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 March 31, 1997
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 Company 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) 983-1303
(Company'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 Company (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 Company 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 April 30, 1997
Common Stock, $.01 per share par value 35,689,806 Shares
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1997
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
March 31, 1997 and December 31, 1996 2
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 1997 and 1996 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information
- Approval of Gateway Western Railway Company Acquisition 19
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1997
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by the Company, 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 Company 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 Company's Annual Report on Form 10-K for the year ended
December 31, 1996.
<PAGE 2>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
March 31, December 31,
1997 1996
ASSETS
Current Assets:
Cash and equivalents $ 11.1 $ 22.9
Accounts receivable, net 149.7 138.1
Inventories 38.8 39.3
Other current assets 57.1 91.8
Total current assets 256.7 292.1
Investments held for operating purposes 614.4 335.2
Properties (net of $500.6 and $491.3 accumulated
depreciation and amortization, respectively) 1,219.7 1,219.3
Intangibles and Other Assets, net 241.4 237.5
Total assets $ 2,332.2 $ 2,084.1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 7.3 $ 7.6
Accounts and wages payable 80.4 102.6
Accrued liabilities 152.9 134.4
Total current liabilities 240.6 244.6
Other Liabilities:
Long-term debt 916.3 637.5
Deferred income taxes 335.9 337.7
Other deferred credits 131.7 129.8
Total other liabilities 1,383.9 1,105.0
Minority Interest in consolidated subsidiaries 9.2 18.8
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock 0.4 0.4
Capital surplus - -
Retained earnings 875.0 883.3
Net unrealized gain on investments 16.0 24.9
Shares held in trust (200.0) (200.0)
Total stockholders' equity 698.5 715.7
Total liabilities and stockholders' equity $ 2,332.2 $ 2,084.1
See accompanying notes to consolidated condensed financial statements.
<PAGE 3>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months
Ended March 31,
1997 1996
Revenues $ 228.1 $ 201.3
Costs and expenses 156.1 141.8
Depreciation and amortization 17.9 19.0
Operating Income 54.1 40.5
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 6.1 1.9
Other 1.2 1.3
Interest expense (13.1) (12.9)
Other, net 5.9 4.6
Pretax Income 54.2 35.4
Income tax provision 21.0 12.5
Minority interest in
consolidated earnings 4.7 3.0
Net Income $ 28.5 $ 19.9
Computation of Primary Earnings per Common Share
Weighted Average Primary Common
Shares Outstanding (in thousands) 36,739 40,010
Primary Earnings per Common Share $ 0.77 $ 0.50
Cash Dividends Paid:
Per Preferred share $ .25 $ .25
Per Common share $ .10 $ .10
See accompanying notes to consolidated condensed financial statements.
<PAGE 4>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
Three Months
Ended March 31,
1997 1996
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 28.5 $ 19.9
Adjustments to net income:
Depreciation and amortization 17.9 19.0
Deferred income taxes 7.1 1.1
Equity in undistributed earnings (7.3) 0.6
Changes in working capital items:
Accounts receivable (11.6) (8.9)
Inventories 0.5 2.1
Other current assets (2.2) 7.8
Accounts and wages payable (18.7) (13.1)
Accrued liabilities 17.0 (56.4)
Other, net (13.4) (7.3)
Net 17.8 (35.2)
INVESTING ACTIVITIES:
Property acquisitions (15.8) (44.5)
Proceeds from disposal of property 2.5 1.0
Investment in and loans with affiliates (292.3) (3.8)
Net sales of short-term investments 34.5 6.3
Other, net 2.5 3.6
Net (268.6) (37.4)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 280.0 95.7
Repayment of long-term debt (1.6) (1.9)
Proceeds from stock plans 4.2 1.6
Stock repurchased (39.9) (39.1)
Cash dividends paid (7.3) (7.0)
Other, net 3.6 1.3
Net 239.0 50.6
CASH AND EQUIVALENTS:
Net decrease (11.8) (22.0)
At beginning of year 22.9 31.8
At end of period $ 11.1 $ 9.8
See accompanying notes to consolidated condensed financial statements.
<PAGE 5>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
closing procedures) necessary to present fairly the financial position of
Kansas City Southern Industries, Inc. ("Company"; "KCSI") and its subsidiary
companies as of March 31, 1997 and December 31, 1996, and the results of
operations and cash flows for the three months ended March 31, 1997 and 1996.
2. The results of operations for the three months ended March 31, 1997 and
1996 are not necessarily indicative of the results to be expected for the full
year 1997.
3. The accompanying consolidated condensed financial statements have been
prepared consistently with accounting policies described more fully in Note 1
to the consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
Effective January 1, 1997, the Company realigned its business segments to
better define the core industries in which it operates. The various components
comprising the segment formerly known as Corporate & Other have been assigned
to either the Transportation or Financial Asset Management segment.
Transportation consists of: The Kansas City Southern Railway Company ("KCSR");
Southern Group, Inc.; transportation-related KCSI Holding Company amounts; and
transportation-related subsidiaries and equity investments, including
Transportacion Ferroviaria Mexicana S. de R.L. de C.V. ("TFM"), Southern
Capital Corporation, LLC ("Southern Capital"), Mexrail, Inc. ("Mexrail"), and
Gateway Western Railway Company ("Gateway Western"). Financial Asset
Management includes Janus Capital Corporation ("Janus"), Berger Associates,
Inc. ("Berger"), the Company's approximate 41% interest in DST Systems, Inc.
("DST"), as well as Financial Asset Management-related KCSI Holding Company
amounts. Prior year's information has been realigned to reflect the new
segment approach.
4. The Company's inventories ($38.8 million at March 31, 1997 and $39.3
million at December 31, 1996) primarily consist of material and supplies
related to rail transportation. Other components of inventories are not
material.
5. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method generally include all entities in which
the Company or its subsidiaries have significant influence, but not more than
50% voting control. Investments in unconsolidated affiliates at March 31, 1997
include equity interests in DST, TFM, Southern Capital, Gateway Western and
Mexrail, as well as the Company's interests in other companies.
As more fully discussed in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996, during first quarter 1997, Gateway Western was
accounted for under the equity method as a majority-owned subsidiary while the
Company awaited approval from the Surface Transportation Board ("STB") for the
acquisition of Gateway Western. The STB approved the Company's acquisition of
Gateway Western, effective May 5, 1997. Accordingly, purchase price
allocations will be completed, and the assets, liabilities, revenues and
expenses of Gateway Western will be included in the Company's financial
statements as a consolidated subsidiary subsequent to STB approval.
<PAGE 6>
DST has a Stockholders' Rights Agreement, which includes provisions providing
that under certain circumstances following a "change in control" of KCSI, as
defined in DST's Stockholders' Rights Agreement, substantial dilution of the
Company's interest in DST could result. Additionally, the Company is party to
certain agreements with Transportacion Maritima Mexicana, S.A. de C.V. ("TMM")
covering the TFM and Mexrail ventures. TMM (including its subsidiaries) owns
51% each of TFM and Mexrail. These agreements contain "change in control"
provisions, provisions intended to preserve the Company's and TMM's
proportionate ownership of the ventures, and super majority provisions with
respect to voting on certain significant transactions. Such agreements also
provide a right of first refusal in the event that either party initiates a
divestiture of its equity interest in TFM or Mexrail. Under certain
circumstances, such agreements could affect the Company's ownership percentage
and rights in these equity affiliates.
Condensed financial information of DST is shown below (in millions):
Financial Condition:
March 31, December 31,
1997 1996
Current Assets $ 206.3 $ 201.3
Non-current assets 865.1 920.3
Assets $ 1,071.4 $ 1,121.6
Current liabilities $ 108.5 $ 129.3
Non-current liabilities 294.1 297.1
Equity of stockholders 668.8 695.2
Liabilities and equity $ 1,071.4 $ 1,121.6
Investment in DST $ 276.0 $ 283.5
Operating Results:
Three Months
Ended March 31,
1997 1996
Revenues $ 158.7 $ 144.3
Costs and expenses $ 135.0 $ 125.1
Net income $ 15.1 $ 4.4
<PAGE 7>
6. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with a maturity of generally three months or less
to be cash equivalents.
a. Supplemental Cash Flow Information (in millions):
Three Months
Ended March 31,
1997 1996
Interest paid (net of capitalized interest) $ 16.0 $ 18.0
Income taxes paid - 66.0
The Company's income taxes paid for the three months ended March 31, 1996
included the payment of federal and state income taxes resulting from the DST
initial public offering transactions, which occurred in fourth quarter 1995.
b. Noncash Investing and Financing Activities:
In first quarter 1997, the Company issued approximately 82,000 shares of KCSI
common stock under the Ninth Offering of the Employee Stock Purchase Plan
("ESPP"). These shares, totaling a purchase price of approximately $3.1
million, were subscribed and paid for through employee payroll deductions in
1996.
In first quarter 1996, the Company issued approximately 101,800 shares of KCSI
common stock under the Eighth Offering of the ESPP. These shares, totaling a
purchase price of approximately $3.8 million, were subscribed and paid for
through employee payroll deductions in 1994 and 1995.
The Company accrued a liability for the donation of 300,000 shares of DST
common stock to a charitable trust in December 1995. These shares were
delivered to the charitable trust in January 1996, resulting in a reduction in
the Company's investment in DST and associated liabilities.
Certain Company subsidiaries and affiliates hold investments which are
accounted for as "available for sale" securities as defined by Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." The Company records its proportionate share of
any unrealized gains or losses related to these investments, net of deferred
taxes, in stockholders' equity. The unrealized gain as of March 31, 1997, net
of deferred taxes, related to these investments decreased $8.9 million from
December 31, 1996.
7. Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("SFAS 128") was issued in February 1997, effective for financial statements
for interim and annual periods ending after December 15, 1997. The statement
specifies the computation, presentation and disclosure requirements for
earnings per share. The statement requires the computation of earnings per
share under two methods: "basic" and "diluted." Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding during the period. Diluted
earnings per share is computed giving effect to all dilutive potential common
shares that were outstanding during the period (i.e., the denominator used in
the basic calculation is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued). SFAS 128 requires the Company to present basic and diluted
per share amounts for income from continuing operations and for net income on
the face of the income statement.
<PAGE 8>
Although early adoption of SFAS 128 is not permitted, pro forma earnings per
share amounts may be disclosed in the notes to the financial statements.
Accordingly, if the Company's earnings per share had been computed in
accordance with SFAS 128 for the three months ended March 31, 1997 and 1996,
pro forma earnings per share would have been as follows:
Three Months
Ended March 31,
1997 1996
Pro Forma Earnings per share:
Basic $ 0.79 $ 0.51
Diluted 0.77 0.50
8. As discussed more fully in Notes 2 and 11 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1996, the Mexican Government ("Government") awarded to TFM
the right to purchase 80% of the common stock of Ferrocarril del Noreste, S.A.
de C.V. ("FNE") for approximately 11.072 billion Mexican pesos (approximately
$1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on
December 5, 1996). FNE holds the concession to operate Mexico's Northeast rail
lines for the next 50 years, with the option of a 50 year extension (subject to
certain conditions). At March 31, 1997, the Company owned 49% of the ordinary
voting stock of TFM. The Company accounts for TFM under the equity method.
In connection with the Company's investment in TFM, a Mexican company, matters
arise with respect to financial accounting and reporting for foreign currency
transactions and for translating foreign currency financial statements from
Mexican pesos into U.S. dollars. The Company follows the requirements outlined
in Statement of Financial Accounting Standards No. 52 "Foreign Currency
Translation" ("SFAS 52"), and related authoritative guidance.
On January 31, 1997, TFM deposited approximately $565 million U.S. with the
Government (representing approximately 40% of the purchase price) as the
initial installment under the agreement to acquire ownership in FNE. The
Company funded its proportionate amount (approximately $277 million U.S. based
on the U.S. dollar/Mexican peso exchange rate on January 31, 1997) of the
initial installment as a capital contribution to TFM using borrowings under
existing lines of credit.
TFM is required to pay the remaining 60% of the purchase price in Mexican
pesos no later than July 31, 1997. TFM (through FNE) has entered into a letter
of intent with an investment banking institution for financing that would make
available to TFM approximately $875 million through a combination of a senior
term loan, two high yield note offerings and a revolving credit facility. The
terms of the letter of intent include a possible capital call of $150 million
from TMM and the Company if certain performance benchmarks, to be agreed upon,
are not met. The Company would be responsible for approximately $74 million of
the capital call, if exercised.
Concurrent with the arrangement of financing for TFM, TMM and the Company
entered into a letter of intent to sell approximately 24.5% of TFM to the
Government for approximately $200 million U.S. The proceeds from the
Government will be used to finance a portion of the FNE purchase price. Upon
completion of the transaction with the Government, the Company's interest in
TFM would be reduced from 49% to approximately 37%. The letter of intent
includes a call option for TMM and the Company, which could be exercised at
the share price paid by the Government plus a (U.S. dollar-denominated)
interest factor based on one-year U.S. Treasury securities.
<PAGE 9>
In the event that the proceeds from these arrangements do not provide funds
sufficient for TFM to make the final installment of the purchase price, the
Company may be required to make additional capital contributions. In order to
hedge against a portion of the Company's exposure to fluctuations in the value
of the Mexican peso versus the U.S. dollar, the Company entered into two
separate forward contracts to purchase Mexican pesos - $98 million in February
1997 and $100 million in March 1997. These contracts were not held for trading
purposes. In April 1997, the Company realized a $3.8 million pretax gain in
connection with these contracts. This gain will be deferred until the final
installment of the FNE purchase price is made, and accounted for as a component
of the Company's investment in TFM. These contracts were intended to hedge
only a portion of the Company's exposure related to the final installment of
the purchase price and not any other transactions or balances. In separate
transactions, TFM entered into approximately $600 million in forward
contracts to hedge against its exposure to fluctuations in the value of the
Mexican peso versus the U.S. dollar.
Upon completion of the TFM purchase of 80% of FNE, the Company expects that its
investment in TFM will be approximately $300 million.
Mexico's economy is currently classified as "highly inflationary" as defined
in SFAS 52; accordingly, the U.S. dollar is assumed to be TFM's functional
currency, and any gains or losses from translating its financial statements
into U.S. dollars will be included in the determination of its net income.
Any equity earnings or losses from TFM included in the Company's results of
operations will reflect the Company's share of such translation gains and
losses. The Company will evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
TFM as market conditions change or exchange rates fluctuate.
9. In accordance with Statement of Financial Accounting Standards No. 58
"Capitalization of Interest Cost in Financial Statements That Include
Investments Accounted for by the Equity Method" ("SFAS 58"), the Company has
capitalized interest incurred on the borrowings from its lines of credit
associated with the approximate $277 million capital contribution to TFM. This
contribution was the Company's proportionate amount of the initial installment
made by TFM in connection with its acquisition of 80% of FNE. TFM will obtain
operational control of FNE upon payment of the final installment of the
purchase price, which is required to occur no later than July 31, 1997. Once
the final installment is paid, the planned principal operations of TFM will
commence and, pursuant to SFAS 58, capitalization of interest by the Company
will cease. Interest capitalized by the Company for the three months ended
March 31, 1997 totaled $2.6 million.
10. The Company has had no significant changes in its outstanding litigation or
other contingencies from that previously reported in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
11. See the Recent Developments section of Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations, for significant
transactions and events that will have an impact on the Company's future
results of operations and financial position.
<PAGE 10>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-Q,
contains comments not based upon historical fact. Such forward-looking
comments are based upon information currently available to management and
management's perception thereof as of the date of this Form 10-Q. The actual
results of operations of Kansas City Southern Industries, Inc. ("Company";
"KCSI") could materially differ from those indicated in forward-looking
comments. The differences could be caused by a number of factors or
combination of factors including, but not limited to, those factors identified
in the Company's Current Report on Form 8-K dated November 12, 1996, which has
been filed with the U.S. Securities and Exchange Commission (File No. 1-4717)
and is hereby incorporated by reference herein. Readers are strongly
encouraged to consider these factors when evaluating any such forward-looking
comments.
KCSI, a Delaware Corporation organized in 1962, is a diversified holding
company with principal operations in rail transportation, through its
subsidiary The Kansas City Southern Railway Company and various equity
investments, and Financial Asset Management, through its subsidiaries Janus
Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"). The
Company supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" and more passive investments.
Effective January 1, 1997, the Company realigned its industry segments to more
clearly reflect the Company's focus on its core businesses. The various
components which formerly comprised the Corporate & Other segment were assigned
to either the Transportation or Financial Asset Management segment.
Accordingly, the Company's business activities by newly aligned industry
segment and principal subsidiary companies are:
Transportation - The Transportation segment consists of all
transportation-related subsidiaries and investments, including:
* The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary of the Company, operating a Class I Common Carrier railroad
system;
* Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning
100% of Carland, Inc. and managing the loan portfolio for Southern Capital
Corporation, LLC ("Southern Capital," a 50% owned joint venture);
* Equity investments in Southern Capital, Transportacion Ferroviaria Mexicana
S. de R.L. de C.V. ("TFM," a 49% owned affiliate at March 31, 1997, but
which may be reduced to approximately 37% in second or third quarter 1997),
Mexrail, Inc. ("Mexrail," a 49% owned affiliate) and Gateway Western
Railway Company ("Gateway Western," a majority-owned unconsolidated
subsidiary at March 31, 1997 - see below);
* Various other consolidated subsidiaries;
* KCSI Holding Company amounts.
Financial Asset Management - This segment consists of all subsidiaries engaged
in the management of investments for mutual funds, private and other accounts,
as well as any Financial Asset Management-related investments. Included are:
* Janus, an 83% owned subsidiary;
* Berger, an 87% owned subsidiary;
* DST Systems, Inc. ("DST"), an approximate 41% owned equity investment;
* KCSI Holding Company amounts.
<PAGE 11>
RECENT DEVELOPMENTS
Mexico's Northeast Rail Lines - As disclosed previously, TFM, a joint venture
of the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), was
awarded the right to purchase 80% of the common stock of Ferrocarril del
Noreste, S.A. de C.V. ("FNE") for approximately 11.072 billion Mexican pesos
(approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange
rate on December 5, 1996). FNE holds the concession to operate Mexico's
Northeast rail lines for the next 50 years, with the option of a 50 year
extension (subject to certain conditions). At March 31, 1997, the Company
owned 49% of the ordinary voting stock of TFM. The Company accounts for TFM
under the equity method.
On January 31, 1997, TFM deposited approximately $565 million U.S. with the
Mexican Government (representing approximately 40% of the purchase price) as
the initial installment under the agreement to purchase FNE. The Company
funded its proportionate amount (approximately $277 million U.S. based on the
U.S. dollar/Mexican peso exchange rate on January 31, 1997 ) of the initial
installment as a capital contribution to TFM using borrowings under existing
lines of credit. The remaining 60% of the purchase price will be paid when TFM
obtains operational control of the Northeast rail lines, which is required to
occur no later than July 31, 1997.
TFM (through FNE) has entered into a letter of intent with an investment
banking institution to finance the majority of the remaining purchase price
through a combination of a senior term loan, two high yield note offerings and
a revolving credit facility. The arrangements are expected to make available
to TFM approximately $875 million. The terms of the letter of intent include a
possible capital call of $150 million from TMM and the Company if certain
performance benchmarks, to be agreed upon, are not met. The Company would be
responsible for approximately $74 million of the capital call, if exercised.
Additionally, the Company and TMM entered into a letter of intent to sell
approximately 24.5% of TFM to the Mexican Government for approximately $200
million U.S. These proceeds are expected to be used to finance a portion of
the FNE purchase price. Upon completion of the transaction with the Mexican
Government, the Company's interest in TFM would be reduced from 49% to
approximately 37%. The letter of intent includes a call option for TMM and the
Company, which could be exercised at the share price paid by the Mexican
Government plus a (U.S. dollar-denominated) interest factor based on one-year
U.S. Treasury securities.
In order to hedge against a portion of the Company's exposure to fluctuations
in the value of the Mexican peso versus the U.S. dollar, the Company entered
into two separate forward contracts to purchase Mexican pesos - $98 million in
February 1997 and $100 million in March 1997. In April 1997, the Company
realized a $3.8 million pretax gain in connection with these contracts. This
gain will be deferred until the final installment of the FNE purchase price is
made, and accounted for as a component of the Company's investment in TFM.
These contracts were intended to hedge only a portion of the Company's exposure
related to the final installment of the purchase price and not any other
transactions or balances. In separate transactions, TFM entered into
approximately $600 million in forward contracts to hedge against its exposure
to fluctuations in the value of the Mexican peso versus the U.S. dollar.
Common Stock Repurchases - The Company's Board of Directors ("Board") has
authorized management to repurchase a total of eleven million shares of KCSI
common stock under two programs - the 1995 program for eight million shares and
the 1996 program for three million shares. During first quarter 1997, the
Company purchased the final 800,000 shares under the forward purchase contract
disclosed in Note 8 to the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
With these transactions, the Company has repurchased approximately 9.1 million
of its common shares, effectively completing the 1995 program and part of the
1996 program.
<PAGE 12>
Additional share repurchases may be made during 1997 based on management's
assessment of current market conditions and perceived risks, as well as the
Company's available capital and liquidity.
Gateway Western - KCS Transportation Company ("KCSTC," a wholly-owned
subsidiary of the Company) acquired beneficial ownership of the outstanding
stock of Gateway Western in December 1996. The stock acquired by KCSTC was
held in an independent voting trust until the Company received approval from
the Surface Transportation Board ("STB") on the Company's proposed acquisition
of Gateway Western. The STB issued its approval of the transaction effective
May 5, 1997. Because the Gateway Western stock was held in trust during first
quarter 1997, the Company accounted for Gateway Western under the equity
method as a majority-owned unconsolidated subsidiary. With the STB approval
of the acquisition, the Company will complete purchase price allocations and
Gateway Western will become a consolidated subsidiary reported in the
Transportation segment.
RESULTS OF OPERATIONS
Segment revenues and operating income comparisons follow (dollars in millions):
Three Months
Ended March 31,
1997 1996
Revenues:
Transportation $ 124.6 $ 130.9
Financial Asset Management 103.5 70.4
Total $ 228.1 $ 201.3
Operating Income:
Transportation $ 12.5 $ 15.2
Financial Asset Management 41.6 25.3
Total $ 54.1 $ 40.5
The Company reported first quarter 1997 earnings of $28.5 million ($0.77 per
share) compared to $19.9 million ($0.50 per share) in first quarter 1996.
Consolidated first quarter 1997 revenues rose 13% to $228.1 million compared to
first quarter 1996, primarily from increases in assets under management at
Janus. Operating income for the three months ended March 31, 1997 increased
34% (to $54.1 million) versus comparable 1996, largely due to lower
proportionate growth in Financial Asset Management operating expenses as
compared to revenues, coupled with operating cost reductions at KCSR. First
quarter 1997 depreciation and amortization decreased approximately 6%, chiefly
because of reduced depreciation at KCSR and its subsidiaries as a result of
the contribution of rail property to the Southern Capital joint venture in
October 1996. Equity earnings in unconsolidated affiliates increased $4.1
million, primarily from improved earnings at DST. Interest expense for the
three months ended March 31, 1997 was approximately 2% higher than comparable
1996 as a result of slightly higher average debt balances in 1997 (exclusive
of indebtedness on which interest was capitalized during first quarter 1997).
<PAGE 13>
TRANSPORTATION
Three Months Three Months
Ended March 31, 1997 Ended March 31, 1996
(in millions)
-------------------------- -------------------------
Holding Company Holding Company
and Trans- and Trans-
portation- portation-
Related Consolidated Related Consolidated
Affil- Trans- Affil- Trans-
KCSR iates portation KCSR iates portation
Revenues $ 121.0 $ 3.6 $ 124.6 $ 123.3 $ 7.6 $ 130.9
Costs and expenses 93.5 3.7 97.2 94.1 5.6 99.7
Depreciation and
amortization 13.6 1.3 14.9 14.6 1.4 16.0
Operating income (loss) 13.9 (1.4) 12.5 14.6 0.6 15.2
Equity in net earnings
of unconsolidated
affiliates 0.5 0.6 1.1 - 0.6 0.6
Interest expense (9.7) (1.1) (10.8) (12.1) (0.1) (12.2)
Other, net 2.4 - 2.4 0.9 (0.3) 0.6
Pretax income (loss) 7.1 (1.9) 5.2 3.4 0.8 4.2
Income tax
provision (benefit) 3.1 (0.9) 2.2 1.4 0.4 1.8
Net income (loss) $ 4.0 $ (1.0) $ 3.0 $ 2.0 $ 0.4 $ 2.4
The Transportation segment contributed $3.0 million to the Company's first
quarter 1997 earnings, a 25% increase over first quarter 1996. This increase
was attributable to higher equity earnings from unconsolidated affiliates,
reduced interest expense, and a one time gain on the sale of track, partially
offset by lower operating income as a result of a 5% decrease in revenues (to
$124.6 million for the quarter ended March 31, 1997).
KCSR first quarter 1997 revenues decreased 2%, primarily due to a 16% reduction
in unit coal revenues as a result of four unplanned outages at utilities served
by KCSR and weather problems affecting connecting carriers and mines
originating the coal. This decrease was partially offset by a $2.2 million
improvement in general commodities revenues for the three months ended
March 31, 1997. Revenue improvements were evident in metal and petroleum
products (from volume increases), and paper/forest products as a result of
higher average revenues per carload. While first quarter 1997 intermodal
carloadings were 5% lower than the comparable prior period, associated
revenues decreased only 2%, indicative of a focus on higher-rate business.
Holding Company and Transportation-Related Affiliate revenues decreased $4.0
million primarily as a result of the dissolution of Southern Leasing
Corporation ("SLC") in connection with the formation of the Southern Capital
joint venture in October 1996.
The decline in Transportation revenues was partially offset by reduced costs
during first quarter 1997. KCSR reported a $1.6 million decrease in operating
expenses, primarily attributable to reduced 1997 depreciation costs (due to the
KCSR/Carland contribution of rail property to Southern Capital in fourth
quarter 1996) and higher costs in first quarter 1996 associated with customer
service enhancements and the transportation-related effects of severe winter
weather conditions. Reduced costs were evident in salaries and wages, car
hire costs and purchased services. Additionally, cost containment measures
implemented during third and fourth quarter 1996 helped stabilize other first
quarter 1997 costs. KCSR cost reductions were partially offset by higher fuel
costs as a result of increased prices, increased equipment lease costs to
Southern Capital, and the inclusion of costs and expenses from SGI, which
became a consolidated KCSR subsidiary in October 1996. Holding Company and
Transportation-Related Affiliate costs and expenses decreased $2.0 million
primarily due to the dissolution of SLC.
Equity earnings from unconsolidated affiliates included in the Transportation
segment increased $0.5 million over first quarter 1996, reflecting the
inclusion of Southern Capital and Gateway Western, both of which became Company
investments in fourth quarter 1996.
<PAGE 14>
Interest expense decreased 11% from first quarter 1996 because of the repayment
of KCSR, Carland and SGI debt using proceeds from the Southern Capital
transaction, offset somewhat by interest expense associated with higher average
Holding Company debt balances during first quarter 1997 versus first quarter
1996. Interest expense related to the indebtedness incurred in connection with
the Company's investment in TFM is being capitalized until the final
installment of the FNE purchase price is made, which is required to occur no
later than July 31, 1997. Interest capitalized during the quarter ended
March 31, 1997 totaled $2.6 million.
Other, net increased in first quarter 1997 as a result of a one time pretax
gain of $1.6 million resulting from the sale of track by KCSR.
FINANCIAL ASSET MANAGEMENT
Three Months Three Months
Ended March 31, 1997 Ended March 31, 1996
(in millions)
-------------------------- ------------------------
Holding Holding
Company Company
Janus and FAM- Consol- Janus and FAM- Consol-
and Related idated and Related idated
Berger Affiliates FAM Berger Affiliates FAM
Revenues $ 103.6 $ (0.1) $ 103.5 $ 70.1 $ 0.3 $ 70.4
Costs and expenses 57.6 1.3 58.9 40.5 1.6 42.1
Depreciation and
amortization 2.9 0.1 3.0 3.0 - 3.0
Operating income (loss) 43.1 (1.5) 41.6 26.6 (1.3) 25.3
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc - 6.1 6.1 - 1.9 1.9
Other 0.1 - 0.1 - 0.7 0.7
Interest income (expense)(1.5) (0.8) (2.3) (1.1) 0.4 (0.7)
Other, net 0.3 3.2 3.5 0.8 3.2 4.0
Pretax income 42.0 7.0 49.0 26.3 4.9 31.2
Income tax provision 16.4 2.4 18.8 10.6 0.1 10.7
Minority interest 4.7 - 4.7 3.0 - 3.0
Net income $ 20.9 $ 4.6 $ 25.5 $ 12.7 $ 4.8 $ 17.5
Financial Asset Management contributed $25.5 million to KCSI's 1997 first
quarter consolidated earnings, an increase of 46% over comparable 1996.
Average assets under management by Janus and Berger were 45% higher during
first quarter 1997 than first quarter 1996, fueling a $33.1 million increase
in revenues and a 64% increase in operating income over first quarter 1996.
Assets under management continued to grow as year to date 1997 net fund sales
of $3.3 billion (offset partially by market depreciation) raised total assets
to $53.2 billion at March 31, 1997 ($49.9 billion at Janus; $3.3 billion at
Berger). Shareowner accounts increased 3% from December 31, 1996 to
approximately 2.8 million accounts as of March 31, 1997.
Janus
Janus continues to report improved product performance - assets under
management increased $3.2 billion from December 31, 1996 - in part because
more than 50% of (separately tracked) Janus fund products ranked in the first
quartile when compared to their respective peer categories based on product
performance over a rolling one-year period through March 31, 1997 (using
data from Lipper Analytical Services, Inc.). Additionally, the Janus
Overseas Fund and Janus Worldwide Fund both ranked in the top 5% of their
peer categories, combining for over $8.7 billion in assets under management
as of March 31, 1997 compared to $2.9 billion at March 31, 1996.
<PAGE 15>
Berger
In February 1997, Berger assumed the advisory contract for the Omni Fund,
renaming it The Berger Small Cap Value Fund ("Small Cap"). At March 31, 1997,
assets under management for the Small Cap fund totaled approximately $46
million. Also, the Berger/BIAM International Fund (introduced in fourth
quarter 1996) increased its assets under management to $58.1 million as of
March 31, 1997. Exclusive of these new funds, assets under management of
Berger's core funds decreased approximately $400 million from December 31,
1996, reflecting market depreciation and net redemptions during first quarter
1997.
In January 1997, KCSI's ownership in Berger increased to approximately 87%
(from 80%) due to Berger's repurchase of its common stock (for treasury) from
a minority shareholder. The Company recorded $8.7 million in intangibles in
connection with this transaction, which will be amortized over 15 years.
While revenues for the first quarter 1997 increased 47% over comparable 1996,
costs and expenses increased at a lower proportionate rate, resulting in
improved operating margins. These improved margins were primarily attributable
to cost containment efforts at Janus.
First quarter 1997 equity earnings from DST increased to $6.1 million from $1.9
million in comparable 1996, primarily due to the Company's proportionate share
of DST's $10.2 million non-recurring charge in first quarter 1996 related to a
former DST equity affiliate, The Continuum Company, Inc. Exclusive of this
item, DST's 1997 earnings reflect an increase in mutual fund, output processing
and subscriber management revenues and higher operating margins compared to
first quarter 1996.
Financial Asset Management interest expense increased $1.6 million over first
quarter 1996 as a result of higher average Holding Company debt balances during
first quarter 1997.
TRENDS AND OUTLOOK
The Company's first quarter 1997 earnings per share of $0.77 were more than 50%
higher than the $0.50 per share in first quarter 1996. Driven by increased
equity earnings, reduced interest expense and a non-recurring gain on the sale
of track, the Transportation segment reported improved earnings in first
quarter 1997. As a result of improved operating margins and a 37% growth in
assets under management since March 31, 1996, the Financial Asset Management
segment's contribution to first quarter 1997 consolidated earnings increased
by 46% over comparable 1996.
A current outlook for the Company's businesses for the remainder of 1997 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
i) KCSR - General commodities and intermodal traffic will continue to be
largely dependent on economic trends within certain industries in the
geographic region served by KCSR. (I) Based on anticipated traffic
levels, including consideration of recent rail mergers, revenues are
expected to be relatively flat during the remainder of 1997. (I)
Variable costs and expenses are expected to continue at levels
proportionate with revenue activity. (I) Consistent with first quarter
1997, equipment lease costs will be higher in 1997 than comparable 1996
as a result of operating leases with Southern Capital.
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 16>
ii) Financial Asset Management - Future growth will be largely dependent on
prevailing financial market conditions, relative performance of Janus' and
Berger's products, introduction and market reception of new products, as
well as other factors. (I) Costs and expenses should continue at operating
levels consistent with the rate of growth, if any, in revenues. (I)
iii) Equity Investments - The Company will continue to participate in the
earnings or losses from its equity investment in DST. Equity earnings in
the 1997 second and third quarters are expected to be favorably impacted
by the investment in Southern Capital. (I) However, the Company expects
to report equity losses from TFM once it begins operation of Mexico's
Northeast rail lines (expected in late second or early third quarter
1997.) (I)
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
Three Months
Ended March 31,
1997 1996
Cash flows provided by (used for):
Operating activities $ 17.8 $ (35.2)
Investing activities (268.6) (37.4)
Financing activities 239.0 50.6
Cash and equivalents:
Net decrease (11.8) (22.0)
At beginning of year 22.9 31.8
At end of period $ 11.1 $ 9.8
During the three months ended March 31, 1997, the Company's cash position
decreased $11.8 million from December 31, 1996. This decrease was caused
primarily by cash used for property acquisitions and Company common stock
repurchases, offset partially by positive operating cash flows and sales of
short-term investments by Janus. Operating cash flows for the quarter ended
March 31, 1997 increased $53.0 million compared to the same period in 1996.
This increase was chiefly attributable to reduced operating cash flows in first
quarter 1996 as a result of the payment of approximately $66 million in federal
and state income taxes resulting from the taxable gains associated with the DST
public stock offering completed in November 1995, offset partially by changes
in other working capital components.
Investing expenditures for the quarter ended March 31, 1997 included the
Company's approximate $277 million capital contribution to TFM and KCSR road
property additions. Cash from investing activities was generated primarily
from the sale of short-term investments by Janus.
Financing cash flows were generated through borrowings under credit lines in
excess of repayments, essentially to fund the TFM capital contribution. Debt
proceeds and cash from sales of short-term investments were used for the
repurchase of $39.9 million in Company common stock in connection with the
stock repurchase programs authorized by the Company's Board of Directors.
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 17>
Cash flows from operations are expected to increase during the remainder of
1997 from positive operating income, which has historically resulted in
favorable cash flows. (I) Investing activities will continue to use
significant amounts of cash. Future roadway improvement projects are expected
to be funded by KCSR operating cash flow. (I) Based on anticipated financing
arrangements for TFM, significant additional contributions from the Company to
TFM are not expected to be necessary. (I) However, as discussed earlier,
there exists a possible approximate $74 million capital call if certain TFM
benchmarks, to be agreed upon with the investment banking institution, are not
met. Additionally, if circumstances develop in which a contribution may be
requested by TFM, the Company will evaluate the contribution based on the
merits of the specific underlying need.
In addition to operating cash flows, the Company has financing available
through its various lines of credit (with a maximum borrowing amount of $480
million, of which $160 million was available at March 31, 1997). Because of
certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted. The Company also has $500 million with respect to a Universal
Shelf Registration Statement ("Registration Statement") filed in September
1993, as amended in April 1996. The Securities and Exchange Commission
declared the Registration Statement effective on April 22, 1996; however, no
securities have been issued. The Company believes its operating cash flows
and available financing resources are sufficient to fund working capital and
other requirements for the remainder of 1997, as well as other potential
business opportunities that the Company is currently pursuing. (I)
The Company's debt ratio (total debt as a percent of total debt plus equity) at
March 31, 1997 was 56.9% compared to 47.4% at December 31, 1996. Company
consolidated debt increased $278.5 million from December 31, 1996 (to $923.6
million at March 31, 1997) primarily as a result of borrowings to fund the
approximate $277 million capital contribution to TFM. Consolidated equity
decreased $17.2 million from December 31, 1996. This decrease was due to
common stock repurchases and a negative non-cash equity adjustment related to a
decrease in unrealized gains on "available for sale" securities held by
affiliates, offset partially by net income and the issuance of common stock
under the Employee Stock Purchase Plan and other plans. The increase in debt,
together with reduced equity, resulted in an increase in the debt ratio from
December 31, 1996.
Management anticipates that the debt ratio will increase slightly during the
remainder of 1997 as a result of continued repurchases of Company common stock
and the consolidation of approximately $40 million of Gateway Western
indebtedness, partially offset by profitable operations. (I)
(I) See the first paragraph of "Overview" section of Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations,
regarding forward-looking comments
<PAGE 18>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Financial Statements, Note 10 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its 1997 Annual Meeting of Stockholders ("Annual Meeting")
on May 1, 1997. A total of 32,108,142 shares of the Preferred stock and
the Common stock, or 88.5% of such outstanding stock on the record date,
were represented at the Annual Meeting. These shares vote together as a
single class.
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors as
listed in such Proxy Statement and all such nominees were elected. The
voting was as follows:
Total
Shares
Election of Three Directors
(i) Michael G. Fitt
For 31,939,648
Withheld 410,062
Total 32,349,710
(ii) Michael R. Haverty
For 31,208,206
Withheld 410,062
Total 31,618,268
(iii) Morton I. Sosland
For 31,945,287
Withheld 411,162
Total 32,356,449
<PAGE 19>
c) Listed below is each of the other matters voted on at the Company's Annual
Meeting. Each of these matters is fully described in the Company's
Definitive Proxy Statement. The voting was as follows:
Total
Shares
Approval of a Performance-Based
Compensation Plan for the
Chief Executive Officer of
Janus Capital Corporation
For 30,697,841
Against 1,168,282
Abstentions 242,019
Non-votes -
Total 32,108,142
Ratification of the Board of Directors'
selection of Price Waterhouse LLP
as Company's Independent Accountants for 1997
For 31,881,469
Against 124,164
Abstentions 102,509
Non-votes -
Total 32,108,142
Based upon the majority of votes required for approval, each of these matters
passed.
Item 5. Other Information
Approval of Gateway Western Railway Company Acquisition
Effective May 5, 1997, the Surface Transportation Board ("STB") granted
approval of the Company's proposed acquisition of Gateway Western Railway
Company ("Gateway Western"). In December 1996, KCS Transportation Company
("KCSTC," a wholly-owned subsidiary of the Company) acquired beneficial
ownership of the outstanding stock of Gateway Western, a regional rail carrier
with operations from Kansas City, Missouri to East St. Louis and Springfield,
Illinois, and restricted haulage rights between Springfield and Chicago from
the Southern Pacific Rail Corporation. In 1996, Gateway Western reported
earnings of $5.1 million on revenues of approximately $41 million.
The stock acquired by KCSTC was held in an independent voting trust until the
Company received approval from the STB on the proposed transaction. While the
Gateway Western stock was held in trust (including during first quarter 1997),
the Company accounted for Gateway Western under the equity method as a
majority-owned unconsolidated subsidiary. With the STB approval, the voting
trust was dissolved and the stock transferred to KCSTC. The Company will
complete purchase price allocations and Gateway Western will become a
consolidated subsidiary reported in the Transportation segment.
<PAGE 20>
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - The Kansas City Southern Railway Company Directors'
Deferred Fee Plan, adopted August 20, 1982, as Amended and
Restated March 19, 1997, is attached to this Form 10-Q as
Exhibit 10.1
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated February 21, 1997,
reporting: i) the payment of 40% of the purchase price for Ferrocarril del
Noreste, S.A. de C.V. ("FNE"), who holds the concession to operate
Mexico's Northeast rail lines, by Transportacion Ferroviaria Mexicana
S. de R.L. de C.V., a joint venture of the Company and Tranportacion
Maritima Mexicana, S.A. de C.V.; and ii) the Company's funding of its
proportionate amount of the initial installment. Also, anticipated
financing arrangements for the remaining 60% of the FNE purchase price
were disclosed.
<PAGE 21>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on
May 14, 1997.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)