounts from Kemper
Financial Services, Inc. ("Kemper," a DST customer), which were
anticipated to be converted from the DST system in 1994. As a result of
the Kemper transactions, discussed earlier, DST expects to continue to
process the Kemper accounts. These earnings increases in 1994 were,
however, hampered by operating and net losses of its developmental
businesses, discussed earlier. During 1994, these developmental
businesses, reported revenues and net losses of $39.3 million and $5.3
million, respectively, versus revenues and net losses of $11 million and
$2.3 million, respectively, in 1993. Management expects losses with
respect to these developmental businesses to continue into 1995.
During 1993, DST consolidated revenues rose 27% from 1992, while DST's
contribution to KCSI earnings improved 50% to $22.9 million from $15.3
million in 1992. This revenue and income increase resulted from an
increase in mutual fund accounts serviced and the absence of one-time
expenses which reduced 1992 results (discussed below). Total mutual
fund shareowner accounts serviced rose to 28 million at December 31,
1993 from 22.4 million at December 31, 1992, resulting in higher mutual
fund processing and output services volume. During 1993, 500,000 Kemper
accounts were converted from the DST system. The loss of 500,000
accounts in 1993 was offset by account growth from other mutual fund
customers and accordingly, did not have a material financial impact.
[Page 36]
During 1992, DST experienced a 28% increase in revenues; however,
operating income declined from 1991. Revenue growth was generated by
increased overall business volumes and the expanded contribution of OTI
and Vantage. The operating income decline resulted from several items
which negatively impacted 1992 earnings: (i) lower weighted average
billable monthly balance of mutual fund shareowner accounts serviced in
1992 as a result of the loss of 2.7 million Vanguard accounts in late
1991, even though DST ended 1992 at 22.4 million shareowner accounts;
(ii) higher ESOP component of employee benefit costs (1992-$12.7
million; 1991-$4.2 million) from expanded headcount and additional ESOP
expense which resulted in lower ESOP costs in 1993; (iii) start up and
development costs for DST's TRAC-2000TM system for 401(K) plans and
Vantage's software for the property and casualty insurance industry; and
(iv) certain building renovation costs. The number of mutual fund
accounts serviced by DST increased to 22.4 million at December 31, 1992,
versus 18.7 million at December 31, 1991.
The financial institutions served by DST, both mutual fund and
insurance, will continue to evaluate whether to internalize or outsource
their servicing and technology needs. This process will have both
positive and negative effects on DST's results; however, on an overall
basis, DST's customer base is expected to grow.
(MDA Graph #5)
Beginning in 1991 and continuing through 1994, DST continued its focus
on internal and external expansion of its service presence in the mutual
fund, insurance and financial services industries. DST made a commitment
to the life and property/casualty insurance industry business lines in
1990, and the structure of DST's involvement in the insurance industry
changed during 1993 with the exchange of Vantage and the resulting
equity ownership in Continuum. However, DST's total service to the
insurance industry increased as DST continues to process the Vantage
policyholder accounts, has added processing of all Continuum
policyholder accounts and other services as well as gaining access to
Continuum's market for DST's AWD(R) imaging product.
During 1993, DST continued marketing of Automated Work DistributorTM, an
image-based clerical work management system. The AWD(R) System's image
technology can also be combined with principles of an intelligent
workstation. AWD(R) was initially implemented in several mutual fund
transfer agencies, but through expansion resided on more than 4,200 work
stations in companies throughout the world at December 31, 1993 (a 75%
increase since December 31, 1992) and was used to service approximately
53% of the mutual fund shareowner accounts on DST's system. AWD(R) is
also used in industries such as insurance, banking and health care.
Concurrent with the Continuum transaction, Continuum and DST signed a
licensing agreement whereby Continuum will market the AWD(R) product for
use in insurance industry applications. The Continuum agreement provides
DST access to additional international markets for its AWD(R) products.
(MDA Graph #6)
In 1994, DST sought greater market penetration of its AWD(R) product in
the insurance marketplace through its licensing agreement with Continuum
and directly into non-insurance markets through DST's international
subsidiaries. By the end of 1994, DST had international locations in the
United Kingdom, Netherlands and South Africa, with more than 8,000
AWD(R) workstations in use worldwide (a 90% increase over 1993), of
which approximately 27% are installed in insurance company operations.
DST's printed output processing businesses, Output Technologies, Inc.
("OTI") also continued to grow in 1994. In 1994, OTI revenues rose 9%
primarily from increased print processing as laser click volumes rose
20% to 802 million pages. Revenues rose 34% for the OTI group of
companies in 1993 from increased output processing volumes and
contributions from new and expanded business lines. These new and
expanded business lines have contributed to DST's growth during the last
three years and expanded its product lines available to customers. OTI's
1993 laser click volume was 669 million pages of printed output, an
increase of 45% over the 460 million pages in 1992. OTI growth has been
achieved through acquisitions and location expansion.
[Page 37]
Financial Asset Management
Janus Capital Corporation. ("Janus," an 83% owned subsidiary). Janus
operations experienced significant growth in 1993 and 1992 with
operating income comprising 38% and 36%, respectively, of the Company's
consolidated operating income. In 1994, however, operating income
declined compared to 1993 while revenues rose 11%. This decline in
operating income is primarily attributable to the one-time net charge to
KCSI's consolidated earnings of $13.6 million, ($27.1 pretax increase in
Janus operating expenses) from the early termination of employment and
earnings related compensation arrangements, discussed earlier. Excluding
this charge, operating income would have risen compared to 1993 but not
at levels experienced in prior years. 1994 was a difficult year for
equity money managers as rising interest rates affected market
conditions in general and, when coupled with increased expenses for
advanced customer services capabilities and marketing and promotional
efforts, Janus' earnings were negatively affected. Growth in assets
under management began a pattern of slower growth in the second half of
1993 and continued into 1994 rising to $22.9 billion at December 31,
1994 from $22.2 billion at December 31, 1993. While overall assets under
management remained relatively stable, fund sales continued strong in
1994 at $6.5 billion. Total Janus assets under management increased $.7
billion in 1994, $6.7 billion in 1993, $6.8 billion in 1992, $5.6
billion in 1991 and $1.3 billion in 1990.
(MDA Graph #7)
While Janus experienced significant growth during 1993, much of that
growth occurred in the first half of 1993. During the third and fourth
quarters of 1993, growth in assets under management slowed. Total fund
sales were $3.3 billion during the second half of 1993 versus $5.5
billion during the first six months of 1993, while fund redemptions
increased to $2.2 billion versus $1.6 billion, respectively. Janus has
increased expenditures to provide quality service to its shareholders
through the use of advanced technology and extensive personnel training
programs.
Janus continued to reap significant benefits from ongoing marketing
efforts in terms of fund sales and market appreciation during 1993 and
1992.
The following table highlights assets under management and revenues:
1994 1993 1992
Assets Under Management
(in billions):
Janus No-Load
Funds $ 17.3 $ 17.0 $ 11.7
IDEX Load Funds .9 1.2 1.0
WRL Insurance
Products Funds 1.2 1.2 .8
Institutional and Separately
Managed Accounts 2.7 2.1 1.3
Cash Equivalent Fund .8 .7 .7
Total Janus $ 22.9 $ 22.2 $ 15.5
Berger Funds 3.0 ---- ----
Total $ 25.9 $ 22.2 $ 15.5
Revenues (in millions):
Janus $180.5 $162.7 $ 97.5
Berger 7.8* ---- ----
*since acquisition, October 1994.
In 1994, Janus introduced the Janus Overseas Fund, an international
equity fund and expanded its product offerings for the Janus Aspen
Series, initiated in 1993. As overall fund sales growth slowed in 1994,
Janus focused its efforts on increased marketing and promotional
activities in an effort to increase recognition of the Janus brand name
and reach a class of potential investors who have not typically used
mutual funds as an investment alternative. This initiative led to the
launching of a major print, radio and television marketing campaign
begun in late 1994, which is continuing into 1995.
During 1993, Janus continued to expand the distribution channels of the
Janus funds by participating in Schwab's Mutual Fund "OneSource" service
of Charles Schwab as well as a similar program offered by Fidelity
Investments, both of which began in 1992. At December 31, 1994,
approximately 10% of Janus' total assets under management were generated
through the Schwab relationship, the largest of such programs. In
addition, Janus introduced two new Janus fund portfolios; Janus Mercury
Fund, an equity fund; Janus Federal Tax Exempt Fund, a tax exempt income
fund; and the Janus Aspen Series, which consists of portfolios funded
through variable annuity contracts, such as the Janus Retirement
Advantage. During 1992, Janus introduced three new mutual funds; Janus
Enterprise Fund, an equity fund; Janus Balanced Fund, a combination
equity/fixed income fund and Janus Short-Term Bond Fund, a short-term
income fund.
[Page 38]
Janus has expanded its assets under management by marketing advisory
services directly to pension plan sponsors, insurance, banking and
brokerage firms for their proprietary investment products. These
relationships generated approximately $948, $920 and $340 million in new
assets in 1994, 1993 and 1992, respectively.
Berger Associates, Inc. ("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 private and other accounts,
(collectively "Berger Funds"). The Company made its first investment in
Berger in 1992 when it acquired an 18% interest. In October 1994, the
Company acquired a controlling interest in Berger, increasing its
ownership to over 80%. At the date of closing of the transaction,
Berger became a consolidated subsidiary of KCSI. For the period since
acquisition of a controlling interest, Berger contributed essentially
breakeven results to KCSI consolidated earnings. These earnings include
all acquisition related costs and were it not for the one-time charge to
earnings, discussed earlier, Berger would have contributed positively to
KCSI's results. Berger assets under management grew rapidly in 1994
beginning the year at $1.9 billion and ending on December 31, 1994 at $3
billion. Management believes Berger has good name recognition in the
industry, has historically had favorable fund performance and through
the use of marketing and promotional efforts has attracted increasing
fund sales and investors.
Financial Asset Management revenues and operating income increases are a
direct result of increases in assets under management and processing
services. Assets under management and shareholder accounts have grown in
recent years from a combination of new money investments or fund sales
and market appreciation. Fund sales have risen in response to marketing
efforts, favorable fund performance and the current popularity of
no-load mutual funds. Market appreciation has resulted from increases in
stock investment values. However, a decline in the stock and bond
markets and/or an increase in the rate of return of alternative
investments could negatively impact Financial Asset Management revenues
and operating income. In addition, the mutual fund market, in general,
faces increasing competition as the number of mutual funds continues to
increase, marketing and distribution channels become more creative and
complex, and investors place greater emphasis on published fund
recommendations and investment category rankings. These factors could
also affect the Company's Financial Asset Management businesses and
negatively impact revenues and operating income.
Eliminations, Corporate & Other. The "Eliminations, Corporate and Other"
consists of unallocated KCSI Holding Company operating expenses,
intercompany eliminations, and miscellaneous other investment
activities. Modest fluctuations in this reporting category occurred
during 1993 and 1992. In 1994, however, net operating losses declined
from a combination of lower unallocated holding company expenses and a
shift in net interest income/expense as intercompany debt amounts and
costs were fully allocated to subsidiary operations as opposed to being
borne at the holding company level. In addition, lower expenses in 1994
resulted from the reversal of certain employment related tax and
interest accruals (amounting to approximately $.06 per share), on the
favorable outcome of long-standing tax issues regarding the status of
KCSI Holding Company employees under the Railroad Retirement Tax Act.
Unconsolidated Affiliates. Earnings from Unconsolidated Affiliates
consist principally of DST's equity in the earnings of Investors
Fiduciary Trust Company ("IFTC," a 50% owned affiliate prior to the sale
of IFTC discussed earlier), Boston Financial Data Services, Inc.
("BFDS," a 50% owned affiliate), The Continuum Company, Inc.
("Continuum," a 29% owned affiliate), Midland Data Systems, Inc., and
Midland Loan Services L.P. (collectively "Midland," 45% owned
affiliates) and Argus Health Systems, Inc., ("Argus," a 50% owned
affiliate).
(MDA Graph #8)
IFTC experienced substantial growth in assets under custody
($126 billion - 1994 from $106 billion - 1992). DST's equity in IFTC
earnings were $6.5, $4.8 and $4.8 million in 1994, 1993 and
1992, respectively. IFTC earnings are influenced by mutual fund industry
growth and interest rate fluctuations. IFTC's 1994 earnings rose
significantly from 1993. These improved earnings resulted from the
increasing interest rate environment in 1994 along with improved mutual
fund industry growth. 1993 net income was essentially unchanged when
compared to 1992. While IFTC assets under custody grew, results were
reduced by a change in the fiduciary fee arrangement between IFTC and
its parent companies and lower investment earnings. Excluding the change
in fiduciary fees, IFTC results were improved over 1992. In 1992, IFTC
earnings declined from 1991 even though assets under custody continued
to grow. The 1992 earnings decline resulted from interest rate
fluctuations and losses on certain foreign currency investments. At
December 31, 1992, IFTC had liquidated its portfolio regarding the
foreign currency investments.
[Page 39]
In early 1995, DST exchanged its 50% interest in IFTC for 2,986,111
common shares of State Street Boston Corporation ("State Street"),
representing an approximate 4% interest in State Street, discussed
earlier. As a result of this transaction DST recognized a gain on the
sale of its IFTC equity investment and after consideration of
appropriate tax effects recognized a net gain of $4.7 million in first
quarter 1995. DST's equity in earnings of unconsolidated affiliates are
expected to decline in 1995 as a result of the loss of the IFTC
earnings. This decline will be partially offset with State Street
dividends, currently $.16 per common share quarterly (assuming State
Street continues its recent trend regarding payment of dividends to
stockholders), and anticipated improvements in earnings of remaining
unconsolidated DST affiliates.
BFDS provides full service transfer agency functions for open and closed
end mutual funds and corporations utilizing DST's proprietary systems.
In addition, it performs remittance processing functions. In 1994, 1993
and 1992, BFDS contributed $5.1, $2.1 and $.5 million, respectively, in
equity earnings to DST through increases in mutual fund and corporate
shareowner accounts processed, efficient operating practices and
expanded services.
As discussed earlier, Continuum became a DST equity affiliate when DST
exchanged its interest in Vantage for an equity interest in Continuum in
late 1993. Accordingly, Continuum was an unconsolidated affiliate for
all of 1994 and contributed $7.2 million in equity earnings to DST and
$.7 million in 1993. Assuming Continuum continues revenue and earnings
growth trends exhibited in 1994, management expects that Continuum will
provide significant equity earnings to DST during 1995.
Argus, which provides insurance processing services to the health care
industry through a pharmaceutical claims processing system, also
experienced volume and income growth in 1994. Argus revenues and
earnings are a direct result of pharmacy claims volume. Pharmacy claims
processed have grown steadily (106 million claims in 1994 from 49
million claims in 1992). Increased claims volume led to income growth;
DST's equity in Argus earnings were $3.7, $2.3 and $1.7 million in 1994,
1993 and 1992, respectively.
Midland had been awarded contracts with the Resolution Trust Corporation
("RTC") for operation of an Asset Management System and a Control Totals
Module System for use by the RTC. In 1994, however, the RTC converted
off of the Midland system. Midland also provides commercial loan
processing services. Midland's earnings contribution to DST improved in
1994 compared to 1993. Improved commercial loan conversion volumes
resulted in increased earnings but were somewhat offset by a decline in
Midland's RTC loan processing work as the RTC converted off of the
Midland system. Midland earnings declined significantly in 1993 from
1992. This decline in earnings stemmed from a 1993 trend of lower
margins on loan securitizations and delays on the receipt of certain
loan processing work for the RTC. DST's combined equity in Midland
earnings were $1.7, $.9 and $4.3 million in 1994, 1993 and 1992,
respectively. Management believes opportunities exist in Midland's
business lines and is focusing attention on the expansion of Midland's
loan services capabilities in the private sector.
Interest Expense. Consolidated interest expense rose 5% in 1994 to
$53.6 million from $51.2 million in 1993. This rise in interest expense
is primarily attributable to an increase in debt balances in 1994,
principally associated with borrowings to finance the acquisition of
Berger Associates, Inc., additional Continuum stock purchases by DST,
KCSR equipment requirements and subsidiary working capital, and higher
interest rates. During 1994, the Federal Reserve Board ("Fed") increased
short-term borrowing rates significantly. This Fed action increased the
Company's short-term floating debt cost of funds, however, a significant
portion of the Company's debt structure, approximately 62%, represents
fixed rate debt instruments, most of which were in place prior to 1994.
Accordingly, the rising interest rates did not affect interest expense
related to this fixed rate debt. Interest expense in 1994 was also
affected by the reversal of interest accruals ($3 million) related to
KCSI Railroad Retirement Tax issues discussed earlier, which reduced
consolidated interest expense. Interest expense in 1993 rose
dramatically from 1992 and 1991 levels, ($33.1 million in 1992 and $32.1
in 1991). This rise in interest expense is primarily attributable to
borrowings required to finance the MidSouth acquisition, but somewhat
offset by the refinancing of debt at subsidiary levels, including
MidSouth, with more favorable borrowing rates. Additional borrowings in
1993 were primarily $200 million in public debt offerings and $230
million from the Company's revolving credit agreement. Interest expense
in 1992 increased from proceeds of the Company's $200 million Note and
Debenture offer somewhat offset by a decline in short-term interest
rates, redemption of the 12% Debentures in 1991 and repayment of working
capital credit lines.
[Page 40]
LIQUIDITY
Operating Cash Flow. The Company's cash flow from operations has
historically been positive, and traditionally sufficient to fund
operations, KCSR roadway capital improvements, DST systems development
and operating capacity costs, and debt service. External sources of
cash, principally negotiated bank debt, public debt and sale of
investments, have historically been used to fund acquisitions, new
ventures, investments, equipment additions and Company stock purchases.
Operating cash flows have risen steadily in each year from 1992 to 1994.
The following table summarizes operating cash flow information (in
millions):
1994 1993 1992
Net income $104.9 $ 90.5 $ 63.8
Depreciation and
amortization 119.1 97.2 74.2
Change in working
capital items 14.4 (37.7) (34.8)
Deferred income taxes 20.0 29.6 2.6
Other (23.1) 9.6 17.1
Net operating
cash flow $235.3 $189.2 $122.9
(MDA Graph #9)
Operating cash flows in 1994 rose 24% over 1993 to $235.3 million. The
improved operating cash flow resulted from higher net income, increased
non-cash depreciation and amortization (MidSouth, Berger and DST related
acquisitions and property additions along with increased road and
equipment property additions at KCSR), and changes in working capital
items. 1993 operating cash flows increased 54% from 1992 to $189.2
million. This increase primarily related to higher net income, increased
non-cash depreciation and amortization, (MidSouth and DST acquisitions
along with KCSR road property additions), and increased deferred income
taxes. 1992 operating cash flows of $122.9 million increased 10% over
1991 from increased net income, higher depreciation and amortization
primarily related to DST equipment acquisitions, increases in non-cash
expense accruals but offset by changes in working capital items,
primarily increased accounts receivable on higher revenues.
Summary cash flow data is as follows (in millions):
1994 1993 1992
Cash flows provided by
(used for):
Operating activities $235.3 $189.2 $122.9
Investing activities (333.6) (394.7) (178.0)
Financing activities 104.4 196.7 26.5
Net increase (decrease) in
cash and equivalents 6.1 (8.8) (28.6)
Cash and equivalents
at beginning of year 6.6 15.4 44.0
Cash and equivalents at
end of year $ 12.7 $ 6.6 $ 15.4
Financing and Investing Cash Flows. These cash flows include: (i) new
financings of $201, $447 and $283 million in 1994, 1993 and 1992,
respectively; (ii) repayment of indebtedness in the amounts of $66,
$231 and $215 million in 1994, 1993 and 1992, respectively, and (iii)
cash dividends of $13 million each in 1994-1992.
Proceeds from the issuance of debt in 1994 were used for KCSR equipment
purchases ($64 million), DST Continuum stock purchases ($18 million),
the Berger acquisition ($48 million), ESOP contributions ($12 million)
and DST property additions ($59 million).
Proceeds from issuance of debt in 1993 were used for the MidSouth
acquisition ($214 million), Continuum stock purchases ($20 million),
refinancing of MidSouth indebtedness ($129 million) and subsidiary
refinancing and working capital ($84 million).
Proceeds from issuance of debt in 1992 were used for operating cash
requirements ($42 million), repayment of bank credit lines ($90
million), repurchase of KCSI capital stock ($31 million), MidSouth
Common stock investment ($26 million), subsidiary indebtedness financing
($65 million), operating growth and business expansion at DST ($29
million).
Repayment of indebtedness includes scheduled maturities and
refinancings.
[Page 41]
CAPITAL STRUCTURE
Capital Requirements. The Company has traditionally funded capital
expenditures in Transportation Services using Equipment Trust
Certificates for major purchases of Railway locomotive and rolling
stock, and negotiated term financing for other equipment, and DST and
Janus operations. Conversely, capital improvements for roadway track
structure have historically been funded with cash flow from operations.
The MidSouth acquisition required completion of a capital improvement
program for MidSouth roadbed, locomotives and facilities. This program
contemplated a multi-year time frame to upgrade and expand MidSouth's
track to handle greater traffic levels at higher train speeds. During
1994, the Company accelerated its time table with respect to major
upgrades of the MidSouth program, which included welded rail replacement
and construction of new track sidings. Acceleration of the program was
necessary to handle increased traffic especially with respect to
intermodal business. By the end of 1994 the major portions of the
MidSouth program were complete. Subsequent to completion of the
MidSouth acquisition and debt refinancing, the Company funded MidSouth
capital requirements with historical funding sources. These same sources
were used in funding 1994 Transportation Services capital programs and
are expected to be used in funding 1995 capital programs, currently
estimated at $130 million, a significant decline from the $208 million
expended in 1994.
Funding requirements for the KCSR long-term roadway improvement program,
which began in the mid-1980's, has used significant portions of KCSR's
operating cash flow. This program, initially scheduled for completion in
1995, was essentially completed in 1994. While certain portions of this
program will be ongoing in 1995, KCSR's capital expenditures will be
reduced over the next several years. Reduction of capital expenditures
will provide cash flow, which is anticipated to be used for repayment of
debt and other general corporate purposes. In addition, KCSR acquired
locomotives and rolling stock equipment during 1994 through the issuance
of $55 million in privately placed Equipment Trust Certificates.
Southern Leasing Corporation ("SLC"), included in the Transportation
Services business segment, funds growth in its lease portfolio through
SLC credit lines and Company financing arrangements and intends to
continue to do so in the future.
DST capital requirements typically consist of mainframe, peripheral and
other data processing computer equipment. In order to accommodate
continuing customer growth demands, DST began a physical expansion of
its Winchester Data Center during 1994. The Data Center expansion,
currently under construction, is expected to require approximately $24
million, will be ultimately financed with mortgage loan indebtedness and
is anticipated to be completed in the latter half of 1995. When
completed, the Data Center expansion will effectively double the size of
the facility and allow for increased DST processing capacity. DST
management continually monitors its computer capacity needs to
accommodate customer growth. During 1994, DST entered into transactions
for the termination of certain mainframe computer equipment leases and
purchase of other mainframe equipment in the amount of $11 million,
which was funded through vendor arranged financing. In 1993 and 1992,
DST purchased data processing equipment in the amount of $26 and $27
million, respectively, through bank term financing. Additionally, in
1993, DST entered into a sale/leaseback transaction of certain mainframe
computer equipment in the amount of $16.6 million. In the last several
years, Janus has upgraded its customer service capabilities, through new
equipment and technology enhancements. Janus' capital requirements are
typically funded with existing cash flows and negotiated indebtedness
when necessary.
(MDA Graph #10)
Capital. Debt as a percent of total debt plus equity ("debt ratio")
increased from 49.3% at December 31, 1992 to 59.9% at December 31, 1993.
The debt ratio declined slightly during 1994 closing at 59.6% on
December 31, 1994. The Company's total debt increased to $985.2 million
at December 31, 1994 from $839.7 million at December 31, 1993. This
increase in debt was, however, accompanied by increases in stockholders'
equity from earnings and decreases in ESOP deferred compensation in
keeping the debt ratio at approximately 60%. The MidSouth acquisition,
completed in 1993, added significant amounts of new indebtedness to the
Company's balance sheet. These higher debt amounts were expected as the
Company fully absorbed MidSouth operations. During 1992, debt increased
($200 million Note and Debenture offer), but was partially offset by
[Page 42]
stockholders' equity increases. The current debt ratio at 59.6% is above
management's established goals, but was expected in consideration of the
MidSouth acquisition in 1993 and acceleration of the railway capital
improvement program in 1994. Management intends to reduce relative debt
ratios in future years through profitable operations, a reduction of
railway capital expenditures, both of which generate positive cash flow
for debt retirement, and increases in net worth. In addition, completion
of a plan for a public offering of DST common stock, discussed earlier,
would significantly change the Company's capital and asset structure.
The offering of 51% of DST, if it occurs, would result in the assets and
liabilities of DST being removed from the consolidated financial
position of the Company. At December 31, 1994, DST had assets totalling
$531.7 million. Furthermore, it is anticipated that funds raised by such
an offering, if completed, would be used by DST for debt retirement to
KCSI and in turn used for repayment of debt by KCSI or repurchase of the
Company's Common stock. Completion of these transactions could
significantly reduce the Company's debt ratio and strengthen its capital
structure and financial position.
Components of capital are shown as follows
(in millions):
1994 1993 1992
Current debt $ 56.4 $ 63.5 $ 62.0
Long-term debt 928.8 776.2 387.0
Total debt 985.2 839.7 449.0
Stockholders' equity 667.2 562.7 462.4
Total debt plus equity $1,652.4 $1,402.4 $ 911.4
Debt as a percent of
total debt plus equity 59.6% 59.9% 49.3%
In 1994, 1993 and 1992, the Company repurchased $10.3, $9.5 and $30.9
million, respectively, of its Capital stock in accordance with the stock
repurchase and stock option plans approved by the Company's Board of
Directors.
Minority Purchase Agreements. Agreements between KCSI and certain Janus
minority owners contain, among other provisions, mandatory stock
purchase provisions whereby under certain circumstances, KCSI would be
required to purchase the minority interest of Janus at a purchase price
based upon a multiple of Janus earnings. In late 1994, the Company was
notified that certain Janus minority owners made effective the mandatory
purchase provisions for a certain percentage of their ownership. In the
aggregate, the shares made effective for mandatory purchase totalled $59
million. Concurrent with the early termination of the Janus compensation
arrangements, discussed earlier, recipients of the amounts paid to
terminate the arrangements used their after tax net proceeds to purchase
certain portions of the shares made effective for mandatory purchase, in
early January 1995. In addition, the Janus minority group was
restructured to allow for minority ownership by other key Janus
employees. These employees purchased other portions of the minority
shares made effective for mandatory purchase through payment of cash and
creation of recourse loans financed by KCSI in the amount of $10.5
million. The remaining minority shares made effective for mandatory
purchase were purchased by Janus for treasury, $6.1 million, and by KCSI
for $12.7 million. As a result of the combination of KCSI acquiring
additional Janus shares and the reduction of outstanding shares with
Janus' treasury purchase, KCSI increased its ownership in Janus from
approximately 81% to 83%, upon closing of the transaction in January
1995. The KCSI share purchase resulted in the recording of intangibles
as the purchase price exceeded the value of underlying tangible assets
and will be amortized over its estimated economic life. A restructuring
of the Janus minority ownership group provides for greater stock
ownership in establishing greater emphasis on the growth of Janus.
The new minority owners of Janus also have stock purchase provisions
which under certain circumstances require KCSI to purchase the minority
interest at fair market value. If all of the provisions of the Janus
minority owner agreements became effective, KCSI would be required to
purchase the respective minority interests, currently estimated at
approximately $138 million.
The purchase price for the mandatory provisions is based upon a multiple
of earnings and/or fair market value determinations depending upon
specific agreement terms. In the event such provisions became effective,
KCSI would be required to meet such commitments.
Overall Liquidity. During the 1994-1992 period, the Company continued to
grow and strengthen its relative position in the Transportation
Services, Information & Transaction Processing and Financial Asset
Management businesses. The Company believes it has adequate liquid
resources, which include sufficient lines of credit and businesses which
are positive cash flow generators to meet future operating, capital and
debt service requirements.
[Page 43]
OTHER
Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Generally accepted accounting
principles require the use of historical costs. Replacement cost and
related depreciation expense, on a replacement cost basis, of the
Company's property would be substantially higher than the historical
costs reported. The increase in expenses from these fixed costs, coupled
with variable cost increases due to significant inflation, would be
difficult to recover through price increases given the competitive
environments of the Company's two principal subsidiaries, KCSR and DST.
SWEPCO Litigation. As previously disclosed, 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. During 1994, KCSR and SWEPCO settled this
litigation and the case against KCSR has been dismissed. This matter was
concluded without material adverse effect on the financial condition or
future results of operations of the Company.
Environmental Matters. Also as previously reported, KCSR has been named
as a "potentially responsible party" by the Louisiana Department of
Environmental Quality in a state environmental proceeding involving a
location near Bossier City, Louisiana, which was the site of a wood
preservative treatment plant (Lincoln Creosoting). KCSR is a former
owner of part of the land in question. This matter was the subject of a
trial in the United States District Court in Shreveport, Louisiana which
was concluded in July of 1993. The court found that Joslyn Manufacturing
Company, an operator of the plant, was and is required to indemnify KCSR
for damages arising out of plant operations. (KCSR's potential liability
is as a property owner rather than as a generator or transporter of
contaminants.) The case was appealed to the United States Court of
Appeals for the Fifth Circuit, which Court affirmed the U.S. District
Court ruling in favor of KCSR.
In early, 1994, the Environmental Protection Agency ("EPA") added the
Lincoln Creosoting site to its Federal Comprehensive Environmental
Response, Compensation & Liability Act, ("CERCLA," also known as the
superfund law), national priority list. Since major remedial work has
been performed at this site by Joslyn and KCSR has been held by the
Federal District and Appeals Courts to be entitled to indemnity for such
costs, it would appear that KCSR should not incur significant remedial
liability. At this time, it is not possible to evaluate the potential
consequences of remediation at the site.
Management's Review of Strategic Alternatives. In late 1993, the Company
began the process of a comprehensive study, with the assistance of
outside consultants, of the strategic options available to further
increase value to the Company's stockholders. This study included
evaluation of a wide range of alternatives with the objective of
identifying opportunities for reinvestment of earnings, alternatives for
financing of capital requirements, methods of increasing the return on
the Company's investment in its various business segments and the
strategic positions of its primary subsidiaries within the industries in
which they operate. The alternatives studied ranged from operational
improvements to asset redeployments. The Company recently announced
authorization for the development of a plan for a public offering by DST
of approximately 51% of DST's common equity. The financial impact of
such a decision will produce, the Company believes, substantial
advantages to KCSI and its owners.
Consideration of strategic alternatives is not a new process for the
Company. Many such studies have been performed during KCSI's history to
assist the Company in determining the most effective use of its assets.
KCSI, as a holding company, is responsible for the management of its
primary assets; investments in its subsidiaries. Accordingly, KCSI
management continually evaluates its position as to the most effective
utilization of these assets. As early as the 1970's and 1980's, KCSI
was using investment assets in other companies as dividends to
shareholders (Kemper Corporation and MAPCO) as a way of redeploying
assets to increase shareholder value. This strategic review is intended
to utilize the strength of the Company's business lines and
capabilities, provide for future growth opportunities and achieve the
Company's strategic financial objectives. 1992 through 1994 and future
years have been and will be affected by these strategic decisions.
* In the period 1992-1994 KCSI management has followed these
strategies:
- Drive our strongest businesses.
- Capitalize on advantages of location and technology
leadership.
- Leverage earnings with productivity
gains for itself and its customers.
[Page 44]
- Link new directions to present market
and technical strengths.
* KCSI management has applied its cash flows primarily as follows:
- Strategic and operating needs of Transportation Services,
Information & Transaction Processing and Financial Asset
Management businesses to the enhancement of KCSI market
leadership positions.
- Reduction of debt.
- Repurchase of KCSI Common stock to the
extent possible.
- Improvement of the cash return to KCSI
stockholders.
The Company's dividend to stockholders will be reviewed annually and
adjustments considered that are consistent with growth in real earnings
and prevailing business conditions.
* During 1994, as part of the strategic planning process, the
Company sought to link its rail transportation operations with a
rail partner to improve its position within the railroad industry
while creating a stand alone financial services entity through tax
advantaged transactions with minimal regulating risk. This process
lead to a proposed transaction with Illinois Central Corporation
("IC") and spin off of the Company's financial services
businesses. After much discussion and analysis, however, the
Company and IC were unable to reach a definitive agreement on a
number of issues and determined that the transaction would not
meet the objectives previously established. Accordingly, the
Company and IC mutually terminated negotiations on the proposed
transaction. The Company will continue to operate its core
Transportation operations, which management believes occupies a
strong strategic position within the railroad industry and the
geographic area it serves.
* In early 1995, the KCSI Board of Directors authorized development
of a plan for a public offering by DST of approximately 51% of
DST's common equity.
In accordance with the Company's strategic focus, the purpose of
the offering would be to obtain better market recognition of DST's
performance and to obtain proceeds for the retirement of debt
including debt owed KCSI and general corporate purposes. Such an
offering, if completed, would significantly change the financial
structure of the Company. Capital raised by the offering may be
used for DST debt retirement to KCSI for reduction of KCSI debt,
repurchase of KCSI Common stock and general corporate purposes.
* The Transportation Services management team is committed to growth
in its service area and intends to expand through short-line rail
acquisitions and strategic joint ventures. This commitment is
evidenced by the following activity:
- In February 1995, KCSR filed a petition with the Interstate
Commerce Commission ("ICC") seeking approval for construction of
an approximate nine mile rail line from KCSR's main line into the
Geismar, Louisiana industrial area. The Geismar area is a large
industrial corridor, which includes companies engaged in the
petro-chemical industry, and is currently served by only one rail
carrier. The rail line would expect to be completed in
approximately 12 to 18 months after ICC approval. The Geismar
project extends KCSR's rail line and could be a significant source
of traffic and revenues thereby complementing its business in the
petro-chemical industry. The KCSR Geismar line extension has
received the support of certain shippers in the Geismar industrial
area and would provide those shippers with additional rail storage
facilities, production efficiencies and competitive transportation
service.
- In June 1993, KCSI completed the acquisition of MidSouth
Corporation, as previously discussed. The Company has historically
been a North/South railroad. This acquisition provides the Company
an East/West rail line, which presents the opportunity to be a
significant competitor in the intermodal transportation market. In
mid-November 1994, KCSR began dedicated through train service for
intermodal traffic between Dallas, Texas and Atlanta, Georgia in
conjunction with the Norfolk Southern Railway Company. This
acquisition also increased and diversified KCSR's market share in
its trade territory.
- In May 1992, the KCSR signed an agreement with the Santa Fe
Railway to purchase portions of its rail line in the Dallas, Texas
area. The sale consists of approximately 90 miles of track and an
80 acre intermodal facility. The agreement is being implemented in
phases over several years. Phase I of this agreement was completed
in late 1993. The final portion of Phase II is anticipated to be
completed in 1995. As a result of the agreement, KCSR has direct
access to the Dallas market for the first time in the Company's
history.
- In 1992, the Company purchased 530 acres of land adjacent to
the Company's Pabtex, Inc., coal and
[Page 45]
petroleum coke storage, barge and ship loading facility in Port
Arthur, Texas. The 530 acres includes 4,000 linear feet of deep
water frontage on the Sabine-Neches Waterway, which has direct
access to the Gulf of Mexico via the Intercoastal Waterway. This
acquisition increases the Transportation Service's deep water
access in the Port Arthur, Texas area and will permit a doubling
of capacity of the Pabtex coal and coke facility for future
expansion of the petroleum coke and coal import/export business
and development of additional port operations in KCSR's service
area.
The Company owns 1,025 acres of property located on the waterfront in
the Port Arthur, Texas area, which includes 22,000 linear feet of deep
water frontage and three docks. Port Arthur is an uncongested port with
direct access to the Gulf of Mexico. Approximately 75% of this property
is available for development.
- In April 1992, KCSR signed a letter of intent for the
purchase of all of the capital stock of the Graysonia, Nashville &
Ashdown Railway ("GNA"). The GNA connects with KCSR at Ashdown,
Arkansas and extends 32 miles east. The purchase price also
included industrial real estate. Acquisition of the GNA received
ICC approval and was merged into KCSR in June 1993.
These transactions fit within the strategic business plan for extension
of KCSR rail property and increase of the Company's traffic and industry
base.
* DST's growth in recent years has come not only from growth in its
core mutual fund processing business but also by product expansion
and acquisitions designed to strengthen market and strategic
positions.
- DST's strategic merger of Vantage with Continuum and
additional Continuum investments in 1994, as discussed earlier,
have increased the opportunities in the insurance industry in both
domestic and international markets. Continuum has been a good
partner with DST in the expansion of DST's AWD(R) product within
the insurance industry.
- In 1991, DST began evaluating the feasibility of marketing
its products outside the United States and also products that
would serve foreign markets in DST's product lines. In 1992, DST,
together with State Street Bank and Clarke and Tilley, Ltd. (a
United Kingdom software firm), formed Clarke and Tilley Data
Services ("CTDS"). CTDS is developing a unit trust accounting
system for the U.K. and Luxembourg markets, incorporating DST
workflow management and image technology.
- During 1993, DST completed the acquisition of Clarke &
Tilley, Ltd., (100% owned), which markets investment management
software primarily for use in Europe and the Pacific Rim, and
Corfax Benefit Systems, Ltd., (100% owned), a Canadian company,
which processes shareowner transactions for mutual funds and
pension accounts in Canada. These strategic acquisitions provide
DST with future growth opportunities for expansion of its products
into international markets, especially Europe and Canada.
- The formation, expansion, and internal reorganization of OTI
provides a greater variety and number of products which DST
businesses can offer to its existing customer base.
* KCSI has been committed to the mutual fund industry since 1962 and
intends to continue and expand that commitment in seeking strong
mutual fund growth and increase in its mutual fund servicing
businesses.
- In 1994, Janus introduced the Janus Overseas Fund, an
international equity fund and expanded product offerings for the
Janus Aspen Series, initiated in 1993. During 1993, Janus
introduced three new fund products: Janus Mercury Fund, an equity
fund; Janus Federal Tax Exempt Fund, a tax exempt income fund; and
the Janus Aspen Series, which are annuity products. During 1992,
Janus introduced three new mutual funds: Janus Enterprise Fund, an
equity fund; Janus Balanced Fund, a combination equity/fixed
income fund and Janus Short-Term Bond Fund, a short-term income
fund.
- In 1994, KCSI acquired a controlling interest in Berger
Associates, Inc. ("Berger") by increasing its ownership to over
80% from the 18% interest purchased in 1992. Berger is the
investment advisor to the Berger One Hundred Fund, Berger One
Hundred and One Fund, Berger Small Company Growth Fund as well as
private and other accounts.
* In 1992 and 1993, the Company's Board of Directors authorized
2-for-1 Common stock splits effected in the form of stock
dividends.
Consideration of the Company's strategic alternatives, including the
items mentioned above, are expected to continue and to present growth
opportunities in future years.
[Page 46]
KCSI
Management Report on Responsibility for Financial Reporting
The accompanying financial statements and related notes of Kansas City
Southern Industries, Inc. and its consolidated subsidiaries were
prepared by management in conformity with generally accepted accounting
principles appropriate in the circumstances. In preparing the financial
statements, management has made judgments and estimates based on
currently available information. Management is responsible for not only
the financial information but also all other information in this Annual
Report. Representations contained elsewhere in this Annual Report are
consistent with the financial statements and supplementary financial
information contained in the Financial Section.
The Company has a formalized system of internal accounting controls
designed to provide reasonable assurance that assets are safeguarded and
that its financial records are reliable. Management monitors the system
for compliance, and the Company's internal auditors measure its
effectiveness and recommend possible improvements thereto. In addition,
as part of their audit of the consolidated financial statements, the
Company's independent accountants, who are selected by the stockholders,
review and test the internal accounting controls on a selective basis to
establish the extent of their reliance thereon in determining the
nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of
financial reporting and internal accounting control through its Audit
Committee. This committee, composed solely of non-management directors,
meets regularly with the independent accountants, management and
internal auditors to monitor the proper discharge of responsibilities
relative to internal accounting controls and to evaluate the quality of
external financial reporting.
Price Waterhouse LLP
Report of Independent Accountants
To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the
financial position of Kansas City Southern Industries, Inc. and its
subsidiaries at December 31, 1994, 1993 and 1992, and the results of
their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
the opinion expressed above.
As discussed in Notes 7 and 10 to the financial statements, the Company
changed its method of accounting for income taxes and other
postretirement benefits in 1993 to conform with Statements of Financial
Accounting Standards Nos. 109 and 106.
/s/ Price Waterhouse LLP
Kansas City, Missouri
February 23, 1995
[Page 47]
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Millions, Except per Share Amounts
Years Ended December 31
1994 1993 1992
Operations Revenues $1,097.9 $ 961.1 $741.4
Costs and expenses 776.3 651.8 541.3
Depreciation and amortization 119.1 97.2 74.2
Operating income 202.5 212.1 125.9
Equity in net earnings of
unconsolidated affiliates
(Notes 4, 13) 24.8 14.1 11.1
Interest expense (53.6) (51.2) (33.1)
Pretax Pretax income 173.7 175.0 103.9
Income tax provision (Note 7) 63.5 69.0 35.2
Income before minority interest 110.2 106.0 68.7
Minority Minority interest in
consolidated earnings (Note 9) 5.3 9.0 4.9
Income before cumulative effect
of accounting changes 104.9 97.0 63.8
Accounting Cumulative effect of changes in accounting for
Changes income taxes and postretirement benefits,
net of taxes (Notes 7, 10) (6.5)
Net income $ 104.9 $ 90.5 $ 63.8
Per
Share Primary earnings per share (Note 1)
Data Before cumulative effect of
accounting changes $ 2.32 $ 2.16 $ 1.43
Cumulative effect of accounting changes (.14)
Total $ 2.32 $ 2.02 $ 1.43
Weighted average primary Common
shares outstanding (in thousands) 45,061 44,728 44,318
Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ .30 $ .30 $ .30
See accompanying notes to consolidated financial statements.
[Page 48]
CONSOLIDATED BALANCE SHEETS
Dollars in Millions at December 31
1994 1993 1992
ASSETS
Current Cash and equivalents $ 12.7 $ 6.6 $ 15.4
Assets Accounts receivable,
net (Note 5) 232.3 194.7 147.4
Inventories 46.6 48.3 26.7
Other current
assets (Note 5) 88.5 86.1 56.9
Total 380.1 335.7 246.4
Investments Held for operating
purposes (Note 4) 214.6 174.5 155.8
Properties Cost 2,101.3 1,792.0 1,312.0
Accumulated depreciation
and amortization (686.0) (599.4) (543.8)
Net (Note 5) 1,415.3 1,192.6 768.2
Other Intangibles and other
assets (Notes 2, 5) 220.8 214.2 78.0
Total assets $ 2,230.8 $ 1,917.0 $ 1,248.4
LIABILITIES & STOCKHOLDERS' EQUITY
Current Debt due within
Liabilities one year (Note 6) $ 56.4 $ 63.5 $ 62.0
Accounts and wages payable 140.8 70.9 55.3
Accrued liabilities
(Note 5) 142.4 154.0 101.3
Total 339.6 288.4 218.6
Other Long-term debt (Note 6) 928.8 776.2 387.0
Liabilities Deferred income taxes
(Note 7) 204.2 184.7 101.4
Other deferred credits 80.5 99.1 77.9
Contingencies (Notes 6, 7, 9, 11, 12)
Total 1,213.5 1,060.0 566.3
Minority Consolidated
Interest subsidiaries (Note 9) 10.5 5.9 1.1
Stockholders'$25 par, 4% noncumulative,
Equity Preferred stock 6.1 6.1 6.3
$1 par, Series B convertible,
Preferred stock (Note 8) 1.0 1.0
$.01 par, Common stock
(Note 8) .4 30.9 30.0
Capital surplus 338.0 303.9 89.5
Retained earnings 530.1 439.0 361.4
Shares held in
trust (Note 8) (200.0) (200.0)
ESOP deferred compensation (8.4) (18.2) (24.8)
Net Worth Stockholders' equity
(Notes 6, 8) 667.2 562.7 462.4
Total liabilities
and stockholders'
equity $ 2,230.8 $ 1,917.0 $ 1,248.4
See accompanying notes to consolidated financial statements.
[Page 49]
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
Years Ended December 31
1994 1993 1992
CASH FLOWS PROVIDED BY (USED FOR):
Operating Net income $104.9 $ 90.5 $63.8
Activities Adjustments to net income:
Depreciation and
amortization 119.1 97.2 74.2
Deferred income taxes 20.0 29.6 2.6
Equity in undistributed
earnings (23.9) (12.6) (8.6)
Employee benefit expenses not
requiring operating cash 4.3 10.1 19.5
Changes in working capital items:
Accounts receivable (35.8) (29.1) (40.6)
Inventories 1.6 (14.5) 3.0
Accounts payable 69.8 20.3 17.3
Accrued liabilities (20.6) 12.1 (16.2)
Other working capital
items, net (.6) (26.5) 1.7
Other, net (3.5) 12.1 6.2
Net 235.3 189.2 122.9
Investing Property acquisitions (287.7) (159.2) (154.9)
Activities Proceeds from disposal
of property 19.2 14.6 12.6
Investments in affiliates (24.6) (31.8) (16.6)
Purchase of companies, net of
cash acquired (42.6) (197.8) (28.5)
Proceeds from disposal of
other investments 4.5 3.9 16.4
Other, net (2.4) (24.4) (7.0)
Net (333.6) (394.7) (178.0)
Financing Proceeds from issuance
Activities of long-term debt 200.6 446.5 283.2
Repayment of long-term debt (66.3) (231.4) (214.6)
Proceeds from stock plans 4.9 7.3 7.0
Stock repurchased (10.3) (9.5) (30.9)
Cash dividends paid (13.3) (12.9) (13.0)
Other, net (11.2) (3.3) (5.2)
Net 104.4 196.7 26.5
Cash and Net increase (decrease) 6.1 (8.8) (28.6)
EquivalentsAt beginning of year 6.6 15.4 44.0
At end of year (Note 3) $ 12.7 $ 6.6 $ 15.4
See accompanying notes to consolidated financial statements.
[Page 50]
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions
$1 Par
$25 Par Series B$.01 Par Shares ESOP
Preferred PreferredCommonCapital Retained Held
Deferred
Stock Stock Stock Surplus Earnings In
Compen-
Trust sation
Total
Balance at
December 31, 1991 $ 6.9 $ - $30.3 $106.4 $ 310.6 $ - ($42.4) $411.8
Net income 63.8 63.8
Dividends (13.0) (13.0)
Stock repurchased (0.6) (1.1) (26.3) (28.0)
Options exercised and
stock subscribed 0.8 9.4 10.2
Contribution accruals 17.6 17.6
Balance at
December 31, 1992 6.3 - 30.0 89.5 361.4 - (24.8) 462.4
Net income 90.5 90.5
Dividends (12.9) (12.9)
Stock repurchased (0.2) (9.3) (9.5)
Issuance of Series B
Preferred stock 1.0 199.0 (200.0) 0.0
Options exercised and
stock subscribed 0.9 22.4 23.3
Contribution accruals 6.6 6.6
Other 2.3 2.3
Balance at
December 31, 1993 6.1 1.0 30.9 303.9 439.0 (200.0)(18.2) 562.7
Net income 104.9 104.9
Dividends (13.3) (13.3)
Options exercised and
stock subscribed 0.3 13.1 13.4
Stock repurchased (10.3) (10.3)
Stock plan shares issued
from treasury 0.2 4.4 4.6
Establishment of a
par value of
Common stock (31.0) 31.0 0.0
Redemption of Common
stock rights (0.5) (0.5)
Contribution accruals 9.8 9.8
Other (4.1) (4.1)
Balance at
December 31, 1994 $ 6.1 $1.0 $0.4 $338.0 $530.1 ($200.0)($8.4) $667.2
See accompanying notes to consolidated financial statements.
[Page 51]
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a
diversified holding company, which comprises businesses engaged in
Transportation Services, Information & Transaction Processing and
Financial Asset Management. Note 13 further describes the
operations of the Company.
The accounting and financial reporting policies of the Company conform
with generally accepted accounting principles. Use of the term "Company"
as described in this financial section means Kansas City Southern
Industries, Inc. as a holding company and all of its consolidated
subsidiary companies. Significant accounting and reporting policies are
described below.
Principles of Consolidation. The consolidated financial statements
include all majority owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
The equity method of accounting is used for all entities in which the
Company or its subsidiaries have significant influence but not more than
50% voting control interest; the cost method of accounting is generally
used for investments of less than 20% voting control interest.
Cash Equivalents. Short-term liquid investments with a maturity of
generally three months or less are considered cash equivalents. Carrying
value approximates market value due to the short-term nature of these
investments.
Inventories. Inventories held for resale are valued at the lower of
average cost or market; materials and supplies inventories for
transportation operations are valued at average cost.
Properties and Depreciation. Properties are stated at cost. Additions
and renewals constituting a unit of property are capitalized and all
properties are depreciated over the estimated remaining life of such
assets. Ordinary maintenance and repairs are charged to expense as
incurred.
The cost of transportation equipment and road property normally retired,
less salvage, is charged to accumulated depreciation. Conversely, the
cost of industrial and rental property retired, and the cost of
transportation property abnormally retired, together with accumulated
depreciation thereon, are eliminated from the property accounts and the
related gains or losses are reflected in earnings.
Depreciation for transportation operations is computed using composite
straight-line rates for financial statement purposes. The Interstate
Commerce Commission ("ICC") approves the depreciation rates used by The
Kansas City Southern Railway Company ("KCSR"). KCSR evaluates
depreciation rates for properties and equipment and implements ICC
approved rates. Periodic revision of rates have not had a material
effect on operating results. Unit depreciation methods, employing both
accelerated and straight-line rates, are employed in other business
segments. Accelerated depreciation is used for income tax purposes. The
ranges of annual depreciation rates for financial statement purposes
are:
Transportation
Road and structures 1% - 19%
Rolling stock & equipment 1% - 24%
Other equipment 2% - 6%
Industrial and rental property 2% - 25%
Capitalized leases 5% - 17%
The Company periodically evaluates the recoverability of its operating
properties. If it is determined that the carrying value of properties
exceeds the discounted value of future estimated cash flows over the
remaining productive lives of the assets, such excess is charged to
earnings.
Software Development. The Company's Information & Transaction Processing
subsidiary, DST Systems, Inc. ("DST"), expenses as incurred development
and maintenance expenditures for its proprietary software.
Advertising. The Company expenses all advertising as incurred. Direct
response advertising for which future economic benefits are probable and
specifically attributable to the advertising is not material.
Intangibles. Intangibles principally represent the excess of cost over
the fair value of net underlying assets of acquired companies using
purchase accounting and are amortized using the straight-line method
over periods ranging from 7 to 40 years.
Income Taxes. Deferred income tax effects of transactions reported in
different periods for financial reporting and income tax return purposes
are recorded by the liability method. This method gives consideration to
the future tax consequences of the deferred income tax items and
immediately recognizes changes in income tax laws upon enactment. The
income statement effect is derived from changes in deferred income taxes
on the balance sheet.
Prior to January 1, 1993, provision was generally not made for possible
deferred tax liabilities for unremitted earnings of
[Page 52]
corporate unconsolidated affiliates for which the Company's interest is
accounted for under the equity method, as those earnings were expected
to be reinvested.
Beginning in 1993, on a prospective basis, deferred tax liabilities are
provided on the portion of unremitted earnings from such affiliates
which would not qualify for dividend exclusion had the earnings been
distributed. The cumulative amount of unremitted earnings through
December 31, 1994 was $81 million, which includes $48.4 million related
to Investors Fiduciary Trust Company, a DST affiliate. Tax expense,
should these earnings be remitted to the Company in the form of
dividends, would amount to $5.7 million at currently enacted tax rates.
Deferred taxes actually provided through December 31, 1994 were $2.7
million.
Treasury Stock. The excess of par over cost of the Preferred shares held
in Treasury is credited to capital surplus. Common shares held in
Treasury are accounted for as if they were retired and the excess of
cost over par value of such shares is charged to capital surplus.
Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the
year they are exercised.
The Leveraged Employee Stock Ownership Plans' ("ESOP") loan principal
payments are accounted for as employee benefit expense, interest
payments are recorded as interest expense, and quarterly dividends paid
from retained earnings on the ESOP stock are used to partially service
the ESOP loan. Because the ESOP loan is guaranteed by KCSI, the
borrowings are reported as long-term debt and corresponding amounts,
representing "ESOP deferred compensation," are reduced as the
related compensation expense is recognized by the Company.
Earnings per Share. On January 28, 1993, the Company authorized a
2-for-1 stock split effected in the form of a stock dividend paid March
17, 1993.
On January 31, 1992, the Company authorized a 2-for-1 stock split
effected in the form of a stock dividend paid March 17, 1992.
Appropriate share and per share data have been restated to reflect both
of these stock splits.
The Company uses the Primary method for computing earnings per share.
The difference between the Primary and Fully-Diluted methods is not
material.
Stockholders' Equity. Information regarding the Company's capital stock
at December 31, 1994 follows:
Shares Shares
Authorized Issued
$25 Par, 4% noncumulative,
Preferred stock 840,000 649,736
$1 Par,
Preferred stock 2,000,000 None
$1 Par, Series A,
Preferred stock 150,000 None
$1 Par, Series B,
Preferred stock 1,000,000 1,000,000
$.01 Par,
Common stock 400,000,000 48,402,192
The Company's Series B Preferred stock, issued in
1993, has a $200 per share liquidation preference and
is convertible to Common at a ratio of 4 to 1.
Shares outstanding are as follows, at December 31,
(in thousands):
1994 1993 1992
$25 Par,
Preferred stock 243 243 252
$.01 Par,
Common stock 43,518 42,798 41,616
Retained earnings include equity in unconsolidated affiliates of $78.3,
$53.2 and $42.9 million at December 31, 1994, 1993 and 1992,
respectively.
[Page 53]
Note 2. Mergers and Acquisitions
On October 14, 1994, the Company completed the acquisition of a
controlling interest in Berger Associates, Inc. ("Berger"). The Company
made payments of $47.5 million, in cash, pursuant to a Stock Purchase
Agreement, (the "Agreement"). The Agreement also provides for additional
purchase price payments, totalling approximately $62.4 million,
contingent upon attaining certain levels (up to $10 billion) of assets
under management, as defined in the Agreement, over a five year period.
The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% to over 80%.
Adjustments to appropriate asset and liability balances have been
recorded based upon estimated fair values of such assets and
liabilities. The transaction resulted in the recording of intangibles as
the purchase price exceeded the fair value of underlying tangible
assets. The intangible amounts will be amortized over their estimated
economic life of 15 years, subject to completion of an economic life
analysis. The financial statements of Berger were consolidated into the
Company 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 year
ended December 31, 1994, would have had an immaterial effect on the
consolidated results of the Company.
On January 31, 1995, DST completed the sale of its 50% interest in IFTC
Holdings, Inc., which wholly-owns Investors Fiduciary Trust Company, to
State Street Boston Corporation ("State Street"). At closing, DST
received 2,986,111 shares of State Street common stock in a tax free
exchange (representing an approximate 4% ownership interest in State
Street). As a result of this transaction, DST recognized a gain on the
sale of an equity investment and after consideration of appropriate tax
effects recognized a net gain of $4.7 million in first quarter 1995.
With the closing of the transaction, IFTC ceases to be an unconsolidated
affiliate of DST and no further equity in earnings of IFTC will be
recorded by DST. DST recognized equity in earnings from IFTC of $6.5,
$4.8 and $4.8 million in 1994, 1993 and 1992, respectively.
The Company completed the acquisition of MidSouth Corporation
("MidSouth") on June 10, 1993. The purchase price for the acquisition of
the MidSouth common stock aggregated approximately $213.5 million paid
in cash by KCSI to holders of MidSouth's common stock and in connection
with the exercise of certain options held by MidSouth employees and
others. Liabilities were assumed in the amount of $306.9 million.
The MidSouth transaction, which was accounted for as a purchase,
represented a significant transaction for the Company. Results of
operations of the Company for the years ended December 31, 1993 and 1994
include the operations of MidSouth as a consolidated subsidiary
effective with the closing of the transaction.
Adjustments were recorded to appropriate asset and liability balances
based upon the fair value of such assets and liabilities. Based upon
these adjustments, the total purchase price exceeded the fair value of
the underlying net assets by a total of approximately $98 million and is
being amortized over a period of 40 years. Additional assets are being
depreciated over lives ranging from 5 to 35 years.
Certain unaudited pro forma financial information, regarding results of
operations assuming the MidSouth transaction had been completed on
January 1, 1993 and 1992, respectively, follows (in millions, except per
share amounts):
Years Ended December 31
1993 1992
Revenues $1,010.2 $ 856.1
Income before cumulative
effect of accounting changes 98.5 67.9
Net income 93.4 67.9
Primary earnings per share:
Before cumulative effect of
accounting changes $ 2.19 $ 1.53
After cumulative effect of
accounting changes 2.08 1.53
During second quarter 1993, DST completed the acquisitions of Clarke &
Tilley Ltd., (100% owned), a United Kingdom company, which markets
investment management software primarily for use in Europe and the
Pacific Rim; Corfax Benefit Systems, Ltd., (100% owned), a Canadian
company, which processes shareowner transactions for mutual funds and
pension accounts in Canada; and DBS Systems Corporation, (60% owned), a
United States company, which has developed a software billing system for
the direct broadcast satellite industry. During the third quarter 1993,
DST acquired Belvedere Financial Systems, Inc., (100% owned), which
develops and markets portfolio accounting and investment man-
[Page 54]
agement systems. Each of these transactions was accounted for as a
purchase. The total purchase price exceeded the fair value of the
underlying net assets, and is being amortized over a period of 7 to 20
years. Cash paid for these transactions was approximately $15.3 million
and liabilities assumed were $10.3 million.
Effective September 30, 1993, DST completed the merger of its 90.5%
owned subsidiary, Vantage Computer Systems, Inc. ("Vantage"), into a
subsidiary of The Continuum Company, Inc. ("Continuum"). DST received
approximately 3.6 million shares of Continuum stock. As a result of this
transaction and through additional purchases of Continuum stock, DST
owned approximately 24% of the outstanding common stock of Continuum at
December 31, 1993. In 1994, DST purchased additional Continuum shares
through privately negotiated transactions. Accordingly, at December 31,
1994, DST owned approximately 29% (5.5 million shares) of Continuum's
outstanding common stock. In the initial exchange, DST exchanged Vantage
stock with a book value of approximately $17 million for Continuum stock
with a then current market value of approximately $62 million. DST
accounted for the initial exchange as a non-cash, non-taxable exchange
in investment basis of Vantage for an investment in Continuum.
Accordingly, no gain recognition was associated with the transaction.
Continuum is a publicly traded international consulting and computer
services firm based in Austin, Texas, which primarily serves the needs
of life, and property and casualty insurance companies for computer
software and services.
Note 3. Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information. (in millions):
1994 1993 1992
Cash payments:
Interest (net of
capitalized) $ 67.5 $ 47.4 $ 34.4
Income taxes 15.5 24.1 27.1
Supplemental Schedule of Noncash Investing and Financing Activities. DST
acquired $29.7, $21 and $17 million in 1994, 1993 and 1992,
respectively, in computer mainframe equipment and software for the
Winchester Data Center. These purchases were financed through bank term
loans, with equipment manufacturers and/or software vendors, and
accordingly, required no direct outlay of cash.
In first quarter of 1994, KCSI issued approximately 234,000 shares of
Common stock under the Seventh Offering of the Employee 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.
As described in greater detail in Note 6, the Company issued $200
million in Notes and Debentures in 1992, and $200 million in Notes in
1993. As part of these transactions, the Company incurred $3.2 million
and $2.5 million, respectively, in discount and underwriting fees which
were transferred directly to the underwriter. The discount and
underwriting fees represent non-cash amounts, which are being amortized
over the respective terms of the Notes and Debentures.
In 1993, DST entered into a sale/leaseback of certain mainframe computer
equipment. As part of this transaction, the buyer assumed certain debt
obligations related to the computer equipment in the amount of $16.6
million, which provided no cash flow to DST.
Property acquired under capital leases was $3.4, $1.3 and $1.4 million
for 1994, 1993 and 1992, respectively. Such acquisitions require no
direct outlay of cash.
[Page 55]
Note 4. Investments
Investments held for operating purposes include investments in
unconsolidated affiliates as follows (in millions):
Percentage Ownership Carrying Value
Company Name December 31, 1994 1994 1993 1992
The Continuum Company, Inc. (i),(vii) 29% $ 62.5 $ 37.1 $ -
Investors Fiduciary Trust Co.(i),(vi),(ix) 50% 52.9 50.2 47.6
Boston Financial Data Services, Inc. (i) 50% 15.5 11.4 8.7
Argus Health Systems, Inc. (i) 50% 9.8 6.1 3.3
Midland (i),(iii) 45% 4.8 3.2 3.4
First of Michigan Capital Corp. (i) 21% 7.6 7.6 7.2
MidSouth Corporation (iv) 26.2
Berger Associates, Inc. (v) 1.2 1.2
Partnerships 1.4 1.5 2.3
Equipment Finance Receivables (ii) 40.0 42.8 33.1
Other 23.0 20.5 29.6
Market Valuation Allowances (2.9) (7.1) (6.8)
Total (viii) $214.6 $174.5 $155.8
(i) owned by DST Systems, Inc. (wholly-owned subsidiary) or a
subsidiary of DST
(ii) fair market value based upon rates currently offered was
approximately $40.5 million at December 31, 1994
(iii) Midland is comprised of Midland Data Systems, Inc. and Midland
Loan Services, L.P. (both 45% owned)
(iv) in 1993, the Company completed its purchase of MidSouth which is
now consolidated
(v) in 1994, the Company acquired a controlling interest in Berger, by
increasing its ownership percentage from approximately 18% to over 80%,
which is now consolidated
(vi) includes $1.6 million of unrealized depreciation on "available for
sale" securities
(vii) fair market value based upon a quoted share price was
approximately $169 million at December 31, 1994
(viii) fair market value is not readily determinable for investments
other than noted above, and in the opinion of management, market value
approximates carrying value
(ix) effective January 31, 1995, IFTC ceased to be an unconsolidated
affiliate of DST as a result of the sale of DST's interest (see Note 2).
Additionally, as a result of the 1993 adoption of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," the Company will be required to "mark to
market" its investment in State Street Boston Corporation.
Transactions Between Unconsolidated Affiliates. Boston Financial Data
Services, Inc. ("BFDS") is a corporate joint venture of DST and State
Street Boston Corporation, the parent of State Street Bank and Trust
Company. BFDS performs shareholder accounting services for companies
using State Street Bank and Trust Company as their transfer agent and
DST's data processing services, mutual fund recordkeeping and
shareholder accounting systems, and securities transfer system.
Prior to the sale of DST's interest in Investors Fiduciary Trust Company
("IFTC"), discussed in Note 2, IFTC was a corporate joint venture of DST
and Kemper Financial Services, Inc. IFTC provides transfer agent and
custodial services primarily to the mutual fund industry and utilizes
DST's portfolio accounting, securities transfer, and mutual fund
systems. DST received advance payments from IFTC for services to be
provided in the subsequent fiscal year. At December 31, 1993 and 1992,
these advance payments amounted to $4 and $3 million, respectively; none
at December 31, 1994.
Argus Health Systems, Inc. ("Argus") is a corporate joint venture of DST
which provides pharmaceutical claims processing services for the health
care industry. Argus uses DST's data processing services. DST received
cash advances from Argus totalling $5 million as of December 31, 1993.
Midland Data Systems, Inc. ("MDS") is a corporate joint venture of DST,
which was awarded contracts with the Resolution Trust Corporation
("RTC") for the operation (using DST's Winchester Data Center) of an
Asset Management System and a Control Totals Module System for use by
the RTC. In 1994, the RTC converted off the Midland system; however,
Midland continues to perform programming work for the RTC related to the
system. In 1992, Midland Loan Services L.P. ("MLS") was formed to
provide comprehensive commercial loan servicing for assets, performing
and non-performing loans, and related asset management services for
governmental and institutional clients. MDS is the Corporate General
Partner of MLS.
The Continuum Company, Inc. ("Continuum") became an equity affiliate of
DST during 1993 when DST exchanged its interest in Vantage, as discussed
in Note 2. Subsequent to this transaction, DST and Continuum
[Page 56]
reached an agreement whereby DST will provide all of Continuum's North
American operations data processing requirements through use of DST's
Winchester Data Center.
DST revenues associated with the above unconsolidated affiliates were
$76, $74 and $50 million for 1994, 1993 and 1992, respectively. Accounts
receivable include amounts due from unconsolidated affiliates of $14,
$16 and $13 million for 1994, 1993 and 1992, respectively, for services
provided by DST in the ordinary course of business and payable at usual
trade terms.
Financial Information. Combined financial information of all
unconsolidated affiliates, principally DST related, which the Company
and its subsidiaries account for on the equity method is as follows (in
millions):
1994 1993 1992
Investment in unconsolidated
affiliates $ 166.5 $ 126.3 $ 77.9
Equity in net assets of
unconsolidated affiliates 159.1 117.3 69.8
Dividends and distributions received
from unconsolidated affiliates 1.0 1.5 2.5
Financial condition:
Current assets $1,129.7 $1,047.7 $ 826.4
Non-current assets 143.6 150.1 69.6
Assets $1,273.3 $1,197.8 $ 896.0
Current liabilities $ 933.9 $ 856.8 $ 693.6
Non-current liabilities 73.2 122.9 56.1
Equity of stockholders and
partners 266.2 218.1 146.3
Liabilities and equity $1,273.3 $1,197.8 $ 896.0
Operating results:
Revenues $ 652.1 $ 383.8 $ 272.6
Costs & expenses 597.3 354.1 246.8
Net income $ 54.8 $ 29.7 $ 25.8
Financial information with respect to IFTC Holdings, Inc. and its
wholly-owned subsidiary Investors Fiduciary Trust Company, which are
included in the amounts shown above, is as follows (in millions):
Financial condition:
Current assets $ 814.0 $ 835.5 $ 722.9
Non-current assets 4.5 1.4 2.3
Assets $ 818.5 $ 836.9 $ 725.2
Current liabilities $ 712.6 $ 711.2 $ 627.9
Non-current liabilities 25.2 10.7
Equity of stockholders 105.9 100.5 86.6
Liabilities and equity $ 818.5 $ 836.9 $ 725.2
Operating results:
Revenues $ 63.6 $ 51.2 $ 64.1
Costs & expenses 50.7 41.6 54.4
Net income $ 12.9 $ 9.6 $ 9.7
Other. Interest income on cash and equivalents was $1.6, $1.8 and $4.6
million in 1994, 1993 and 1992, respectively.
Berger Associates, Inc. At December 31, 1993, the Company had acquired
an approximate 18% interest in Berger. During 1994, the Company
acquired a controlling interest (over 80%) of Berger (see Note 2.)
MidSouth Corporation. At December 31, 1992, the Company had acquired
approximately 16% of MidSouth's Common stock. In 1993, the Company
completed its acquisition of MidSouth (see Note 2.)
[Page 57]
Note 5. Other Balance Sheet Captions
Accounts Receivable. Accounts receivable include the following
allowances (in millions):
1994 1993 1992
Accounts receivable $ 237.6 $ 199.0 $ 152.4
Allowance for doubtful accounts (5.3) (4.3) (5.0)
Accounts receivable, net $ 232.3 $ 194.7 $ 147.4
Doubtful account expense $ 3.3 $ 2.1 $ 1.6
Other Current Assets. Other current assets include the following items
(in millions):
1994 1993 1992
Maturities of equipment finance receivables
(Southern Leasing Corp.) $ 25.4 $ 25.6 $ 22.9
Deferred taxes 17.9 23.8 9.8
Marketable investments
(cost approximates market) 17.6 19.0 8.8
Other 27.6 17.7 15.4
Total $ 88.5 $ 86.1 $ 56.9
Properties. Properties and related accumulated depreciation and
amortization are summarized below (in millions):
1994 1993 1992
Properties, at cost
Transportation
Road properties $ 1,198.4 $ 1,075.3 $ 684.0
Equipment, including
$15.5, $12.9 and $12.6
financed under capital leases 444.9 355.6 338.4
Land and Facilities 67.8 67.2 59.0
Information & Transaction Processing,
including $5.9, $5.6 and $3.9 equipment
financed under capital leases 351.0 262.8 208.1
Financial Asset Management, including
$1.6, $1.6 and $1.5 equipment
financed under capital leases 30.1 21.7 12.8
Corporate and Other 9.1 9.4 9.7
Total $ 2,101.3 $ 1,792.0 $1,312.0
1994 1993 1992
Accumulated depreciation and amortization
Transportation
Road properties $ 295.2 $ 264.2 $ 251.6
Equipment, including $8.9,
$8.6 and $8.1 for capital leases 179.7 174.8 168.0
Facilities 22.1 20.2 18.4
Information & Transaction Processing,
including $4.4, $3.7 and $1.7 for
equipment capital leases 169.6 128.5 98.9
Financial Asset Management,
including $.8, $.5 and $.2
for equipment capital leases 14.5 7.2 3.0
Corporate and Other 4.9 4.5 3.9
Total $ 686.0 $ 599.4 $ 543.8
Net Properties $ 1,415.3 $ 1,192.6 $ 768.2
[Page 58]
Intangibles and Other Assets. Intangibles and other assets include the
following items (in millions):
1994 1993 1992
Intangibles $ 244.9 $ 194.6 $ 74.8
Accumulated amortization (39.8) (31.3) (16.6)
Net 205.1 163.3 58.2
Other assets 15.7 50.9 19.8
Total $ 220.8 $ 214.2 $ 78.0
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
1994 1993 1992
Prepaid freight charges due other
railroads $ 35.1 $ 32.2 $ 27.4
Current interest payable on
indebtedness 25.4 18.9 11.9
Other 81.9 102.9 62.0
Total $ 142.4 $ 154.0 $ 101.3
Note 6. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow
(in millions):
1994 1993 1992
KCSI
Competitive Advance & Revolving Credit
Facilities, with reducing commitments
through December 8, 1997 $319.0 $231.0 $ -
Rate: Below Prime
Notes and Debentures, due July 8,
1998 to July 1, 2022 400.0 400.0 200.0
Unamortized discount (2.3) (2.6) (1.6)
Rate: 5.75% to 8.8%
ESOP secured term loan, due
serially to February 28, 1997 13.2 22.8 26.5
Rate: 7.6%
Transportation Services
Equipment trust indebtedness, due
serially to December 15, 2006 115.4 67.8 80.8
Rate: 7.15% to 15.0%
Short-term renewable lease
financing working capital lines 46.0 32.6 29.0
Rate: Below prime
Subordinated and senior notes,
and industrial revenue bonds, due
April 1, 1995 to May 1, 2004 12.3 15.3 20.4
Rate: 7.13% to 12.95%
DST
ESOP secured term loan,
repaid in 1993 3.9
Secured and unsecured term loans,
promissory and mortgage notes,
various maturities to January 2007 59.2 58.2 68.7
Rate: 5.5% to 10.5%
Other
Miscellaneous subsidiary obligations,
due April 1995 to September 1998
Rate: Below Prime to 27.9% 22.4 14.6 21.3
Total 985.2 839.7 449.0
Less debt due within one year 56.4 63.5 62.0
Long-term debt $928.8 $776.2 $387.0
[Page 59]
New KCSI Credit Agreements. During 1994, the Company established or
increased credit agreements with several lending institutions. These new
or expanded credit lines increased the Company's borrowing ability by
$150 million. These agreements bear interest rates below prime. Proceeds
from these agreements have been used to finance the Berger acquisition
and subsidiary working capital requirements. Remaining credit capacity
under these agreements is intended for general corporate purposes. These
agreements require commitment or facility fees ranging from .10-.125%
per annum and have provisions similar to those included in the Company's
$250 million credit agreement, discussed below. At December 31, 1994,
the Company had an aggregate of $115 million of indebtedness outstanding
on these agreements.
KCSI $250 Million Credit Agreement. On December 8, 1992, the Company
established a credit agreement in the amount of $250 million. A
commitment fee of .25% per annum is required on the unused portion. This
agreement replaced the Company's then existing $100 million credit
agreement, which had been in place since 1989. The revolving credit
commitment reduces to $188 million on June 8, 1996; $125 million on
December 8, 1996; $63 million on June 8, 1997 and final maturity is due
December 8, 1997. Proceeds have been used, in part, to fund acquisition
of MidSouth Corporation and refinance certain MidSouth indebtedness and
for general corporate purposes.
Among other provisions, the agreement limits subsidiary indebtedness,
sale of assets, coverage ratios and requires minimum consolidated net
worth of $375 million plus 50% of net income after December 31, 1992.
Public Debt Transactions. On July 1, 1992, the Company issued $100
million 7.875% Notes due 2002 and $100 million 8.8% Debentures due 2022
under a $300 million debt securities registration with the Securities
and Exchange Commission. The 7.875% Notes are not redeemable prior to
their maturity in 2002, the 8.8% Debentures are redeemable on or after
July 1, 2002 at a premium of 104.04%, which declines to par on or after
July 1, 2012. Proceeds from the debt offer have been used to repay
borrowings under then existing revolving credit agreements. The Company
used the remaining net proceeds for general corporate purposes including
debt repayments, working capital, capital expenditures, acquisition of
or investments in businesses and assets and acquisition of the Company's
capital stock.
On March 3, 1993, the Company issued $100 million of 6.625% Notes due
2005 under the remaining 1992 registration with the Securities and
Exchange Commission. The notes are not redeemable prior to maturity.
Proceeds were used for debt repayment by DST and Southern Credit
Corporation, working capital, capital expenditures, acquisition of or
investments in businesses, and assets and acquisition of the Company's
capital stock.
On June 24, 1993, the Company issued $100 million of 5.75% Notes due in
1998 under a $200 million 1993 debt securities registration with the
Securities and Exchange Commission. The Notes are not redeemable prior
to maturity. The net proceeds were used to refinance certain MidSouth
debt.
This debt was issued at a total discount of $2.8 million which is being
amortized over the respective debt maturities on a straight-line basis,
which is not materially different from the interest method.
KCSI ESOP. In 1988, the Company established a $39 million leveraged ESOP
(see Stockholders' Equity Note 8). Related indebtedness is repayable
over ten years, and guaranteed by the Company.
Among other provisions, the KCSI ESOP loan agreement requires minimum
consolidated tangible net worth (stockholders' equity plus deferred
income taxes less intangibles) of $250 million.
In 1994, the Company made contributions to the ESOP plan sufficient to
retire $5.6 million of indebtedness in advance of its scheduled
maturity.
Railway Indebtedness. KCSR has purchased rolling stock under conditional
sales agreements, equipment trust certificates and capitalized lease
obligations, which equipment has been pledged as collateral for the
related indebtedness.
Credit Lines. Unused lines of credit at December 31, 1994 follow (in
millions):
Commitment
or
Facility Lines of Credit
Fee Total Unused
KCSI .10-.25% $450.0 $131.0
DST Systems, Inc. None 28.9 22.2
Southern Credit
Corporation .375% 65.0 19.0
KCSR .1875% 5.0
Total $548.9 $172.2
[Page 60]
Other Agreements, Provisions and Restrictions.
As previously noted, the Company and several of its consolidated
subsidiaries have debt agreements containing restrictions on dividends,
loans, advances and transfers of assets to the parent company, limits on
guarantees and leasing commitments, and maintenance of minimum levels of
working capital. At December 31, 1994, the Company was in compliance
with provisions and restrictions of these agreements. Unrestricted
retained earnings at December 31, 1994 were $96.9 million.
Guarantees. The Company and its subsidiaries are guarantors of $1.8
million principal indebtedness of partnerships and other entities
involving the Company or its subsidiaries. These guarantees represent
"off balance sheet" contingent liabilities.
Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, and office and other operating facilities
under various capital and operating leases. Rental expenses under
operating leases were $53, $33 and $25 million for the years 1994, 1993
and 1992, respectively.
Minimum annual payments and present value thereof, under existing
capital leases, other debt maturities and minimum annual rental
commitments under noncancellable operating leases are as follows (in
millions):
Capital Leases
Minimum Net
Lease Less Present Other Operating
Payments Interest Value Debt Total Leases
1995 $ 3.1 $ 1.0 $ 2.1 $ 54.3 $ 56.4 $ 50.3
1996 2.3 .7 1.6 28.0 29.6 46.3
1997 1.6 .5 1.1 26.1 27.2 34.5
1998 1.0 .4 .6 111.2 111.8 27.0
1999 .8 .3 .5 11.1 11.6 21.8
Later years 5.4 1.4 4.0 744.6 748.6 52.0
Total $ 14.2 $ 4.3 $ 9.9 $975.3 $985.2 $231.9
Fair Value of Long-Term Debt. Based upon the borrowing rates currently
available to the Company and its subsidiaries for indebtedness with
similar terms and average maturities, the fair value of long-term debt
was approximately $959, $903 and $463 million at December 31, 1994, 1993
and 1992, respectively.
Note 7. Income Taxes
The Company adopted, effective January 1, 1993, Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income
Taxes." SFAS 109 was issued in February 1992 as an amendment to
Statement of Financial Accounting Standards No. 96, "Accounting for
Income Taxes," ("SFAS 96"). The Company had previously adopted SFAS 96
effective January 1, 1988. The adoption of SFAS 109 resulted in a
$970,000 charge to earnings in the first quarter of 1993.
Under the liability method specified by SFAS 109, the deferred tax
liability is determined based on the difference between the financial
statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences
reverse. Deferred tax expense is the result of changes in the liability
for deferred taxes. The principal difference between the Company's
assets and liabilities recorded for financial statement and tax return
purposes is accumulated depreciation.
[Page 61]
Tax Expense. Income tax expense attributable to continuing operations,
consists of the following components (in millions):
1994 1993 1992
Current
Federal $40.2 $31.7 $25.4
State and local 3.3 3.2 1.8
Total current 43.5 34.9 27.2
Deferred
Federal 16.0 24.5 6.9
Federal enacted rate change 3.4
State and local 4.0 6.2 1.1
Total deferred 20.0 34.1 8.0
Total income tax expense $63.5 $69.0 $35.2
Deferred Taxes. Deferred taxes are recorded based upon differences
between the financial statement and tax basis of assets and liabilities
and available tax credit carryovers. Temporary differences which give
rise to a significant portion of federal deferred tax expense (benefit)
applicable to continuing operations are as follows (in millions):
1994 1993 1992
Depreciation $16.7 $19.5 $ 9.0
Deferred revenue (.3) (1.6) (.4)
Deferred gain on asset dispositions 1.2 .3
AMT credit and NOL carryovers (5.9) (.3) 1.4
Other expenses for financial
reporting purposes not currently
deductible for tax purposes 4.3 9.0 (2.7)
Other, net 1.2 .1 (.7)
Total $16.0 $27.9 $ 6.9
The federal and state deferred tax liabilities and deferred tax (assets)
recorded on the Consolidated Balance Sheets at December 31, 1994 and
1993, respectively, follow (in millions):
1994 1993
Liabilities:
Depreciation $259.2 $242.5
Equity, unconsolidated affiliates 5.1 1.3
Gross deferred tax liabilities 264.3 243.8
Assets:
NOL and AMT credit carryovers (31.7) (23.2)
Book reserves not currently deductible
for tax (20.0) (23.2)
Deferred compensation and other
employee benefits (13.1) (14.4)
Deferred revenue (5.0) (4.7)
Vacation accrual (3.5) (2.8)
Foreign NOL carryforwards (1.9) (.7)
Other, net (5.8) (5.9)
Gross deferred tax assets (81.0) (74.9)
Deferred tax asset valuation allowance 1.9 .7
Net deferred tax liability $185.2 $169.6
[Page 62]
Management has determined, based upon the Company's history of prior
operating earnings and its expectations for the future, that except for
the deferred tax valuation allowance provided for foreign NOL
carryforwards, operating income of the Company will, more likely than
not, be sufficient to recognize fully the above gross deferred tax
assets.
Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax
statutory rates of 35% in 1994 and 1993 and 34% in 1992, are as follows
(in millions):
1994 1993 1992
Income tax expense using the
statutory rate in effect $60.8 $61.2 $35.4
Tax effect of:
Unremitted earnings of
equity investees (6.3) (3.7) (3.0)
Cumulative effect of enacted
1% federal tax rate increase 3.4
Other, net 1.7 (1.3) (.1)
Federal income tax expense 56.2 59.6 32.3
State and local income
tax expense 7.3 9.4 2.9
Total $63.5 $69.0 $35.2
Effective tax rate 36.6% 39.4% 33.9%
Tax Carryovers. At December 31, 1994, the Company had $11.7 million of
alternative minimum tax credit carryover. This credit can be carried
forward indefinitely and is available on a "tax return basis" to reduce
future federal income taxes payable. The MidSouth Corporation generated
$3.4 million of the above alternative minimum tax credit prior to its
acquisition by the Company.
The amount of federal net operating loss carryover generated by the
MidSouth Corporation prior to its acquisition was $57.1 million with
expiration dates beginning in the year 2001. The use of preacquisition
net operating losses and tax credit carryovers is subject to limitations
imposed by the Internal Revenue Code. The Company does not anticipate
that these limitations will affect utilization of the carryovers prior
to their expiration.
Tax Examinations. Examinations of the consolidated federal income tax
returns by the Internal Revenue Service ("IRS") have been completed for
the years 1984-1989 and the IRS has proposed $14.6 million in tax
assessments for these years. In addition, other taxing authorities have
also completed examinations principally through 1992, and have proposed
additional tax assessments aggregating $2.4 million, before benefit for
federal income tax deductions related thereto.
Since most of these asserted tax deficiencies represent temporary
differences, subsequent payments of taxes will not require additional
charges to income tax expense. In addition, accruals have been made for
interest (net of tax benefit) for estimated settlement of the proposed
tax assessments. Thus, management believes that final settlement of
these matters will not have a material effect on the accompanying
financial statements.
[Page 63]
Note 8. Stockholders' Equity
Establishment of Par Value for Common Stock. On May 6, 1994, the Company
amended its certificate of incorporation to set a par value for the
Common stock and increase its authorized shares. 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. In addition, the number
of authorized Common shares was increased from 100 million to 400
million.
Stock Option Plans. Employee Stock Option Plans established in 1978,
1983 and 1987 provide for the granting of options to purchase up to
2,800,000 (pre-splits) shares of the Company's Common stock by officers
and other designated employees. In addition, the Company established a
1991 plan which authorized 2% of the outstanding shares available for
grant; the Board of Directors amended the 1991 plan in November 1991, to
provide for the granting of two million shares in lieu of the 2% of
outstanding shares. The amendment was approved by KCSI stockholders in
May 1992. In addition, the Company established a 1993 Directors' Stock
Option Plan with a maximum of 120,000 shares for grant. Shares
authorized for the 1991 Plan were adjusted for the stock split to
4,000,000 and the Plan was amended to increase the number of shares
authorized by 3,400,000 shares for a total of 7.4 million shares.
Such options have been granted at 100% of the average market price of
the Company's stock on the date of grant and may not be exercised sooner
than one year, nor longer than ten years following the date of the
grant, except that options outstanding for six months or more, with
limited rights, become immediately exercisable upon certain defined
circumstances constituting a change in control of the Company.
The Plans include provisions for stock appreciation rights ("SARs") and
limited rights ("LRs"), but, in 1987, substantially all outstanding SARs
and related options were exchanged for "bonus" options and LRs. In
addition, special stock options, SARs and LRs, exercisable only upon
certain defined circumstances constituting a change in control of the
Company, were granted to certain officers and directors of the Company.
All outstanding options include LRs. Relevant information is summarized
below:
1994 1993 1992
Stock Options:
Outstanding at January 1 3,935,800 5,527,648 2,341,934
Exercised (904,235) (1,987,848) (796,360)
Cancelled/Expired (30,000) (4,000) (18,500)
Granted 278,950 400,000 1,236,750
Effect of Stock Splits 2,763,824
Outstanding at December 31 3,280,515 3,935,800 5,527,648
Exercisable at December 31 2,488,665 2,851,400 3,567,248
Exercise Price, December 31:
for all outstanding $8.7969 $8.7969 $8.50
options to $49.00 to $41.5625 to $22.66
for exercisable $8.7969 $8.7969 $8.50
options to $41.5625 to $22.6563 to $13.06
Shares available for future grants at December 31, 1994 aggregated
4,650,146.
Employee Stock Ownership Plan ("ESOP"). In 1987 and 1988, KCSI and DST
established leveraged ESOP plans for its employees not covered by
collective bargaining agreements, which collectively purchased $69
million of KCSI Common stock from Treasury at a then current market
price of $49 per share. The indebtedness, which was guaranteed by KCSI
and DST, is repayable over ten years.
During 1990, the KCSI and DST ESOP plans were merged into one plan known
as the KCSI ESOP. This merger did not change any substantial terms,
repayment provisions or guarantees of the individual components
of indebtedness.
Employee benefit expense aggregated $15.5, $8.1 and $18.1 million in
1994, 1993 and 1992, respectively, for the ESOP. Interest incurred on
the indebtedness was $1.2, $1.8 and $2.8 million in 1994, 1993 and 1992,
[Page 64]
respectively. Dividends used to service the ESOP indebtedness were $1.3,
$.8 and $1.0 million in 1994, 1993 and 1992, respectively.
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. Certain of the Company's ESOP
shares are grandfathered under the provisions of SOP 93-6. In 1994, the
Company contributed $11.5 million to the ESOP which was used by the plan
administrator to purchase 352,000 shares of KCSI Common stock in the
open market for future allocation to plan participants. These new ESOP
shares are not grandfathered under the provisions of SOP 93-6.
Disclosures regarding the Company's ESOP plan follow, (in millions at
December 31, 1994):
Number of Common shares
allocated to plan participants 4.6
Cost of unallocated grandfathered
ESOP shares $11.1
Fair value of committed to be
allocated not grandfathered
ESOP shares $10.9
Employee Plan Funding Trust. On October 1, 1993, KCSI transferred one
million shares of KCSI Series B Convertible Preferred Stock (the "Series
B Preferred Stock") to the Kansas City Southern Industries, Inc.
Employee Plan Funding Trust ("the Trust"), a grantor trust established
by KCSI. The purchase price of the stock, based upon an independent
valuation, was $200 million, which the Trust financed through KCSI. The
indebtedness of the Trust to KCSI is repayable over 27 years with
interest at 6% per year, with no principal payments in the first three
years. The Trust, which is administered by an independent bank trustee
and consolidated into the Company's financial statements, will repay the
indebtedness to KCSI utilizing dividends and other investment income as
well as other cash obtained from KCSI. As the debt is reduced, shares of
the Series B Preferred Stock, or shares of Common stock acquired on
conversion, will be released and available for distribution to various
KCSI employee benefit plans, including its ESOP, Stock Option Plan and
Stock Purchase Plans. No principal payments have been made and
accordingly, no shares have been released or are available for
distribution to these plans.
The Series B Preferred Stock, which has a $10 per share (5%) annual
dividend and a $200 per share liquidation preference, is convertible
into Common stock at an initial ratio of four shares of Common stock for
each share of Series B Preferred Stock. The Series B Preferred Stock is
redeemable after 18 months at a specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held only by the Trust or its
beneficiaries, the employee benefit plans of KCSI. The full terms of the
Series B Convertible Preferred Stock are set forth in a Certificate of
Designations approved by the Board of Directors and filed in Delaware.
Treasury Stock. The Company issued 721,431; 1,187,224 and 1,020,514
shares of Common stock from Treasury, in 1994, 1993 and 1992,
respectively, to fund the exercise of options and subscriptions under
various employee stock option and purchase plans. Treasury stock
previously acquired had been accounted for as if retired. The Company
purchased 1,376; 5,443 and 1,575,410 shares in 1994, 1993 and 1992,
respectively.
Stock Purchase Plan. The Plan, established in 1977, provides to
substantially all full-time employees of the Company, certain
subsidiaries and certain other affiliated entities, the right to
subscribe to an aggregate of 7.6 million shares of Common stock. The
purchase price for shares under any stock offering is to be 85% of the
average market price on either the exercise date or the offering date,
whichever is lower, but in no event less than $.98 per share.
In December 1992, the Company initiated the seventh offering under the
stock purchase plan. The purchase price under this offering at 85% of
the average market price on the offering date was $18.75. Employees of
the Company subscribed to 247,254 shares under this offering, of which,
233,926 shares were issued in January 1994.
The Company initiated the eighth offering under the stock purchase plan
in December, 1993. The purchase price under this offering at 85% of the
average market price on the offering date was $38.20. Employees of the
Company subscribed to 220,576 shares under this offering. At December
31, 1994, there were 4,051,255 shares available for future offerings.
Restricted Stock. The Company issued 7,300 and 144,500 shares of
restricted stock, in 1993 and 1992, respectively, to senior management
executives of KCSI and certain subsidiaries at then current market
prices ranging between $14.86 $41.5625 per share. These shares vest
ratably over a five year period.
[Page 65]
Note 9. Minority Interest
Purchase Agreements. Agreements between KCSI and Janus minority owners,
contain among other provisions, mandatory stock purchase provisions
whereby under certain circumstances, KCSI would be required to purchase
the minority interest at a purchase price based upon a multiple of Janus
earnings.
In late 1994, the Company was notified that certain Janus minority
owners made effective the mandatory purchase provisions for a certain
percentage of their ownership. In the aggregate, the shares made
effective for mandatory purchase totalled $59 million. Concurrent with
the notification of these mandatory purchase provisions, the Company
negotiated the early termination of certain Janus compensation
arrangements, which began in 1991. The compensation arrangements
permitted individuals to earn units which vested over time, based upon
Janus earnings. These arrangements were scheduled to be fully vested at
the end of 1996. The negotiated termination resulted in payments of $48
million in cash, by Janus, of which approximately $21 million had been
accrued, upon vesting, in 1994 and previous years. Recipients of amounts
paid to terminate the arrangements used their after tax net proceeds to
purchase certain portions of the shares made effective for mandatory
purchase, in early 1995. In addition, the Janus minority group was
restructured to allow for minority ownership by other key Janus
employees. These employees purchased other portions of the minority
shares made effective for mandatory purchase through payment of cash and
creation of recourse loans financed by KCSI in the amount of $10.5
million. The remaining minority shares made effective for mandatory
purchase were purchased by Janus for treasury, $6.1 million, and by KCSI
for $12.7 million. As a result of the combination of KCSI acquiring
additional Janus shares and the reduction of outstanding shares with
Janus' treasury purchase, KCSI increased its ownership in Janus from
approximately 81% to 83%, upon closing of the transaction in January
1995. The KCSI share purchase resulted in the recording of intangibles
as the purchase price exceeded the value of underlying tangible assets
and will be amortized over its estimated economic life.
The new minority owners of Janus also have mandatory stock purchase
provisions which under certain circumstances require KCSI to purchase
the minority interest at fair market value. If all of the provisions of
the Janus minority owner agreements became effective, KCSI would be
required to purchase the respective minority interests, currently
estimated at approximately $138 million. The purchase price for the
mandatory provisions is based upon a multiple of earnings and/or fair
market value determinations depending upon specific agreement terms.
Note 10. Profit Sharing and Other Postretirement Benefits
Profit Sharing. Qualified profit sharing plans are maintained for most
employees not included in collective bargaining agreements.Contributions
for the Company and its subsidiaries are made at the discretion of the
Boards of Directors in amounts not to exceed the maximum allowable for
federal income tax purposes. Profit sharing expense was $.8, $4.6 and $3.8
million in the years 1994, 1993 and 1992, respectively.
Other Postretirement Benefits. The Company adopted Statement of
Financial Accounting Standards No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions," ("SFAS 106"), effective
January 1, 1993. The Company and its Transportation subsidiaries provide
certain medical, life and other post-retirement benefits other than
pensions to its retirees. The medical and life plans are available to
employees
[Page 66]
not covered under collective bargaining arrangements, who have attained
age 60 and rendered ten years of service. Individuals employed as of
December 31, 1992 were excluded from a specific service requirement. The
medical plan is contributory and provides benefits for retirees, their
covered dependents and beneficiaries. Benefit expense begins to accrue
at age 40. The medical plan was amended effective January 1, 1993 to
provide for annual adjustment of retiree contributions and also
contains, depending on the plan coverage selected, certain deductibles,
copayments, coinsurance and coordination with Medicare. The life
insurance plan is non-contributory and covers retirees only. The
Company's policy, in most cases, is to fund benefits payable under these
plans as the obligations become due. However, certain plan assets do
exist with respect to life insurance benefits.
The following table displays a reconciliation of the plans' obligations
and assets at December 31, 1994, December 31 and January 1, 1993, (in
millions):
Dec. 31, Dec. 31, Jan.1,
1994 1993 1993
Accumulated
postretirement
benefit obligation:
Retirees $ 7.9 $ 8.0 $ 7.7
Fully eligible
active plan
participants 1.1 .9 .7
Other active
plan participants 1.4 2.0 1.6
Plan assets (1.3) (1.3) (1.3)
Accrued
postretirement
benefit obligation $ 9.1 $ 9.6 $ 8.7
Net periodic postretirement benefit cost included the
following components (in millions):
1994 1993
Service cost $ .4 $ .2
Interest cost .8 .6
Return on plan assets (.1) (.1)
Net periodic postretirement
benefit cost $ 1.1 $ .7
The entire accumulated postretirement benefit obligation was charged to
earnings in first quarter 1993 in the amount of $5.5 million, net of
applicable income taxes. The Companys' health care costs are limited to
the increase in the Consumer Price Index ("CPI") with a maximum annual
increase of 5%. Accordingly, health care costs in excess of the CPI
limit will be borne by the plan participants, and therefore assumptions
regarding health care cost trend rates are not applicable.
The assumed annual increase in the CPI is 4%, 3% and 4% at December 31,
1994, December 31, 1993 and January 1, 1993, respectively. Life
insurance plan assets represent bank funds on deposit, with an expected
rate of return of 6.5%. The discount rate assumed in determining the
accumulated postretirement benefit obligation was, 8.5%, 7% and 8% at
December 31, 1994, December 31, 1993 and January 1, 1993 respectively,
and the assumed salary increase was 5%. The adoption of SFAS 106 is not
expected to have a material effect on future annual expenses of the
Company.
Prior to January 1, 1993, the Company recognized the cost of these
benefits on a "pay as you go" basis. For 1992, the cost of these
benefits totalled $722,000.
Note 11. Litigation
Litigation Reserves. In the opinion of management, claims or lawsuits
incidental to the business of the Company and its subsidiaries have been
adequately provided for in the consolidated financial statements.
[Page 67]
Note 12. Control
Subsidiaries. The Company and certain of its subsidiaries have entered
into agreements with joint venture partners whereby, upon defined
circumstances constituting a change in control of the Company, such
joint venture partners have the right to either purchase from the
Company or sell to the Company their entire equity interest in such
joint ventures.
DST and certain of its joint venture affiliates, are parties to certain
processing and agency agreements that provide for optional termination
of such agreements by their clients and or purchase at net book value by
the other joint venture partner in the event of a change in control of
DST or the respective other joint venture partners.
In connection with its acquisition of an interest in Janus, the Company
entered into an agreement, which provides for preservation of a measure
of management autonomy at the subsidiary level and for rights of first
refusal on the part of minority stockholders, Janus and the Company with
respect to certain sales of Janus stock by the minority stockholders.
The agreement also requires the Company to purchase the shares of
minority stockholders in certain circumstances. In addition, in the
event of a "change of ownership" of the Company, as defined in the
agreement, the Company may be required to sell its stock of Janus to the
minority stockholders or to purchase such holders' Janus stock. Purchase
and sales transactions under the agreements are to be made based upon a
multiple of the net earnings of Janus and/or fair market value
determinations, as defined therein. See Note 9 for further details.
Under the Investment Company Act of 1940, certain changes in ownership
of Janus or Berger may result in termination of its investment advisory
agreements with the mutual funds and other accounts it manages,
requiring approval of fund shareholders and other account holders to
obtain new agreements.
Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances
constituting a change in control of the Company or subsidiary, certain
stock options become exercisable, certain benefit entitlements are
automatically funded and such employees are entitled to specified cash
payments upon termination of employment.
Assets. The Company and certain of its subsidiaries have established
trusts to provide for the funding of corporate commitments and
entitlements of officers, directors, employees and others in the event
of a specified change in control of the Company or subsidiary. Assets
held in such trusts at December 31, 1994 were immaterial. Depending upon
the circumstances at the time of any such change in control, the most
significant factor of which would be the highest price paid for KCSI
Common stock by a party seeking to control the Company, funding of the
Company's trusts could be very substantial.
Debt. Certain loan agreements and debt instruments entered into or
guaranteed by the Company and its subsidiaries provide for default in
the event of a specified change in control of the Company or particular
subsidiaries of the Company.
Note 13. Industry Segments
The Company's three major business activities are classified as follows:
Transportation Services. The Company operates a Class I Common Carrier
railroad system through its wholly-owned subsidiary, The Kansas City
Southern Railway Company. As a common carrier, the Railway's customer
base is comprised of utilities and a wide range of companies in the
petro-chemical, agricultural and paper processing industries. The
railroad system operates primarily from the Midwest part of the United
States to the Gulf of Mexico and, with the addition of the MidSouth
Corporation, on an East-West axis from Dallas, Texas to Meridian,
Mississippi. Also included in this industry segment are transportation
related real estate, leasing and support services subsidiaries.
Information & Transaction Processing. DST, (a wholly-owned subsidiary)
its subsidiaries and affiliates, design, produce, distribute and operate
proprietary software systems for the mutual fund, securities transfer,
portfolio accounting, loan processing, asset management and
[Page 68]
insurance industries, among others, and provides administrative and
transfer agent services using DST's proprietary systems. In addition to
data processing, subsidiaries of DST also provide various output
processing products and services including computer output
microfilm/microfiche, laser printing and mailing. DST operates
throughout the United States with its base of operations in the Midwest
and, through certain of its subsidiaries and affiliates, internationally
in Canada, Europe, Africa and the Pacific Rim.
Financial Asset Management. Janus (an 83% owned subsidiary) and Berger
(an 80% owned subsidiary acquired in October, 1994) manage investments
for mutual funds and private accounts. Both companies operate throughout
the United States with headquarters in Denver, Colorado. Janus assets
under management at December 31, 1994, 1993 and 1992 were $22.9, $22.2
and $15.5 billion, respectively. Berger assets under management at
December 31, 1994 and 1993 were $3.0 and $1.9 billion, respectively.
Eliminations, Corporate & Other. Unallocated holding company expenses,
intercompany eliminations, and miscellaneous investment activities are
reported in the "Eliminations, Corporate and Other" industry segment.
Segment Financial Information. Sales between segments are not material
and therefore not disclosed. Industry segment financial information
follows (in millions):
[Page 69]
Segment Financial Information, dollars in millions, years ended December
31,
Information & Financial Eliminations,
Transportation Transaction Asset Corporate &
Services Processing Management Other Consolidated
1994
Revenues $508.5 $ 404.3 $188.3 $ (3.2) $1,097.9
Costs & expenses 332.8 312.3 126.2 5.0 776.3
Depreciation &
amortization 50.8 57.3 9.0 2.0 119.1
Operating income 124.9 34.7 53.1 (10.2) 202.5
Equity in net
earnings of uncon-
solidated affiliates .1 24.5 .2 24.8
Interest expense (41.4) (14.0) (2.1) 3.9 (53.6)
Pretax income 83.6 45.2 51.0 (6.1) 173.7
Income taxes 33.4 14.3 20.1 (4.3) 63.5
Income before
minority interest 50.2 30.9 30.9 (1.8) 110.2
Minority interest (1.1) 6.4 5.3
Net income $ 50.2 $ 32.0 $ 24.5 $ (1.8) $ 104.9
Capital
expenditures $207.9 $ 102.0* $ 7.8* $ .2 $ 317.9
1993
Revenues $451.1 $ 342.2 $162.7 $ 5.1 $ 961.1
Costs & expenses 288.0 267.6 77.2 19.0 651.8
Depreciation &
amortization 46.4 43.4 5.5 1.9 97.2
Operating income 116.7 31.2 80.0 (15.8) 212.1
Equity in net
earnings of uncon-
solidated affiliates1.9 12.0 .2 14.1
Interest expense (32.2) (10.9) (.7) (7.4) (51.2)
Pretax income 86.4 32.3 79.3 (23.0) 175.0
Income taxes 38.5 10.0 30.7 (10.2) 69.0
Income before
minority interest 47.9 22.3 48.6 (12.8) 106.0
Minority interest (.6) 9.6 9.0
Income before
accounting changes $47.9 $ 22.9 $ 39.0 (12.8) 97.0
Cumulative effect of
accounting changes (6.5) (6.5)
Net income $(19.3) $ 90.5
Capital
expenditures $108.9* $ 63.9* $ 9.2 $ .1 $182.1
1992
Revenues $369.2 $ 270.5 $ 97.5 $ 4.2 $741.4
Costs & expenses 258.0 218.3 48.4 16.6 541.3
Depreciation &
amortization 35.9 34.4 3.4 .5 74.2
Operating income 75.3 17.8 45.7 (12.9) 125.9
Equity in net
earnings of uncon-
solidated affiliates(.1) 11.6 (.4) 11.1
Interest expense (12.3) (9.1) (.3) (11.4) (33.1)
Pretax income 62.9 20.3 45.4 (24.7) 103.9
Income taxes 23.0 5.0 21.2 (14.0) 35.2
Income before
minority interest 39.9 15.3 24.2 (10.7) 68.7
Minority interest 4.9 4.9
Net income $ 39.9 $ 15.3 $ 19.3 $(10.7) $ 63.8
Capital
expenditures $107.5 $ 56.5 $ 10.0 $ .1 $174.1
*Exclusive of property additions from acquisitions
[Page 70]
Segment Financial Information, dollars in millions, as of December 31,
Information & Financial Eliminations,
Transportation Transaction Asset Corporate &
Services Processing Management Other
Consolidated
1994
ASSETS
Current assets $ 189.5 $ 131.6 $ 70.4 $(11.4) $ 380.1
Investments held
for operating
purposes 43.8 167.0 .7 3.1 214.6
Properties, net
of depreciation 1,214.1 181.4 15.6 4.2 1,415.3
Intangible and
other assets 107.4 51.7 57.3 4.4 220.8
Total assets $1,554.8 $ 531.7 $ 144.0 $ .3 $2,230.8
LIABILITIES & STOCKHOLDERS' EQUITY
Current
liabilities $ 212.0 $ 129.4 $ 32.5 $(34.3) $ 339.6
Long-term debt 659.5 175.8 48.2 45.3 928.8
Deferred income
taxes 206.1 (1.9) 204.2
Other 32.6 19.8 11.1 27.5 91.0
Net worth 444.6 206.7 52.2 (36.3) 667.2
Total liabilities &
stockholders'
equity $1,554.8 $ 531.7 $ 144.0 $ .3 $2,230.8
1993
ASSETS
Current assets $ 174.3 $ 115.0 $ 39.9 $ 6.5 $ 335.7
Investments held
for operating
purposes 46.3 125.6 .2 2.4 174.5
Properties, net
of depreciation 1,039.3 134.3 14.4 4.6 1,192.6
Intangible and
other assets 139.0 53.9 17.7 3.6 214.2
Total assets $1,398.9 $ 428.8 $ 72.2 $ 17.1 $1,917.0
LIABILITIES & STOCKHOLDERS' EQUITY
Current
liabilities $ 176.6 $ 88.8 $ 14.0 $ 9.0 $ 288.4
Long-term debt 577.9 146.0 .9 51.4 776.2
Deferred income
taxes 196.8 (12.1) 184.7
Other 41.1 9.3 26.0 28.6 105.0
Net worth 406.5 184.7 31.3 (59.8) 562.7
Total liabilities &
stockholders'
equity $1,398.9 $ 428.8 $ 72.2 $ 17.1 $1,917.0
1992
ASSETS
Current assets $ 109.4 $ 91.6 $ 24.3 $ 21.1 $ 246.4
Investments held
for operating
purposes 40.8 78.3 .2 36.5 155.8
Properties, net
of depreciation 643.5 109.2 9.8 5.7 768.2
Intangible and
other assets 5.4 57.0 8.9 6.7 78.0
Total assets $ 799.1 $ 336.1 $ 43.2 $ 70.0 $1,248.4
LIABILITIES & STOCKHOLDERS' EQUITY
Current
liabilities $ 115.2 $ 83.0 $ 9.0 $ 11.4 $ 218.6
Long-term debt 157.9 72.6 1.1 155.4 387.0
Deferred income
taxes 108.7 (7.3) 101.4
Other 38.6 12.6 19.5 8.3 79.0
Net worth 378.7 167.9 13.6 (97.8) 462.4
Total liabilities &
stockholders'
equity $ 799.1 $ 336.1 $ 43.2 $ 70.0 $1,248.4
[Page 71]
Note 14. Quarterly Financial Data (Unaudited)
Quarterly financial data follows (in millions, except per share
amounts):
1994
Fourth Third Second First
Quarter Quarter Quarter Quarter
Operations Revenues $ 292.2 $ 273.4 $ 267.2 $ 265.1
Costs and expenses 228.8 185.6 181.2 180.7
Depreciation and
amortization 32.8 30.7 27.4 28.2
Operating income 30.6 57.1 58.6 56.2
Equity in net earnings of
unconsolidated affiliates 6.9 6.8 5.1 6.0
Interest expense (13.9) (15.2) (9.5) (15.0)
Pretax Pretax income 23.6 48.7 54.2 47.2
Income taxes 7.4 18.4 20.1 17.6
Income before
minority interest 16.2 30.3 34.1 29.6
Minority Minority interest (.7) 1.7 2.3 2.0
Net income $ 16.9 $ 28.6 $ 31.8 $ 27.6
Per Share Primary earnings per share:
Data Income from continuing
operations $ .37 $ .64 $ .70 $ .61
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Preferred - High $ 20 $18 3/4 $ 20 $16 1/2
Ranges - Low 15 16 14 14 5/8
Common - High 36 1/4 44 1/2 52 1/8 52 5/8
- Low 29 7/8 33 5/8 37 42 3/8
[Page 72]
1993
Fourth Third Second First
Quarter Quarter Quarter Quarter
Operations Revenues $ 261.5 $ 253.3 $ 231.7 $ 214.6
Costs and expenses 171.5 167.5 164.0 148.8
Depreciation and
amortization 27.7 27.4 21.3 20.8
Operating income 62.3 58.4 46.4 45.0
Equity in net earnings of
unconsolidated affiliates 4.9 2.3 4.0 2.9
Interest expense (14.9) (13.8) (11.8) (10.7)
Pretax Pretax income 52.3 46.9 38.6 37.2
Income taxes 19.7 21.1 14.9 13.3
Income before minority
interest 32.6 25.8 23.7 23.9
Minority Minority interest 2.5 2.5 2.2 1.8
Income before cumulative effect
of accounting changes 30.1 23.3 21.5 22.1
Accounting Cumulative effect of changes in
Change accounting for income taxes and
postretirement benefits (6.5)
Net income $ 30.1 $ 23.3 $ 21.5 $ 15.6
Per Share Primary earnings per share:
Data Income before cumulative effect
of accounting changes $ .67 $ .52 $ .48 $ .49
Cumulative effect of accounting changes (.14)
Total $ .67 $ .52 $ .48 $ .35
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Preferred - High $ 16 $ 16 $ 16 $15 1/4
Ranges - Low 14 3/4 15 14 13 1/2
Common - High 51 1/2 42 3/4 42 33 1/4
- Low 41 7/8 37 30 1/2 23 7/16
[Page 73]