FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 556-0303
(Registrant's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1995
Common Stock, $.01 per share par value 42,796,066 Shares
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1995
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
June 30, 1995 and December 31, 1994 2
Consolidated Condensed Statements of Income -
Three and Six Months Ended June 30, 1995 and 1994 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Six Months Ended June 30, 1995 and 1994 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1.Legal Proceedings 18
Item 6.Exhibits and Reports on Form 8-K 18
SIGNATURES 19
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1995
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Registrant believes that
the disclosures are adequate to enable a reasonable understanding of the
information presented. These Consolidated Condensed Financial Statements should
be read in conjunction with the financial statements and the notes thereto
included in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
The Registrant has announced certain transactions, which, if completed, would
significantly change the composition of the Registrant as it is currently
structured. Accordingly, the Consolidated Condensed Financial Statements should
also be read in conjunction with Item 2.; Management's Discussion and Analysis
of Financial Condition and Results of Operations - Recent Announcements -
included in this Form 10-Q.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
June 30, December 31,
1995 1994
ASSETS
Current Assets:
Cash and equivalents $ 12.0 $ 12.7
Accounts receivable, net 241.0 232.3
Inventories 49.0 46.6
Other current assets 95.4 88.5
Total current assets 397.4 380.1
Investments (held for operating purposes) 275.6 214.6
Properties (net of $735.8 and $686.0 accumulated
depreciation and amortization, respectively) 1,459.0 1,415.3
Intangibles and Other Assets 294.9 220.8
Total assets $ 2,426.9 $ 2,230.8
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 102.8 $ 56.4
Accounts and wages payable 93.3 140.8
Other accrued and current liabilities 182.5 142.4
Total current liabilities 378.6 339.6
Other Liabilities:
Long-term debt 1,031.7 928.8
Deferred income taxes 242.3 204.2
Other deferred credits and liabilities 94.1 80.5
Total other liabilities 1,368.1 1,213.5
Minority Interest 7.4 10.5
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock .4 .4
Capital surplus 311.8 338.0
Retained earnings 559.7 530.1
Shares held in trust (200.0) (200.0)
ESOP deferred compensation (6.2) (8.4)
Total stockholders' equity 672.8 667.2
Total liabilities and stockholders' equity $ 2,426.9 $ 2,230.8
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues $ 308.7 $ 267.2 $ 610.9 $ 532.3
Costs and expenses 239.1 181.2 452.8 361.9
Depreciation and amortization 36.6 27.4 69.5 55.6
Operating Income 33.0 58.6 88.6 114.8
Equity in net earnings of
unconsolidated affiliates 5.0 5.1 9.0 11.1
Gain on sale of equity investment -- -- 39.7 --
Interest expense (19.3) (9.5) (38.8) (24.5)
Pretax income 18.7 54.2 98.5 101.4
Provision for taxes on income 7.6 20.1 58.3 37.7
Income before minority interest 11.1 34.1 40.2 63.7
Minority interest 2.6 2.3 4.3 4.3
Net Income 8.5 31.8 35.9 59.4
Less-dividends on preferred stock .1 .1 .1 .1
Net Income Applicable to
Common Stockholders $ 8.4 $ 31.7 $ 35.8 $ 59.3
Computation of Primary Earnings per Common Share
Average Primary Common
Shares Outstanding(in thousands)44,417 45,196 44,703 45,129
Primary Earnings per
Common Share: $ .19 $ .70 $ .80 $ 1.31
Cash Dividends Paid:
Per Common share $.071/2 $ .071/2 $ .15 $ .15
Per Preferred share $ .25 $ .25 $ .50 $ .50
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Six Months
Ended June 30,
1995 1994
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 35.9 $ 59.4
Adjustments to net income:
Depreciation and amortization 69.5 55.6
Deferred income taxes 41.5 19.6
Equity in undistributed earnings (8.2) (10.8)
Gain on sale of equity investment (39.7) --
Changes in working capital items:
Accounts receivable (3.8) (37.8)
Inventories (2.3) .7
Other current assets (9.0) (1.0)
Accounts payable (48.8) 15.9
Other accrued and current liabilities 42.1 11.7
Other, net 9.9 (3.6)
Net 87.1 109.7
INVESTING ACTIVITIES:
Property acquisitions (93.8) (155.6)
Proceeds from disposal of property 5.8 7.7
Purchase of companies, net of cash acquired (49.7) --
Investment and loans with affiliates (43.3) (24.5)
Proceeds from disposal of investments -- .2
Other, net (2.8) 2.1
Net (183.8) (170.1)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 213.8 131.8
Repayment of long-term debt (68.9) (45.6)
Proceeds from stock plans 4.3 2.5
Stock repurchased (43.4) (10.1)
Cash dividends paid (6.6) (6.6)
Other, net (3.2) (8.3)
Net 96.0 63.7
CASH AND EQUIVALENTS
Net increase (decrease) (.7) 3.3
At beginning of year 12.7 6.6
At end of period $ 12.0 $ 9.9
See accompanying notes to consolidated condensed financial statements.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
JUNE 30, 1995
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Registrant, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
interim closing procedures) necessary to present fairly the financial position
of Kansas City Southern Industries, Inc. ("Registrant" or "KCSI") and its
subsidiary companies as of June 30, 1995 and December 31, 1994, the results of
operations for the three and six months ended June 30, 1995 and 1994, and cash
flows for the six months ended June 30, 1995 and 1994.
The Registrant has announced certain transactions, which, if completed, would
significantly change the composition of the Registrant as it is currently
structured. Accordingly, the Consolidated Condensed Financial Statements should
also be read in conjunction with Item 2.; Management's Discussion and Analysis
of Financial Condition and Results of Operations - Recent Announcements -
included in this Form 10-Q, which is hereby incorporated by reference herein.
2. The results of operations for the three and six months ended June 30, 1995
and 1994 are not necessarily indicative of the results to be expected for the
full year 1995.
3. The accompanying financial statements have been prepared consistent with
accounting principles described more fully in Note 1 of the Registrant's 1994
Annual Report to Stockholders.
4. The Registrant's inventories, $49.0 million at June 30, 1995 and $46.6
million at December 31, 1994, principally represent material and supplies
related to rail transportation and DST's output processing operations. Other
components of inventories are immaterial.
5. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method of accounting include all entities in
which the Registrant or its subsidiaries have significant influence but not more
than 50% control. Investments in unconsolidated affiliates (joint ventures) at
June 30, 1995, include the equity interests of DST Systems, Inc. ("DST") in
Boston Financial Data Services, Inc., The Continuum Company, Inc. ("Continuum"),
Argus Health Systems, Inc. ("Argus"), Midland Data Systems, Inc. and Midland
Loan Services, L.P.(collectively "Midland"), First of Michigan Capital Corpor-
ation, and certain other venture operations plus the Registrant's interests in
other companies. Among other provisions, the joint venture agreements contain
"change of control" provisions affecting the rights of the partners to acquire
the other partners' equity interests in the event of circumstances which would
result in a change of control.
On January 31, 1995, DST completed the sale of its 50% ownership in IFTC
Holdings, Inc., which wholly-owns Investors Fiduciary Trust Company ("IFTC") to
State Street Boston Corporation ("State Street"), in a non-cash, tax-free
exchange for State Street Common stock. At closing of the transaction, DST
received 2,986,111 shares of State Street Common stock (representing an
approximate 4% 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.
Combined condensed financial information of unconsolidated affiliates is
shown below (dollars in millions):
Financial Condition
June 30, December 31,
1995 1994
Current assets $ 433.9 $ 1,129.7
Non-current assets 159.3 143.6
Assets $ 593.2 $ 1,273.3
Current liabilities $ 314.6 $ 933.9
Non-current liabilities 89.2 73.2
Equity of stockholders and partners 189.4 266.2
Liabilities and equity $ 593.2 $ 1,273.3
Investment in unconsolidated affiliates $ 222.1 $ 166.5
Operating Results
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues:
IFTC $ -- $ 19.0 $ -- $ 29.2
All others 176.7 141.7 344.9 285.1
Total Revenues $ 176.7 $ 160.7 $ 344.9 $ 314.3
Costs and expenses:
IFTC $ -- $ 16.1 $ -- $ 23.4
All others 163.2 131.2 320.1 263.8
Total Costs and
Expenses $ 163.2 $ 147.3 $ 320.1 $ 287.2
Net Income:
IFTC $ -- $ 2.9 $ -- $ 5.8
All others 13.5 10.5 24.8 21.3
Total Net Income $ 13.5 $ 13.4 $ 24.8 $ 27.1
Equity in Earnings:
IFTC $ -- $ 1.4 $ -- $ 2.9
All others 5.0 3.7 9.0 8.2
Total Equity in
Earnings $ 5.0 $ 5.1 $ 9.0 $ 11.1
6. For purposes of the Statement of Cash Flows, the Registrant considers all
short-term investments with an original maturity of generally three months or
less to be cash equivalents. Other required supplementary disclosures follow:
a. Cash Flow Information (in millions):
Six Months
Ended June 30,
1995 1994
Interest paid $41.6 $28.6
Income taxes paid (refunded) 11.7 (1.0)
b. Noncash Investing and Financing Activities:
In the first quarter of 1994, the Registrant issued approximately 234,000 shares
of Common stock under the Seventh Offering of the Employees Stock Purchase Plan.
These shares, totaling a purchase price of approximately $4.4 million, were
subscribed and paid for through employee payroll deductions in 1993.
During the first six months of 1995 and 1994, the Registrant recorded expenses
of $2.3 million and $2.1 million, respectively, related to its existing ESOP.
These charges, which were non-cash in nature, had the effect of decreasing
retained earnings and ESOP deferred compensation with no overall effect upon
stockholders' equity.
In the first six months of 1995, DST acquired mainframe computer equipment for
its Winchester Data Center and production equipment for its output processing
facilities in the amount of $4.2 million. This equipment was financed through
vendor installment notes and capital leases which required no direct outlay of
cash.
As further described in Note 5, the Registrant's wholly-owned subsidiary, DST
Systems, exchanged its equity interest in IFTC for State Street Common stock.
Further details regarding the IFTC transaction, including unaudited pro forma
combined financial statements, are disclosed in a Form 8-K filed by the
Registrant dated January 31, 1995.
7. In February 1995, DST's wholly-owned subsidiary, Clarke & Tilley Limited,
purchased HiPortfolio Pty Ltd. ("HiPortfolio"), an Australian provider of
portfolio accounting software and services. Additionally, as part of this
transaction, DST acquired the rights to the software marketed by HiPortfolio.
As previously disclosed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994, DST signed a definitive agreement to purchase
substantially all of the assets and business operations of Supervised Service
Company ("SSC"), a subsidiary of Kemper Financial Services, Inc. ("Kemper") and
the mutual fund shareholder servicing system software owned by Kemper Service
Company ("KSC") used to service the Kemper Mutual Funds. 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. The trans-
action was completed on April 17, 1995.
The collective consideration for the HiPortfolio and Kemper transactions was
approximately $56 million, $49.7 million net of cash acquired. DST financed
these transactions through borrowings from the Registrant and banks. The
transactions resulted in the recording of intangibles as the total purchase
price exceeded the fair value of the underlying net assets. These additional
assets are being depreciated over lives ranging from 3-7 years, while
intangibles are being amortized over periods of 7-15 years.
8. May 5, 1995, the Registrant established credit agreements for both KCSI and
DST, in the amounts of $400 million and $250 million, respectively. These
credit agreements replace approximately $420 million of existing Registrant
credit agreements which had been in place for varying periods since 1992.
Proceeds of the KCSI credit facility are anticipated to be used for general
corporate purposes. The proceeds from the DST credit agreement were used to pay
a dividend to KCSI, to repay bridge financing in connection with the Kemper
transaction described above, and for general corporate purposes. These
agreements include facility fees ranging from .07 - .25 % per annum, below prime
interest rates, and terms ranging from one to five years. Among other
provisions, the agreements limit subsidiary indebtedness, sale of assets, and
coverage ratios. The DST agreements also require minimum consolidated net worth
of $50 million plus 75% of the net proceeds of the proposed DST capital stock
offering discussed in the management's discussion and analysis of financial
condition and results of operations included in this Form 10-Q.
9. On April 19, 1995, the Registrant filed Amendment No.1 to its Registration
Statement on Form S-3 with the SEC (File No. 33-69648), registering $500 million
in securities. The Registrant has not yet requested that the Registration
Statement be declared effective and no securities have been issued.
10.LITIGATION. The Registrant has had no significant changes in its outstanding
litigation from that previously reported in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Kansas City Southern Industries, Inc. (the "Registrant") is a Delaware
Corporation, organized in 1962, which engages in supervising the operations of
its subsidiaries and providing certain managerial, legal and financial services
to its subsidiaries.
The Registrant's business activities by industry segment and principal
subsidiary companies are:
Transportation Services - Operating a Class I Common Carrier Railroad system
through the Registrant's 100% owned subsidiary The Kansas City Southern
Railway Company and its affiliated trucking and other subsidiaries ("KCSR")
along with other subsidiaries supporting the transportation segment.
Information & Transaction Processing - DST Systems, Inc., ("DST") a 100% owned
subsidiary, together with its subsidiaries and joint ventures (principally The
Continuum Company, Inc., Boston Financial Data Services, Inc., Argus Health
Systems, Inc., Midland Data Services, Inc. and Midland Loan Services L.P.),
designs, maintains and operates proprietary on-line shareowner accounting and
record keeping data processing systems, primarily for mutual funds, financial
services institutions and insurance companies. In addition to data processing,
subsidiaries of DST also provide computer output microfilm/microfiche,
printing and graphic design services.
Financial Asset Management - Management of investments for mutual funds,
private and other accounts through Janus Capital Corporation ("Janus"), an 83%
owned subsidiary and Berger Associates, Inc. ("Berger") an 80% owned
subsidiary.
Corporate and Other - Primarily general administrative and corporate
operations of the Registrant and other minor subsidiaries.
The information contained in this management's discussion and analysis of
financial condition and results of operations should be read in conjunction with
the notes to consolidated condensed financial statements included in this Form
10-Q.
Recent Announcements
DST Public Offering - On April 24, 1995, the Registrant's Board of Directors
approved a public offering of 51% of its wholly owned subsidiary, DST. The
public offering is planned to occur in the fourth quarter of 1995 subject to
market conditions. A DST offering would only be made by means of a prospectus
and otherwise in compliance with federal and state securities laws.
Stock Repurchase Program - On April 24, 1995, the Registrant's Board of
Directors also authorized management to repurchase up to six million shares of
the Registrant's Common stock in open market transactions as market conditions
permit. Payments received by the Registrant from DST in retirement of
intercompany debt after a DST public offering would, in part, be used to fund
these repurchases. As of July 31, 1995, the Registrant repurchased
approximately 1.1 million shares of Common stock in open market transactions.
Results of Operations
Segment revenues and operating income comparisons follow (dollars in millions):
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues:
Transportation Services $ 133.7 $ 123.4 $ 268.7 $ 246.7
Information & Transaction
Processing 118.6 101.2 231.2 198.6
Financial Asset Management 57.4 43.7 112.8 88.3
Eliminations, Corporate & Other (1.0) (1.1) (1.8) (1.3)
Total $ 308.7 $ 267.2 $ 610.9 $ 532.3
Operating Income:
Transportation Services $ 2.6 $ 31.4 $ 32.9 $ 59.4
Information & Transaction
Processing 8.9 9.6 21.6 21.6
Financial Asset Management 24.8 19.6 39.6 38.6
Eliminations, Corporate & Other (3.3) (2.0) (5.5) (4.8)
Total $ 33.0 $ 58.6 $ 88.6 $ 114.8
The Registrant reported second quarter 1995 earnings of $8.5 million, ($.19 per
share), significantly below the $31.8 million, ($.70 per share) earned in the
second quarter 1994. However, included in second quarter and year to date 1995
consolidated results is approximately $17.8 million, or $.39 per share and $19.7
million, or $.44 per share, respectively, of unusual costs and expenses related
to employee separations and other personnel related activities, unusual system
congestion related expenses, and reserves for contracts, leases, and property in
the Transportation Services segment. Second quarter 1994 also benefited from the
reversal of certain KCSI Holding Company employment tax and interest accruals
($.06 per share) resulting from the favorable outcome, in second quarter 1994,
of long standing employment tax issues. Consolidated second quarter 1995
revenues rose 16% to $308.7 million compared to prior year, while operating
income of $33 million declined 44% from $58.6 million. Revenue growth in all of
the Registrant's primary business lines was offset by increased operating
expenses, particularly those associated with the Registrant's Transportations
Services segment.
For the six months ended June 30, 1995, earnings of $35.9 million ($.80 per
share) decreased 40% from comparable prior year earnings of $59.4 million.
Included in 1995 year to date earnings is the one time gain on the sale of DST's
50% investment in Investors Fiduciary Trust Company ("IFTC") in exchange for an
approximate 4% common stock interest in State Street Boston Corporation,
previously reported in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994. The IFTC transaction resulted in a net gain of $4.7
million, or $.10 per share in first quarter 1995.
Second quarter and year to date 1995 results also include non-cash acquisition
related intangible amortization expenses of $.09 per share and $.17 per share,
respectively, versus $.06 per share and $.12 per share, for second quarter and
year to date 1994, respectively. The 1995 amounts reflect DST acquisitions (SSC
and HiPortfolio), the fourth quarter 1994 Berger acquisition, and 1995
additional investments in Janus.
TRANSPORTATION SERVICES
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues $ 133.7 $ 123.4 $ 268.7 $ 246.7
Costs and expenses 116.1 80.2 206.3 161.5
Depreciation and amortization 15.0 11.8 29.5 25.8
Operating income 2.6 31.4 32.9 59.4
Unconsolidated affiliates .1 .1
Interest expense (12.9) (9.0) (25.4) (20.6)
Pretax income (10.2) 22.4 7.6 38.8
Income taxes (4.1) 9.4 3.1 16.1
Net income $ (6.1) $ 13.0 $ 4.5 $ 22.7
Transportation Services, comprised principally of The Kansas City Southern
Railway Company ("KCSR"), reported a loss of $6.1 million for the second quarter
1995, significantly below the $13 million income for second quarter 1994.
Transportation revenues rose 8% to $133.7 million, while operating income
declined to $2.6 million on higher operating costs. Included in the higher
operating costs were $30.9 million of pretax unusual costs and expenses related
to employee separations, other personnel related activities and system
congestion, primarily at KCSR.
KCSR second quarter general commodity carloadings improved 4% from first quarter
1994 on increased volumes of farm products, pulp/paper, chemicals and petroleum
products, but somewhat offset by lower non-metallic ores and lumber/wood
traffic. Intermodal traffic rose 51% in second quarter 1995 over second
quarter 1994 on continued strong volumes. Unit coal revenues improved 14% from
second quarter 1994 resulting from a mix of length of haul and rates and the
seasonality of coal shipments, and resumption of shipments to a Monticello,
Texas, electric utility plant ("TUMCO"), which had been out of service since
late 1993 and came back on line in June, 1995.
KCSR operating expenses in second quarter 1995 were 45% higher, principally the
result of unusual costs and expenses totaling $29.9 million, pre-tax. These
unusual costs and expenses include $4.6 million for employee separations and
benefit related costs; $7 million for increased casualty related reserves; $8.1
million for the cost of inefficient utilization of locomotive and rolling stock
equipment and terminating certain equipment leases caused by a combination of
increased demand and changes in service delivery requirements; and $4.9 million
of other unusual system congestion related expenses. Excluding these unusual
costs and expenses, operating expenses would still have been 8% higher from
increased fuel, car hire, salaries and wages, casualties and equipment lease
expenses all associated with increased traffic volumes and system congestion.
Depreciation and amortization was 27% higher than second quarter 1994,
reflecting the completion of the KCSR roadbed improvement program in the second
half of 1994. Interest expense also continued to be higher in second quarter
1995 compared to prior year from a combination of higher rates and balances and
the one time reversal of employment tax related interest accruals, which
resulted from the resolution of certain tax issues in 1994.
Transportation Services also included improved results from the Registrant's
Pabtex petroleum coke export facility on higher volumes, offset by reduced
earnings at Southern Credit Corporation compared to second quarter 1994.
For the first six months of 1995, Transportation Services contribution to the
Registrant's consolidated net income declined 80% from prior year, from $22.7
million to $4.5 million. Revenues increased 9%, led by volume increases in farm
products, intermodal, chemical and petroleum traffic but were more than offset
by the previously described unusual costs and expenses, fuel expense on both
increased volume and higher prices, depreciation associated with the completion
of the roadbed rebuilding program, and interest expense on rate and balance
increases.
INFORMATION & TRANSACTION PROCESSING
DST SYSTEMS, INC.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues $ 118.6 $ 101.2 $ 231.2 $ 198.6
Costs and expenses 92.1 78.5 177.1 152.0
Depreciation and amortization 17.6 13.1 32.5 25.0
Operating income 8.9 9.6 21.6 21.6
Unconsolidated affiliates 4.9 5.2 8.9 11.2
Gain on sale of equity investment -- -- 39.7 --
Interest expense (6.0) (3.8) (10.6) (7.4)
Pretax income 7.8 11.0 59.6 25.4
Income taxes 2.5 3.2 41.2 7.4
Minority interest (.1) (.1) (.1) (.3)
Net income $ 5.4 $ 7.9 $ 18.5 $ 18.3
DST recorded second quarter 1995 earnings contribution to the Registrant's
consolidated earnings of $5.4 million, a decline of 32% from the $7.9 million
contribution to the Registrant's consolidated results in the second quarter
1994. The lower DST second quarter results were due to the absence of Investors
Fiduciary Trust Company ("IFTC") earnings ($1.4 million pre-tax in 1994),
increased interest expense of $1.4 million pre-tax related to indebtedness
associated with a special $150 million dividend made in May, 1995 to KCSI, and
increased costs associated with DST's developmental and international business
units. The combination of these items reduced DST net income by $2.2 million
after-tax, equivalent to $.05 per share.
DST revenues increased 17% to $118.6 million in second quarter 1995 as mutual
fund shareowner accounts serviced increased to 34.2 million, 3.2 million (10%)
over comparable June 30, 1994, and a 7% increase over the 32.1 million at year
end 1994 (representative of the growth in DST's mutual fund clients) and which
led to increased mutual fund processing volumes. Operating earnings from "core"
business activities at DST increased over second quarter 1994 on higher mutual
fund processing revenues, partially due to accounts processed as a result of the
previously announced Kemper transaction. These increased earnings were offset by
operating losses on developmental and international business units, particularly
Belvedere Financial Systems, Inc., which incurred additional product
infrastructure development costs, and Clarke & Tilley, as a result of the recent
acquisition of Hi Portfolio Pty, Ltd., as insufficient time has elapsed to
implement the planned operational synergies. Depreciation and amortization
increased 34% over second quarter 1994 due to increased investment in computer
mainframe equipment and amortization of certain acquisition costs associated
with the HiPortfolio and Supervised Service Company ("SSC") transactions.
Equity in DST's unconsolidated affiliates earnings of $4.9 million for the
second quarter 1995 declined only slightly from comparable 1994. The previously
discussed absence of earnings from IFTC was substantially offset by higher
earnings reported by The Continuum Company, Boston Financial Data Services,
Inc., and Argus Health Systems, Inc., DST's other major unconsolidated
affiliates, all on improved volumes for their respective business lines. DST's
Midland Data Systems and First of Michigan joint ventures reported slightly
lower earnings than prior years second quarter on lower volumes.
During the first six months of 1995, DST's contribution to the Registrant's
consolidated net income increased slightly over the same period prior year from
$18.3 million to $18.5 million as revenues rose 16% to $231.2 million. Revenues
from international and developmental business units increased $12.6 million, or
83% during the six months ended June 30, 1995 versus the comparable period in
1994. Costs and expenses increased 16.5% to $177.1 million over the comparable
1994 period. Expenses from international and developmental units increased
$13.7 million or 73% from the six months ended June 30, 1994, to the comparable
period in 1995. Depreciation and amortization increased $7.5 million or 30% over
the first six months of 1994 on increased amortization associated with the SSC
and HiPortfolio acquisitions and further depreciation of investment in data
processing equipment. Earnings from unconsolidated affiliates decreased $2.3
million from the comparable 1994 period which included IFTC earnings of $2.9
million. IFTC was sold in first quarter 1995, generating a net gain of $4.7
million.
FINANCIAL ASSET MANAGEMENT
JANUS CAPITAL CORP. & BERGER ASSOCIATES, INC.
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues $ 57.4 $ 43.7 $ 112.8 $ 88.3
Costs and expenses 29.3 21.8 66.9 45.9
Depreciation and amortization 3.3 2.3 6.3 3.8
Operating income 24.8 19.6 39.6 38.6
Interest expense (1.5) (.4) (2.6) (.8)
Pretax income 23.3 19.2 37.0 37.8
Income taxes 9.5 7.4 15.2 14.7
Minority interest 2.7 2.4 4.4 4.6
Net income $ 11.1 $ 9.4 $ 17.4 $ 18.5
Financial Asset Management contribution to second quarter 1995 consolidated
Registrant results of $11.1 million rose 18% over comparable 1994 results on a
31% improvement in revenues to $57.4 million. Operating income also improved
27% resulting from the revenue gains. Net income did not increase in proportion
to revenue improvement due to increased intangible amortization and interest
expenses related to acquisition of a controlling interest Berger in late 1994
along with the acquisition of additional ownership in Janus in early 1995.
Janus and Berger combined to total $29.6 billion in assets under management at
June 30, 1995, a 14% increase over the $25.9 billion at December 31, 1994.
Shareholder accounts grew to 2.5 million versus the 2.4 million at year end
1994. Favorable market conditions during the first six months of 1995,
especially in late second quarter, fueled the rise in assets under management
and produced the revenue improvement. Combined Financial Asset Management
operating expenses also rose in second quarter 1995, primarily from the
increased business volumes. However, Janus marketing and promotional expenses
declined significantly from first quarter 1995 levels. Additionally, salaries
and wages benefitted from the termination of certain Janus compensation arrange-
ments in fourth quarter 1994. Combined Financial Asset Management depreciation
and amortization expense in second quarter 1995 was $3.3 million, compared to
$2.3 million in 1994 second quarter. The increase is due to the Berger acquisi-
tion in late 1994 along with the acquisition of an additional ownership in Janus
in early 1995.
For the first six months of 1995, Financial Asset management contributed $17.4
million to the Registrant's consolidated results, $1.1 million or 6% below the
comparable 1994 period. The first six months of 1995 included earnings from
Berger Associates, Inc., which was not consolidated until fourth quarter of
1994. Janus revenues were up $8.4 million or 10% from the comparable 1994
period, with Berger recording revenues of $16.1 million in 1995. Costs and
expenses increased 46% in the first half of 1995 over the prior year. The in-
crease includes marketing and promotional expenses incurred primarily in the
first quarter of 1995 on a major print and television advertising campaign,
higher variable costs associated with increased business volumes, costs related
to the first quarter establishment of Janus' own line of money market funds, and
the addition of Berger.
Lower year to date 1995 salaries and wages expenses were experienced by Janus
due to the fourth quarter 1994 termination of certain compensation arrangements
as described in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994.
ELIMINATIONS, CORPORATE & OTHER
Three Months Six Months
Ended June 30, Ended June 30,
1995 1994 1995 1994
Revenues $ (1.0) $ (1.1) $ (1.9) $ (1.3)
Costs and expenses 1.6 .7 2.4 2.5
Depreciation and amortization .7 .2 1.2 1.0
Operating loss (3.3) (2.0) (5.5) (4.8)
Unconsolidated affiliates -- (.1) -- (.1)
Interest income (expense) 1.1 3.7 (.2) 4.3
Pretax income (loss) (2.2) 1.6 (5.7) (.6)
Income tax (benefits) (.3) .1 (1.2) (.5)
Net income (loss) $ (1.9) $ 1.5 $ (4.5) $ (.1)
Eliminations, Corporate & Other recorded net losses of $1.9 million versus a
profit of $1.5 million from the equivalent period in second quarter 1994.
Registrant general and administrative expenses were lower in second quarter 1995
versus 1994, however, comparability with prior year costs and expenses is
affected by the reversal in second quarter 1994 of certain employment tax and
interest expense accruals resulting from the favorable outcome of long standing
employment tax issues, which reduced overall second quarter 1994 costs and
expenses.
For the first six months of 1995, Eliminations, Corporate & Other contributed a
loss of $(4.5) million to the Registrant's consolidated results, versus a loss
of $(.1) during the first six months of 1994, due primarily to the absence of
the reversal of the tax and interest expense accrual which occurred in 1994 as
described above.
TRENDS AND OUTLOOK
The Registrant reported earnings of $.19 per share for the second quarter 1995,
significantly lower than second quarter 1994 earnings of $.70. Consolidated
revenues rose 16% to $308.7 million from revenue growth in all of the Company's
primary business segments. Transportation Services operated at increased
traffic levels compared to prior year but reported decreased earnings as $17.8
million ($.39 per share) in unusual costs and expenses for the quarter were
incurred. Information & Transaction Processing reported lower second quarter
operating income on higher costs at its developmental and international units,
offsetting core business growth. Financial Asset Management earnings were
higher on both increased revenues at Janus and the inclusion of Berger in
1995.
A current outlook for the Registrant's three core businesses for the remainder
of 1995 is as follows: a) Transportation Services - KCSR rail operations are
expected to continue to experience increased traffic levels, as intermodal,
paper, chemicals, petroleum, and grain traffic carloadings continue to enjoy
strong volumes; unit coal revenues are slightly ahead of prior year and should
benefit from the resumption of shipments to the "TUMCO" electric utility plant
in June 1995. Improvement to system congestion caused by increased traffic
levels are anticipated throughout the rest of 1995. b) Information & Transac-
tion Processing - DST has shown continued revenue growth in both it's "core" and
developmental and international business segments. Increased operating income
levels in "core" business lines have been offset by higher than expected costs
in developmental and international units. While continued investment in
developmental and international units will continue throughout 1995, management
expects improvement by the end of the year. DST's growth will depend on growth
in the mutual fund, insurance, pharmaceutical claim, international, and other
financial services markets it serves. DST's earnings for the remainder of 1995
will continue to be affected by increased interest expense associated with
indebtedness incurred for payment of a special $150 million dividend to KCSI.
c) Financial Asset Management - Janus' assets under management grew in second
quarter 1995, increasing more than 9%, with shareholder accounts also increas-
ing. Berger assets under management and shareholder accounts remained flat for
most of the second quarter. Future growth will be largely dependent on pre-
vailing financial market conditions, which have generally been favorable in the
first half of 1995, and relative performance of the Janus and Berger products.
Lower operating expenses at Janus, including reduced levels of marketing from
those in first quarter 1995 coupled with lower salaries associated with the
1994 termination of certain Janus compensation arrangements, should continue to
be sustained throughout the remainder of 1995.
Liquidity and Capital Resources
Summary cash flow data is as follows (in millions):
Six Months
Ended June 30,
1995 1994
Cash flows provided by (used for):
Operating activities $ 87.1 $ 109.7
Investing activities (183.8) (170.1)
Financing activities 96.0 63.7
Net increase (decrease) in cash
and equivalents (.7) 3.3
Cash and equivalents at beginning of year 12.7 6.6
Cash and equivalents at end of period $ 12.0 $ 9.9
During the first six months of 1995, the Registrant's cash position remained
relatively unchanged, decreasing from $12.7 million at December 31, 1994, to
$12.0 million at June 30, 1995. Operating cash flows and proceeds from issuance
of long term debt in excess of repayments, were used for property acquisitions,
investment in affiliates, and purchase of companies. Operating cash flows for
the first six months of 1995 of $87.1 million decreased $22.6 million compared
to prior year. The decrease was chiefly attributable to lower net income; a net
change in working capital items, primarily a decrease in accounts payable,
partially offset by an increase in accrued liabilities; and an increase in
depreciation and amortization. Net income includes a non cash gain of $4.7
million, net of deferred taxes, from the sale of IFTC, as described more
fully in the Registrant's Annual Report on Form 10-K for the year ended December
31, 1994.
During the first six months of 1995, cash was invested in KCSR road property
additions and additions related to DST's Winchester Data Center expansion and
data processing equipment needs. KCSR capital expenditures for property
acquisitions have, however, declined 42% in the first six months of 1995
compared to prior year, due largely to the completion of a long term capital
improvement program in late 1994. Cash was also used for investment
acquisitions, principally DST purchase of Supervised Service Company ("SSC")
from Kemper Financial Services and further investment in international
companies; and investments and loans with affiliates, which was principally re-
lated to the Janus minority restructuring. Financing cash flows were generated
through issuance of long-term debt in excess of repayments. Debt proceeds were
used at KCSR for working capital, DST for working capital and acquisition
investments, Southern Leasing for portfolio growth as well as Registrant Common
stock repurchases. The Registrant also made principal payments totaling $4.2
million with respect to the Registrant's Employee Stock Ownership Plan ("ESOP")
indebtedness.
Cash flows from operations are expected to increase during the remainder of 1995
from positive operating income, which have historically resulted in favorable
cash flows, and higher levels of depreciation and amortization than prior year.
Investing activities will continue to use significant amounts of cash, although
such amounts will be reduced from 1994 levels as KCSR has completed its roadbed
capital improvement program. The Registrant anticipates that continued roadway
improvement investments will be funded by KCSR operating cash flow. Other
capital expenditures may be funded through debt. Investing cash flows will also
be used for completion of the expansion of DST's Winchester Data Center,
expected to be completed in the latter half of 1995.
In addition to operating cash flows, the Registrant has available financing
arrangements at subsidiary levels (including remaining credit from the pre-
viously described new $250 million credit agreement at DST), remaining credit
from $400 million in the Registrant's previously described new credit agreement,
of which $419.1 million was available at June 30, 1995, proceeds available with
respect to the Registrant's $200 million Note and Medium Term Notes shelf
filing, of which $100 million were issued at June 30, 1995 and $500 million with
respect to a Universal Shelf Offering filed in September 1993 and as amended
April 19, 1995. The Registrant has not yet requested that the $500 million
Universal Shelf Offering be declared effective by the Securities and Exchange
Commission and no securities have been issued. As further described under
"Recent Announcements" in Item 2 of this Form 10-Q, the Registrant has announced
its intention to sell 51% of DST later this year, market conditions permitting.
Should this occur, it would result in significant cash being generated for the
Registrant. Such proceeds are currently anticipated to be used for debt
repayment, purchase of Registrant common stock, and general corporate purposes.
The Registrant believes these positive operating cash flows and available
financing resources are sufficient to fund working capital and other
requirements for the remainder of 1995.
The Registrant's debt ratio (debt as a percent of total debt plus equity) at
June 30, 1995 was 62.8% compared to 59.6% for the year ended December 31, 1994.
While consolidated equity increased in the first six months of 1995, consoli-
dated debt more than proportionately increased from borrowings to finance the
Common stock repurchases, acquisitions and investments described earlier.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1, Footnote 10 to the financial statements of this Form 10-Q is
hereby incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - Five-Year Competitive Advance and Revolving Credit
Facility Agreement dated May 5, 1995 among Kansas City Southern
Industries, Inc. and the lenders named.
Exhibit 10.2 - Employment agreement dated May 15, 1995, among Kansas City
Southern Industries, Inc., The Kansas City Southern Railway Company, and
Michael R. Haverty.
Exhibit 27.1 - Financial Data Schedule.
b) Reports on Form 8-K
The Registrant filed a Form 8-K dated May 15, 1995, under Item 5
reporting the retirement and resignation of George W. Edwards, Jr.
President and Chief Executive Officer of the Kansas City Southern
Railway and a Director and Executive Vice President of the Registrant.
Mr. Edwards is succeeded by Michael R. Haverty, former President of The
Atchison, Topeka, and Santa Fe Railway.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on August
9, 1995.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Comptroller
(Principal Accounting Officer)