SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1993
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
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)
Registrant's telephone number, including area code (816) 556-0303
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Preferred Stock, Par Value $25 Per Share,
4% Maximum Dividend, Noncumulative New York Stock Exchange
Common Stock, Without Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 [ ]
As of March 4, 1994, 43,369,807 shares of Common stock and 243,170 shares of
voting Preferred stock were outstanding. On such date, the aggregate market
value of the voting Common and Preferred stock held by non-affiliates was
$1,982,638,164 (amount computed based on closing prices of Preferred and
Common stock on New York Stock Exchange).
i<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1993 Annual Report to Stockholders for the fiscal
year ended December 31, 1993, Exhibit 13.1 hereto, are incorporated by
reference into Parts I, II, and IV.
Portions of the Registrant's Definitive Proxy Statement for the 1994 Annual
Meeting of Stockholders, which will be filed no later than 120 days after
December 31, 1993, are incorporated by reference into Part III.
Financial statements and related notes, together with the report of Ernst &
Young, for Investors Fiduciary Trust Company for the fiscal year ended
December 31, 1993, Exhibit 99.1 hereto, are incorporated by reference into
Part IV.
A listing of explanations of graphics used in the Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1993, Exhibit 99.2 hereto, are incorporated by reference into
Part II.
ii<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1993 FORM 10-K ANNUAL REPORT
Table of contents
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . 22
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 25
Item 4. Submission of Matters to a Vote of Security Holders. 26
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . . 28
Item 6. Selected Financial Data. . . . . . . . . . . . . 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . 29
Item 8. Financial Statements and Supplementary Data. . . 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . 29
PART III
Item 10. Directors and Executive Officers of the Registrant . 30
Item 11. Executive Compensation . . . . . . . . . . . . . 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . 30
Item 13. Certain Relationships and Related Transactions . 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . 31
Signatures . . . . . . . . . . . . . . . . . . . 36
iii<PAGE>
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF REGISTRANT BUSINESS
The major business developments of Kansas City Southern Industries, Inc.
("Registrant" or "KCSI") and the Registrant's subsidiaries for 1993 are as
follows:
General
1993 Tax Legislation
On August 10, 1993, President Clinton signed into law the Omnibus Budget
Reconciliation Act of 1993 ("the 1993 Tax Act"). This new tax legislation
changed numerous provisions to the then existing tax law. The most
significant of these changes, affect the Registrant's Transportation Services
operations.
The new tax law increased the corporate tax rate from 34% to 35%.
Accordingly, the Registrant's 1993 earnings include additional income tax
expense attributable to the tax rate increases retroactive to January 1, 1993.
These charges, which are included in the provision for taxes on income,
represent $3.4 million ($.08 per share) related to deferred tax accruals and
$900,000 ($.02 per share) related to current year earnings. In addition, the
new tax law included provisions for higher fuel tax rates, which resulted in
an additional expense to Transportation operations during 1993 of $400,000.
Transportation Services
MidSouth Acquisition. As previously disclosed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992, the Registrant and
MidSouth Corporation ("MidSouth") signed a definitive merger agreement on
September 21, 1992. The merger agreement provided that holders of MidSouth
Common stock receive $20.50 per share in cash. The transaction was approved
by both boards of directors. At its Annual Meeting of Stockholders on April
30, 1993, MidSouth stockholders approved the merger agreement and on June 4,
1993 the Interstate Commerce Commission announced their approval of the
transaction. On June 10, 1993, the Registrant closed the acquisition of
MidSouth pursuant to the merger agreement. The purchase price for the
acquisition of the MidSouth common stock aggregated approximately $213.5
million paid in cash by the Registrant to holders of MidSouth's common stock
and in connection with the exercise of certain options held by MidSouth
employees and others. Liabilities were assumed in the amount of $306.9
million. The acquisition was funded with proceeds from the Registrant's $250
million credit agreement.
The MidSouth transaction, which was accounted for as a purchase, represents a
significant transaction for the Registrant. Results of operations of the
Registrant for the year ended December 31, 1993 include the operations of
MidSouth as a consolidated subsidiary effective with the closing of the
transaction.
Adjustments were recorded to appropriate asset and liability balances based
upon the fair value of such assets and liabilities. Based upon these
adjustments, the total purchase price exceeded the fair value of the
underlying net assets by a total of approximately $98.3 million and is being
amortized over a period of 40 years. Additional assets are depreciated over
lives ranging from 5-35 years.
1<PAGE>
Certain unaudited proforma financial information regarding results of
operations assuming the MidSouth transaction had been completed on January 1,
1993 and 1992, respectively, follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Years Ended
December 31,
1993 1992
<S> <C> <C>
Revenues $ 1,010.2 $ 856.1
Income before cumulative effect
of accounting changes 98.5 67.9
Net income 93.4 67.9
Primary Earnings Per Share:
Before cumulative effect of
accounting changes $ 2.19 $ 1.53
After cumulative effect of
accounting changes 2.08 1.53
</TABLE>
Effective January 1, 1994, MidSouth was operationally and administratively
merged into The Kansas City Southern Railway Company ("KCSR", a wholly-owned
subsidiary of the Registrant).
Other Transportation Services Activity
In May 1992, KCSR signed an agreement with the Santa Fe Railway to purchase
portions of its rail line in the Dallas, Texas area. The sale consists of
approximately 90 miles of track and an 80 acre piggyback intermodal facility.
The agreement is being implemented in phases over a two year period and will
gain KCSR direct access to the Dallas/Ft. Worth markets for the first time in
the Registrant's history. Phase I of this agreement was completed on October
31, 1993. Phase I included the portion of Santa Fe's line between
Farmersville, Texas and a switch at Zacka Junction, Texas. Phase II is
anticipated to be completed in second quarter 1994 to acquire the Zacka
Junction facility.
In April 1992, KCSR signed a letter of intent for the purchase of all of the
capital stock of the Graysonia, Nashville & Ashdown Railroad ("GNA") from
Holnam, Inc. The GNA, which was wholly-owned by Holnam, connects with KCSR at
Ashdown, Arkansas and extends 32 miles east. Acquisition of the GNA closed on
December 31, 1992 and was operated in trust until ICC approval was obtained in
June 1993, at which time it was merged into KCSR.
During 1993, KCSR continued emphasis of important safety and quality programs,
which includes the Safety Training Observation Program (S.T.O.P. - originally
established by E.I. DuPont). The S.T.O.P. program is designed to curtail
employee injuries through elimination of unsafe acts in the workplace.
Increased safety awareness achieved positive results during 1991-1993 with an
approximate 31% reduction in Federal Railroad Administration reportable
employee injuries in 1993 as compared to 1992 and an approximate 28% reduction
in employee injuries in 1992 when compared to 1991. The transportation
business continued its substantial commitment towards a safer work environment
in 1993 and remains committed to continuing safety awareness.
Fuel costs represent approximately 7% of KCSR's operating expenses and have
been declining as diesel fuel prices have decreased each of the past three
years. The average 1993 price of fuel declined 8% from 1992 average prices.
Fuel prices stabilized in 1992-1993 due to a general oversupply of crude oil
in world petroleum markets. KCSR operations experienced lower fuel prices in
1992 and 1991, particularly in the latter half of 1991, stemming from
resolution of the 1990-1991 Gulf War and stabilization of relations in the
2<PAGE>
Middle East region. Average per gallon diesel fuel prices were 7% lower in
1992 compared to 1991 and were 6% lower in 1991 compared to 1990, resulting in
lower transportation operating costs. Overall fuel costs are also affected by
the ratio of fuel gallons consumed to gross ton miles. This ratio had
declined in both 1991 and 1992, but rose slightly in 1993 from variances in
traffic mix and length of haul. Fuel efficiencies are attributable to more
efficient railway operating practices related to train schedules, reallocation
of locomotive power and general fuel conservation. Fuel usage was also
improved by the purchase of additional new fuel efficient locomotives during
the period 1989-1991, totalling 46 new SD-60 locomotives placed in service.
Additionally, as part of KCSR's locomotive fleet modernization program, 16
GP40 locomotives were refurbished in 1991 and another 17 GP40 used units were
purchased and refurbished in 1993 and early 1994. In 1991, KCSR issued $32.2
million of privately placed Equipment Trust Certificates ("ETC's") to fund
acquisition of 24 of the new locomotive units.
The 46 new locomotive purchases during the period 1989-1991, have caused an
improvement in the average age of KCSR's locomotive fleet. These new fuel
efficient locomotives additionally helped effect a 1% reduction in fuel
gallons consumed per gross ton miles in 1992 compared to 1991 and an 8%
reduction in 1991 compared to 1990. However, in 1993 the ratio of fuel
gallons consumed per gross ton miles increased 2% from a combination of
increased carloading volumes, and variances in traffic mix and length of haul.
KCSR 1993 revenues rose 3% compared to 1992. General commodity revenues,
excluding intermodal traffic, rose 5.5% on generally higher traffic volumes.
The higher traffic volumes resulted, in part, from a strengthening of U.S.
economic conditions, which have continued to rise slowly from a recessionary
period in 1990-1992. Higher traffic levels were experienced in carloadings of
farm products, particularly corn & wheat, non-metallic ores, lumber/wood -
pulp/paper, chemical and petroleum shipments. Intermodal carloadings declined
8% in 1993 as KCSR continues the process of upgrading its current "on-off
ramp" loading facilities in anticipation of greater intermodal traffic in the
future. Unit coal revenues rose modestly in 1993 on overall increased tonnage
but were adversely affected by variances in length of haul and rates. As
evidenced by the increased farm products carloadings, KCSR continues to use
haulage rights with the Union Pacific Railroad (discussed later) allowing KCSR
market access to the corn belt regions of Iowa and Nebraska.
The flooding in the Midwest region of the United States during 1993 did not
materially affect the Registrant's rail transportation operations. KCSR's
trackage, facilities and physical properties were not directly hampered by the
rising flood waters. However, a washout of trackage in the Pittsburg, Kansas
area occurred during heavy rains. While none of KCSR's properties were
directly affected, many of KCSR's interchange partners in the Kansas City
gateway were affected, which resulted in congestion, rerouting of certain
traffic and delays of commodity movements, particularly for grain and coal
shipments. KCSR experienced revenue declines, during third quarter 1993, in
certain commodities due to the inability to interchange shipments with other
railroads. Overall the financial impact was immaterial.
Transportation Division results also benefitted in 1993 from revenue and net
income additions of MidSouth and continuing favorable operations at the
Registrant's petroleum coke export facility (Pabtex, Inc.), which experienced
increased volumes in 1993. MidSouth contributed $67.8 million in revenues to
1993 Transportation Division results, which surpassed comparative prior year
revenues on increased carloadings. MidSouth's 1993 earnings, net of all
acquisition related expenses, were positive after excluding the effect of the
federal income tax rate increase.
3<PAGE>
Information and Transaction Processing
DST Systems, Inc. ("DST")
Vantage Computer Systems, Inc./The Continuum Company, Inc. Transaction.
Effective September 30, 1993, the Registrant's wholly-owned subsidiary, DST,
completed the merger of its 90.5% owned subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of The Continuum Company, Inc.
("Continuum"). DST and the minority shareholder of Vantage received a total
of 4 million shares of Continuum stock -- 2,939,000 shares at closing and the
remainder after Continuum shareholder approval was obtained in late 1993. As
a result of this transaction, and additional Continuum stock purchases made by
DST, DST owned approximately 24% of the outstanding common stock of Continuum
at December 31, 1993. In January 1994, DST acquired additional Continuum
shares through privately negotiated transactions. Accordingly, DST currently
owns approximately 29% of Continuum's outstanding common stock. In the
initial exchange, DST exchanged Vantage stock with a book value of
approximately $17 million for Continuum stock with a market value of
approximately $62 million. DST accounted for the initial exchange as a non-
cash, non-taxable exchange in investment basis of Vantage for an investment in
Continuum. Accordingly, no gain recognition was associated with the
transaction. Vantage revenues for the nine months ended September 30, 1993,
were $32.6 million and $38.7 million for the year ended December 31, 1992.
Continuum is a publicly traded international consulting and computer services
firm based in Austin, Texas, which primarily serves the needs of life and
property and casualty insurance companies for computer software and services.
Continuum has annual revenues of approximately $250 million and total assets
of approximately $160 million.
The Vantage/Continuum transaction will allow DST to expand its presence in the
information processing market for the insurance industry and combine the
strengths of both Vantage and Continuum. Prior to the merger, Vantage's
business was primarily centered in the U.S. domestic market while Continuum
has a significant international and domestic presence. Subsequent to this
transaction, DST assumed all of the North American operations data processing
functions for Continuum. DST and Continuum signed an agreement whereby DST
will make available the capabilities of the Winchester Data Center for
Continuum processing requirements. This processing agreement will reduce
overall Continuum processing costs, provide a revenue source for DST and
present opportunities for greater Continuum growth.
Other DST Activity.
Financial institutions within the industries served by DST will continue to
evaluate whether to internalize or outsource their technology needs. This
process will have both positive and negative effects on DST's results;
however, on an overall basis, DST's customer base is expected to grow. In
1993, DST experienced an overall increase in the number of mutual fund
accounts serviced; at December 31, 1993, DST serviced a record total of 28
million mutual fund accounts, a 5.6 million account increase over the 22.4
million accounts serviced at December 31, 1992. The 1993 account increase is
a result of overall mutual fund account growth. Kemper Financial Services
("Kemper"), a DST customer, began conversion of its mutual fund shareowner
processing, which will result in the removal of its accounts from the DST
system. The total number of Kemper accounts, approximately 2.5 million, will
be converted from the DST system in stages by the end of 1994. In early July
1993, the first stage, which encompassed 500,000 Kemper accounts were
converted from the DST system. The loss of 500,000 accounts in 1993 was
offset by account growth from other mutual fund customers and accordingly, did
not have a material financial impact. DST serviced 22.4 million mutual fund
4<PAGE>
accounts at December 31, 1992, a 3.7 million increase from the 18.7 million
accounts serviced at December 31, 1991 and 20.4 million accounts at December
31, 1990. The 1991 account decrease is in large part a result of the loss of
the Vanguard group of funds in September 1991, comprising approximately 2.7
million shareowner accounts and the removal of 800,000 broker based accounts
of Prudential Bache in late 1991. Excluding the loss of the Vanguard and
Prudential Bache accounts, mutual fund accounts serviced by DST increased 1.8
million accounts in 1991 when compared to 1990.
During 1993, DST continued marketing of its Automated Work Distributor System
("AWD" TM), an image-based clerical work management system which was completed
and placed in service during 1990. The AWD System's image technology can also
be combined with principles of an intelligent work station. AWD was initially
implemented in several mutual fund transfer agencies, but through expansion,
now resides on more than 4,200 work stations in companies throughout the world
(a 75% increase since December 31, 1992) and is used to service approximately
53% of the mutual fund shareowner accounts on DST's system. AWD is also used
in industries such as insurance, banking and health care. Concurrent with the
Continuum/Vantage merger, discussed earlier, DST and Continuum reached a
license agreement, whereby Continuum will market AWD for use in insurance
industry applications.
During 1993, DST continued marketing of its record keeping system for 401(k)
plans, TRAC-2000 TM. TRAC-2000 TM, introduced in late 1991, represents a
major commitment by DST to offer the mutual fund industry a fully integrated
service for such plans. Integrated with TA2000 TM, DST's mutual fund record
keeping system, TRAC-2000 TM delivers comprehensive 401(k) record keeping and
ancillary services including full compliance testing in accordance with
Department of Labor regulations.
DST's printed output processing businesses, Output Technologies, Inc. ("OTI")
continued to expand in 1993. During 1993, OTI completed the internal
reorganization of its subsidiaries, which included renaming of certain
subsidiaries and merging of certain operations. The overall objective of this
reorganization was consolidation of output related activities, identification
of businesses with the OTI name and alignment into geographic operating
regions. OTI serves as a holding company for businesses which perform printed
output processing, commercial printing, telecommunications and fulfillment,
graphics design, computer output microfilm/microfiche and printing and mailing
of laser printed output primarily for DST's mutual fund clients but also for a
wide range of customers. The OTI concept, which was originally launched in
1990, achieved further growth in 1993 through acquisition and location
expansion. At December 31, 1993, OTI operated in 35 locations throughout the
U.S. During 1993 OTI's laser click volume was 669 million pages of printed
output, an increase of 45% over the 460 million pages in 1992. Management
expects growth in the OTI business will result from DST mutual fund account
growth along with expansion and acquisitions in future years.
During 1993, DST completed the acquisition of Clarke & Tilley Ltd., (96.25%
owned), a United Kingdom company, which markets investment management software
primarily for use in Europe and the Pacific Rim; Corfax Benefit Systems, Ltd.,
(100% owned), a Canadian company, which processes shareowner transactions for
mutual funds and pension accounts in Canada; DBS Systems Corporation, (60%
owned), a United States company, which is developing a software billing system
for the direct broadcast satellite industry; and Belvedere Financial Systems,
Inc. (100% owned), which develops and markets portfolio accounting, and
investment management systems. Each of these transactions was accounted for
as a purchase. The total purchase price exceeded the fair value of the
underlying net assets, which will be amortized over a period of 7-20 years.
Cash paid for these transactions was $15.3 million and liabilities assumed
were $10.3 million.
5
Financial Asset Management
Janus Capital Corporation
Janus Capital Corporation ("Janus"), which manages investments for the Janus
group of mutual funds and the IDEX equity funds, insurance companies and other
institutional accounts, continued to experience significant growth in terms of
assets under management and accounts serviced during 1993. Janus assets under
management grew from $15.5 billion at December 31, 1992 to a record $22.2
billion at December 31, 1993 from account growth and market appreciation. The
number of Janus and IDEX Funds shareholders increased from 1.5 million at
December 31, 1992 to a record 2.0 million at December 31, 1993. Janus'
revenues and profitability both increased in 1993 as a result of the increased
assets under management and greater number of shareholder accounts serviced.
While Janus experienced significant growth during 1993, much of that growth
occurred in the first half of 1993. During the third and fourth quarters of
1993 growth in assets under management slowed. Total fund sales were $3.3
billion during the second half of 1993 versus $5.5 billion during the first
six months of 1993, while fund redemption increased to $2.2 billion versus
$1.6 billion, respectively.
During 1993, Janus continued to expand the distribution channels of the Janus
funds by participating in "Schwabs' Mutual Fund OneSource" service of Charles
Schwab as well as a similar program offered by Fidelity Investments. In
addition, Janus introduced two new Janus fund portfolios; Janus Mercury Fund,
an equity fund; Janus Federal Tax Exempt Fund, a tax exempt income fund; and
the Janus Aspen Series, which consists of six portfolios funded through
variable annuity contracts, such as the Janus Retirement Advantage. During
1992, Janus introduced three funds; Janus Enterprise Fund, an equity fund;
Janus Balanced Fund, a combination equity/fixed income fund and Janus Short-
Term Bond Fund, an income fund. Additional portfolio managers have joined the
Janus staff concurrent with the growth in assets under management and new
investment products.
Janus has expanded its assets under management by marketing advisory services
directly to pension plan sponsors, insurance, banking and brokerage firms for
their proprietary investment products. These relationships generated
approximately $920 million and $340 million in new assets in 1993 and 1992,
respectively.
Janus revenues and operating income increases are a direct result of increases
in assets under management and Janus processing services. Assets under
management and shareholder accounts have grown in recent years from a
combination of new money investments or fund sales and market appreciation.
Fund sales have risen in response to marketing efforts, favorable fund
performance and the current popularity of no-load mutual funds. Market
appreciation has resulted from increases in stock investment values. However,
a decline in the stock and bond markets and/or an increase in the rate of
return of alternative investments could negatively impact Janus revenues and
operating income. In addition, the mutual fund market, in general, faces
increasing competition as the number of mutual funds continues to increase,
marketing and distribution channels become more creative and complex, and
investors place greater emphasis on published fund recommendations and
investment category rankings. These factors could also affect Janus and
negatively impact revenues and operating income.
Unconsolidated Affiliates (primarily DST related)
A significant portion of DST and Registrant consolidated earnings are derived
from operations of unconsolidated affiliates, primarily connected with DST.
Major developments during 1993 for unconsolidated affiliates were: (i)
Investors Fiduciary Trust Company ("IFTC", a 50% owned affiliate of DST)
6
assets under custody increased to $125.1 billion at December 31, 1993 from
$106.3 billion at December 31, 1992. IFTC earnings for 1993 were flat
compared to 1992. While IFTC assets under custody grew, results were reduced
by a change in the fiduciary fee arrangement between IFTC and its parent
companies and lower investment earnings. Excluding the change in fiduciary
fees, IFTC results were improved over 1992; (ii) as previously discussed, The
Continuum Company, Inc. ("Continuum") became an equity affiliate of DST on
September 30, 1993, when DST exchanged its 90.5% interest in Vantage Computer
Systems, Inc. for an equity interest in Continuum. DST's ownership position
in Continuum is approximately 29% of the outstanding common stock. DST
recorded equity in earnings from Continuum, which contributed positively to
DST 1993 results; (iii) Boston Financial Data Services, Inc. ("BFDS", a 50%
owned affiliate of DST) recorded significantly improved earnings in 1993
primarily from volume related mutual fund growth; (iv) Argus Health Systems,
Inc. ("Argus", a 50% owned affiliate of DST) recorded improved earnings on an
increase in pharmaceutical insurance claims processing volumes. Argus
processed approximately 78 million claims in 1993 versus approximately 49
million claims in 1992, an increase of 59%; (v) First of Michigan Capital
Corp. ("FOM", a 21% owned affiliate of DST) recorded slightly lower earnings
on costs incurred as a result of a failed merger with Comerica, Incorporated,
discussed below; and (vi) Midland Data Systems, Inc. and Midland Loan
Services, L.P. (collectively "Midland", 45-50% owned affiliates of DST)
reported sharply lower earnings in 1993 compared to 1992 from a continuing
trend of lower margins on loan securitizations and delays on receipt of
certain loan processing work for the RTC. Midland provides operation of an
Asset Management System and a Control Totals Module System for use by the
Resolution Trust Corporation as well as commercial loan servicing for
performing and non-performing commercial loans.
In the Registrant's Annual Report on Form 10-K for the year ended December 31,
1992, the Registrant reported that Comerica Incorporated ("Comerica") and
First of Michigan Capital Corporation ("FOM") had signed a definitive merger
agreement in January 1993. According to the agreement, Comerica was to
acquire all of the outstanding stock of FOM in exchange for approximately $45
million in Comerica stock. In late March 1993, Comerica abandoned its efforts
to acquire FOM. Accordingly, FOM remains an unconsolidated affiliate of DST.
Corporate and Other
Debt Securities Registration and Offerings - 1993
On March 3, 1993, the Registrant issued the remaining $100 million of debt
securities under a $300 million debt securities Registration Statement on Form
S-3 filed in 1992. The Registrant issued the $100 million in debt securities
as 6 5/8% Notes due 2005. Proceeds of this debt offering, net of discount and
underwriting fees, of $98.5 million were delivered to the Registrant on March
10, 1993. In March 1993, $60 million of proceeds from this debt offering were
transferred to DST and Southern Credit Corporation for use in repayment of
debt and working capital needs. The Registrant used the remaining net
proceeds for general corporate purposes, including debt repayments, working
capital, capital expenditures, acquisitions of or investments in businesses
and assets and acquisitions of the Registrant's capital stock.
The Registrant filed a Registration Statement on Form S-3 with the Securities
and Exchange Commission ("SEC") on March 29, 1993, (File No. 33-60192),
registering $200 million in debt securities to be offered in the form of
Medium Term Notes. The Registrant's Form S-3 was amended on May 3, 1993 and
declared effective on May 10, 1993. Proceeds from the sale of the debt
securities are expected to be added to the general funds of the Registrant and
used to principally repay debt and for other general corporate purposes,
including working capital, capital expenditures and acquisitions of or
investments in businesses or assets. On June 24, 1993, pursuant to an
Indenture and Purchase Agreement, the Registrant issued $100 million of debt
7
securities under this Registration Statement. The transaction, which closed
on July 8, 1993, is comprised of Notes bearing interest at a rate of 5.75%
maturing in 1998. The net proceeds of this transaction of $99 million, along
with certain proceeds from the Registrant's $250 million credit agreement,
were used to refinance certain MidSouth debt in July 1993.
$500 Million "Universal Shelf" Registration
On September 29, 1993, the Registrant filed a Registration Statement on Form
S-3 with the SEC (File No. 33-69648), registering $500 million in securities.
The securities may be offered in the form of no par Common Stock, New Series
Preferred Stock $1 par value, Convertible Debt Securities, Debt Securities or
Equipment Trust Certificates (collectively, "the Securities"). Net proceeds
from the sale of the Securities are expected to be added to the general funds
of the Registrant and used principally for general corporate purposes,
including working capital, capital expenditures and acquisitions of or
investments in businesses and assets. The SEC has cleared the Registration
Statement without review, but the Registrant has not yet requested that it be
declared effective and no securities have been issued.
Series B Convertible Preferred Stock
On October 1, 1993, KCSI transferred one million shares of KCSI Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to the Kansas
City Southern Industries, Inc. Employee Plan Funding Trust ("the Trust"), a
grantor trust established by KCSI. The purchase price of the stock, based
upon an independent valuation, was $200 million, which the Trust financed
through KCSI. The indebtedness of the Trust to KCSI is repayable over 27
years with interest at 6% per year, with no principal payments in the first
three years. The Trust, which is administered by an independent bank trustee,
and is consolidated into the Registrant's financial statements, will repay the
indebtedness to KCSI utilizing dividends and other income as well as other
cash obtained from KCSI. As the debt is reduced, shares of the Series B
Preferred Stock, or shares of common stock acquired on conversion, will be
released and available for distribution to various KCSI employee benefit
plans, including its ESOP, Stock Option Plan and Stock Purchase Plans. No
principal payments have been made and accordingly, no shares have been
released or are available for distribution to these plans.
The Series B Preferred stock, which has a $10 per share (5%) annual dividend
and a $200 per share liquidation preference, is convertible into common stock
at an initial ratio of 4 shares of common stock for each share of Series B
Preferred Stock. The Series B Preferred Stock is redeemable after 18 months
at a specified premium and under certain other circumstances.
The Series B Preferred Stock can be held only by the Trust or its
beneficiaries, the employee benefit plans of KCSI. The full terms of the
Series B Convertible Preferred Stock are set forth in a Certificate of
Designations approved by the Board of Directors and filed in Delaware.
Accounting Changes
Postretirement Benefits - The Registrant adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions", ("SFAS 106"), effective January 1, 1993. The
Registrant and its Transportation subsidiaries provide certain medical, life
and other postretirement benefits other than pensions to its retirees. The
medical and life plans are available to employees not covered under collective
bargaining arrangements, who have attained age 60 and rendered ten years of
service. Individuals employed as of December 31, 1992 were excluded from a
specific service requirement. The medical plan is contributory and provides
benefits for retirees, their covered dependents and beneficiaries. Benefit
expense begins to accrue at age 40. The medical plan was amended effective
8
January 1, 1993 to provide for annual adjustment of retiree contributions and
also contains, depending on the plan coverage selected, certain deductibles,
copayments, coinsurance and coordination with Medicare. The life insurance
plan is non-contributory and covers retirees only. The Registrants' policy,
in most cases, is to fund benefits payable under these plans as the
obligations become due. However, certain plan assets do exist with respect to
life insurance benefits. Prior to January 1, 1993, the Registrant recognized
the cost of these benefits on a "pay as you go" basis.
The entire accumulated postretirement benefit obligation was charged to
earnings in first quarter 1993 in the amount of $5.5 million, net of
applicable income taxes. The adoption of SFAS 106 is not expected to have a
material effect on future annual expenses of the Registrant.
Income Taxes - The Registrant also adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"), effective
January 1, 1993. SFAS 109 was issued as an amendment to Statement of
Financial Accounting Standards No. 96, "Accounting for Income Taxes," ("SFAS
96"). The adoption of SFAS 109 resulted in a charge to earnings in first
quarter 1993 of $970,000. Under the liability method specified by SFAS 109,
the deferred tax liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the liability for deferred
taxes. The principal difference between the Registrant's assets and
liabilities recorded for financial statement and tax return purposes is
accumulated depreciation.
As a result of the Registrant's previous adoption of SFAS 96, the adoption of
SFAS 109 did not have a material impact on the components of income tax
expense or the effective income tax rates applicable to continuing operations
versus the U.S. federal income tax statutory rate.
Stock Splits
On January 28, 1993, the Registrant's Board of Directors authorized a 2-for-1
stock split which was effected in the form of a stock dividend in the
Registrant's Common stock and paid March 17, 1993.
On January 30, 1992, the Registrant's Board of Directors authorized a 2-for-1
stock split which was effected in the form of a stock dividend in the
Registrant's Common stock and paid March 17, 1992.
All appropriate information in this report reflect the effects of both of
these 2-for-1 stock splits.
Employees Stock Purchase Plan
In the fourth quarter 1993, the Registrant filed a Form S-8 with the
Securities and Exchange Commission as the eighth offering under the Employees
Stock Purchase Plan. Approximately 221,000 shares of Registrant Common stock
were subscribed to under this offering, which will be funded through employee
payroll deductions, over a two year period, at a price of $38.20 per share.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
Financial information by industry segment for the three years ended December
31, 1993, which appears on pages 65 through 67 of Registrant's 1993 Annual
Report to Stockholders, is hereby incorporated herein by reference (see
Exhibit 13.1).
9
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The Registrant is a Delaware corporation, organized in 1962, with executive
offices located at 114 West 11th Street, Kansas City, Missouri. The
Registrant is a holding company which supervises the operations of its
subsidiaries, supplying them with managerial, legal, tax, financial and
accounting services, and manages its portfolio of other "non-operating" and
more passive investments.
As of December 31, 1993, the Registrant and its majority owned subsidiaries
employed approximately 7,470 persons, with approximately 2,760 employed in the
Transportation Services; 3,960 at DST, 700 at Janus and 50 in Corporate and
Other. In addition, unconsolidated affiliates of the Registrant and its
subsidiaries employed approximately 5,630 persons, including 2,400 and 1,600
at The Continuum Company Inc. ("Continuum") and Boston Financial Data
Services, Inc., ("BFDS"), respectively, the largest employers of such
ventures.
The Registrant's business activities, by industry segment, with principal
subsidiary companies are:
Transportation Services - The Kansas City Southern Railway Company, their
affiliated trucking subsidiaries (collectively "KCSR"), MidSouth Corporation
("MidSouth") prior to its merger into KCSR effective January 1, 1994, Pabtex,
Inc. ("Pabtex") and Southern Leasing Corporation ("Southern Leasing"); along
with other subsidiaries supporting the transportation segment.
Information & Transaction Processing - DST Systems, Inc. ("DST") and its
subsidiaries.
Financial Asset Management - Janus Capital Corporation ("Janus") and its
subsidiaries.
Eliminations, Corporate & Other - Registrant's Corporate general and
administrative operations, and passive investments.
Unconsolidated Affiliates, (primarily DST related) - DST Joint Ventures, The
Continuum Company, Inc., Investors Fiduciary Trust Company, Boston Financial
Data Services, Inc., Argus Health Systems, Inc., First of Michigan Capital
Corporation, Midland Data Systems, Inc. and Midland Loan Services, L.P.
Transportation Services
General Description of the Business-Commodities
The Kansas City Southern Railway Company ("KCSR"), a wholly-owned subsidiary
of the Registrant, comprises the largest percentage of the Registrant's
revenue and assets employed. KCSR operates a rail system of 1,712 main and
branch line route miles and 2,552 total track miles in a six state region.
KCSR serves the states of Missouri, Kansas, Arkansas, Oklahoma, Louisiana, and
Texas, and in conjunction with the Union Pacific haulage rights, the two
additional states of Nebraska and Iowa. KCSR has the shortest rail route
between Kansas City and the Gulf of Mexico, serving the ports of Beaumont and
Port Arthur, Texas; and New Orleans, Baton Rouge, Reserve and West Lake
Charles, Louisiana. Through haulage rights, KCSR also serves the ports of
Houston and Galveston, Texas. Kansas City, Missouri, as the second largest
rail center in the United States, represents an important gateway for KCSR
where it interchanges freight with eight major rail carriers. KCSR also has
important interchange gateways in the cities of New Orleans and Shreveport,
Louisiana; and Dallas and Beaumont, Texas.
The Registrant completed the acquisition of MidSouth Corporation ("MidSouth")
in June 1993 at which time it became a wholly-owned subsidiary of the
10
Registrant. MidSouth is a regional railroad holding company, which operates
over 1,100 track miles. MidSouth, through four operating subsidiaries, serves
the states of Mississippi, Louisiana, Alabama and Tennessee. The MidSouth
acquisition provides an important East/West rail line, as a complement to
KCSR's predominantly North/South route, and adds interchange gateways in
Jackson and Meridian, Mississippi and Birmingham, Alabama. This East/West
rail line running from Dallas, Texas to Meridian, Mississippi will allow the
Registrant to be more competitive in the intermodal transportation market. In
addition, the acquisition adds a base of MidSouth customers in the South
Central U.S. to KCSR's already strong traffic base and presents opportunities
for the rerouting of certain commodity movements over less circuitous routes.
Through haulage rights, MidSouth also serves the city of Gulfport,
Mississippi.
Effective January 1, 1994, MidSouth was operationally and administratively
merged into KCSR. Future MidSouth results will be included with KCSR. The
combined KCSR/MidSouth operations will operate approximately 2,800 main and
branch line route miles and approximately 3,700 total track miles over a nine
state region.
Major commodities handled by KCSR include coal, grain and farm products,
petroleum, chemicals, paper and forest products as well as other general
commodities and intermodal traffic. Coal continues to be the largest single
commodity handled by KCSR since the advent of unit coal train shipments in the
mid-1970's from the Powder River Basin in Wyoming, via the Burlington Northern
and Union Pacific interchange at Kansas City, for movement south by KCSR.
KCSR delivers coal to six electric generating plants located at Amsterdam,
Missouri; Flint Creek, Arkansas; Welsh, Texas; Mossville (near Lake Charles),
Louisiana, Kansas City, Missouri and Pittsburg, Kansas. KCSR also delivers
lignite, originating on its line at Thermo, Texas, to an electric generating
plant at Monticello, Texas ("Tumco"), a distance of approximately 30 miles.
During 1993, the Tumco plant was shut down when one of its smoke stacks
collapsed. The plant is not scheduled to be back in service until 1995.
The MidSouth merger is strategically important in reducing KCSR's dependence
on coal traffic. MidSouth derives only minimal revenues from coal. On a
stand alone basis, KCSR coal revenues represented 30% of total revenues in
1993. However, when combined with MidSouth revenues since the June 1993
acquisition, the percentage of coal revenues to total combined revenues would
have reduced to 25% and even further reduced to 23% assuming the MidSouth
transaction had occurred at the beginning of 1993. Conversely, MidSouth's
primary commodity traffic is in the pulp/paper and forest products area, which
allows KCSR to complement its revenues in that industry.
Gross revenue from unit coal trains aggregated $106, $106 and $107 million, in
1993-1991, respectively. Certain coal transportation contracts contain "take
or pay" and volume discount clauses. Revenue from Southwestern Electric Power
Company ("SWEPCO"), operator of two electric generating facilities served
under long-term contracts by KCSR, continues to represent the greatest portion
of coal revenues. In 1993, SWEPCO revenues approximated $60 million or 13% of
Transportation Services revenues. (See Item 3. Legal Proceedings).
KCSR serves the petroleum and chemicals industry, via refineries located in
the Gulf states of Texas and Louisiana, through tank and hopper car service
primarily to markets in the Southeast and Northeast through interchange with
other rail carriers. Petroleum and chemical products represent the second
largest commodity to KCSR in terms of revenues, trailing only coal. MidSouth
provides rail transportation of chemical products, primarily vinyl chloride
used in the production of polyvinyl chloride ("PVC") materials, as well as
other chemical products, some used in paper production to customers primarily
in the Mississippi and Alabama areas. These products are shipped via rail
interchange to many destinations throughout the United States. As part of
serving the petroleum and chemicals industry, KCSR/MidSouth transport
11
hazardous materials and have a Shreveport, Louisiana based hazardous materials
emergency team available to handle environmental problems which might occur in
the transport of such materials.
KCSR/MidSouth serve eleven paper mills directly and seven others indirectly
through short-line connections. International Paper Co. at South Texarkana,
Texas and Georgia Pacific at Ashdown, Arkansas, both served by KCSR, have
completed plant expansions in recent years which increases their operating
capacity. Paper/pulp and primary forest products represent the largest
component of MidSouth revenue carloadings. MidSouth provides transportation
of pulpwood, woodchips, poles and raw fiber used in the production of paper,
pulp and paperboard. MidSouth also serves as the first leg of rail
transportation throughout the United States for finished paper products from
major manufacturers such as, International Paper, Riverwood International
Corporation, Stone Container and Packaging Corporation of America. MidSouth's
geographic location provides a stable market due to the abundance and fast
growth of timber in the area. The cost effective nature of the plants served
by MidSouth provide a competitive advantage over trucks for these bulk
commodities.
KCSR farm products carloadings increased 15% during 1993. Increased
carloadings were experienced in the shipment of corn, wheat, soybeans and
other farm products. Grain shipments are transported from the grain producing
states of Iowa and Nebraska southward to poultry feed mills served by KCSR in
the states of Missouri, Arkansas, Oklahoma, Louisiana and Texas. Consumer
demand for poultry consumption remains constant thereby generating demand for
feed grains delivered by KCSR. MidSouth also transports farm products,
principally corn and processed soybean to customers on its rail line, which
include poultry feed processing mills.
KCSR has continued to implement its roadway capital improvement program to
provide safer commodity movements. This long-term capital improvements
project is designed to improve the integrity and quality of service to KCSR
customers. Management expects this program to be completed in 1995. The
MidSouth acquisition will require the Registrant to complete a capital
improvement program for MidSouth roadbed, locomotives and facilities. This
program will upgrade and expand MidSouth's track to handle greater traffic
levels at higher train speeds and will be completed over the next five years
with a large majority of these upgrades completed during the next two years.
The Registrant currently anticipates the cost of this five year capital
program will be approximately $150 million, 50% of which was planned by
MidSouth management prior to the acquisition.
KCSR/MidSouth marketing departments have primary responsibility for developing
transportation services and are supported by field marketing offices at
various locations throughout the United States. Heavy emphasis is placed on
providing the highest quality of transportation service and on servicing the
current needs of customers and also on the promotion of additional growth
through efforts to locate industrial and manufacturing companies in the
KCSR/MidSouth service area. Addition of new traffic resulting from
combination of the two rail systems may affect this service.
Other wholly-owned subsidiaries comprising the Transportation Services
industry segment include Trans-Serve, Inc.; Carland, Inc.; Southern Leasing
Corporation; Pabtex, Inc.; Rice-Carden Corporation; Tolmak, Inc.; Southern
Development Company and Mid-South Microwave, Inc.
Trans-Serve, Inc. owns and operates a railroad wood tie treating facility in
Vivian, Louisiana and a vehicle fleet maintenance operation for the KCSR
Engineering, Mechanical and Transportation department vehicles, with locations
in Shreveport, Louisiana, Pittsburg, Kansas and Heavener, Oklahoma.
Carland, Inc., a subsidiary of Southern Credit Corporation, headquartered in
12
Kansas City, leases various types of equipment including railroad rolling
stock, roadway maintenance equipment and vehicles. KCSR is the principal
customer of Trans-Serve and Carland.
Southern Leasing Corporation, a subsidiary of Southern Credit Corporation, was
formed in late 1983 and is involved in finance leasing and other forms of
secured financing, generally for equipment acquisition by small to medium
sized businesses.
Pabtex, Inc. ("Pabtex") owns and operates a bulk handling facility which
stores and transfers coal and petroleum coke from trucks and rail cars to
ships and barges primarily for export. This facility, located in Port Arthur,
Texas, with deep water access to the Gulf of Mexico, is served on an inbound
basis by KCSR and independent truckers. In 1990, under the provision of a
twenty year capital lease commitment, which expired in that year, the
Registrant exercised its right to purchase the facility improvements of
Pabtex. This purchase was completed in the fourth quarter of 1991 at a
purchase price of $9.2 million and will allow KCSR opportunities for future
expansion of the petroleum coke and coal export business. In 1992, the
Registrant purchased 530 acres of land adjacent to the Registrant's Pabtex
coal and petroleum coke storage, barge and ship loading facility in Port
Arthur, Texas.
The 530 acres includes 4,000 linear feet of deep water frontage on the Sabine-
Neches Waterway, which has direct access to the Gulf of Mexico via the
Intercoastal Waterway. This acquisition increases the Transportation Services
deep water access in the Port Arthur, Texas area and will permit capacity
expansion of the Pabtex coal and coke facility and development of additional
port operations in KCSR's service area. The Registrant currently owns 1,025
acres of property located on the waterfront in the Port Arthur, Texas area,
which includes approximately 22,000 linear feet of deep water frontage and
three docks. Port Arthur is an uncongested port with direct access to the
Gulf of Mexico. Approximately 75% of this property is available for
development.
Mid-South Microwave, Inc. owns and leases a 1,600 mile industrial frequency
microwave transmission system, which is a primary communications facility used
by KCSR.
Rice-Carden Corporation and Tolmak, Inc. both wholly-owned subsidiaries of the
Registrant and both headquartered in Kansas City, own and operate various
industrial real estate and spur rail trackage contiguous to the KCSR right of
way. These properties are leased to various industrial businesses, many of
whom are serviced by KCSR.
Southern Development Company, a wholly-owned subsidiary of the Registrant,
owns and operates the headquarters building of the Registrant and KCSR located
in Downtown Kansas City. Southern Development leases a substantial portion of
the building to KCSR for its executive, financial, marketing, operating and
engineering departments.
Regulatory Influence
Transportation operations are subject to the regulatory jurisdiction of the
Interstate Commerce Commission ("ICC"), various state regulatory agencies, the
Department of Transportation ("DOT") and the Occupational Safety and Health
Administration ("OSHA"). The ICC has jurisdiction over interstate rates
charged, routes, service, issuance or guarantee of securities, extension or
abandonment of rail lines, and consolidation, merger or acquisition of control
of rail common carriers. State agencies regulate some aspects of rail
operations with respect to health and safety and in some instances intrastate
freight rates. The DOT and OSHA have jurisdiction over certain health and
safety features of railroad operations. In addition, railway operations are
13
subject to extensive regulation under environmental protection laws
concerning, among other things, discharges to waters and the generation,
handling, storage, transportation and disposal of waste and other materials,
where environmental risks are inherent. KCSR and some of the Registrant's
other subsidiaries land holdings have been used for industrial purposes or
leased to commercial and industrial companies whose activities may have
resulted in discharges onto the property. Accordingly, the Registrant and its
subsidiaries may become subject from time to time to environmental clean-up
and enforcement actions. In particular, the Registrant is subject to
regulatory legislation such as; the Federal Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), also known as the
"superfund law"; the Toxic Substances Control Act ("TSCA"); the Federal Water
Pollution Control Act, commonly known as the "Clean Water Act" and the
Hazardous Materials Transportation Act ("HAZMAT"). This legislation generally
imposes joint and several liability for clean up and enforcement costs,
without regard to fault or legality of the original conduct, on current and
predecessor owners and operators of a site. The discharge of hazardous
materials or contamination of property by hazardous materials may arise from
the transportation, production, storage, use and disposal of such materials by
rail operations. Normal rail transportation operations may result in hazards
and expose the Registrant to claims and potential liability for injuries to
employees, other persons, property and the environment. Registrant management
does not foresee that compliance with the requirements imposed by these
agencies' standards under present statutes will impair its competitive
capability or result in any material additional operating or maintenance
costs. KCSR continued to implement extensive safety programs during 1993
designed to reduce employee injuries through promotion of a safe work
environment. The Registrant expects these programs will exceed safety
requirements of the various regulatory agencies governing transportation
operations.
Railroad Industry Trends and Competition
KCSR is in direct competition with the Union Pacific Railroad ("UP") for
certain freight traffic moving between Kansas City and Gulf Ports served by
KCSR. KCSR, in conjunction with the Santa Fe Railroad, also competes with the
Southern Pacific Transportation Company ("SP") for certain transcontinental
freight traffic in the Dallas-New Orleans corridor. In 1992, KCSR signed an
agreement with the Santa Fe Railway to purchase portions of its rail line in
the Dallas, Texas area. The sale consists of approximately 90 miles of track
and an 80 acre piggyback intermodal facility. The agreement is being
implemented in phases over two years (Phase I of which was completed in 1993)
and will gain KCSR direct access to the Dallas/Ft. Worth markets for the first
time in the Registrant's history. Phase II is anticipated to be completed in
second quarter 1994 to acquire the Zacka Junction facility.
In 1988, the UP and KCSR signed a haulage and trackage rights agreement which
facilitated and supported the acquisition of control of the Missouri-Kansas-
Texas Railroad Company ("MKT") by the UP. This agreement gave KCSR haulage
rights between Omaha and Lincoln, Nebraska; Council Bluffs, Iowa; Topeka and
Atchison, Kansas and Kansas City, Missouri. KCSR also received haulage rights
over UP tracks between Beaumont, Houston and Galveston, Texas. Under this
haulage rights agreement, UP is required to move KCSR traffic in UP trains.
Under the trackage rights, KCSR is allowed to operate its own trains over UP
tracks. The "rights" between Beaumont, Houston and Galveston, Texas are
restricted to transporting grain and grain products. However, the "North end
rights" between Kansas City, Missouri and Omaha and Lincoln, Nebraska; Council
Bluffs, Iowa and Atchison and Topeka, Kansas are unrestricted. These "rights"
enable KCSR to be more competitive, particularly in feed grains, with the UP
and Burlington Northern railroads in both the Gulf port and domestic
transportation corridors. Beginning in 1990, KCSR made more extensive use of
these haulage rights with the UP in accessing the corn belt states of Nebraska
and Iowa.
14
During 1993, the ICC ruled that it had jurisdiction regarding the UP
acquisition of certain voting stock of CNW Holding Corp., ("CNW") a holding
company for the Chicago North Western Railroad. UP was required by the ICC to
submit evidence regarding marketing and operating coordination and related
public benefits which UP alleges will stem from the CNW transaction. The
Registrant filed a responsive application with the ICC supporting protective
conditions designed to upgrade current haulage rights to Omaha/Council Bluffs
and provide direct access, by way of additional haulage and local gathering
rights to CNW grain origins in Iowa, Nebraska and South Dakota. Hearings on
the matter are scheduled in second quarter 1994 with a final decision
anticipated in late third quarter 1994.
In addition to competition within the railroad industry, highway carriers
compete with KCSR and MidSouth throughout its territory. Since deregulation
of the railroad industry, competition has resulted in extensive downward
pressure on freight rates. Truck carriers have eroded the railroad industry's
share of total transportation revenues. However, rail carriers, including
KCSR/MidSouth have, in recent years, placed a greater effort towards competing
in the intermodal marketplace. Rail carriers are working together to provide
end-to-end transportation of products and forming working partnerships with
truck carriers in an effort to recapture market share. In some cases,
additions to box car fleets and upgrade of existing box car equipment are
underway to attract new business. KCSR/MidSouth are in the process of
upgrading current "on-off ramps" intermodal facilities in anticipation of
greater TOFC/COFC traffic.
Mississippi and Missouri River barge traffic also compete with KCSR in the
transportation of bulk commodities such as grains, steel, aluminum and
petroleum products.
Labor Relations
Collective bargaining agreements with KCSR union employees, representing
approximately 83% of KCSR's workforce were completed in 1992. Through a
process of national negotiation and arbitration, KCSR and contract employees
reached agreement on issues which will allow implementation of productivity
improvements and partially reduce the costs of escalating health care premiums
through a cost sharing arrangement with contract employees. In addition, the
terms and conditions of the agreements allow KCSR to improve its operating
income through savings to be realized by modification in the operation of its
trains with reduced crew sizes. KCSR is initially permitted to operate any
through freight train without limitation to the number of cars and train
length with two man crews. Additionally, via a "phased in" approach through
December 31, 1997, KCSR has the opportunity to operate one hundred percent of
its trains with two man crews as it both achieves and demonstrates the ability
to safely operate with reduced crews in a productive manner. These
productivity improvements are necessary to enable the railroad industry to
remain competitive with other modes of transportation. However railroads
remain restricted by antiquated operating rules and uncompetitive employee
benefit programs and they are prevented from achieving optimum productivity.
These national agreements, with the exception of the International Association
of Machinist and Aerospace Workers ("IAM"), discussed below, will be open for
renegotiation on December 31, 1994.
As a result of the arbitration process and a Registrant initiated voluntary
buy out program offered in January 1992, approximately 150 trainmen were
declared excess by the Registrant, of which 105 excess employees accepted the
$60,000 buy out. The remaining excess employees were placed on a Reserve
Board where they received 70% of their 1991 W-2 earnings (net of certain
adjustments). During 1992, through attrition and increased business levels,
all excess employees were removed from the Reserve Board. KCSR had fully
reserved the cost of the buy outs in 1991, accordingly no charges to earnings
were required in 1992 and none are anticipated in the future.
15
In 1992, KCSR operations experienced a two day operational shutdown as part of
an orderly shutdown of freight transportation operations by all Class I U.S.
Railroads. This two day shutdown was precipitated when members of the IAM
initiated a strike against the CSX Railway. The national rail shutdown ended
through Congressional intervention, which ordered all IAM workers back to
work. In ending the rail strike, Congress established a process intended to
result in settlement of disputes between the parties or recommendation by an
arbitrator on settlement terms. KCSR participated in the national bargaining
of issues with the IAM through the National Railway Labor Conference ("NRLC").
In early August 1992, the NRLC and the IAM were able to resolve virtually all
issues and the arbitrator's settlement recommendations on the remaining issues
were accepted by President Bush. The resulting labor agreements will be open
for renegotiation in 1995. The two day shutdown resulted in reduced KCSR
revenues but, in total, the effect of the shutdown was immaterial to the
Registrant.
Approximately 87% of MidSouth's employees are also covered under collective
bargaining agreements. MidSouth has numerous labor agreements with a variety
of unions. These labor agreements, which were in place at the date of
acquisition, will be open for renegotiation in varying periods beginning in
1994.
As a result of completion of these labor agreements, management believes the
Registrant has made progress in becoming able to compete with all railroads
contiguous to the KCSR/MidSouth lines as well as other forms of
transportation.
16
<PAGE>
Information & Transaction Processing
DST Systems, Inc.
General Description of the Business
DST Systems, Inc., formed in 1968, together with its subsidiaries and joint
ventures (principally The Continuum Company, Inc., Boston Financial Data
Services, Inc., Investors Fiduciary Trust Company, Argus Health Systems, Inc.,
Midland Data Services, Inc. and Midland Loan Services L.P.), designs,
maintains and operates proprietary on-line shareowner accounting and record
keeping data processing systems, primarily for mutual funds and financial
services institutions and insurance companies. Historically, the majority of
DST's revenue has been derived from full-service and remote-service record
keeping for the mutual fund industry. The growth of the mutual fund industry
is a major contributor to the substantial increase in revenues of DST.
Currently, DST's growth results from an increase in both existing and new
mutual fund customers as well as acquisitions and expansion of existing
business lines and products.
Output Technologies, Inc. ("OTI"), a wholly-owned subsidiary of DST, was
formed in early 1991 as a holding company for DST's business involved in the
financial printing, mailing, output processing and related business lines.
During 1993, OTI completed the internal reorganization of its subsidiaries,
which included renaming of subsidiaries and merging of certain operations.
The overall objective of the internal reorganization was a consolidation of
output related activities, identification of businesses with the OTI name and
alignment into geographic operating regions. Included under OTI are its
wholly-owned subsidiaries; Output Technologies Central Region, Inc.; formerly
United Micrographics Systems, Inc. and Network Graphics, Inc., which process
computer output microfilm and microfiche, and printing and mailing of
specialized laser printing output and perform graphics design services; Output
Technologies SRI Group, Inc., formerly Support Resources, Inc. and Output
Technologies Eastern Region, Inc., formerly Mail Processing Systems, Inc.
provide laser printing and mailing of value-added customer information; Output
Technologies of Illinois, Inc., was formed in 1992 and performs telemarketing
and fulfillment services; Output Technologies Phoenix Litho Group, Inc.,
formerly Phoenix Litho, Inc. performs commercial printing services, and Output
Technologies Vital Records Storage Group, Inc., formerly Data Retrieval
Services, which performs vital records storage.
Effective September 30, 1993, DST completed the merger of Vantage Computer
Systems, Inc. ("Vantage") into a subsidiary of The Continuum Company, Inc.
("Continuum"). Vantage, a 90.5% owned subsidiary, along with its wholly-owned
subsidiary Vantage P&C Systems, Inc., provide record keeping services and
custom designed software packages to the life and property/casualty insurance
industries. Vantage, using DST's computer systems on a remote basis, focus on
the administration of universal life coverage and other non-traditional
insurance products. DST and the minority shareholder of Vantage received a
total of 4 million shares of Continuum stock -- 2,939,000 shares at closing
and the remainder after Continuum shareholder approval was obtained in late
1993. As a result of this transaction and additional Continuum stock
purchases made by DST, DST owned approximately 24% of the outstanding common
stock of Continuum at December 31, 1993. In January 1994, DST acquired
additional Continuum shares through privately negotiated transactions.
Accordingly, DST currently owns approximately 29% of Continuum's outstanding
common stock. DST accounted for the initial exchange transaction as a non-
cash, non-taxable exchange in investment basis of Vantage for an investment in
Continuum. Accordingly, no gain or loss recognition was associated with the
transaction. Vantage revenues for the nine months ended September 30, 1993,
were $32.6 million and $38.7 million for the year ended December 31, 1992.
Continuum is a publicly traded international consulting and computer services
17
firm based in Austin, Texas, which primarily serves the needs of life and
property and casualty insurance companies for computer software and services.
The Vantage/Continuum transaction will allow DST to expand its presence in the
information processing market for the insurance industry and combine the
strengths of both Vantage and Continuum. Prior to the merger, Vantage's
business was primarily centered in the U.S. domestic market while Continuum
has a significant international and domestic presence. Subsequent to this
transaction, DST assumed all of the North American operations data processing
functions for Continuum. DST and Continuum signed an agreement whereby DST
will make available the capabilities of the Winchester Data Center for
Continuum processing requirements. Concurrent with the Continuum/Vantage
merger, DST and Continuum reached a license agreement, whereby Continuum will
market AWD for use in insurance industry applications.
Other services offered by DST include securities transfer services for debt
securities and corporate stocks, portfolio accounting for investment fund
managers and health care pharmaceutical insurance claim processing. DST also
engages, directly and through its affiliates, in trust accounting, security
clearing services, asset management administration, commercial loan servicing,
broker-dealer services, pharmaceutical claim processing and processing for the
insurance industry through Investors Fiduciary Trust Company, Boston
Financial Data Services, Inc., Midland Data Systems, Inc., Midland Loan
Services, L.P., First of Michigan Capital Corporation, Argus Health Systems,
Inc. and The Continuum Company, Inc. in which DST is either a joint venture
partner or investor. These affiliates are further described below:
Investors Fiduciary Trust Company ("IFTC"), a 50% joint venture owned with
Kemper Financial Services, Inc., is incorporated under the banking laws of
Missouri and provides fiduciary and other custodial services to its
clients. IFTC serves as trustee for unit trusts, tax deferred retirement
and compensation plans, including IRAs, Keogh Plans and other deferred
compensation plans offered by DST's clients. IFTC also serves as transfer
agent and custodian for several mutual funds and sponsors a federally
insured money market deposit account.
Boston Financial Data Services, Inc. ("BFDS"), a Boston based 50% joint
venture between DST and State Street Boston Corporation, performs full
service transfer agency functions for open and closed end mutual funds and
corporations using DST's proprietary software on a remote basis through
telecommunication transmissions with DST's computer facility located in
Kansas City.
Midland Data Systems, Inc. and Midland Loan Services, L.P. (collectively
"Midland") 45-50% joint ventures, respectively, provide comprehensive
commercial loan servicing for assets, both performing and non-performing
loans and related asset management services for governmental and
institutional clients. Midland has been awarded contracts with the
Resolution Trust Corporation ("RTC") for the operation of an Asset
Management System and a Control Totals Module System for use by the RTC and
for servicing RTC loans. Midland intends to expand its market by
continuing to create innovative and responsive systems through technology
and expanding its loan processing and asset management capabilities to the
private sector.
First of Michigan Capital Corporation, ("FOM"), a publicly held company,
21% owned by DST, provides full service retail securities brokerage
services and maintains several offices throughout the State of Michigan.
Argus Health Systems, Inc., ("Argus"), a 50% joint venture owned with
Financial Holding Corporation provides pharmaceutical claim insurance
processing services for several health care providers through a data base
network.
18
The Continuum Company, Inc. ("Continuum"), a publicly held company,
approximately 29% owned by DST, is an international consulting and computer
services firm based in Austin, Texas, serving the needs of life insurance,
property and casualty insurance and other financial services companies for
computer software and services.
Product Base and Competitive Influence
DST's reputation is based largely on service, ability to handle volume
increases, commitment to software development and, to a lesser degree, price.
The advantages of DST include its experience in providing service to the
markets it serves, the number and size of its clients, its use of centralized
data processing facilities which enables it to achieve economies of scale, the
breadth of services it and its joint ventures offer, and the reputations of
its joint venture partners. In addition, DST's systems are complex, having
been enhanced over a number of years to provide a high quality service and to
meet changing regulatory and user requirements. The complex nature of the
business, the software systems and the significant resource base needed to
operate and/or duplicate such systems make it difficult for new firms to enter
these markets. Although market entry by new firms may be difficult, several
strong competitors in DST's marketplace do exist. In recent years, the
competitive environment for shareowners processing has changed as several
major bank competitors exited from direct participation in the shareowner
processing business. The balance of these accounts were absorbed by DST or
its competitors. A further review of competitive factors for DST's principal
product lines follows:
Mutual Fund Shareowners Accounting System: Certain competitors provide
remote processing services or engage in software sales. DST also considers
in-house systems as a competitive alternative. DST does not ordinarily
offer its software for sale; therefore, when customers purchase software,
they do so as an alternative to DST's remote processing or full-service
product offerings. The Shareholder Services Group ("TSSG"), a unit of
First Data Resources, Sungard Data Systems Inc., Oppenheimer Industries,
Provident National Bank and U.S. Trust are the primary competitors for
full-service and remote processing. Oppenheimer Industries is the primary
competitor for systems sales. DST currently processes approximately one-
third of all United States mutual fund shareowner accounts.
DST and its affiliates also provide a full-service product by acting in the
capacity of a transfer agent either through direct appointment or
subcontract. DST's main full service competitor is TSSG.
Securities Transfer and Portfolio Accounting Systems: DST's Securities
Transfer System competes with in-house systems and independent vendors,
some of whom supply clerical support in connection with their software sys-
tems. The Portfolio Accounting System competes primarily with in-house
systems and systems offered by certain banks in conjunction with their
custodial services. Banks and thrift institutions in competition with DST
may have an advantage by considering the value of their client's funds on
deposit when pricing their services. Moreover, such banks or thrift
institutions generally have much greater financial resources available to
them than DST. DST's 1993 acquisitions of Belvedere Financial Systems,
Inc. ("Belvedere") and Clarke & Tilley, both of which develop and market
portfolio accounting and investment management systems, expands DST's
portfolio accounting opportunities. Belvedere's system will provide a
common platform for DST future portfolio growth in both domestic and
international markets.
International Market Expansion: In 1991, DST began evaluating the
feasibility of marketing its products outside the United States and also
products that would serve foreign markets in DST's product lines. DST
acquired a 50% interest in Talisman Services during 1991. Talisman is a
19
European software company whose primary product is a multi-currency
financial accounting package. In 1992, DST formed DST Systems
International B.V. as a holding company for certain of its non-U.S.
operations and a marketing unit for DST's software. Also in 1992, DST,
together with State Street Bank and Clarke and Tilley, Ltd. (a United
Kingdom software firm), formed Clarke and Tilley Data Services ("CTDS").
CTDS is developing a unit trust accounting system for the U.K. and
Luxembourg markets, combining DST workflow management, image technology and
unit trust software. During 1993, DST completed the acquisition of Clarke
& Tilley Ltd., (96% owned), which markets investment management software
primarily for use in Europe and the Pacific Rim and Corfax Benefit Systems,
Ltd., (100% owned), a Canadian company, which processes shareowner
transactions for mutual funds and pension accounts in Canada.
This international expansion provides DST with a base of products which are
multi-currency, as well as multi-platform, and creates avenues for greater
market penetration of DST's U.S. products into international channels.
Through these subsidiaries, sales and development offices currently reside
in the United Kingdom, Switzerland, Netherlands, Belgium, Luxembourg,
Canada, Australia and South Africa. DST foresees opportunities for further
growth and expansion in international markets.
The financial institutions served by DST, both mutual fund and insurance,
will continue to evaluate whether to internalize or outsource their
technology needs. This process will have both positive and negative
effects on DST's results; however, on an overall basis, DST's customer base
is expected to grow.
During 1993, the financial markets as a whole experienced an increase in spite
of certain uncertainties in domestic and global economies. DST's mutual fund
shareowner accounts serviced also rose in 1993 to end the year at an all time
high of 28 million accounts. In 1993, Kemper Financial Services ("Kemper"), a
DST customer, mutual fund shareowner began conversion of its mutual fund
shareowner processing, which will result in the removal of its accounts from
the DST system. The total number of Kemper accounts, approximately 2.5
million, will be converted from the DST system in stages over the next few
years. In early July 1993, the first stage, which encompassed 500,000 Kemper
accounts were converted from the DST system. The remaining accounts will be
removed in 1994. The loss of 500,000 Kemper accounts in 1993 was offset by
account growth from other mutual fund customers and accordingly, did not have
a material financial impact. Mutual fund shareowner accounts had also risen
in 1992 even through weighted average monthly billable accounts lagged 1991
averages. In 1991, DST experienced an overall decline in the number of mutual
fund shareowner accounts serviced. This decline is in large part the result
of the Vanguard group of mutual funds, which exited the DST system in
September 1991 and the removal of 800,000 broker based accounts of Prudential
Bache in late 1991. Vanguard comprised approximately 2.7 million shareowner
accounts. Excluding the Vanguard and Prudential Bache accounts, DST
experienced growth in certain other fund groups serviced during 1991.
Financial Asset Management
Janus Capital Corporation
Janus Capital Corporation, headquartered in Denver, Colorado and 81% owned by
the Registrant, provides investment advisory and management services to the
Janus and IDEX equity mutual fund groups, investment management services for
individuals and institutions including large pension and profit sharing plans.
Janus experienced substantial growth during 1993 in terms of both shareholder
accounts and assets under management. Funds under management increased from
$15.5 billion at December 31, 1992 to $22.2 billion at December 31, 1993 while
total shareholder accounts increased 35% in 1993. This growth is largely
attributable to successful marketing programs, an overall favorable
20
performance of the Janus no-load and IDEX load funds compared to the market as
a whole and general growth in the mutual fund marketplace.
While Janus experienced significant growth during 1993, much of that growth
occurred in the first half of 1993. During the third and fourth quarters of
1993 growth in assets under management slowed. Total fund sales were $3.3
billion during the second half of 1993 versus $5.5 billion during the first
six months of 1993, while fund redemption increased to $2.2 billion versus
$1.6 billion, respectively.
Janus experiences competition in the form of alternative investment vehicles,
which offer competitive investment returns and different investment objectives
when compared to Janus. These alternatives have typically been other mutual
funds, certificates of deposit, money market accounts and individual stocks
and bonds. Janus management continues to strive in offering a variety of
investment products. While Janus has historically been a primarily equity
based fund group, management has sought to build a base of fixed income
products. During 1993, Janus introduced three new fund products; Janus
Mercury Fund, an equity fund; Janus Federal Tax Exempt Fund, a federal tax
exempt income fund; and the Janus Aspen Series, which are variable annuity
products. During 1992, Janus introduced three new mutual funds, Janus
Enterprise Fund, an equity fund; Janus Balanced Fund, a combination equity
/fixed income fund and Janus Short-Term Bond Fund, a fixed income fund. Janus
revenues and operating income increases are a direct result of increases in
assets under management. Assets under management have grown in recent years
from a combination of new money investments or fund sales and market
appreciation. Fund sales have risen in response to marketing efforts,
favorable fund performance and the current popularity of no-load mutual funds.
Market appreciation has resulted from increases in stock investment values.
However, a decline in stock and bond markets and/or an increase in the rate of
return of alternative investments could negatively impact Janus revenues and
operating income. In addition, the mutual fund market, in general, faces
increasing competition as the number of mutual funds continues to increase,
marketing and distribution channels become more creative and complex, and
investors place greater emphasis on published fund recommendations and
investment category rankings. These factors could also affect Janus and
negative impact revenues and operating income. Operating expenses are
expected to increase as assets and service requirements grow.
Janus, its subsidiaries and the funds it manages are subject to a variety of
regulatory requirements including, but not limited to, the Securities and
Exchange Commission, individual state Blue Sky laws, the National Association
of Securities Dealers and various other state regulatory agencies. Janus
management does not foresee that compliance with these various requirements
will have a material impact upon operations.
Eliminations, Corporate & Other
This industry segment is comprised of passive investments, and the general
administrative and corporate operations of the Registrant.
21<PAGE>
Item 2. Properties
Transportation Services
KCSR owns and operates approximately 1,633 miles of main and branch lines and
approximately 752 miles of other tracks. In addition, approximately 79 miles
of main and branch lines and 88 miles of other tracks are operated by KCSR
under trackage rights and leases. Through the acquisition of MidSouth, an
additional 1,100 track miles were added, primarily in the states of Louisiana,
Mississippi and Alabama. MidSouth has no material classification yards or
other building facilities.
Kansas City Terminal Railway Company, of which KCSR is a one-twelfth owner,
with other railroads, owns and operates approximately 80 miles of track, and
operates an additional 8 miles of track under trackage rights in greater
Kansas City, Missouri. KCSR also leases for operating purposes certain short
sections of trackage owned by various other railroad companies and jointly
owns certain other facilities with such railroads.
KCSR also owns and operates repair shops, depots and office buildings along
its right-of-way in support of its transportation operations. A major
facility, Deramus Yard, is located in Shreveport, Louisiana and includes a
general office building, locomotive repair shop, car repair shops, material
warehouses and fueling facilities totalling approximately 210,000 square feet.
KCSR and Registrant executive offices are located in an eight story office
building in Kansas City, Missouri and are leased from a subsidiary of the
Registrant.
At December 31, 1993, KCSR's fleet of rolling stock consisted of 255 diesel
locomotives, of which six were leased from non-affiliates; 7,179 freight cars,
of which 1,828 were leased from non-affiliates; and 1,982 tractors, trucks and
trailers, of which 1,961 were leased from non-affiliates. At December 31,
1993, MidSouth's fleet of rolling stock consisted of 110 diesel locomotives,
none of which were leased from non-affiliates; 7,734 freight cars, of which
6,776 were leased from non-affiliates. Some of this equipment is subject to
liens created under conditional sales agreements, equipment trust certificates
and capitalized leases in connection with the original purchase or lease of
such equipment.
Maintenance expenses for Way and Structure and Equipment (pursuant to ICC
accounting rules, which include depreciation) for the three years ended
December 31, 1993 and as a percent of KCSR revenues are as follows (dollars in
millions):
<TABLE>
<CAPTION>
KCSR Maintenance
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
1993 $64.4 18.6% $54.5 15.8%
1992 62.6 18.7 59.8 17.8
1991 62.2 19.3 52.7 16.4
</TABLE>
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option to
purchase. This facility contains buildings totaling approximately 12,000
square feet. Carland, Inc. leases approximately 1,400 square feet of office
facilities in downtown Kansas City, Missouri from DST Realty, Inc. a wholly-
owned subsidiary of DST. Pabtex, Inc. owns a 70 acre coal and petroleum coke
22
bulk handling facility at Port Arthur, Texas. Southern Leasing leases 2,800
square feet of office space in downtown Kansas City, Missouri, from DST
Realty, Inc., a wholly-owned subsidiary of DST.
Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City, Missouri to
Dallas, Beaumont-Port Arthur, Texas and New Orleans, Louisiana. This system
is leased to KCSR.
Other subsidiaries of the Registrant own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also
include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk
handling facility at Port Arthur, Texas, and several former railway buildings
now being rented to non-affiliated companies, primarily as warehouse space.
At December 31, 1993, the Registrant owns 1,025 acres of property located on
the waterfront in the Port Arthur, Texas area, which includes 22,000 linear
feet of deep water frontage and three docks. Port Arthur is an uncongested
port with direct access to the Gulf of Mexico. Approximately 75% of this
property is available for development.
Information & Transaction Processing
DST Systems, Inc.
DST owns an 82,000 square foot Data Center, located in Kansas City, commonly
known as its Winchester Data Center, which commenced operations in 1985. This
facility is located on 13 acres of land within an overall 25 acre tract of
land owned by DST.
DST master-leases three downtown Kansas City office buildings consisting of
approximately 353,000 square feet in which DST or its affiliates occupy
approximately 330,000 square feet and the balance is leased to non-affiliated
tenants. This space is utilized by DST for its shareholder operations,
systems development and other support functions.
DST and its wholly-owned subsidiary, DST Realty, Inc., own six buildings in
Kansas City, Missouri, with approximately 413,000 square feet. DST utilizes
117,000 square feet in these buildings for its portfolio, laser printing and
mailing operations, and leases 47,000 square feet to Argus Health Systems for
its systems development, administrative and other support operations, 81,000
square feet are leased to Midland Data Systems and Midland Loan Services. In
first quarter 1994, Argus purchased the building it had leased from DST. The
balance of 168,000 square feet is available for business expansion needs.
Output Technologies Central Region, Inc. (formerly United Micrographics
Systems, Inc.), a 100% owned DST subsidiary, leases 97,000 square feet in
several buildings representing its primary operating facilities in Kansas City
and St. Louis, Missouri, along with remote locations throughout the Midwestern
United States.
Output Technologies Eastern Region, Inc. (formerly Mail Processing Systems,
Inc.), a 100% owned DST subsidiary, leases 156,000 square feet of production,
warehouse and office space facilities in East Hartford, Connecticut and
Braintree, Massachusetts. Additionally, a 20,000 square foot facility in New
York, New York was leased in 1993.
In addition to the previously discussed office space, DST Realty, Inc. also
owns six parking facilities in downtown Kansas City, Missouri having 1,670
parking spaces which are rented by the Registrant's and affiliates' employees,
and the public. A 100% owned subsidiary of DST, Winchester Business Center,
Inc., owns and operates an underground storage and office facility
encompassing a total of 550,000 square feet. 191,000 square feet of this
23
facility is leased to another DST subsidiary with the remaining space occupied
by unaffiliated tenants or as yet unfinished space.
At December 31, 1993, DST owned or leased mainframe computers which are
capable of processing approximately 1.3 billion instructions per second. DST
presently uses a substantial portion of the capacity of these mainframes. In
addition, DST owns significant amounts of auxiliary computer support equipment
such as disk and tape drives, CRT terminals, etc., all of which are necessary
for its computer and communications operations.
Financial Asset Management
Janus Capital Corporation
Janus leases 140,000 square feet of office space in two facilities from non-
affiliated companies for its administrative and shareowner processing
departments. In addition, in October, 1993, Janus leased approximately 34,000
square feet from a non-affiliated entity for its mail processing and storage
requirements. Its corporate offices are located in Denver, Colorado.
Corporate & Other
The Registrant and DST are a combined 80% owner of Wyandotte Garage
Corporation, a parking facility in downtown Kansas City, Missouri. The
facility is located adjacent to the Registrant's and KCSR's headquarters
building, and consists of 1,147 parking spaces which are utilized by the
Registrant's and affiliates' employees and the public.
Unconsolidated Affiliates, primarily DST related
DST's 50% joint venture, Boston Financial Data Services, Inc., leases and
occupies a 186,000 square foot office building in Quincy, Massachusetts.
Additionally, DST's 50% joint venture, Investors Fiduciary Trust Co. leases
and occupies a total of 86,000 square feet in a downtown Kansas City office
building.
DST formed Winchester Ventures II, for the purpose of acquiring land and
subsurface areas near DST's Data Center. To date, twelve acres adjacent to
the Data Center have been purchased for resale or development. Additionally,
DST is a 50% joint venture partner of a 260,000 square foot downtown Kansas
City, Missouri office building which is both leased by DST, affiliates and
non-affiliates, and houses DST's corporate headquarters.
The Continuum Company, approximately 29% owned by DST, occupies and owns a
building of 186,000 square feet located in Austin, Texas, which is used for
product development and administration. Continuum leases an additional 35,000
square feet of office in Austin, approximately 100,000 at several locations in
Australia, and another approximately 100,000 square feet for various
administrative premises in Europe. The Continuum Company, through Vantage
(formerly 90.5% owned by DST) also leases 35,000 and 53,000 square feet of
office space in Weatherfield, Connecticut and Kansas City, Missouri,
respectively.
24<PAGE>
Item 3. Legal Proceedings
SWEPCO Litigation. The Registrant's wholly-owned subsidiary, The Kansas City
Southern Railway Company ("KCSR") is a defendant in a lawsuit filed in the
District Court of Bowie County, Texas by Southwestern Electric Power Company
("SWEPCO"). SWEPCO has alleged that KCSR is required to reduce SWEPCO's coal
transportation rate due to changed circumstances that allegedly create a
"gross inequity" under the provisions of the existing coal transportation
contract among SWEPCO, KCSR and the Burlington-Northern Railroad. SWEPCO is
the largest single customer of KCSR. Although the suit is pending, KCSR and
SWEPCO are negotiating an agreement to settle the major issues which are the
subject of this litigation. Management is confident that the matter will be
concluded without material adverse effect on the financial condition or future
results of operation of KCSR.
Environmental Matters. KCSR is a participant in certain federal and state
environmental matters as follows:
In the Ilada Superfund Site East Cape Girardeau, Ill., KCSR was cited for
furnishing one carload of used oil to this petroleum recycling facility.
Counsel advises that KCSR's liability, if any, should fall within the "de
minimus" provisions of the Superfund law, representing minimal exposure.
In Petroleum Products Corp. Hollywood, Fla., also a Superfund case, KCSR was
cited, as a transporter only, in hauling two carloads of material in
interchange from Princeton, Louisiana to New Orleans. KCSR was removed from
the list of Potentially Responsible Parties during 1993 and is no longer
involved in this proceeding.
Louisiana Department of Environmental Quality, Docket No. IE-0-91-0001, is a
proceeding involving the alleged contamination of Capitol Lake, Baton Rouge,
Louisiana. This proceeding also names KCSR as a party due to its ownership of
part of the lake bottom. Potentially Responsible Parties remain to be named
in this proceeding. Studies commissioned by KCSR indicate that contaminants
contained in the lake were not generated by KCSR. Management and counsel do
not believe this proceeding will have a material effect on the Registrant.
Louisiana Department of Environmental Quality, Docket No. IAS 88-0001-A, The
Louisiana Department of Environmental Quality named KCSR in a state
environmental proceeding involving contaminated land near Bossier City,
Louisiana, which was the site of a wood preservative treatment plant (Lincoln
Creosoting). KCSR is a former owner of part of the land in question. This
matter was the subject of a trial in the United States District Court in
Shreveport, Louisiana which was concluded in July of 1993. The Court found
that Joslyn Manufacturing Company, an operator of the plant, is required to
indemnify KCSR for damages arising out of plant operations. (KCSR's potential
liability is as a property owner rather than as a generator or transporter of
contaminants.) The case has been appealed to the United States Court of
Appeals for the Fifth Circuit.
On January 18, 1994, the Environmental Protection Agency ("EPA") published a
list of potential sites that may be placed on the CERCLA national priority
list. The Lincoln Creosoting site was included. Since major remedial work
has been performed at this site by Joslyn and KCSR has been held by the
Federal Court to be entitled to indemnity for such costs, it would appear that
KCSR should not incur significant remedial liability. In any event, it is not
possible to meaningfully evaluate the potential consequences of remediation at
the site, since the EPA has made no announcement other than listing of the
Lincoln Creosoting site for "potential" inclusion on the national list.
Litigation Reserves. In the opinion of the Registrant, claims or lawsuits
incidental to the business of the Registrant and its subsidiaries have been
adequately provided for in the consolidated financial statements.
25<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three month
period ended December 31, 1993.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in KCSI's Definitive Proxy Statement which will be filed no later
than 120 days after December 31, 1993.
Directors/Officers
L.H. Rowland, age 56, has continuously served as President and Chief Executive
Officer since January 1987. He has been employed by the Registrant since
1983, serving in numerous management positions and has served as a director of
the Registrant continuously since 1983.
T.A. McDonnell, age 48, has continuously served as Executive Vice President
since February 1987. He has served as a director of the Registrant
continuously since 1983 and has been Chief Executive Officer of DST since
1984.
G.W. Edwards, Jr. age 54, has continuously served as Executive Vice President
since April 1991. He has served as a director of the Registrant continuously
since May 1991. He has also served as President and Chief Executive Officer
of KCSR since April 1991. Prior to this, he served as Chairman of the Board
and Chief Executive Officer of the United Illuminating Company, New Haven,
Connecticut from 1985 to 1991.
Vice Presidents and Other Corporate Officers (In alphabetical order)
R.H. Bornemann, age 38, has continuously served as Vice President -
Governmental Affairs since July 1992. From 1987 to July 1992 he was employed
by United Illuminating Company, New Haven, Connecticut, serving most recently
as Vice President - Corporate Affairs.
P.S. Brown, age 57, has continuously served as Vice President and Assistant
General Counsel since July 1992. From 1981 to July 1992, he served as Vice
President - Governmental Affairs.
R.L. Brown II, age 49, has continuously served as Vice President and Assistant
Comptroller since January 1992. From October 1986 to January 1992, he served
as Vice President and Comptroller. He also serves as Senior Vice President -
Finance of KCSR.
R.P. Bruening, age 55, has continuously served as Vice President and General
Counsel since May 1982. He also serves as Senior Vice President and General
Counsel of KCSR.
D.R. Carpenter, age 47, has continuously served as Vice President - Tax
Counsel since June 1993. From 1978 to June 1993, he was a partner in the law
firm of Watson, Ess, Marshall & Enggas, Kansas City, Missouri.
R.W. Comstock, age 63, has continuously served as Vice President -
Administration since April 1992. From 1986 to April 1992, he served as Senior
Vice President - Corporate Affairs with United Illuminating Company, New
Haven, Connecticut. He also serves as Senior Vice President - Administration
of KCSR.
J.B. Dehner, age 48, has continuously served as Vice President since December
1989. From November 1987 to December 1989, he served as Assistant to the
26
President. Prior to November 1987, he was Executive Vice President of
Southern Group, Inc. and a principal officer of several other KCSI
subsidiaries. He also serves as Executive Vice President and Chief Operating
Officer of KCSR.
A.P. McCarthy, age 47, has continuously served as Treasurer since December
1989. From 1984 to December 1989, he served as Assistant Treasurer.
A.P. Mauro, age 64, has continuously served as Vice President and Corporate
Secretary since August 1985.
J.D. Monello, age 49, has continuously served as Vice President-Finance since
October 1992. From January 1992 to October 1992, he served as Vice President
- - Finance and Comptroller. From May 1989 to January 1992 he served as Vice
President and Assistant Comptroller. From October 1986 to May 1989, he served
as Assistant Comptroller.
H.H. Salisbury, age 68, has continuously served as Vice President - Public
Affairs since May, 1986.
L.G. Van Horn, age 35, has continuously served as Comptroller since October
1992. From January 1992 to October 1992 he served as Assistant Comptroller.
From January 1989 to January 1992 he served as Manager - Financial Reporting.
From April 1988 to January 1989 he served as Supervisor - Internal Audit.
None of the above officers are related to one another by family.
27<PAGE>
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
See information on pages i and ii of this Form 10-K. Also, pages 68 and 69 of
KCSI's 1993 Annual Report to Stockholders (Exhibit 13.1 hereto) are hereby
incorporated herein by reference.*
The Registrant's Board of Directors authorized an 11% increase in its Common
stock dividend in January 1992. The dividend will be reviewed annually and
adjustments considered that are consistent with growth in real earnings and
prevailing business conditions. Unrestricted retained earnings of the
Registrant at December 31, 1993 were $97.2 million.
At December 31, 1993, there were 3,386 holders of the Registrant's Common
stock based upon an accumulation of the registered stockholder listing.
Item 6. Selected Financial Data
(In millions, except per share and ratio data)
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Operating Revenue $961.1 $741.4 $610.2 $528.0 $498.3
Income from continuing
operations $97.0 $63.8 $45.7 $41.4 $37.1
Income from continuing
operations per
Common share $2.16 $1.43 $1.08 $.99 $.89
Total assets $1,917.0 $1,248.4 $1,091.9 $1,034.0 $964.9
Long-term
obligations $776.2 $387.0 $317.1 $344.9 $282.8
Cash dividends per
Common share $.30 $.30 $.27 $.27 $.27
Ratio of earnings to fixed charges (Exhibit 12.1 hereto)
Excluding interest on
deposits of IFTC 3.68 3.40 2.88 2.58 2.55
Including interest on
deposits of IFTC 3.43 2.98 2.44 2.23 2.32
</TABLE>
Above amounts reflect the 2-for-1 Common stock split to shareholders of record
on February 19, 1993, payable March 17, 1993 and the 2-for-1 Common stock
split to shareholders of record on February 14, 1992, payable March 17, 1992.
See information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 30 through 45 of
KCSI's 1993 Annual Report to Stockholders (Exhibit 13.1 hereto) which are
hereby incorporated herein by reference.*
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(2) to Form 10-K
28<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
See information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 30 through 45 of
KCSI's 1993 Annual Report to Stockholders (Exhibit 13.1 hereto) which is
hereby incorporated herein by reference.*
A listing of explanations of graphics used in the Managements' Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1993, (Exhibit 99.2 hereto), which is hereby incorporated herein
by reference.*
Item 8. Financial Statements and Supplementary Data
The report of the independent accountants, the audited consolidated financial
statements and the unaudited quarterly financial data appear on pages 46
through 70 of KCSI's 1993 Annual Report to Stockholders (Exhibit 13.1 hereto)
and are hereby incorporated herein by reference.*
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General
Instruction G(2) to Form 10-K
29<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
See "Election of Directors" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
(b) Executive Officers of the Registrant
Included under Part I pages 26 and 27.
Item 11. Executive Compensation
See "Management Compensation" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) See "Principal Stockholders" in the Registrant's Definitive Proxy
Statement, incorporated herein by reference.**
(b) See "Election of Directors" in the Registrant's Definitive Proxy
Statement, incorporated herein by reference.**
Item 13. Certain Relationships and Related Transactions
See "Certain Transactions" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
_________ ___________________
**Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(3) to Form 10-K. KCSI's Definitive 1993 Proxy Statement will be filed no
later than 120 days after December 31, 1993
30<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The financial statements and related notes, together with the report of Price
Waterhouse dated February 24, 1994, which appear on pages 46 through 70 of the
accompanying 1993 Annual Report to Stockholders (Exhibit 13.1), are hereby
incorporated herein by reference*. With the exception of the information
explicitly incorporated by reference in this Form 10-K, the 1993 Annual Report
to Stockholders is not to be deemed filed as a part of this Form 10-K.
The following additional financial statement schedules should be read in
conjunction with the financial statements in such 1993 Annual Report to
Stockholders. Schedules and exhibits for which provision is made in the
applicable accounting regulation of the Securities and Exchange Commission not
included with these additional financial statement schedules have been omitted
because they are not applicable, insignificant or the required information is
shown in the financial statements or notes thereto.
(2) Financial Statement Schedules
Supplementary Financial Information
Page
Report of independent accountants on financial statement F-1 thru
schedules and consents of independent accountants F-2
Schedule V
Property, plant and equipment - Years ended
December 31, 1993, 1992 and 1991 F-3
Schedule VI
Accumulated depreciation and amortization of
property, plant and equipment - Years ended
December 31, 1993, 1992 and 1991 F-4
Schedule X
Supplementary income statement information -
Years ended December 31, 1993, 1992 and 1991 F-5
The financial statements and related notes, together with the report of Ernst
& Young dated January 12, 1994, of Investors Fiduciary Trust Company (a 50%
owned affiliate of DST Systems, Inc., a 100% owned subsidiary of the
Registrant and accounted for using the equity method) for the year ended
December 31, 1993 (Exhibit 99.1) are hereby incorporated herein by reference*.
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(2) to Form 10-K
31<PAGE>
(3) List of Exhibits
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
- Exhibit 4*** to Registrant's Registration Statement on Form S-8,
Commission File No. 33-8880
- Certificate of Designation Establishing the New Series Preferred
Stock, Series A, of Registrant, dated May 16, 1986 which is detailed
as Exhibit A*** to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1986, Commission File No. 1-4717
- Exhibit 4.1*** to Registrant's Current Report on Form 8-K dated
October 1, 1993 (Commission File No. 1-4717), Certificate of
Designation of Series B Convertible Preferred Stock
Bylaws
- Exhibit 3.1***, Registrant's By-Laws, as amended and restated
November 7, 1991, to Registrant's Form 10-K for the fiscal year ended
December 31, 1991, Commission File No. 1-4717
(4) Instruments Defining the Right of Security Holders, Including Indentures
- Exhibits incorporated by reference under Part IV Item 14 (a)(3)(3) of
this Form 10-K
- Item 5*** to Registrant's Current Report on Form 8-K dated December
8, 1992 (Commission File No. 1-4717), which is a brief description of
the $250 million Revolving Credit Agreement, dated December 8, 1992.
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
- The Director Indemnification Agreement attached as Exhibit I*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717 and Exhibit B*** to Registrant's Proxy
Statement for 1987 Annual Stockholder Meeting, dated April 6, 1987
- The Deferred Directors Fee Plan attached as Exhibit 10*** to DST's
Form 10-K, for the fiscal year ended December 31, 1986, Commission
File No. 2-81678
- The Kansas City Southern Railway 1987 Restricted Stock Plan, attached
as Exhibit C*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The Indenture, dated July 1, 1992, to (i) a $300 million Shelf
Registration of Debt Securities attached as Exhibit 4*** to
Registrant's Form S-3 Commission File No. 33-47198, filed June 19,
____________________________
*** Incorporated by reference pursuant to Rule 12b-32
32<PAGE>
1992 (ii) a $200 million Medium Term Notes Registration of Debt
Securities, attached as Exhibit 4(a)*** to Registrant's Form S-3
Commission File No. 33-60192, filed March 29, 1993
- The Rights Agreement, dated May 16, 1986 attached as Exhibit 1*** to
Registrant's Registration Statement on Form 8-A , dated May 17, 1986,
Commission File No. 1-4717
- The 1978 Employee Stock Option Plan as amended attached as Exhibit
D*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
- The 1983 Employee Stock Option Plan as amended attached as Exhibit
E*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
- The 1987 Employee Stock Option Plan as amended attached as Exhibit
F*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
- The Employment Continuation Agreements - KCSI and subsidiaries
attached as Exhibit G*** to Registrant's Form 10-K, for the fiscal
year ended December 31, 1987, Commission File No. 1-4717 extended to
February 19, 1993
- The Officer Indemnification Agreement attached as Exhibit H*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717
- The DST ESOP Loan Agreement, dated December 18, 1987, and Amendment
No. 1, dated February 3, 1988, attached as Exhibit J*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717
- The DST Guarantee Agreement, dated December 18, 1987, and
Ratification and Amendment of Guarantee, dated February 3, 1988,
attached as Exhibit K*** to Registrant's Form 10-K, for the fiscal
year ended December 31, 1987, Commission File No. 1-4717
- The KCSI ESOP Loan Agreement, dated February 3, 1988, attached as
Exhibit L*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The KCSI Guarantee Agreement, dated February 3, 1988, attached as
Exhibit M*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The KCSI Directors' Deferred Fee Plan and Amendment to KCSI
Directors' Fee Plan attached as Exhibit N*** to Registrant's Form 10-
K, for the fiscal year ended December 31, 1987, Commission File No.
1-4717
- The Kansas City Southern Railway Company Directors' Deferred Fee Plan
and Amendment to Kansas City Southern Railway Company Directors'
Deferred Fee Plan attached as Exhibit O*** to Registrant's Form 10-K,
for the fiscal year ended December 31, 1987, Commission File No. 1-
4717
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32
33<PAGE>
- Exhibit 10.1*** Employee Stock Ownership Plan and Trust Note
Agreement dated December 1, 1989 to Registrant's Form 10-K, for the
fiscal year ended December 31, 1989, Commission File No. 1-4717
- Exhibit 10.3*** Employment Continuation Agreement, dated, May 5,
1987, between T.A. McDonnell and DST Systems, Inc. to Registrant's
Form 10-K, for the fiscal year ended December 31, 1990, Commission
File No. 1-4717
- Exhibit 10.4*** Description of the Registrant's 1991 incentive
compensation plan to Registrant's Form 10-K, for the fiscal year
ended December 31, 1990, Commission File No. 1-4717
- Exhibit 10.1*** The Registrant's 1991 Stock Option and Performance
Award Plan to Registrant's Form 10-K, for fiscal year ended December
31, 1991, Commission File No. 1-4717
- Exhibit 10.2*** The Registrant's Directors Deferred Fee Plan, adopted
August 20, 1982, amended and restated September 13, 1991, to
Registrant's Form 10-K, for fiscal year ended December 31, 1991,
Commission File No. 1-4717
- The Agreement and Plan of Merger dated September 19, 1992, among the
Registrant, K&M Newco, Inc. (a wholly-owned subsidiary of the
Registrant) and MidSouth Corporation as Exhibit 2*** to Registrant's
Form 8-K dated September 19, 1992, Commission File No. 1-4717; and
letter agreement dated August 4, 1992, between Registrant and
MidSouth Corporation setting forth confidentiality and standstill
agreements; letter dated September 24, 1992 modifying the Agreement
and Plan of Merger dated September 19, 1992 and letter agreement
dated August 4, 1992 as Exhibits 28.1*** and 28.2 *** respectively to
Registrant's Form 8, dated September 28, 1992, Commission File No. 1-
4717. Third Amendment dated March 30, 1993 to the confidentiality
letter dated August 4, 1992 as Exhibit 28.1*** to Registrant's Form
8-K, dated March 30, 1993, Commission File No. 1-4717.
- Exhibit 10.1*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, Inc., and Landon H. Rowland to the Registrant's
Form 10-K, for fiscal year ended December 31, 1992, Commission File
No. 1-4717.
- Exhibit 10.2*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, Inc., The Kansas City Southern Railway Company
and George W. Edwards, Jr. to the Registrant's Form 10-K, for fiscal
year ended December 31, 1992, Commission File No. 1-4717.
- Exhibit 10.3*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, DST Systems, Inc. and Thomas A. McDonnell to the
Registrant's Form 10-K, for fiscal year ended December 31, 1992,
Commission File No. 1-4717.
- Exhibit 10.4*** Employment Agreement, dated April 1, 1992, by and
between Kansas City Southern Industries, Inc. and Roland W. Comstock
to the Registrant's Form 10-K, for fiscal year ended December 31,
1992, Commission File No. 1-4717.
- Exhibit 10.1 attached to this Form 10-K
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32#
34
(11) Statement Re Computation of Per Share Earnings
(Inapplicable)
(12) Statements Re Computation of Ratios
Exhibit 12.1 attached to this Form 10-K
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders
- Exhibit 13.1 attached to this Form 10-K
(16) Letter Re Change in Certifying Accountant
(Inapplicable)
(18) Letter Re Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Registrant
- Exhibit 21.1 attached to this Form 10-K
(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23) Consents of Experts and Counsel
Page F-1 and F-2 to this Form 10-K
(24) Power of Attorney
(Inapplicable)
(27) Financial Data Schedules
(Inapplicable)
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)
(99) Additional Exhibits
- The financial statements and related notes, together with the report
of Ernst & Young dated January 12, 1994, of Investors Fiduciary Trust
Company as listed under Item 14(a)2, for the year ended December 31,
1993 attached hereto as Exhibit 99.1
- A listing of explanations of graphics used in the Management's
Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 1993, attached hereto as
Exhibit 99.2
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated October 1, 1993 under Items 5 and 7,
reporting (a) the establishment of the KCSI Employee Plan Funding Trust and
transfer of KCSI Series B Convertible Preferred Stock and (b) completion of
the Vantage Computer Systems, Inc. merger into a wholly-owned subsidiary of
The Continuum Company, Inc.
35<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Kansas City Southern Industries, Inc.
March 18, 1994 By: /s/L.H. Rowland
L.H. Rowland, President,
Chief Executive Officer
and Director
36<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 18, 1994.
Signature Capacity
/s/P.H. Henson Chairman and Director
P.H. Henson
/s/L.H. Rowland President, Chief Executive
L.H. Rowland Officer and Director
/s/G.W. Edwards Jr. Executive Vice President
G.W. Edwards Jr. and Director
/s/T.A. McDonnell Executive Vice President
T.A. McDonnell and Director
/s/J.D. Monello Vice President-Finance
J.D. Monello (Principal Financial Officer)
/s/L.G. Van Horn Comptroller
L.G. Van Horn (Principal Accounting Officer)
/s/A.E. Allinson Director
A.E. Allinson
/s/P.F. Balser Director
P.F. Balser
/s/J.E. Barnes Director
J.E. Barnes
/s/T.S. Carter Director
T.S. Carter
/s/M.G. Fitt Director
M.G. Fitt
/s/M.M. Levin Director
M.M. Levin
/s/M.I. Sosland Director
M.I. Sosland
37<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Kansas City Southern Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 24, 1994, appearing on page 70 of the 1993 Annual Report to
Stockholders of Kansas City Southern Industries, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these
Financial Statement Schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse
PRICE WATERHOUSE
Kansas City, Missouri
February 24, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-69060, 33-50517, 33-50519), and in the
Prospectuses constituting part of the Registration Statements on Form S-3 (No.
33-60192, 33-69648) of Kansas City Southern Industries, Inc. of our report
dated February 24, 1994, appearing on page 70 of the Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedules, which appears above.
/s/ Price Waterhouse
PRICE WATERHOUSE
Kansas City, Missouri
March 18, 1994
F-1<PAGE>
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 and Form S-3 of Kansas City Southern Industries, Inc. and the related
Prospectuses of our report dated January 12, 1994, with respect to the
financial statements of Investors Fiduciary Trust Company included at page 1
of Exhibit 99.1 in this Annual Report on Form 10-K for the year ended
December 31, 1993.
/s/ Ernst & Young
ERNST & YOUNG
Kansas City, Missouri
March 18, 1994
F-2<PAGE>
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(Dollars in Millions)
<CAPTION>
Balance at Balance at
beginning Additions end of
of period at cost Retirements period
<S> <C> <C> <C> <C>
Year ended
December 31, 1993
DST $ 208.1 $ 69.0 $ 14.3 $ 262.8
Janus 12.8 9.2 .3 21.7
Corporate & Other 9.7 .4 .7 9.4
Transportation -
Road 684.0 411.6 20.3 1,075.3
Equipment 338.4 26.9 9.7 355.6
Land and Facilities 59.0 9.3 1.1 67.2
$1,312.0 $ 526.4 $ 46.4 $1,792.0
Year ended
December 31, 1992
DST $ 155.6 $ 56.5 $ 4.0 $ 208.1
Janus 2.8 10.0 -- 12.8
Corporate & Other 9.6 .1 -- 9.7
Transportation -
Road 650.1 52.7 18.8 684.0
Equipment 340.0 47.3 48.9 338.4
Land and Facilities 51.8 7.5 .3 59.0
$1,209.9 $ 174.1 $ 72.0 $1,312.0
Year ended
December 31, 1991
DST $ 127.7 $ 31.1 $ 3.2 $ 155.6
Janus 1.3 1.6 .1 2.8
Corporate & Other 9.5 .1 -- 9.6
Transportation -
Road 646.3 39.7 35.9 650.1
Equipment 309.4 41.2 10.6 340.0
Land and Facilities 51.6 10.6 10.4 51.8
$1,145.8 $ 124.3 $ 60.2 $1,209.9
</TABLE>
F-3<PAGE>
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(Dollars in Millions)
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Retirements of period
<S> <C> <C> <C> <C>
Year ended
December 31, 1993
DST $ 98.9 $35.4 $ 5.8 $128.5
Janus 3.0 4.3 .1 7.2
Corporate & Other 3.9 .6 -- 4.5
Transportation -
Road 251.6 26.7 14.1 264.2
Equipment 168.0 14.5 7.7 174.8
Land and Facilities 18.4 2.4 .6 20.2
$543.8 $83.9 $ 28.3 $599.4
Year ended
December 31, 1992
DST $ 78.4 $23.9 $ 3.4 $ 98.9
Janus .9 2.1 -- 3.0
Corporate & Other 3.4 .5 -- 3.9
Transportation -
Road 244.0 21.7 14.1 251.6
Equipment 200.6 12.0 44.6 168.0
Land and Facilities 16.4 2.2 .2 18.4
$543.7 $62.4 $ 62.3 $543.8
Year ended
December 31, 1991
DST $ 60.4 $20.3 $ 2.3 $ 78.4
Janus .6 .4 .1 .9
Corporate & Other 2.8 .7 .1 3.4
Transportation -
Road 252.3 23.6 31.9 244.0
Equipment 195.4 10.8 5.6 200.6
Land and Facilities 24.9 1.7 10.2 16.4
$536.4 $57.5 $ 50.2 $543.7
</TABLE>
F-4<PAGE>
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Dollars in Millions)
<CAPTION>
Charged to Costs and Expenses
Years Ended December 31,
1993 1992 1991
<S> <C> <C> <C>
Property maintenance and
repair expenses:
DST and Corporate & Other $ 16.9 $ 8.4 $ 9.5
Transportation Services -
Road properties 42.7 41.9 38.6
Equipment 27.1 28.9 25.1
$ 86.7 $79.2 $73.2
Depreciation and amortization of
intangible assets, preoperating
costs and similar deferrals:
DST and Corporate & Other $ 8.8 $ 5.9 $ 4.3
Transportation Services 2.8 - -
$ 11.6 $ 5.9 $ 4.3
</TABLE>
F-5<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1993 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation SK
Exhibit Item 14(a)(3)
No. Document Exhibit No.
10.1 Employment Agreement, dated July 15, 1993, 10
by and between Kansas City Southern
Industries, Inc. and Mark M. Levin
12.1 Ratio of Earnings to Fixed Charges 12
13.1 1993 Annual Report to Stockholders 13
21.1 Subsidiaries of the Registrant 21
99.1 The financial statements and related notes, together99
with the report of Ernst & Young dated January 12,
1994 of Investors Fiduciary Trust Company for the year
ended December 31, 1993
99.2 Listing of explanations of graphics used in 99
Management's Discussion and Analysis of Financial
Condition and Results of Operations
KANSAS CITY SOUTHERN INDUSTRIES, INC.
Exhibit 10.1 File No. 1-4717
Form 10-K December 31, 1993
July 15, 1993
Mr. Mark M. Levin
4700 Linnean Avenue, NW
Washington, D. C. 20008
Dear Mark:
This is intended to reflect agreements reached between you and Kansas
City Southern Industries ("KCSI") in connection with your employment by KCSI
in its Transportation Division.
1. KCSI has agreed to employ you (and you have agreed to accept such
employment) as Advisor to the Office of the Chief Executive of the Transporta-
tion Division for a period of three (3) years, commencing on July 15, 1993.
2. It is understood and agreed that your duties as an employee of
KCSI will consist of advising KCSI Transportation Division's management in the
areas of strategic planning, merger and acquisition opportunities, potential
business ventures in Mexico and Latin America and such other duties as may be
determined by George W. Edwards, Chief Executive Officer of KCSI's Transporta-
tion Division, or his duly appointed successor (the "CEO"). You agree to
devote a minimum of 25 hours per week for a total of six months during each
calendar year to such duties.
3. Your base compensation for services rendered shall be $100,000 per
annum, paid in arrears in equal monthly installments.
4. In addition to the base compensation described in paragraph 3,
KCSI agrees to issue to you 50,000 options to purchase shares of KCSI common
stock, to become exercisable as follows:
20,000 upon the first anniversary of the date of grant.
15,000 upon the second anniversary of the date of grant.
15,000 upon the third anniversary of the date of grant.
5. KCSI will pay all reasonable expenses incurred in connection with
your maintenance of an office in Washington, D.C., including costs of secre-
tarial and other appropriate and necessary support functions.
6. It is further understood and agreed that your employment is at-
will, and subject at all times to termination by the CEO, if the CEO shall
determine, in his sole discretion and for any reason, that your services are
no longer desired. You may also terminate your employment under this agree-
ment at any time, upon written notice thereof, to the CEO.
7. During the term of your employment and during the period of two
years immediately after termination of your employment, you will not, directly
or indirectly, own any interest in, manage, be employed by, engage in or be
connected with any transportation related business similar to or in competi-
tion with the business conducted by KCSI or its affiliates without the
approval of KCSI. It is understood that this covenant is limited to the
territory and customers served by KCSI. Further, during the term of your
employment and thereafter, you will not directly or indirectly, use or
disclose any proprietary or confidential information of KCSI, except to the
extent necessary to perform your duties as an employee of KCSI.
8. Upon termination of your employment, you will be entitled to
receive salary accrued to your termination date. You will be permitted to
exercise all options that have become exercisable on or before your termina-
tion date for a period of 90 days after such date. It is understood and
agreed between you and KCSI that no other severance or compensation payment
shall be due upon termination.
If the above correctly reflects your understanding of the agreements
between you and KCSI, please execute this letter in the appropriate place
below and return an executed copy to us for our files.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ George W. Edwards, Jr.
George W. Edwards, Jr.
Executive Vice President &
Chief Executive Officer
Transportation Division
Accepted and agreed to this
15th day of July, 1993.
/s/ Mark M. Levin
Mark M. Levin
KANSAS CITY SOUTHERN INDUSTRIES, INC.
EXHIBIT 13.1 FILE NO. 1-4717
FORM 10-K DECEMBER 31, 1993
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Years Ended December 31, 1993
Introduction. Kansas City Southern
Industries, Inc. ("KCSI" or "Company")
is a diversified holding company with
principal operations in Transportation
Services, Information & Transaction
Processing and Financial Asset
Management. This presentation is
intended to clarify and focus on results
of operations, liquidity and capital
structure of the Company and should be
read in conjunction with the
Consolidated Financial Statements and
Notes.
RESULTS OF OPERATIONS
Significant Developments. Consolidated
operating results during 1991-1993 were
affected by the following significant
developments:
MidSouth Acquisition. The Company
completed the acquisition of MidSouth
Corporation ("MidSouth"), a regional
railroad holding company headquartered
in Jackson, Mississippi, on June 10,
1993, pursuant to a definitive merger
agreement. The transaction was approved
by both Boards of Directors, MidSouth
shareholders and the Interstate Commerce
Commission. The agreement provided that
the holders of MidSouth Common stock
receive $20.50 per share in cash,
resulting in a value of all Common stock
and equivalents of approximately $219.3
million. At the date of closing, the
Company had previously acquired
approximately 22% of MidSouth
outstanding Common stock through open
market purchases and privately
negotiated transactions. Accordingly,
the purchase price for the acquisition
of the MidSouth common stock aggregated
approximately $213.5 million paid in
cash by the Company to holders of
MidSouth's common stock and in
connection with the exercise of certain
options held by MidSouth employees and
others.
The MidSouth acquisition, which was
accounted for as a purchase, represents
a significant transaction for the
Company. Results of operations of the
Company for the year ended December 31,
1993 include the operations of MidSouth
as a consolidated subsidiary effective
with the closing of the transaction.
Excluding the effect of additional tax
expense for federal tax rate increases
related to deferred accruals, the
transaction did not result in any
dilution in the Company's 1993 earnings.
At the date of closing, MidSouth had
approximately $55 million of operating
loss carryforwards. Annual utilization
of these loss carryforwards may be
limited by the Internal Revenue Code as
a result of a change in ownership.
Anticipated future tax benefits
associated with the loss carryforwards
were recorded as a reduction of recorded
intangibles.
The Company financed the MidSouth
acquisition with the $250 million credit
agreement, discussed below, and other
financing resources available to the
Company. In addition, as part of the
merger transaction, the Company
refinanced
substantially all of MidSouth's
indebtedness at more favorable interest
rates.
The MidSouth acquisition provides an
important East/West rail line, as a
complement to the Kansas City Southern
Railway Company's ("KCSR," a
wholly-owned subsidiary), predominantly
North/South route. This East/West rail
line, running from Dallas, Texas, to
Meridian, Mississippi, will allow the
Company to be more competitive in the
intermodal transportation market. In
addition, the acquisition adds a base of
MidSouth customers in the South Central
U.S. to KCSR's already strong traffic
base and presents opportunities for the
rerouting of certain commodity movements
over less circuitous routes. Effective
January 1, 1994, MidSouth was
operationally and administratively
merged into KCSR.
Vantage Computer Systems, Inc./The
Continuum Company, Inc. Effective
September 30, 1993, DST Systems, Inc.
("DST," a wholly-owned subsidiary)
completed the merger of its 90.5% owned
subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of
The Continuum Company, Inc.
("Continuum"). Vantage and its
wholly-owned subsidiary, Vantage P&C
Systems, Inc. provide policyholder
record keeping data processing and
software for the life and
property/casualty insurance industries.
DST and the minority shareholder of
Vantage received a total of four million
shares of Continuum stock 2,939,000
shares at closing and the remainder
after Continuum shareholder approval was
obtained in late 1993. As a result of
this transaction and additional
Continuum stock purchases, DST owned
approximately 24% of the outstanding
common stock of Continuum at December
31, 1993. In 1994, DST purchased
additional Continuum shares through
privately negotiated transactions.
Accordingly, DST currently owns
approximately 29% of Continuum's
outstanding common stock. In the initial
exchange, DST exchanged Vantage stock
with a book value of approximately $17
million for Continuum stock with a then
current market value of approximately
$62 million. DST accounted for the
initial exchange as a non-cash,
non-taxable exchange in investment basis
of Vantage for an investment in
Continuum. Accordingly, no
[Page 30]<PAGE>
<PAGE>
gain recognition was associated with the
transaction. Vantage revenues for the
nine months ended September 30, 1993,
were $32.6 million and $38.7 million for
the year ended December 31, 1992.
Effective October 1, 1993, Vantage
results were no longer consolidated with
DST and Continuum earnings were included
in DST results on the equity basis.
Continuum is a publicly traded
international consulting and computer
services firm based in Austin, Texas,
which primarily serves the needs of life
and property and casualty insurance
companies for computer software and
services. Continuum has annual revenues
of approximately $250 million and assets
of approximately $160 million.
The Vantage/Continuum transaction will
allow DST to expand its presence in the
information processing market for the
insurance industry and combine the
strengths of both Vantage and Continuum.
Prior to the merger, Vantage's business
was primarily centered in the U.S.
domestic market while Continuum has a
significant international and domestic
presence. Subsequent to this
transaction, DST assumed all of the
North American operations data
processing functions for Continuum. DST
and Continuum reached agreement whereby
DST will make available the capabilities
of the Winchester Data Center for
Continuum processing requirements. In
addition, Continuum obtained the rights
to license DST's "Automated Work
Distributor" ("AWD"TM) product to
insurance companies worldwide.
DST 1993 Acquisitions. During 1993, DST
completed the acquisition of Clarke &
Tilley Ltd., (96% owned), a United
Kingdom company, which markets
investment management software primarily
for use in Europe and the Pacific Rim;
Corfax Benefit Systems, Ltd., (100%
owned), a Canadian company, which
processes shareowner transactions for
mutual funds and pension accounts in
Canada; DBS Systems Corporation, (60%
owned), a United States company, which
is developing a software billing system
for the direct broadcast satellite
industry; and Belvedere Financial
Systems, Inc. (100% owned) a United
States company, which develops and
markets portfolio accounting and
investment management systems. Each of
these transactions was accounted for as
a purchase. These acquisitions provide
DST with additions to its product base
and future opportunities for expansion
of its product lines into international
markets, especially Europe and Canada.
Janus Capital Corporation. Janus Capital
Corporation ("Janus") provides
management services to the Janus and
IDEX families of mutual funds, insurance
companies and other institutional
accounts. Assets under management grew
significantly from $3.1 billion at
December 31, 1990, to $22.2 billion at
December 31, 1993. Janus and IDEX Funds
shareholder accounts have also risen
from 337,000 at December 31, 1990 to 2.0
million at December 31, 1993. This
growth in funds under management and
shareholder accounts resulted in
significant revenue and operating income
growth.
1993 Tax Legislation. On August 10,
1993, President Clinton signed into law
the Omnibus Budget Reconciliation Act of
1993 ("the 1993 Tax Act"). This new tax
legislation changed numerous provisions
to the then existing tax law. The most
significant of these changes affect the
Company's Transportation Services
operations.
The new tax law increased the corporate
tax rate from 34% to 35%. Accordingly,
the Company's 1993 earnings include
additional income tax expense
attributable to the tax rate increase
retroactive to January 1, 1993. These
charges, which are included in the
provision for taxes on income, represent
$3.4 million ($.08 per share) related to
deferred tax accruals and $900,000 ($.02
per share) related to current year
earnings. In addition, the new tax law
included provisions for higher fuel tax
rates, which resulted in an additional
expense to Transportation operations
during 1993 of approximately $400,000.
Accounting Change Postretirement
Benefits. The Company adopted Statement
of Financial Accounting Standards No.
106 "Employers' Accounting for
Postretirement Benefits Other Than
Pensions," ("SFAS 106"), effective
January 1, 1993. SFAS 106 required the
Company to accrue, currently,
postretirement benefits provided to
retirees by the Company and its
Transportation subsidiaries. These
benefits relate primarily to
postretirement medical, life and other
benefits available to employees not
covered under collective bargaining
agreements.
The adoption of SFAS 106 resulted in a
charge to earnings in first quarter 1993
in the amount of $5.5 million, net of
applicable income taxes. The adoption of
SFAS 106 is not expected to have a
material effect on future annual
expenses of the Company.
Accounting Change Income Taxes. The
Company also adopted Statement of
Financial Accounting Standards No. 109,
"Accounting for Income Taxes," ("SFAS
109"), effective January 1, 1993. SFAS
109 was issued as an amendment to
Statement of Financial Accounting
Standards No. 96, "Accounting for Income
Taxes," ("SFAS 96"). The adoption of
SFAS 109 resulted in a charge to
earnings in first quarter 1993 of
$970,000.
[Page 31]<PAGE>
<PAGE>
As a result of the Company's previous
adoption of SFAS 96, the adoption of
SFAS 109 did not have a material impact
on the components of income tax expense
or the effective income tax rates
applicable to continuing operations
versus the U.S. federal income tax
statutory rate.
Stock Splits. On January 28, 1993, the
Company's Board of Directors authorized
a 2-for-1 split affected in the form of
a stock dividend in the Company's Common
stock paid March 17, 1993. Following the
split, the effective annual dividend is
$.30 per share on the Company's
outstanding Common stock.
On January 30, 1992, the Company's Board
of Directors authorized a 2-for-1 stock
split which was affected in the form of
a stock dividend in the Company's Common
stock paid March 17, 1992. The Company's
Board of Directors also authorized an
11% dividend increase on January 30,
1992, with respect to the Company's
outstanding Common stock also effective
March 17, 1992. The annual Common
dividend was increased to $.30 per share
from the then current $.27 per share, on
an after 1993 split basis.
Appropriate data in this report and the
accompanying Consolidated Financial
Statements and Notes were restated to
reflect the effect of both of these
2-for-1 stock splits.
Debt Securities Registration and
Offerings - 1993. The Company filed a
Registration Statement on Form S-3 with
the Securities and Exchange Commission
("SEC") on March 29, 1993, registering
$200 million in debt securities to be
offered in the form of Medium Term
Notes. Proceeds from the sale of the
debt securities are expected to be added
to the general funds of the Company and
used to principally repay debt and for
other general corporate purposes,
including working capital, capital
expenditures and acquisitions of and/or
investments in businesses or assets. On
June 24, 1993, pursuant to an Indenture
and Purchase Agreement, the Company
issued $100 million of debt securities
under this Registration Statement. The
transaction was comprised of Notes
bearing interest at a rate of 5.75% and
maturing in 1998. The net proceeds of
this transaction, along with certain
proceeds from the Company's $250 million
credit agreement, were used to refinance
certain MidSouth debt in July 1993.
On September 29, 1993, the Company filed
a Registration Statement, registering
$500 million in securities. The
securities may be offered in the form of
no par Common Stock, New Series
Preferred Stock $1 par value,
Convertible Debt Securities, Debt
Securities or Equipment Trust
Certificates (collectively, "the
Securities"). Net proceeds from the
sale of the Securities are expected to
be added to the general funds of the
Company and used principally for general
corporate purposes, including working
capital, capital expenditures and
acquisitions of or investments in
businesses and assets. The Company has
not yet sought to have the Registration
Statement declared effective by the SEC
and no securities have been issued.
$300 Million Debt Securities
Registration. On July 1, 1992, the
Company issued $100 million 77/8% Notes
due 2002 and $100 million 8.8%
Debentures due 2022 under a $300 million
debt securities registration with the
Securities and Exchange Commission. The
77/8% Notes are not redeemable prior to
their maturity in 2002, the 8.8%
Debentures are redeemable on or after
July 1, 2002, at a premium of 104.04%,
which declines to par on or after July
1, 2012. Proceeds from the debt offer
were used to repay borrowings under then
existing revolving credit agreements.
The Company used the remaining net
proceeds for general corporate purposes
including debt repayments, working
capital, capital expenditures,
acquisition of and/or investments in
businesses and assets and acquisition of
the Company's capital stock.
On March 3, 1993, the Company issued the
remaining $100 million of debt
securities as 65/8% Notes due 2005. The
Company used the net proceeds for
general corporate purposes, including
subsidiary debt repayments, working
capital, capital expenditures,
acquisitions of or investments in
businesses and assets, and acquisitions
of the Company's capital stock.
Series B Convertible Preferred Stock. On
October 1, 1993, KCSI transferred one
million shares of KCSI Series B
Convertible Preferred Stock (the "Series
B Preferred Stock") to the Kansas City
Southern Industries, Inc. Employee Plan
Funding Trust ("the Trust"), a grantor
trust established by KCSI. The purchase
price of the stock, based upon an
independent valuation, was $200 million,
which the Trust financed through KCSI.
The indebtedness of the Trust to KCSI is
repayable over 27 years with interest at
6% per year, with no principal payments
in the first three years. The Trust,
which is administered by an independent
bank trustee, and is consolidated into
the Company's financial statements, will
repay the indebtedness to KCSI utilizing
dividends and other income as well as
other cash obtained from KCSI. As the
debt is reduced, shares of the Series B
Preferred Stock, or shares of Common
stock acquired on conversion, will be
released and available for distribution
to various KCSI employee benefit plans,
including its ESOP, Stock Option Plan
and Stock Purchase Plans. [Page 32]<PAGE>
<PAGE>
The Series B Preferred Stock, which has
a $10 per share (5%) annual dividend and
a $200 per share liquidation preference,
is convertible into Common stock at an
initial ratio of four shares of Common
stock for each share of Series B
Preferred Stock. The Series B Preferred
Stock is redeemable after 18 months at a
specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held
only by the Trust or its beneficiaries,
the employee benefit plans of KCSI. The
full terms of the Series B Convertible
Preferred Stock are set forth in a
Certificate of Designations approved by
the Board of Directors and filed in
Delaware.
$250 Million Revolving Credit Facility.
On December 8, 1992, the Company
established a credit agreement in the
amount of $250 million. This agreement
replaced the Company's then existing
$100 million credit agreement, which had
been in place since 1989. During 1993,
proceeds were used to fund the
acquisition of MidSouth and refinance
certain MidSouth indebtedness. Remaining
credit capacity under the facility is
intended for general corporate purposes.
At December 31, 1993, the Company had
$230 million of indebtedness outstanding
on this agreement.
Employees Stock Purchase Plan. In the
fourth quarter 1993, the Company
completed the eighth offering under the
Employees Stock Purchase Plan.
Approximately 221,000 shares of Company
Common stock were subscribed to under
this offering, which will be funded
through employee payroll deductions,
over a two year period, at a price of
$38.20 per share. In the fourth quarter
1992, the Company completed the seventh
offering under the Employees Stock
Purchase Plan. Approximately 248,000
shares of Company Common stock were
subscribed to under this offering, which
were funded through employee payroll
deductions at a price of $18.75 per
share.
Union Labor Negotiations. Collective
bargaining agreements with KCSR union
employees, representing approximately
83% of KCSR's workforce were completed
in 1992. These agreements allow
implementation of productivity
improvements and cost sharing
arrangements with contract employees.
Productivity improvements will be
realized by modification in the
operation of its trains with reduced
crew sizes. These productivity
improvements were necessary to enable
the railroad industry to remain
competitive with other modes of
transportation. These labor agreements
will be open for renegotiation at the
end of 1994 and in 1995. Labor
agreements representing approximately
87% of MidSouth's workforce, which were
in place at the date of acquisition,
will be open for renegotiation in
varying periods beginning in 1994.
As a result of completion of these labor
agreements, management believes the
Company is now adequately positioned to
compete effectively with railroads
contiguous to our lines as well as other
forms of transportation. However,
railroads remain restricted by
antiquated operating rules and prevented
from achieving optimum productivity.
KCSR and other railroads are burdened
with labor regulations which are more
expensive than non-rail industries
including our principal trucking
competitors. The Railroad Retirement Act
requires a 23.75% contribution by
railroads on eligible wages, while the
Social Security and Medicare Acts only
require a 7.65% employer contribution on
similar wage bases. Other programs, such
as The Federal Employees Liability Act
(FELA), compared to The Worker's
Compensation Law and unemployment
programs, are additional examples of
such labor regulations which are
competitively disadvantageous to the
railroad industry.
Principal Stockholders Transactions. The
following activity has occurred among
the Company's principal stockholders:
- - In early 1994, Warburg, Pincus
Capital Company, L.P. an affiliate of
E.M. Warburg Pincus & Co., a New York
based venture banking and investment
management firm, announced plans to
distribute 4 million shares of the
Company's Common stock to its limited
partners, including institutional
holders and pension funds. The general
partners of Warburg, Pincus & Co. intend
to continue to retain a significant
portion of the shares which they will
receive in the planned distribution.
- - In July 1993, Hallmark Cards,
Inc. sold approximately 2 million shares
of the Company's Common stock, which
represented approximately one-half of
Hallmark holdings in KCSI Common stock.
- - In late 1992, the Company
completed the purchase of approximately
1.1 million shares of KCSI Common stock
from several Deramus family trusts for
approximately $22 million. These
purchases represented substantially all
the remaining KCSI Common stock held by
the family.
Safety and Quality Programs. KCSR
continued implementation and emphasis of
important safety and quality programs
during 1993. Related benefits are
expected to be recurring in nature and
realizable over future years. In 1993,
the Company experienced a 31% reduction
in
[Page 33]<PAGE>
Federal Railroad Administration
reportable employee injuries, as
compared to 1992 and 28% and 33%
reductions in 1992 and 1991,
respectively, when compared to prior
years. "Safety" and "Quality" programs
comprise two important ongoing goals of
railroad management.
Management. George W. Edwards, Jr., was
elected Executive Vice President of the
Company, and President and Chief
Executive Officer of The Kansas City
Southern Railway Company on April 1,
1991. He was additionally elected to the
Company's Board of Directors in May
1991. Prior to joining KCSI, Mr. Edwards
was Chairman of the Board and Chief
Executive Officer of The United
Illuminating Company of New Haven,
Connecticut.
Senior Management Compensation.
Effective January 1, 1992, the
compensation package of the three
members of the KCSI Office of the Chief
Executive was revised with the intent of
providing long-term incentives which
closely parallel shareholder returns.
The Office of the Chief Executive is
comprised of:
Landon H. Rowland - President and CEO of
KCSI
George W. Edwards, Jr. - Executive Vice
President of KCSI, President and CEO of
KCSR
Thomas A. McDonnell - Executive Vice
President of KCSI, President and CEO of
DST Systems, Inc.
Messrs. Rowland, Edwards and McDonnell
entered into five year contracts,
freezing base compensation and
suspending annual incentive
compensation. These contracts also grant
restricted stock and stock options which
provide returns based upon appreciation
of the Company's market value.
Fuel Costs and Efficiency. Fuel costs
represent approximately 7% of KCSR's
operating expenses and have been
declining as diesel fuel prices have
decreased each of the past three years.
In recent years, KCSR has achieved
greater fuel efficiency through improved
operating practices related to train
schedules, balancing locomotive
horsepower availability with demand, and
additions of newer, more fuel efficient
locomotives. During the period
1989-1991, KCSR purchased a total of 46
new fuel efficient SD-60 locomotives for
$63 million. These acquisitions were
financed through privately placed
Equipment Trust Certificates. In
addition, during 1991, KCSR refurbished
16 GP40 locomotives as part of its fleet
modernization efforts.
KCSR Locomotive Power (MDA CHART #1)
These new locomotive purchases during
the period 1989-1991 have improved the
average age of KCSR's locomotive fleet.
These new fuel efficient locomotives
have additionally helped effect a
reduction in fuel gallons consumed per
gross ton mile since 1989.
The MidSouth acquisition has resulted in
increased traffic levels on the combined
KCSR/MidSouth rail system. The rail
industry as a whole, including
KCSR/MidSouth, suffers from a shortage
of available locomotive power to handle
increased traffic levels.
Output Technologies, Inc. DST's printed
output processing businesses, Output
Technologies, Inc. ("OTI") continued to
expand in 1993 and had 35 locations
throughout the U.S. at the end of 1993.
During 1993, OTI increased its earnings
contributions to DST consolidated
results and completed the internal
reorganization of its subsidiaries which
included renaming of certain
subsidiaries and merging of certain
operations. The overall objective of
this reorganization was a consolidation
of output related activities,
identification of businesses with the
OTI name and alignment into geographic
operating regions.
The OTI concept was launched in 1990
with the acquisition of companies which
perform commercial printing and graphics
design service, and joined other
wholly-owned subsidiaries of DST,
specializing in computer output
microfilm/microfiche and printing and
mailing of laser printed output. In
early 1991, DST formalized its
commitment to the printed output
processing services businesses with the
formation of Output Technologies, Inc.
as a holding company for subsidiaries in
this line of business.
In the past several years, OTI has
achieved further growth through
acquisitions and location expansion.
During 1991, OTI purchased all of the
capital stock of Mail Processing
Systems, Inc., (renamed Output
Technologies Eastern Region, Inc.) a
provider of laser printing and mailing
services with locations in Connecticut
and Massachusetts. In addition, in 1992,
OTI acquired certain assets and assumed
certain liabilities of Business
Services, Inc., (renamed Output
Technologies of Illinois, Inc.), a
provider of telecommunications and
fulfillment capabilities to a variety of
industries, primarily financial
services.
[Page 34]<PAGE>
<PAGE>
Redemption of 12% Debentures. The
Company exercised its right of optional
redemption on October 1, 1991 with
respect to $57 million of the then
remaining $63 million outstanding
principal amount of its 12% debentures.
At December 31, 1991, the Company had
outstanding $4.7 million of the 12%
debentures which were not voluntarily
tendered. In 1992, the Company exercised
its right of optional redemption, and
subsequently redeemed, the entire $4.7
million remaining principal amount.
In conjunction with the redemption, the
Company recorded an extraordinary after
tax charge to 1991 earnings of $3.8
million or $.09 per Common share. This
charge resulted from the repurchase
premium and write off of unamortized
bond discount costs.
INDUSTRY SEGMENT RESULTS
The Company's major business activities
are classified as follows (in millions):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Revenues
Transportation
Services $451.1 $369.2 $350.1
DST Systems, Inc. 342.2 270.5 211.1
Janus Capital Corp. 162.7 97.5 41.7
Eliminations,
Corporate & Other 5.1 4.2 7.3
Total $961.1 $741.4 $610.2
% Change
from Prior Year 29.6% 21.5% 15.6%
Operating Income
Transportation
Services $116.7 $ 75.3 $ 67.4
DST Systems, Inc. 31.2 17.8 26.8
Janus Capital Corp. 80.0 45.7 15.8
Eliminations,
Corporate & Other (15.8) (12.9) (11.7)
Total $212.1 $125.9 $ 98.3
% Change
from Prior Year 68.5% 28.1% 12.1%
</TABLE>
Transportation Services. Transportation
Services operations are comprised
principally of KCSR and MidSouth (both
wholly-owned subsidiaries), which
account for more than 90% of
Transportation Services revenues.
KCSR Net Ton Miles (MDA CHART #2)
KCSR revenues have increased modestly
each year since 1989 despite downward
pressures on rates. Competition, since
deregulation, is the primary cause of
downward pressures on rates. In
addition, truck competition has eroded
the railroad industry's share of
transportation dollars because of
changing regulations, subsidized highway
improvement programs and favorable labor
regulations, thereby improving the
competitive position of trucks as an
alternative mode of surface
transportation for many commodities.
The modest growth experienced since 1989
resulted from volume increases, a
mixture of both general commodity and
coal trains. As economic conditions
improved in the United States during
1993, Transportation revenues also
increased. Assuming no major economic
deterioration occurs in the region
serviced by the Transportation
businesses, management expects moderate
growth during 1994.
KCSR 1993 revenues rose 3% compared to
1992. General commodity revenues,
excluding intermodal ("TOFC/COFC")
traffic, rose 5.5% on generally higher
traffic volumes. The higher traffic
volumes resulted, in part, from a
strengthening of U.S. economic
conditions, which have continued to rise
slowly from a recessionary period in
1990-1992. Higher traffic levels were
experienced in carloadings of farm
products, particularly corn & wheat,
[Page 35]
<PAGE>
KCSR Revenues (MDA CHART #3)
non-metallic ores, lumber/wood -
pulp/paper, chemical and petroleum
shipments. Intermodal carloadings
declined 8% in 1993 as KCSR continues
the process of upgrading its current
"on-off ramp" loading facilities in
anticipation of greater intermodal
traffic in the future. Unit coal
revenues rose modestly in 1993 on
overall increased tonnage but were
adversely affected by variances in
length of haul and rates. While 1993
revenues rose, operating expenses
declined in 1993 compared to 1992.
Favorable expense variances were caused
by ongoing cost containment efforts,
lower fuel costs and lower expenses from
KCSR's continuing emphasis on safety,
but somewhat offset by increased costs
on higher traffic levels. The
combination of higher KCSR revenues and
lower expenses helped effect a 55%
increase in Transportation Services
operating income in 1993 compared to
1992. These cost containment initiatives
also helped effect a decline in KCSR's
Interstate Commerce Commission ("ICC")
operating ratio from 82.3% in 1992 to
77% in 1993. The ICC operating ratio is
a common efficiency measurement among
Class I railroads.
KCSR general commodities revenues
increased 7.2% during 1992 from 1991.
Revenue gains were experienced in the
transportation of farm products,
particularly soybeans and wheat,
pulp/paper products, lumber/wood
products and non-metallic mineral
shipments, but were somewhat offset by a
decline in carloadings of chemical and
petroleum products and lower TOFC/COFC
traffic. Additionally, general commodity
revenues increased 1.2% during 1991 from
1990 largely from increased carloadings
of non-metallic minerals, grain mill
products, pulpboard and petroleum coke,
but were substantially mitigated by
modest declines in overall farm
products, soda ash and other petroleum
and chemical products.
Transportation Services results also
benefitted in 1993 from revenue and net
income additions of MidSouth and
continuing favorable operations at the
Company's petroleum coke export facility
(Pabtex, Inc.), which experienced
increased volumes in 1993. MidSouth
contributed $67.8 million in revenues to
1993 Transportation Services results,
which surpassed comparative prior year
revenues on increased carloadings.
MidSouth's 1993 earnings, net of all
acquisition related expenses, were
positive after excluding the effect of
the federal income tax rate increase.
The flooding in the Midwest region of
the United States during 1993 did not
materially affect the Company's rail
transportation operations. KCSR's
trackage, facilities and physical
properties were not directly hampered by
the rising flood waters. However, many
of KCSR's interchange partners in the
Kansas City gateway were affected, which
resulted in congestion, rerouting of
certain traffic, and delays of commodity
movements, particularly for grain and
coal shipments. KCSR experienced revenue
declines, during third quarter 1993, in
certain commodities due to the inability
to interchange shipments with other
railroads. Overall the financial impact
was immaterial.
The following summarizes components of
KCSR's revenues (in millions per ICC
Form R-1):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
General
Commodities $ 222.2 $ 212.8 $198.6
Coal 106.2 105.5 106.5
Other 17.1 17.3 17.1
Total $ 345.5 $ 335.6 $322.2
</TABLE>
Railroad Transportation operations are
constantly faced with substantial costs
related to fuel, labor and maintenance
of its roadbed.
KCSR Fuel (MDA CHART #4)
During 1993, 1992 and 1991, particularly
in the latter half of 1991, fuel prices
declined from levels experienced in
1990. These fuel price declines were, in
part, due to the resolution of
hostilities in the Persian Gulf War and
stabilization of relations in the Middle
East region in general and resulted in a
favorable impact on operating income of
$1.6, $1.5 and $1.3 million in
1993-1991, respectively. Current and
future years fuel costs have been and
will be negatively impacted
(approximately $800,000 per year)
because of the locomotive diesel fuel
tax imposed by the Omnibus Budget
Reconciliation Act of 1990 earmarked for
Deficit Reduction. Additionally, new
fuel taxes imposed by the 1993 Tax Act
negatively affected KCSR operating
income by approximately $400,000 in
1993. Control of fuel expenses is a
constant concern of management and fuel
savings (previously discussed) is a top
priority.
[Page 36]<PAGE>
A roadway improvement program was begun
by KCSR in 1986. This program was
implemented to upgrade the roadway in
order to reduce operating costs, improve
safety, increase the capabilities of
KCSR and increase quality of service to
customers. In 1990, KCSR completed
bridge and related modifications to
support unrestricted transportation of
double stack containers. Removal of
restrictions to the double stack
operation along with the addition of an
East/West MidSouth rail line will permit
KCSR to compete with other carriers in
the transcontinental intermodal markets.
KCSR intends to continue its aggressive
capital improvement program into 1995,
at which time its mainline, yards and
side tracks will have been rebuilt. In
addition, the MidSouth line will require
track and roadbed upgrade and expansion,
much of which is anticipated to be
completed over the next two years. This
roadway improvement program has been and
will continue to be funded with
internally generated cash flow.
Portions of roadway maintenance costs
are capitalized and other portions
expensed, as appropriate. Expenses
aggregated $40, $40 and $39 million for
1993-1991, respectively. Maintenance and
capital improvement programs are in
conformity with the Federal Railroad
Administration's track standards and are
accounted for in accordance with the
Interstate Commerce Commission's
accounting rules.
Information & Transaction Processing.
DST Systems, Inc. ("DST", a wholly-owned
subsidiary). DST revenues are increasing
because of customer base growth, new
lines of business and expanded products.
A significant amount of DST's net income
is derived from the operations of its
various joint ventures discussed in
"Unconsolidated Affiliates."
DST Revenues (MDA CHART #5)
During 1993, DST consolidated revenues
rose 27% from 1992, while DST's
contribution to KCSI earnings improved
50% to $22.9 million from $15.3 million
in 1992. This revenue and income
increase resulted from an increase in
mutual fund accounts serviced and the
absence of one-time expenses which
reduced 1992 results (discussed below).
Total mutual fund shareowner accounts
serviced rose to 28 million at December
31, 1993 from 22.4 million at December
31, 1992 resulting in higher mutual fund
processing and output services volume.
During 1993, Kemper Financial Services
("Kemper"), a DST customer, began
conversion of its mutual fund shareowner
processing, which will result in the
removal of its accounts from the DST
system. The total number of Kemper
accounts, approximately 2.5 million,
will be converted from the DST system in
stages by the end of 1994. In July 1993,
the first stage, which encompassed
500,000 Kemper accounts were converted
from the DST system. The remaining
accounts will be removed in 1994. The
loss of 500,000 accounts in 1993 was
offset by account growth from other
mutual fund customers and accordingly,
did not have a material financial
impact.
During 1992, DST experienced a 28%
increase in revenues; however, operating
income declined from 1991. Revenue
growth was generated by increased
overall business volumes and the
expanded contribution of OTI and
Vantage. The operating income decline
resulted from several items, which
negatively impacted 1992 earnings: (i)
lower weighted average billable monthly
balance of mutual fund shareowner
accounts serviced in 1992 as a result of
the loss of 2.7 million Vanguard
accounts in late 1991, even though DST
ended 1992 at 22.4 million shareowner
accounts; (ii) higher ESOP component of
employee benefit costs (1992-$12.7
million; 1991-$4.2 million) from
expanded headcount and additional ESOP
expense which resulted in lower ESOP
costs in 1993; (iii) start up and
development costs for DST's TRAC-2000
system for 401(K) plans and Vantage's
software for the property and casualty
insurance industry; and (iv) certain
building renovation costs.
The number of mutual fund accounts
serviced by DST increased to 22.4
million at December 31, 1992, versus
18.7 million at December 31, 1991. DST
experienced an overall decline in the
number of mutual fund accounts serviced
during 1991, from 20.4 million accounts
at December 31, 1990 to 18.7 million
accounts at December 31, 1991. This
account decrease is in large part a
result of the loss of the Vanguard group
of funds as a DST customer in September
1991, comprising approximately 2.7
million accounts and the removal of
800,000 broker based accounts of
Prudential Bache in late 1991. Excluding
the loss of the Vanguard and Prudential
Bache accounts, mutual fund accounts
serviced increased 1.8 million accounts
in 1991 when compared to 1990.
The financial institutions served by
DST, both mutual fund and insurance,
will continue to evaluate whether to
internalize or outsource their
technology needs. This process will have
both positive and negative effects on
DST's results; however, on an overall
basis, DST's customer base is expected
to grow.
[Page 37]<PAGE>
Beginning in 1991 and continuing into
1993, DST continued its focus on
internal and external expansion of its
service presence in the mutual fund,
insurance and financial services
industries. DST made a commitment to the
life and property/casualty insurance
industry business lines serviced by
Vantage. During 1992, Vantage business
volume increased as revenues rose 45%;
however, Vantage earnings declined from
1991 primarily due to the system
development costs for Vantage's software
for the property and casualty insurance
industry, discussed earlier, and a
contract termination fee received in
1991. The structure of DST's involvement
in the insurance industry changed during
1993 with the exchange of Vantage and
the resulting equity ownership in
Continuum. However, DST's total service
to the insurance industry increased as
DST continues to process the Vantage
policyholder accounts, has added
processing of all Continuum policyholder
accounts and other services as well as
gaining access to Continuum's market for
DST's AWDTM imaging product.
DST's printed output processing
businesses, Output Technologies, Inc.
("OTI") continued to expand in 1993.
Revenues rose 34% for the OTI group of
companies in 1993 from increased output
processing volumes and contributions
from new and expanded business lines.
These new and expanded business lines
have contributed to DST's growth during
the last three years and expanded its
product lines available to customers.
OTI's 1993 laser click volume was 669
million pages of printed output, an
increase of 45% over the 460 million
pages in 1992. OTI growth has been
achieved through acquisitions and
location expansion. In 1991, OTI
acquired all of the outstanding stock of
Mail Processing Systems, Inc., (renamed
Output Technologies Eastern Region,
Inc.) a financial printing and mailing
business, for $7.1 million and opened
several new U.S. locations through its
wholly-owned subsidiary United
Micrographics Systems, Inc., (renamed
Output Technologies Central Region,
Inc.) a provider of computer process
output microfilm and microfiche.
In the 1990-1992 period, DST
experienced significant improvement in
revenues and operating income over prior
years, as a result of mutual fund
account growth and lower system
development costs while expanding its
proprietary software services into new
areas (AWDTM and TA2000TM), increasing
its business lines in the output
processing area (microfilm, microfiche,
graphics design, printing), entering and
expanding the area of government
servicing and expanding its presence in
the life and property/casualty insurance
processing markets.
During 1993, DST continued marketing of
Automated Work Distributor, an
image-based clerical work management
system. The AWDTM System's image
technology can also be combined with
principles of an intelligent work
station. AWDTM was initially implemented
in several mutual fund transfer
agencies, but through expansion now
resides on more than 4,200 work stations
in companies throughout the world (a 75%
increase since December 31, 1992) and is
used to service approximately 53% of the
mutual fund shareowner accounts on DST's
system. AWDTM is also used in industries
such as insurance, banking and health
care. Concurrent with the Continuum
transaction, Continuum and DST signed a
licensing agreement whereby Continuum
will market the AWDTM product for use in
insurance industry applications. The
Continuum agreement provides DST access
to additional international markets for
its AWDTM products.
Financial Asset Management
Janus Assets Under Management (MDA CHART
#6)
Janus Capital Corporation. ("Janus," an
81% owned subsidiary). Janus operations
experienced significant growth, with
operating income in 1993, 1992 and 1991
comprising 38%, 36% and 17%,
respectively, of the Company's
consolidated operating income. From 1985
to 1990, revenues and net income grew,
but not in proportion to assets under
management due to product mix and higher
administrative costs. In 1989, Janus
increased its marketing and staffing
expenditures to heighten awareness of
the Janus funds and their performance
records. These increased expenditures
essentially offset the growth of 1989
revenues from assets under management.
In 1990, Janus realized the first full
year of benefits from its 1989 marketing
campaign. Assets under management
increased $1.3 billion in 1990, $5.6
billion in 1991 and $6.8 billion in 1992
and $6.7 billion in 1993. Janus
continued to reap significant benefits
from these ongoing marketing efforts in
terms of record fund sales and market
appreciation during 1993 and 1992.
While Janus experienced significant
growth during 1993, much of that growth
occurred in the first half of 1993.
During the third and fourth quarters of
1993, growth in assets under management
slowed. Total fund sales were $3.3
billion during the second half of 1993
versus $5.5 billion during the first six
months of 1993, while fund redemptions
increased to $2.2 billion versus $1.6
billion, respectively. Janus has
increased expenditures to provide
quality service to its shareholders
through the use of advanced
[Page 38]
<PAGE>
technology and extensive personnel
training programs. Assets under
management totaled a record $22.2
billion at December 31, 1993.
The following table highlights Janus'
assets under management and revenues:
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Assets Under Management
(in billions):
Janus No-Load Funds$ 17.0 $11.7 $ 6.0
IDEX Load Funds 1.2 1.0 .7
WRL Insurance
Products Funds 1.2 .8 .4
Institutional and Separately
Managed Accounts 2.1 1.3 1.0
Cash Equivalent Fund .7 .7 .6
Total $ 22.2 $15.5 $ 8.7
Janus Revenues
(in millions) $162.7 $97.5 $41.7
</TABLE>
During 1993, Janus continued to expand
the distribution channels of the Janus
funds by participating in "Schwabs'
Mutual Fund OneSource" service of
Charles Schwab as well as a similar
program offered by Fidelity Investments.
In addition, Janus introduced two new
Janus fund portfolios; Janus Mercury
Fund, an equity fund; Janus Federal Tax
Exempt Fund, a tax exempt income fund;
and the Janus Aspen Series, which
consists of six portfolios funded
through variable annuity contracts, such
as the Janus Retirement Advantage.
During 1992, Janus introduced three new
mutual funds; Janus Enterprise Fund, an
equity fund; Janus Balanced Fund, a
combination equity/fixed income fund and
Janus Short-Term Bond Fund, a short-term
income fund.
Janus has expanded its assets under
management by marketing advisory
services directly to pension plan
sponsors, insurance, banking and
brokerage firms for their proprietary
investment products. These relationships
generated approximately $920 million and
$340 million in new assets in 1993 and
1992, respectively.
Janus revenues and operating income
increases are a direct result of
increases in assets under management and
Janus processing services. Assets under
management and shareholder accounts have
grown in recent years from a combination
of new money investments or fund sales
and market appreciation. Fund sales have
risen in response to marketing efforts,
favorable fund performance and the
current popularity of no-load mutual
funds. Market appreciation has resulted
from increases in stock investment
values. However, a decline in the stock
and bond markets and/or an increase in
the rate of return of alternative
investments could negatively impact
Janus revenues and operating income. In
addition, the mutual fund market, in
general, faces increasing competition as
the number of mutual funds continues to
increase, marketing and distribution
channels become more creative and
complex, and investors place greater
emphasis on published fund
recommendations and investment category
rankings. These factors could also
affect Janus and negatively impact
revenues and operating income.
Eliminations, Corporate & Other. The
"Eliminations, Corporate and Other"
consists of unallocated holding company
operating expenses, intercompany
eliminations, and miscellaneous other
investment activities. Modest
fluctuations of these unallocated
expenses have occurred from 1991 to
1993.
Unconsolidated Affiliates. Earnings from
Unconsolidated Affiliates consist
principally of DST's equity in the
earnings of Investors Fiduciary Trust
Company ("IFTC", a 50% owned affiliate),
Boston Financial Data Services, Inc.
("BFDS," a 50% owned affiliate), The
Continuum Company, Inc. ("Continuum," a
29% owned affiliate), Midland Data
Systems, Inc., and Midland Loan Services
L.P. (collectively "Midland," 45-50%
owned affiliates) and Argus Health
Systems, Inc., ("Argus," a 50% owned
affiliate).
IFTC experienced substantial growth in
assets under custody ($93 billion - 1991
to $125 billion - 1993). DST's equity in
IFTC earnings was $6.0, $4.8 and $4.8
million from 1991 to 1993, respectively.
IFTC earnings are influenced by mutual
fund industry growth and interest rate
fluctuations. IFTC earnings grew
steadily from 1989-1991; however, in
1992, IFTC earnings declined even though
assets under custody continued to grow.
The 1992 earnings decline resulted from
interest rate fluctuations and losses on
certain foreign currency investments. At
December 31, 1992, IFTC had liquidated
its portfolio regarding the foreign
currency investments. 1993 net income
was essentially unchanged when compared
to 1992. While IFTC assets under custody
grew, results were reduced by a change
in the fiduciary fee arrangement between
IFTC and its parent companies and lower
investment earnings. Excluding the
change in fiduciary fees, IFTC results
were improved over 1992.
During 1991, IFTC increased its
ownership interest in United Missouri
Bank ("UMB") to approximately 5%. IFTC,
which initiated its investment position
in 1987, uses UMB's
[Page 39]<PAGE>
<PAGE>
correspondent banking and securities
processing facilities in support of
IFTC's custody, portfolio accounting,
trustee and shareowner services to the
mutual fund industry. IFTC continues to
own approximately 5% of UMB.
BFDS provides full service transfer
agency functions for open and closed end
mutual funds and corporations utilizing
DST's proprietary systems. In addition,
it performs remittance processing
functions. In 1993, BFDS contributed
$2.1 million in earnings to DST through
increases in mutual fund and corporate
shareowner accounts processed, efficient
operating practices and expanded
services.
As discussed earlier, Continuum became a
DST equity affiliate when DST exchanged
its interest in Vantage for an equity
interest in Continuum. Continuum
contributed positively to DST's 1993
earnings in unconsolidated affiliates
since completion of the merger
transaction. Management expects that
Continuum will provide significant
increases in equity earnings during
1994. Midland has been awarded contracts
with the Resolution Trust Corporation
("RTC") for operation of an Asset
Management System and a Control Totals
Module System for use by the RTC.
Midland also provides commercial loan
processing services, whose volumes have
increased as commercial loans serviced
have grown (none in 1990 to 12,000 in
1993). Midland contributions to
unconsolidated affiliates' earnings
declined significantly in 1993 from
1992. This decline in earnings stems
from a continuing 1993 trend of lower
margins on loan securitizations and
delays on the receipt of certain loan
processing work for the RTC. DST's
combined equity in Midland earnings was
$.8, $4.3 and $.9 million in 1991-1993,
respectively. Management believes
opportunities exist in Midland's
business lines and is focusing attention
on the expansion of Midland's loan
services capabilities to the private
sector as a complement to loan
processing work for the RTC.
Argus, which provides insurance
processing services to the health care
industry through a pharmaceutical claims
processing system, also experienced
volume and income growth in 1993.
Pharmacy claims processed have grown
steadily (31 million claims in 1991 to
78 million claims in 1993). Increased
claims volume lead to income growth;
DST's equity in Argus earnings was
$1.2, $1.7 and $2.3 million in
1991-1993, respectively.
Interest Expense. Interest expense
amounts increased significantly in 1993
compared to 1991-1992 levels. Interest
expense rose to $51.2 million in 1993
from $33.1 and $32.1 million in 1992 and
1991, respectively. This rise in
interest expense is primarily
attributable to borrowings required to
finance the MidSouth acquisition, but
somewhat offset by the refinancing of
debt at subsidiary levels, including
MidSouth, with more favorable borrowing
rates. Additional borrowings in 1993
where primarily $200 million in public
debt offerings and $230 million from the
Company's revolving credit agreement.
Interest expense in 1992 increased from
proceeds of the Company's $200 million
Note and Debenture offer somewhat offset
by a decline in short-term interest
rates, redemption of the 12% Debentures
and repayment of working capital credit
lines. 1991 interest expense increased
over 1990 primarily as a result of
additional borrowings on the Company's
$100 million credit agreement, and
purchase of 24 new SD-60 locomotives for
$32.2 million, offset somewhat by a
decline in short-term interest rates
during 1991 and redemption of $58
million of the Company's 12% Debentures
in the fourth quarter of 1991.
LIQUIDITY
Operating Cash Flow. The Company's cash
flow from operations has historically
been positive, and traditionally
sufficient to fund operations, KCSR
roadway capital improvements, DST
systems development and operating
capacity costs, and debt service.
External sources of cash, principally
negotiated bank debt, public debt and
sale of investments, have historically
been used to fund acquisitions, new
ventures, investments, equipment
additions and Company stock purchases.
The following table summarizes operating
cash flow information (in millions):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Net income $ 90.5 $ 63.8 $41.9
Depreciation and
amortization 97.2 74.2 59.3
Change in working
capital items (37.7) (34.8) 5.4
Deferred income
taxes 29.6 2.6 4.8
Other 9.6 17.1
Net operating
cash flow $189.2 $122.9 $111.4
</TABLE>
[Page 40]
<PAGE>
1989-1990 cash flows fluctuated from the
disposition of non-core businesses and
non-recurring Transportation Services
transactions. However, cash flows have
risen steadily in each year from 1991 to
1993. 1993 operating cash flows
increased 54% from 1992 to $189.2
million. This increase primarily related
to higher net income, increased non-cash
depreciation and amortization, (MidSouth
and DST acquisitions along with KCSR
road property additions), and increased
deferred income taxes. 1992 operating
cash flows of $122.9 million increased
10% over 1991 from increased net income,
higher depreciation and amortization
primarily related to DST equipment
acquisitions, increases in non-cash
expense accruals but offset by changes
in working capital items, primarily
increased accounts receivable on higher
revenues. 1991 cash flows from
operations increased significantly from
1990 related to reduced cash income tax
payments, deferred income tax timing
items, increased depreciation on KCSR
locomotive purchases, increased
intangible amortization on DST
acquisitions, and changes in working
capital items. The increased operating
cash flows, in 1991 compared to 1990,
also resulted from changes in working
capital items related to increases in
accounts payable and other accrued
liabilities, principally at DST and
Janus, somewhat offset by increases in
accounts receivable at DST. These
fluctuations were primarily caused by
new business line growth, increased
revenues in 1991 compared to 1990 and
timing of payments to vendors.
Net Cash Flow from Operations as
Compared to Net Income (MDA CHART #7)
Financing and Investing Cash Flows.
These cash flows include: (i) new
financings of $100, $283 and $447
million in 1991-1993, respectively; (ii)
repayment of indebtedness in the amounts
of $172, $215 and $231 million in
1991-1993, respectively, and (iii) cash
dividends of $12 million in 1991, and
$13 million each in 1992 and 1993.
Proceeds from issuance of debt in 1993
were used for the MidSouth acquisition
($214 million), Continuum stock
purchases ($20 million), refinancing of
MidSouth indebtedness ($129 million),
and subsidiary refinancing and working
capital ($84 million).
Proceeds from issuance of debt in 1992
were used for operating cash
requirements ($42 million), repayment of
bank credit lines ($90 million),
repurchase of KCSI capital stock ($31
million), MidSouth Common stock
investment ($26 million), subsidiary
indebtedness financing ($65 million),
operating growth and business expansion
at DST ($29 million).
Proceeds from issuance of long-term debt
in 1991 were used for operating cash
requirements ($41 million), business
expansion, acquisition and operating
growth at DST ($22 million) and Southern
Leasing Corporation growth ($37
million).
Repayment of indebtedness includes
scheduled maturities, refinancings and,
in 1991 and 1992, early redemption of
$58 million and $4.7 million
respectively, of the Company's 12%
Debentures.
CAPITAL STRUCTURE
Capital Requirements. The Company has
traditionally funded capital
expenditures in Transportation Services
using Equipment Trust Certificates for
major purchases of Railway locomotive
and rolling stock, and intermediate bank
term loans for other equipment, and DST
and Janus operations. Conversely,
capital improvements for roadway track
structure have historically been funded
with cash flow from operations. The
MidSouth acquisition will require the
Company to complete a capital
improvement program for MidSouth
roadbed, locomotives and facilities.
This program will upgrade and expand
MidSouth's track to handle greater
traffic levels at higher train speeds
and will be completed over the next five
year period with a large majority of
these upgrades completed during the next
two years. The Company currently
anticipates the cost of this five year
capital program will be approximately
$150 million, 50% of which was planned
by MidSouth management prior to the
acquisition. Subsequent to completion
of the
[Page 41]<PAGE>
MidSouth acquisition and debt
refinancing, the Company funded
MidSouth capital requirements with
historical funding sources and intends
to continue to do so in the future.
These same sources were used in funding
1993 capital programs ($182 million,
excluding the MidSouth acquisition
assets) and are expected to be used in
funding 1994 capital programs, currently
estimated at $255 million.
Funding requirements for the KCSR
long-term roadway improvement program,
expected to be completed in 1995, will
use significant portions of KCSR's
operating cash flow. KCSR purchased 24
new SD-60 locomotives during 1991 for
$32 million, which were financed through
issuance of privately placed Equipment
Trust Certificates. Arrangements are
currently in place to acquire 12
locomotive units (approximately $5
million) scheduled for early 1994
delivery and will be funded using
historical financing sources. DST
capacity additions were added through
master lease agreements during 1991 in
order to meet additional processing
capacity requirements. In 1993 and 1992,
DST purchased data processing equipment
in the amount of $26 and $27 million,
respectively, through bank term
financing. Additionally, in 1993, DST
entered into a sale/leaseback
transaction of certain mainframe
computer equipment in the amount of
$16.6 million. Should DST's processing
volumes continue the growth experienced
in the past few years, a physical
expansion of DST's Winchester Data
Center and acquisition of additional
data processing equipment will be
necessary to accommodate this growth.
Southern Leasing Corporation ("SLC")
will fund growth in its portfolio
through SLC credit lines and Company
financing arrangements. Janus' growth
does not require significant capital
requirements and is typically funded
with existing cash flows.
Debt to Debt + Equity Ratio (MDA CHART
#8)
Capital. Debt as a percent of total debt
plus equity ("debt ratio") increased
from 47% at December 31, 1991 to 49% at
December 31, 1992 and to 60% at
December 31, 1993. During 1991, the debt
ratio declined from 1990, principally
from redemption of the Company's 12%
Debentures and increases in
stockholders' equity. During 1992, debt
increased ($200 million Note and
Debenture Offer), but was partially
offset by stockholders' equity
increases. The MidSouth acquisition,
completed in 1993, added significant
amounts of new indebtedness to the
Company's balance sheet and raised the
relative debt ratios above management's
established goals. These higher debt
amounts were expected as the Company
fully absorbs MidSouth operations.
Management intends to reduce the
relative debt ratios in future years
through profitable operations, which
generate positive cash flows for debt
retirement and increases in total net
worth.
Components of capital are shown as
follows
(in millions):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Current debt $ 63.5 $ 62.0 $ 43.7
Long-term debt 776.2 387.0 317.1
Total debt 839.7 449.0 360.8
Stockholders'
equity 562.7 462.4 411.8
Total debt
plus equity $ 1,402.4 $911.4 $772.6
Debt as a percent of
total debt plus
equity 60% 49% 47%
</TABLE>
In 1993, 1992 and 1991, the Company
repurchased $9.5, $30.9 and $6.6
million, respectively, of its Capital
stock in accordance with the stock
repurchase and stock option plans
approved by the Company's Board of
Directors.
Minority Purchase Agreements. Agreements
between KCSI and certain Janus minority
owners contain, among other provisions,
mandatory stock purchase provisions
whereby under certain circumstances,
KCSI would be required to purchase the
minority interest of Janus. If such
provisions became effective as of
December 31, 1993, KCSI would be
required to purchase the respective
minority interest for approximately $160
million; the purchase price
determinations are based on a multiple
of earnings. In the event such
provisions became effective, KCSI would
be required to meet such commitments.
Overall Liquidity. In 1991-1993, the
Company continued to grow and strengthen
its relative position in the
Transportation Services, Information &
Transaction Processing and Financial
Asset Management businesses. The Company
believes it has adequate liquid
resources, which include sufficient
lines of credit and businesses which are
positive cash flow generators to meet
future operating, capital and debt
service requirements.
[Page 42]<PAGE>
<PAGE>
OTHER
Inflation. Inflation has not had a
significant impact on the Company's
operations in the past three years.
Generally accepted accounting principles
require the use of historical costs.
Replacement cost and related
depreciation expense, on a replacement
cost basis, of the Company's property
would be substantially higher than the
historical costs reported. The increase
in expenses from these fixed costs,
coupled with variable cost increases due
to significant inflation, would be
difficult to recover through price
increases given the competitive
environments of the Company's three
principal subsidiaries, KCSR, DST and
Janus.
SWEPCO Litigation. As was previously
reported, KCSR is a defendant in a
lawsuit filed in the District Court of
Bowie County, Texas by Southwestern
Electric Power Company ("SWEPCO").
SWEPCO has alleged that KCSR is required
to reduce SWEPCO's coal transportation
rate due to changed circumstances that
allegedly create a "gross inequity"
under the provisions of the existing
coal transportation contract among
SWEPCO, KCSR and the Burlington-Northern
Railroad. Although the suit is pending,
KCSR and SWEPCO are negotiating for an
agreement to settle the major issues
which are the subject of this
litigation. Management is confident that
the matter will be concluded without
material adverse effect on the financial
condition or future results of
operations of the Company.
Environmental Matters. Also previously
reported was the naming of KCSR as a
"potentially responsible party" by the
Louisiana Department of Environmental
Quality in a state environmental
proceeding involving a location near
Bossier City, Louisiana, which was the
site of a wood preservative treatment
plant (Lincoln Creosoting). KCSR is a
former owner of part of the land in
question. This matter was the subject of
a trial in the United States District
Court in Shreveport, Louisiana which was
concluded in July of 1993. The Court
found that Joslyn Manufacturing Company,
an operator of the plant, is required to
indemnify KCSR for damages arising out
of plant operations. (KCSR's potential
liability is as a property owner rather
than as a generator or transporter of
contaminants.) The case has been
appealed to the United States Court of
Appeals for the Fifth Circuit.
On January 18, 1994, the Environmental
Protection Agency ("EPA") published a
list of potential sites that may be
placed on the Federal Comprehensive
Environmental Response, Compensation &
Liability Act, ("CERCLA", also known as
the superfund law), national priority
list. The Lincoln Creosoting site was
included. Since major remedial work has
been performed at this site by Joslyn
and KCSR has been held by the Federal
Court to be entitled to indemnity for
such costs, it would appear that KCSR
should not incur significant remedial
liability. At this time, it is not
possible to meaningfully evaluate the
potential consequences of remediation at
the site, since the EPA has made no
announcement other than listing of the
Lincoln Creosoting site for "potential"
inclusion on the national list.
Continuing Management Focus On Core
Business. Pursuant to the Company's
strategic plans, KCSI management
continued its focus on the Company's
core businesses of Transportation
Services, Information & Transaction
Processing, and Financial Asset
Management during 1993. This continuing
focus was evidenced by strategic
decisions intended to exploit the
strength of the Company's business lines
and capabilities, provide for future
growth opportunities and to achieve the
Company's strategic financial
objectives. 1991, 1992, 1993 and future
years have been and will be affected by
the following:
-The strategies developed by KCSI
management are to:
- - Drive our strongest businesses.
- - Capitalize on advantages of location
and technology leadership.
- - Leverage earnings with productivity
gains for ourselves and our customers.
- - Tie new directions to present market
and technical strengths.
- - In 1991, KCSI purchased the facility
improvements of Pabtex, Inc., a
petroleum coke and coal bulk export
handling facility located in Port
Arthur, Texas with deep water access to
the Gulf of Mexico. The purchase of this
facility will allow KCSR opportunities
for future expansion of the petroleum
coke and coal export business.
- -In 1992, the Company purchased 530
acres of land adjacent to the Company's
Pabtex coal and petroleum coke storage,
barge and ship loading facility in Port
Arthur, Texas. The 530 acres includes
4,000 linear feet of deep water frontage
on the Sabine-Neches Waterway, which has
direct access to the Gulf of Mexico via
the Intercoastal Waterway. This
acquisition increases the Transportation
Service's deep water access in the Port
Arthur, Texas area and will permit a
[Page 43]
<PAGE>
doubling of capacity of the Pabtex coal
and coke facility and development of
additional port operations in KCSR's
service area.
The Company owns 1,025 acres of property
located on the waterfront in the Port
Arthur, Texas area, which includes
22,000 linear feet of deep water
frontage and three docks. Port Arthur is
an uncongested port with direct access
to the Gulf of Mexico. Approximately 75%
of this property is available for
development.
- - The Transportation Services management
team, which was restructured in 1991, is
committed to growth in its service area
and intends to expand through short-line
rail acquisitions and strategic joint
ventures. This commitment is evidenced
by the following acquisition activity
during 1992 and 1993:
- - The June 1993 completion of the
acquisition of MidSouth Corporation, an
1,100 mile regional railroad company,
previously discussed in this
management's discussion and analysis
section. The Company has historically
been a North/South railroad. This
acquisition provides the Company an
East/West rail line, which presents the
opportunity to be a significant
competitor in the intermodal
transportation market.
- - In May 1992, the KCSR signed an
agreement with the Santa Fe Railway to
purchase portions of its rail line in
the Dallas, Texas area. The sale
consists of approximately 90 miles of
track and an 80 acre piggyback
intermodal facility. The agreement is
being implemented in phases over a two
year period. Phase I of this agreement
was completed in late 1993. Phase II is
anticipated to be completed in second
quarter 1994. The agreement will gain
KCSR direct access to the Dallas/Ft.
Worth markets for the first time in the
Company's history.
- - In April 1992, KCSR signed a letter of
intent for the purchase of all of the
capital stock of the Graysonia,
Nashville & Ashdown Railway ("GNA") from
Holnam, Inc. The GNA, which was
wholly-owned by Holnam, connects with
KCSR at Ashdown, Arkansas and extends 32
miles east. The purchase price also
includes industrial real estate.
Acquisition of the GNA received ICC
approval and was merged into KCSR in
June 1993.
These acquisitions fit within the
strategic business plan for extension of
KCSR rail property in increasing our
excellent traffic and industry base.
- - The recent formation, expansion, and
internal reorganization of OTI provides
a greater variety and number of products
which DST businesses can offer.
- -DST's strategic merger of Vantage with
Continuum, as discussed earlier, will
increase the opportunities in the
insurance industry in both domestic and
international markets.
- - In 1991, DST began evaluating the
feasibility of marketing its products
outside the United States and also
products that would serve foreign
markets in DST's product lines. DST
acquired a 50% interest in Talisman
Services during 1991. Talisman is a
European software company whose primary
product is a multi-currency financial
accounting package. In 1992, DST formed
DST Systems International B.V. as a
holding company for certain of its
non-U.S. operations and a marketing unit
for DST's software. Also in 1992, DST,
together with State Street Bank and
Clarke and Tilley, Ltd. (a United
Kingdom software firm), formed Clarke
and Tilley Data Services ("CTDS"). CTDS
is developing a unit trust accounting
system for the U.K. and Luxembourg
markets, combining DST workflow
management and image technology and
Clarke & Tilley unit trust software.
During 1993, DST completed the
acquisition of Clarke & Tilley, Ltd.,
(96% owned), which markets investment
management software primarily for use in
Europe and the Pacific Rim, and Corfax
Benefit Systems, Ltd., (100% owned), a
Canadian company, which processes
shareowner transactions for mutual funds
and pension accounts in Canada. These
strategic acquisitions provide DST with
future growth opportunities for
expansion of its products into
international markets, especially Europe
and Canada.
- - KCSI has been committed to the mutual
fund industry since 1962 and intends to
continue and expand that commitment in
seeking strong mutual fund growth
through Janus and growth of its mutual
fund servicing businesses. During 1993,
Janus introduced three new fund
products: Janus Mercury Fund, an equity
fund; Janus Federal Tax Exempt Fund, a
tax exempt income fund; and the Janus
Aspen Series, which are annuity
products. During 1992, Janus introduced
three new mutual funds: Janus Enterprise
Fund, an equity fund; Janus Balanced
Fund, a combination equity/fixed income
fund and Janus Short-Term Bond Fund, a
short-term income fund.
[Page 44]
<PAGE>
- - In 1992, KCSI purchased an 18% interest
in Berger Associates, Inc. ("Berger").
Berger provides investment management
services to the Berger One Hundred,
Berger One Hundred One and Berger Small
Company Growth mutual funds.
- - In January 1993, the Company's Board of
Directors authorized a 2-for-1 Common
stock split effected in the form of a
stock dividend as of March 17, 1993.
In January 1992, the Company's Board of
Directors authorized an increase in its
annual dividend with respect to the
Company's Common stock and also
authorized a 2-for-1 split effected in
the form of a stock dividend in the
Company's Common stock as of March 17,
1992.
- - KCSI management intends to apply cash
flows primarily as follows:
- - Strategic and operating needs of
Transportation Services, Information &
Transaction Processing and Financial
Asset Management businesses to the
enhancement of KCSI market leadership
positions.
- - Reduce debt.
- - Repurchase KCSI Common stock to the
extent
possible.
- - Improve the cash return to KCSI
stockholders.
The dividend will be reviewed annually
and adjustments considered that are
consistent with growth in real earnings
and prevailing business conditions.
Focus on the Company's core business
operations including the items mentioned
above are expected to present growth
opportunities in future years.
Strategic Study. The Company's Board of
Directors have recently undertaken a
comprehensive study, with the assistance
of outside consultants, of the strategic
options available to further increase
value to the Company's stockholders.
This study will include evaluation of a
wide range of alternatives, with the
objective of identifying opportunities
for reinvestment of earnings,
alternatives for financing of capital
requirements, and methods of increasing
the return on the Company's investment
in its various business segments. The
alternatives being studied range from
operational improvements to asset
redeployments.
[Page 45]
<PAGE>
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Millions, Except per Share Amounts
Years Ended December 31
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
OperationsRevenues $ 961.1 $741.4 $610.2
Costs and expenses 749.0 615.5 511.9
Operating income 212.1 125.9 98.3
Equity in net earnings of
unconsolidated affiliates
(Notes 4, 13) 14.1 11.1 7.7
Interest expense (51.2) (33.1) (32.1)
Pretax Pretax income 175.0 103.9 73.9
Income tax provision (Note 7) 69.0 35.2 26.0
Income before minority interest 106.0 68.7 47.9
Minority Minority interest in
consolidated earnings (Note 9) 9.0 4.9 2.2
Income before accounting changes
and extraordinary item 97.0 63.8 45.7
Accounting Cumulative effect of changes in accounting (6.5)
Changes for income taxes and postretirement benefits,
net of taxes (Notes 7, 10)
ExtraordinaryDebt retirement, net of taxes (Note 6) (3.8)
Item
Net income $90.5 $63.8 $41.9
Per Primary earnings per share (Note 1)
Share Before cumulative effect of accounting
Data changes and extraordinary item $2.16 $1.43 $1.08
Cumulative effect-accounting changes (.14)
Extraordinary item-debt retirement (.09)
Total $2.02 $1.43 $ .99
Weighted average primary Common
shares outstanding
(in thousands) 44,728 44,31 42,116
Dividends per share
Preferred $1.00 $1.00 $1.00
Common $ .30 $ .30 $ .27
See accompanying notes to consolidated financial statements.
</TABLE>
[Page 46]<PAGE>
CONSOLIDATED BALANCE SHEETS
Dollars in Millions at December 31
<TABLE>
<CAPTION>
1993 1992 1991
ASSETS
<S> <C> <C> <C>
Current Cash and equivalents $ 6.6 $ 15.4 $ 44.0
Assets Accounts receivable,
net (Note 5) 194.7 147.4 102.8
Inventories 48.3 26.7 29.6
Other current assets (Note 5) 86.1 56.9 56.0
Total 335.7 246.4 232.4
Investments Held for operating
purposes (Note 4) 174.5 155.8 114.7
Properties Cost 1,792.0 1,312.0 1,209.9
Accumulated depreciation
and amortization (599.4) (543.8) (543.7)
Net (Note 5) 1,192.6 768.2 666.2
Other Intangibles and other
assets (Notes 2, 5) 214.2 78.0 78.6
Total assets $ 1,917.0$1,248.4$1,091.9
LIABILITIES & STOCKHOLDERS EQUITY
Current Debt due within one
year (Note 6) $ 63.5 $ 62.0 $ 43.7
LiabilitiesAccounts and wages payable 70.9 55.3 37.8
Accrued liabilities (Note 5) 154.0 101.3 119.0
Total 288.4 218.6 200.5
Other Long-term debt (Note 6) 776.2 387.0 317.1
Liabilities Deferred income
taxes (Note 7) 184.7 101.4 98.8
Other deferred credits 99.1 77.9 62.9
Contingencies (Notes 6, 7, 9, 11, 12)
Total 1,060.0 566.3 478.8
Minority Consolidated subsidiaries
(Note 9) 5.9 1.1 .8
Interest
Stockholders $25 par, 4% noncumulative,
Preferred stock 6.1 6.3 6.9
Equity $1 par, Series B convertible,
Preferred stock (Note 8) 1.0
No par Common stock 30.9 30.0 30.3
Capital surplus 303.9 89.5 106.4
Retained earnings 439.0 361.4 310.6
Shares held in trust (Note 8) (200.0)
ESOP deferred compensation (18.2) (24.8) (42.4)
Net Worth Stockholders equity
(Notes 6, 8) 562.7 462.4 411.8
Total liabilities and
stockholders equity $ 1,917.0$1,248.4$1,091.9
</TABLE>
[Page 47]<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
Years Ended December 31
<TABLE>
<CAPTION>
1993 1992 1991
CASH FLOWS PROVIDED BY (USED FOR):
<S> <C> <C> <C>
Operating Net income $ 90.5 $63.8 $41.9
Activities Adjustments to net income:
Depreciation and amortization 97.2 74.2 59.3
Deferred income taxes 29.6 2.6 4.8
Equity in undistributed earnings(12.6) (8.6) (7.7)
Employee benefit expenses not
requiring operating cash 10.1 19.5 6.0
Changes in working capital items:
Accounts receivable (29.1) (40.6) (17.9)
Inventories (14.5) 3.0 (9.8)
Accounts payable 20.3 17.3 8.8
Accrued liabilities 12.1 (16.2) 16.0
Other working capital items, net(26.5) 1.7 8.3
Other, net 12.1 6.2 1.7
Net 189.2 122.9 111.4
Investing Property acquisitions (159.2) (154.9) (79.6)
Activities Proceeds from
disposal of property 14.6 12.6 9.7
Investments in affiliates (31.8) (16.6) (2.5)
Purchase of companies,
net of cash acquired (197.8) (28.5) (4.4)
Proceeds from disposal of
other investments 3.9 16.4 60.1
Other, net (24.4) (7.0) (2.2)
Net (394.7) (178.0) (18.9)
Financing Proceeds from issuance
of long-term debt 446.5 283.2 100.1
Activities Repayment of long-term debt (231.4) (214.6) (172.1)
Proceeds from stock plans 7.3 7.0 6.4
Stock repurchased (9.5) (30.9) (6.6)
Cash dividends paid (12.9) (13.0) (11.6)
Other, net (3.3) (5.2) 2.4
Net 196.7 26.5 (81.4)
Cash and Net increase (decrease) (8.8) (28.6) 11.1
EquivalentsAt beginning of year 15.4 44.0 32.9
At end of year (Note 3) $ 6.6 $ 15.4 $44.0
</TABLE>
[Page 48]<PAGE>
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS EQUITY
Dollars in Millions
Years Ended December 31
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Preferred $25 par, 4% noncumulative, 840,000 shares
Stock authorized, 649,736 shares issued
Beginning of year $ 6.3 $ 6.9 $ 6.9
Preferred stock repurchased (.2) (.6)
End of year 6.1 6.3 6.9
$1 par, 2,000,000 shares authorized, none issued
$1 par, Series A, 150,000 shares authorized, none issued
$1 par, Series B convertible, 1,000,000 shares authorized
and issued, $200 per share liquidation preference,
convertible to Common at a ratio of 4 to 1,
issued in 1993 1.0
Common No par, 100,000,000 shares authorized,
Stock 48,402,192 shares issued
Beginning of year 30.0 30.3 30.1
Options exercised and
stock subscribed .9 .8 .5
Common stock repurchased (1.1) (.3)
End of year 30.9 30.0 30.3
Capital Beginning of year 89.5 106.4 106.8
Surplus Options exercised and
stock subscribed 22.4 9.4 6.0
Stock repurchased (9.3) (26.3) (6.4)
Series B convertible
preferred stock issued 199.0
Other 2.3
End of year 303.9 89.5 106.4
Retained Beginning of year 361.4 310.6 280.3
Earnings Net income 90.5 63.8 41.9
Dividends
Preferred stock (.2) (.3) (.3)
Common stock (12.7) (12.7) (11.3)
End of year, including equity in unconsolidated
affiliates of $53.2;
$42.9; and $34.3 439.0 361.4 310.6
Shares HeldSeries B convertible
preferred stock (200.0)
In Trust
ESOP Beginning of year (24.8) (42.4) (48.4)
Deferred Contribution accruals 6.6 17.6 6.0
Compensation End of year (18.2) (24.8) (42.4)
Total Stockholders equity
(Notes 6, 8) $ 562.7 $462.4 $ 411.8
Shares Preferred (in thousands) 243 252 277
Outstanding Common (in thousands) 42,798 41,616 20,984
</TABLE>
[Page 49]<PAGE>
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc.
("Company" or "KCSI") is a diversified
holding company, which comprises
businesses engaged in Transportation
Services, Information & Transaction
Processing, and Financial Asset
Management. Note 13 further describes
the operations of the Company.
The accounting and financial reporting
policies of the Company conform with
generally accepted accounting
principles. Use of the term "Company" as
described in this financial section
means Kansas City Southern Industries,
Inc. as a holding company and all of its
consolidated subsidiary companies.
Significant accounting and reporting
policies are described below.
Principles of Consolidation. The
consolidated financial statements
include all majority owned subsidiaries.
All significant intercompany accounts
and transactions have been eliminated.
The equity method of accounting is used
for all entities in which the Company or
its subsidiaries have significant
influence but not more than 50% voting
control interest; the cost method of
accounting is generally used for
investments of less than 20% voting
control interest.
Cash Equivalents. Short-term liquid
investments with a maturity of generally
three months or less are considered cash
equivalents. Carrying value approximates
market value due to the short-term
nature of these investments.
Inventories. Inventories held for resale
are valued at the lower of average cost
or market; materials and supplies
inventories for transportation
operations are valued at average cost.
Properties and Depreciation. Properties
are stated at cost. Additions and
renewals constituting a unit of property
are capitalized and all properties are
depreciated over the estimated remaining
life of such assets. Ordinary
maintenance and repairs are charged to
expense as incurred.
The cost of transportation equipment and
road property normally retired, less
salvage, is charged to accumulated
depreciation. Conversely, the cost of
industrial and rental property retired,
and the cost of transportation property
abnormally retired, together with
accumulated depreciation thereon, are
eliminated from the property accounts
and the related gains or losses are
reflected in earnings.
Depreciation for transportation
operations is computed using composite
straight-line rates for financial
statement purposes. The Interstate
Commerce Commission ("ICC") approves the
depreciation rates used by Kansas City
Southern Railway ("KCSR"). KCSR
evaluates depreciation rates for
properties and equipment and implements
ICC approved rates. The revised rates
did not and will not have a material
effect on operating results. Unit
depreciation methods, employing both
accelerated and straight-line rates, are
employed in other business segments.
Accelerated depreciation is used for
income tax purposes. The ranges of
annual depreciation rates for financial
statement purposes are:
Transportation
Road and structures 1%-19%
Rolling stock & equipment 1%-47%
Other equipment 2%- 6%
Industrial and rental property 2%-25%
Capitalized leases 5%-17%
The Company periodically evaluates the
recoverability of its operating
properties. If it is determined that the
carrying value of properties exceeds the
discounted value of future estimated
cash flows over the remaining productive
lives of the assets, such excess is
charged to earnings.
Software Development. The Company's
Information & Transaction Processing
subsidiary, DST Systems, Inc., ("DST"),
expenses as incurred development and
maintenance expenditures for its
proprietary software.
Intangibles. Intangibles principally
represent the excess of cost over the
fair value of net underlying assets of
acquired companies using purchase
accounting and are amortized using the
straight-line method over periods
ranging from 5-40 years.
Income Taxes. Deferred income tax
effects of transactions reported in
different periods for financial
reporting and income tax return purposes
are recorded by the liability method.
This method gives consideration to the
future tax consequences of the deferred
income tax items and immediately
recognizes changes in income tax laws
upon enactment. The income statement
effect is derived from changes in
deferred income taxes on the balance
sheet.
Historically, provision has not been
made for possible deferred tax
liabilities for unremitted earnings of
corporate unconsolidated affiliates for
which the Company's interest is
accounted for under the equity method,
as those earnings have been and are
expected to continue to be reinvested.
[Page 50]<PAGE>
Beginning in 1993, on a prospective
basis, deferred tax liabilities are
provided on the portion of unremitted
earnings from such affiliates which
would not qualify for dividend exclusion
had the earnings been distributed. The
cumulative amount of unremitted earnings
through December 31, 1993 was $59.1
million. Tax expense, should these
earnings be remitted to the Company in
the form of dividends, would amount to
$4.1 million at currently enacted tax
rates. Deferred taxes actually provided
through December 31, 1993 were $.8
million.
Treasury Stock. The excess of par over
cost of the Preferred shares held in
Treasury is credited to capital surplus.
Common shares held in Treasury are
accounted for as if they were retired
and the excess of cost over the stated
amount of such shares is charged to
capital surplus.
Stock Plans. Proceeds received from the
exercise of stock options or
subscriptions are credited to the
appropriate capital accounts in the year
they are exercised.
The Leveraged Employee Stock Ownership
Plans' ("ESOP") loan principal payments
are accounted for as employee benefit
expense, interest payments are recorded
as interest expense, and quarterly
dividends paid from retained earnings on
the ESOP stock are used to partially
service the ESOP loan. Because the ESOP
loan is guaranteed by KCSI, the
borrowings are reported as long-term
debt and corresponding amounts,
representing "ESOP deferred
compensation", are reduced as the
related compensation expense is
recognized by the Company.
Earnings per Share. On January 28, 1993,
the Company authorized a 2-for-1 stock
split effected in the form of a stock
dividend paid March 17, 1993.
On January 31, 1992, the Company
authorized a 2-for-1 stock split
effected in the form of a stock dividend
paid March 17, 1992. Appropriate share
and per share data have been restated to
reflect both of these stock splits.
The Company uses the Primary method for
computing Earnings Per Share. The
difference between the Primary and
Fully-Diluted methods is not material.
Note 2. Mergers and Acquisitions
The Company completed the acquisition of
MidSouth Corporation ("MidSouth") on
June 10, 1993 pursuant to a definitive
merger agreement. The transaction was
approved by both Boards of Directors,
MidSouth shareholders and the Interstate
Commerce Commission. The merger
agreement provided that holders of
MidSouth common stock receive $20.50 per
share in cash. The purchase price for
the acquisition of the MidSouth common
stock aggregated approximately $213.5
million paid in cash by KCSI to holders
of MidSouth's common stock and in
connection with the exercise of certain
options held by MidSouth employees and
others. Liabilities were assumed in the
amount of $306.9 million.
The MidSouth transaction, which was
accounted for as a purchase, represents
a significant transaction for the
Company. Results of operations of the
Company for the year ended December 31,
1993 include the operations of MidSouth
as a consolidated subsidiary effective
with the closing of the transaction.
Adjustments were recorded to appropriate
asset and liability balances based upon
the fair value of such assets and
liabilities. Based upon these
adjustments, the total purchase price
exceeded the fair value of the
underlying net assets by a total of
approximately $98.3 million and is being
amortized over a period of 40 years.
Additional assets are being depreciated
over lives ranging from 5-35 years.
Certain unaudited pro forma financial
information regarding results of
operations assuming the MidSouth
transaction had been completed on
January 1, 1993 and 1992, respectively,
follows (in millions, except per share
amounts):
<TABLE>
<CAPTION>
Years Ended December 31
1993 1992
<S> <C> <C>
Revenues $ 1,010.2 $ 856.1
Income before cumulative
effect of accounting
changes 98.5 67.9
Net income 93.4 67.9
Primary Earnings Per Share:
Before cumulative effect
of accounting changes $ 2.19 $ 1.53
After cumulative effect
of accounting changes 2.08 1.53
</TABLE>
During second quarter 1993, DST
completed the acquisitions of Clarke &
Tilley Ltd., (96.25% owned), a United
Kingdom company, which markets
investment management software primarily
for use in Europe and the Pacific
[Page 51]
<PAGE>
Rim; Corfax Benefit Systems, Ltd., (100%
owned), a Canadian company, which
processes shareowner transactions for
mutual funds and pension accounts in
Canada; and DBS Systems Corporation,
(60% owned), a United States company,
which is developing a software billing
system for the direct broadcast
satellite industry. During the third
quarter 1993, DST acquired Belvedere
Financial Systems, Inc., (100% owned),
which develops and markets portfolio
accounting and investment management
systems. Each of these transactions was
accounted for as a purchase. The total
purchase price exceeded the fair value
of the underlying net assets, and will
be amortized over a period of 7-20
years. Cash paid for these transactions
was approximately $15.3 million and
liabilities assumed were $10.3 million.
Effective September 30, 1993, DST
completed the merger of its 90.5% owned
subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of
The Continuum Company, Inc.
("Continuum"). DST and the minority
stockholder of Vantage received a total
of 4 million shares of Continuum stock
2,939,000 shares at closing and the
remainder after Continuum stockholder
approval. As a result of this
transaction and through additional
purchases of Continuum stock, DST owned
approximately 24% of the outstanding
common stock of Continuum at December
31, 1993. In 1994, DST purchased
additional Continuum shares through
privately negotiated transactions.
Accordingly, DST currently owns
approximately 29% of Continuum's
outstanding common stock. In the initial
exchange, DST exchanged Vantage stock
with a book value of approximately $17
million for Continuum stock with a then
current market value of approximately
$62 million. DST accounted for the
initial exchange as a non-cash,
non-taxable exchange in investment basis
of Vantage for an investment in
Continuum. Accordingly, no gain
recognition was associated with the
transaction.
Continuum is a publicly traded
international consulting and computer
services firm based in Austin, Texas,
which primarily serves the needs of
life, and property and casualty
insurance companies for computer
software and services.
During 1991, DST purchased all of the
capital stock of Mail Processing
Systems, Inc. for $7.1 million. The
purchase price was structured in the
form of $2.2 million in cash and $4.9
million in short-term notes payable and
other liabilities in the amount of $4.9
million were assumed. The acquisition
was accounted for as a purchase.
Note 3. Supplemental Cash Flow
Disclosures
Supplemental Disclosures of Cash Flow
Information. (in millions):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Cash payments
Interest (net of
capitalized) $ 47.4 $ 34.4 $37.6
Income taxes 24.1 27.1 12.9
</TABLE>
Supplemental Schedule of Noncash
Investing and Financing Activities. As
described in greater detail in Note 6,
the Company issued $200 million in Notes
and Debentures in 1992, and $200 million
in Notes in 1993. As part of these
transactions, the Company incurred $3.2
million and $2.5 million, respectively,
in discount and underwriting fees which
were transferred directly
to the underwriter. The discount and
underwriting fees represent non-cash
amounts, which will be amortized over
the respective terms of the Notes and
Debentures.
In 1992 and 1993, DST acquired mainframe
computer equipment for its Winchester
Data Center in the amounts of $17 and
$21 million, respectively. This
equipment was financed through bank term
loans which were transferred directly
from the lender to the equipment
manufacturer and accordingly required no
direct outlay of cash.
In 1993, DST entered into a
sale/leaseback of certain mainframe
computer equipment. As part of this
transaction, the buyer assumed certain
debt obligations related to the computer
equipment in the amount of $16.6
million, which provided no cash flow to
DST.
In 1991, KCSR acquired locomotives which
were financed through issuance of
Equipment Trust Certificates ("ETCs") in
the amount of $32.2 million, the
proceeds of which were transferred
directly by the Trustee to the equipment
manufacturer. Accordingly, this
transaction required no direct cash
outlay by KCSR.
Property acquired under capital leases
was $1.3, $1.4, and $3.1 million for
1993, 1992 and 1991, respectively. Such
acquisitions require no direct outlay of
cash.
[Page 52]<PAGE>
Note 4. Investments
Investments held for operating purposes include investments in unconsolidated
affiliates as follows (in millions):
<TABLE>
<CAPTION>
Percentage Ownership Carrying Value
Company Name December 31, 1993 1993 1992 1991
<S> <C> <C> <C> <C>
Boston Financial Data Services, Inc. (i) 50% $ 11.4 $ 8.7 $ 8.6
Investors Fiduciary Trust Co. (i), (v) 50% 50.2 47.6 42.9
Argus Health Systems, Inc. (i) 50% 6.1 3.3 1.6
Midland (i) (iii) 45-50% 3.2 3.4 .7
The Continuum Company, Inc. (i), (vi) 24% 37.1
First of Michigan Capital Corp. (i) 21% 7.6 7.2 6.9
MidSouth Corporation (iv) 26.2
Berger Associates, Inc. 18% 1.2 1.2
Partnerships 1.5 2.3 5.8
Equipment Finance Receivables
(Southern Leasing Corp.) (ii) 42.8 33.1 34.9
Other 20.5 29.6 20.4
Market Valuation Allowances (7.1) (6.8) (7.1)
Total (vii) $174.5 $155.8 $ 114.7
</TABLE>
(i) owned by DST Systems, Inc. (wholly-owned subsidiary) or a subsidiary of DST
(ii) fair market value based upon rates currently offered was approximately
$43.6 million at December 31, 1993
(iii) Midland is comprised of Midland Data Systems, Inc. (50% owned) and
Midland Loan Services, L.P. (45% owned)
(iv)in 1993 the Company completed its purchase of MidSouth which is now
consolidated
(v) includes $2.1 million of unrealized appreciation on "available for sale"
securities
(vi)fair market value based upon a quoted share price was approximately $89
million at December 31, 1993
(vii) fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value
Transactions Between Unconsolidated
Affiliates. Boston Financial Data
Services, Inc. ("BFDS") is a corporate
joint venture of DST and State Street
Boston Corporation, the parent of State
Street Bank and Trust Company. BFDS
performs shareholder accounting
services for companies using State
Street Bank and Trust Company as their
transfer agent and DST's data processing
services, mutual fund recordkeeping and
shareholder accounting systems, and
securities transfer system.
Investors Fiduciary Trust Co. ("IFTC")
is a corporate joint venture of DST and
Kemper Financial Services, Inc. IFTC
provides transfer agent and custodial
services primarily to the mutual fund
industry and utilizes DST's portfolio
accounting, securities transfer, and
mutual fund systems. DST received
advance payments from IFTC for services
to be provided in the subsequent fiscal
year. At December 31, 1993, 1992 and
1991; these advance payments amounted to
$4, $3 and $8 million, respectively.
Argus Health Systems, Inc. ("Argus") is
a corporate joint venture of DST which
provides pharmaceutical claims
processing services for the health care
industry.
Argus uses DST's data processing
services. DST received cash advances
from Argus totalling $5 million as of
December 31, 1993.
Midland Data Systems, Inc. ("MDS") is a
corporate joint venture of DST, which
has been awarded contracts with the
Resolution Trust Corporation ("RTC") for
the operation (using DST's Winchester
Data Center) of an Asset Management
System and a Control Totals Module
System for use by the RTC. In 1992,
Midland Loan Services
L.P. ("MLS") was formed to provide
comprehensive commercial loan servicing
for assets, performing and
non-performing loans, and related asset
management services for governmental and
institutional clients. MDS is the
Corporate General Partner of MLS.
DST revenues associated with the above
unconsolidated affiliates were $74, $50
and $42 million for 1993-1991,
respectively. Accounts receivable
include amounts due from unconsolidated
affiliates of $16, $13, and $9 million
for 1993-1991, respectively, for
services provided by DST in the ordinary
course of business and payable at usual
trade terms.
[Page 53]<PAGE>
The Continuum Company, Inc.
("Continuum") became an equity affiliate
of DST during 1993 when DST exchanged
its interest in Vantage, as discussed in
Note 2. Subsequent to this transaction,
DST and Continuum reached an agreement
whereby DST will provide all of
Continuum's North American operations
data processing requirements through use
of DST's Winchester Data Center. During
1993, DST revenues associated with this
agreement were approximately $1 million.
Financial Information. Combined
financial information
of all unconsolidated affiliates,
principally DST related, which the
Company and its subsidiaries account for
on the equity method is as follows (in
millions):<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Investment in unconsolidated affiliates $ 126.3 $ 77.9 $ 67.8
Equity in net assets of unconsolidated
affiliates 117.3 69.8 60.4
Dividends and distributions received
from unconsolidated affiliates 1.5 2.5 .2
Financial condition:
Current assets $1,047.7 $ 826.4 $740.9
Non-current assets 150.1 69.6 42.4
Assets $1,197.8 $ 896.0 $783.3
Current liabilities $ 856.8 $ 693.6 $625.8
Non-current liabilities 122.9 56.1 34.3
Equity of stockholders and partners 218.1 146.3 123.2
Liabilities and equity $1,197.8 $ 896.0 $783.3
Operating results:
Revenues $ 383.8 $ 272.6 $255.8
Costs and expenses 354.1 246.8 239.4
Net income $ 29.7 $ 25.8 $ 16.4
</TABLE>
Other. Interest income on cash and
equivalents was $1.8, $4.6, and $5.9
million for 1993-1991, respectively.
MidSouth Corporation. At December 31,
1992, the Company had acquired
approximately 16% of MidSouth's Common
stock. In 1993, the Company completed
its acquisition of MidSouth (see Note
2).<PAGE>
<PAGE>
Note 5. Other Balance Sheet Captions
<TABLE>
Accounts Receivable.Accounts receivable include the following allowances
(in millions):
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Accounts receivable $ 199.0 $ 152.4 $ 107.3
Allowance for doubtful accounts (4.3) (5.0) (4.5)
Accounts receivable, net $ 194.7 $ 147.4 $ 102.8
Doubtful account expense $ 2.1 $ 1.6 $ 1.5
</TABLE>
<TABLE>
Other Current Assets.Other current assets include the following items
(in millions):
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Maturities of Equipment Finance Receivables
(Southern Leasing Corp.) $ 25.6 $ 22.9 $ 25.9
Deferred taxes 23.8 9.8 14.2
Marketable Investments (cost approximates market) 19.0 8.8
Other 17.7 15.4 15.9
Total $ 86.1 $ 56.9 $ 56.0
</TABLE>
[Page 54]<PAGE>
Properties. Properties and related accumulated depreciation and
amortization are summarized below (in millions):
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Properties, at cost
Transportation
Road properties $ 1,075.3 $ 684.0 $ 650.1
Equipment, including $12.9, $12.6 and
$30.7 financed under capital leases 355.6 338.4 340.0
Land and Facilities 67.2 59.0 51.8
DST, including $5.6, $3.9 and $3.8 equipment
financed under capital leases 262.8 208.1 155.6
Janus, including $1.6, $1.5 and $.1 equipment
financed under capital leases 21.7 12.8 2.8
Corporate and Other 9.4 9.7 9.6
Total $ 1,792.0 $ 1,312.0 $ 1,209.9
1993 1992 1991
Accumulated depreciation and amortization
Transportation
Road properties $ 264.2 $ 251.6 $ 244.0
Equipment, including $8.6, $8.1 and $25.5
for capital leases 174.8 168.0 200.6
Facilities 20.2 18.4 16.4
DST, including $3.7, $1.7 and $.2 for
equipment capital leases 128.5 98.9 78.4
Janus, including $.5, $.2 and $.1 for
equipment capital leases 7.2 3.0 .9
Corporate and Other 4.5 3.9 3.4
Total $ 599.4 $ 543.8 $ 543.7
Net Properties $ 1,192.6 $ 768.2 $ 666.2
Intangibles and Other Assets. Intangibles and other assets include the following
items (in millions):
1993 1992 1991
Intangibles $ 194.6 $ 74.8 $ 81.7
Accumulated amortization (31.3) (16.6) (11.9)
Net 163.3 58.2 69.8
Other assets 50.9 19.8 8.8
Total $ 214.2 $ 78.0 $ 78.6
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
1993 1992 1991
Prepaid freight charges due
other railroads $ 32.2 $ 27.4 $ 17.5
Current interest payable
on indebtedness 18.9 11.9 8.7
Other 102.9 62.0 92.8
Total $ 154.0 $ 101.3 $ 119.0
</TABLE>
[Page 55]<PAGE>
Note 6. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):
<TABLE>
<CAPTION>
1993 1992 1991
KCSI
<S> <C> <C> <C>
Competitive Advance & Revolving Credit
Facilities, with reducing commitments
through December 8, 1997 $ 231.0 $ 85.0
Rate: Below Prime
Notes and Debentures, due July 8, 1998
to July 1, 2022 400.0 $ 200.0 4.7
Unamortized discount (2.6) (1.6)
Rate: 5.75% to 8.8%
ESOP secured term loan, due serially to
February 28, 1998 22.8 26.5 29.9
Rate: 7.6%
Transportation Services
Equipment trust indebtedness, due serially to
February 1, 2006 67.8 80.8 95.2
Rate: 7.15% - 15.0%
Short-term renewable lease financing working
capital lines 32.6 29.0 45.8
Rate: Below prime - 6.95%
Subordinated and senior notes, and industrial
revenue bonds, due
June 1, 1994 to May 1, 2004 15.3 20.4 23.4
Rate: 7.13% - 12.95%
DST
ESOP secured term loan, repaid in 1993 3.9 18.3
Secured and unsecured term loans, promissory
and mortgage notes, various
maturities to June 2005 58.2 68.7 35.8
Rate: 4.55% to 10.5%
Other
Miscellaneous subsidiary obligations, due
June 1994 to June 1998 14.6 21.3 22.7
Rate: Prime - 23.2%
Total 839.7 449.0 360.8
Less debt due within one year 63.5 62.0 43.7
Long-term debt $ 776.2 $387.0 $317.1
</TABLE>
KCSI $250 Million Credit Agreement. On
December 8, 1992, the Company
established a credit agreement in the
amount of $250 million. A commitment fee
of 1/4% per annum is required on the
unused portion. This agreement replaced
the Company's then existing $100 million
credit agreement, which had been in
place since 1989. The revolving credit
commitment reduces to $188 million on
June 8, 1996; $125 million on December
8, 1996; $63 million on June 8, 1997,
and final maturity is due December 8,
1997. Proceeds have been used, in part,
to fund acquisition of MidSouth
Corporation and refinance certain
MidSouth indebtedness and for general
corporate purposes.
Among other provisions, the agreement
limits subsidiary indebtedness, sale of
assets, coverage ratios and requires
minimum consolidated net worth of $375
million plus 50% of net income after
December 31, 1992.
Public Debt Transactions. On July 1,
1992, the Company issued $100 million
77/8% Notes due 2002 and $100 million
8.8% Debentures due 2022 under a $300
million debt securities registration
with the Securities and Exchange
Commission. The 77/8% Notes are not
redeemable prior to their maturity in
2002, the 8.8% Debentures are redeemable
on or after July 1, 2002 at a premium of
104.04%, which declines to par on or
after July 1, 2012. Proceeds from the
debt offer have been used to repay
borrowings under then existing revolving
credit agreements. The Company used the
remaining net proceeds for general
corporate purposes including debt
repayments, working capital, capital
expenditures, acquisition of or
investments in businesses and assets and
acquisition of the Company's capital
stock.
On March 3, 1993, the Company issued
$100 million of 65/8% Notes due 2005
under the remaining 1992 registration
with the Securities and Exchange
Commission. The notes are not redeemable
prior to maturity. Proceeds were used
for debt repayment by DST and Southern
Credit Corporation, working capital,
capital expenditures,
[Page 56]<PAGE>
acquisition of or investments in
businesses, and assets and acquisition
of the Company's capital stock.
On June 24, 1993, the Company issued
$100 million of 5.75% Notes due in 1998
under a $200 million 1993 debt
securities registration with the
Securities and Exchange Commission. The
Notes are not redeemable prior to
maturity. The net proceeds were used to
refinance certain MidSouth debt.
This debt was issued at a total discount
of $2.8 million which will be amortized
over the respective debt maturities on a
straight-line basis, which is not
materially different from the interest
method.
KCSI 12% Debentures. The Company
redeemed $58.5 million of its 12%
Debentures, originally issued in 1985,
in 1991 and redeemed the remaining $4.7
million on April 1, 1992 through a
combination of its right of optional
redemption and a tender offer.
The early redemption of these debentures
resulted in a 1991 extraordinary after
tax charge to earnings of $3.8 million
or 9 cents per Common share.
KCSI ESOP. In 1988, the Company
established a $39 million leveraged ESOP
(see Stockholders' Equity Note 8).
Related indebtedness is repayable over
ten years, and guaranteed by the
Company.
Among other provisions, the KCSI ESOP
loan agreement requires minimum
consolidated tangible net worth
(stockholders' equity plus deferred
income taxes less intangibles) of $250
million.
Railway Indebtedness. KCSR has purchased
rolling stock under conditional sales
agreements, equipment trust certificates
and capitalized lease obligations, which
equipment has been pledged as collateral
for the related indebtedness.
Credit Lines. Unused lines of credit at
December 31, 1993 follow (in millions):
<TABLE>
<CAPTION>
Commitment Lines of Credit
Fee Total Unused
<S> <C> <C> <C>
KCSI 1/4% $ 300.0 $69.0
DST Systems, Inc. None 17.0 15.5
Southern Credit
Corporation 3/8% 25.0 2.4
Total $342.0 $86.9
</TABLE>
Other Agreements, Provisions and
Restrictions.
As previously noted, the Company and
several of its consolidated subsidiaries
have debt agreements containing
restrictions on dividends, loans,
advances and transfers of assets to the
parent company, limits on guarantees and
leasing commitments, and maintenance of
minimum levels of working capital. At
December 31, 1993, the Company was in
compliance with provisions and
restrictions of these agreements.
Unrestricted retained earnings at
December 31, 1993 were $97.2 million.
Guarantees. The Company and its
subsidiaries are guarantors of $2.1
million principal indebtedness of
partnerships and other entities
involving the Company or its
subsidiaries. These guarantees represent
"off balance sheet" contingent
liabilities.
Leases and Debt Maturities. The Company
and its subsidiaries lease
transportation equipment, and office and
other operating facilities under various
capital and operating leases. Rental
expenses under operating leases were
$33, $25, and $17 million for the years
1993-1991, respectively.
Minimum annual payments and present
value thereof, under existing capital
leases, other debt maturities and
minimum annual rental commitments under
noncancellable operating leases are as
follows (in millions):
<PAGE>
<TABLE>
<CAPTION>
Capital Leases
Minimum Net
Lease Less Present Other
Operating
Payments Interest Value Debt Total Leases
<S> <C> <C> <C> <C> <C> <C>
1994 $ 3.9 $ .9 $ 3.0 $ 60.5 $ 63.5 $ 47.1
1995 2.2 .8 1.4 35.4 36.8 38.8
1996 1.9 .4 1.5 22.6 24.1 30.0
1997 1.1 .2 .9 10.9 11.8 19.4
1998 .6 .2 .4 110.7 111.1 10.4
Later years 2.5 .6 1.9 590.5 592.4 46.0
Total $12.2 $ 3.1 $ 9.1 $830.6 $839.7 $191.7
</TABLE>
Fair Value of Long-Term Debt. Based upon
the borrowing rates currently available
to the Company and its subsidiaries for
indebtedness with similar terms and
average maturities, the fair value of
long-term debt was approximately $903
million and $463 million at December 31,
1993 and 1992, respectively.
[Page 57]<PAGE>
<PAGE>
Note 7. Income Taxes
The Company adopted, effective January
1, 1993, Statement of Financial
Accounting Standards No. 109 ("SFAS
109"), "Accounting for Income Taxes."
SFAS 109 was issued in February 1992 as
an amendment to Statement of Financial
Accounting Standards No. 96, "Accounting
for Income Taxes," ("SFAS 96"). The
Company had previously adopted SFAS 96
effective January 1, 1988. The adoption
of SFAS 109 resulted in a $970,000
charge to earnings in the first quarter
of 1993.
Under the liability method specified by
SFAS 109, the deferred tax liability is
determined based on the difference
between the financial statement and tax
basis of assets and liabilities as
measured by the enacted tax rates which
will be in effect when these differences
reverse. Deferred tax expense is the
result of changes in the liability for
deferred taxes. The principal difference
between the Company's assets and
liabilities recorded for financial
statement and tax return purposes is
accumulated depreciation.
Tax Expense. Income tax expense
attributable to continuing operations,
consists of the following components (in
millions):<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Current
Federal $31.7 $25.4 $16.4
State and local 3.2 1.8 2.9
Total current 34.9 27.2 19.3
Deferred
Federal 24.5 6.9 6.2
Federal enacted
rate change 3.4
State and local 6.2 1.1 .5
Total deferred 34.1 8.0 6.7
Total income
tax expense $69.0 $35.2 $26.0
</TABLE>
Deferred Taxes. Deferred taxes are
recorded based upon differences between
the financial statement and
tax basis of assets and liabilities and
available tax credit carryovers.
Temporary differences which give rise to
a significant portion of deferred tax
expense (benefit) applicable to
continuing operations are as follows (in
millions):<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Depreciation $19.5 $9.0 $ 3.0
Deferred revenue (1.6) (.4) (2.0)
Deferred gain on asset dispositions 1.2 .3 .6
Alternative minimum tax carryover (.3) 1.4 .1
Other expenses for financial
reporting purposes not currently
deductible for tax purposes 9.0 (2.7) 4.3
Other, net .1 (.7) .2
Total $27.9 $6.9 $ 6.2
</TABLE> [Page 58]<PAGE>
The deferred tax liabilities and
deferred tax (assets) recorded on the
Consolidated Balance Sheets at
December 31, 1993 and January 1, 1993,
respectively, follow (in millions):<PAGE>
<TABLE>
<CAPTION>
December 31, 1993January 1, 1993
<S> <C> <C>
Liabilities:
Depreciation $242.5 $121.8
Assets:
NOL and AMT credit carryovers (23.2)
Book reserves not currently
deductible for tax (23.2) (17.7)
Deferred compensation and other
employee benefits (14.4) (5.1)
Deferred revenue (4.7) (2.7)
Vacation accrual (2.8) (2.1)
Other, net (4.6) (2.6)
Gross deferred tax
assets (72.9) (30.2)
Net deferred tax
liability $169.6 $ 91.6
</TABLE>
Management has determined, based upon
the Company's history of prior earnings
and its expectations for the future,
that taxable income of the Company will,
more likely than not, be sufficient to
recognize fully the above gross deferred
tax assets.
Tax Rates. Differences between the
Company's effective income tax rates
applicable to continuing operations and
the 35% and 34% U.S. federal income tax
statutory rates for 1993 and prior
years, respectively, are as follows (in
millions):<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Income tax expense using the
statutory rate in effect $61.2 $35.4 $25.1
Tax effect of:
Unremitted earnings of equity investees (3.7) (3.0) (2.6)
Cumulative effect of enacted 1% federal tax rate
increase on deferred accruals 3.4
Other, net (1.3) (.1) .1
Federal income tax expense 59.6 32.3 22.6
State and local income tax expense 9.4 2.9 3.4
Total $69.0 $35.2 $26.0
Effective tax rate 39.4% 33.9% 35.2%
</TABLE>
Tax Carryovers. At December 31, 1993,
the Company had $6.6 million of
alternative minimum tax credit
carryover. This credit can be carried
forward indefinitely and is available on
a "tax return basis" to reduce future
federal income taxes payable. The
MidSouth Corporation generated $3.3
million of the above alternative minimum
tax credit prior to its acquisition by
the Company.
The amount of federal net operating loss
carryover generated by the MidSouth
Corporation prior to its acquisition was
$55 million with expiration dates
beginning in the year 2001. The use of
preacquisition net operating losses and
tax credit carryovers is subject to
limitations imposed by the Internal
Revenue Code. The Company does not
anticipate that these limitations will
affect utilization of the carryovers
prior to their expiration.
Tax Examinations. Examinations of the
consolidated federal income tax returns
by the Internal Revenue Service ("IRS")
have been completed for the years
1984-1987 (and years 1980-1985 for a
former subsidiary)
<PAGE>
[Page 59]<PAGE>
and the IRS has proposed $19.1 million
in tax assessments for these years. In
addition, other taxing authorities have
also completed examinations principally
through 1988, and have proposed
additional tax assessments aggregating
$7.1 million, before benefit for federal
income tax deductions related thereto.
Since most of these asserted tax
deficiencies represent temporary
differences, subsequent payments of
taxes will not require additional
charges to income tax expense. In
addition, accruals have been made for
interest (net of tax benefit) for
estimated settlement of the proposed tax
assessments. Thus, management believes
that final settlement of these matters
will have no material effect on the
accompanying financial statements.
Note 8. Stockholders' Equity
Stock Option Plans. Employee Stock
Option Plans established in 1978, 1983
and 1987 provide for the granting of
options to purchase up to 2,800,000
(pre-splits) shares of the Company's
Common stock by officers and other
designated employees. In addition, the
Company established a 1991 plan which
authorized 2% of the outstanding shares
available for grant; the Board of
Directors amended the 1991 plan in
November 1991, to provide for the
granting of two million shares in lieu
of the 2% of outstanding shares. In
addition, the Company established a 1993
Directors' Stock Option Plan with a
maximum of 120,000 shares for grant.
Shares authorized for the 1991 Plan were
adjusted for the stock split to
4,000,000 and the Plan was amended to
increase the number of shares authorized
by 3,400,000 shares for a total of 7.4
million shares. Such options have been
granted at 100% of the average market
price of the Company's stock on the date
of grant and may not be exercised sooner
than one year, nor longer than ten years
following the date of the grant, except
that options outstanding for six months
or more, with limited rights, become
immediately exercisable upon certain
defined circumstances constituting a
change in control of the Company.
The Plans include provisions for stock
appreciation rights ("SARs") and limited
rights ("LRs"), but, in 1987,
substantially all outstanding SARs and
related options were exchanged for
"bonus" options and LRs. In addition,
special stock options, SARs and LRs,
exercisable only upon certain defined
circumstances constituting a change in
control of the Company, were granted to
certain officers and directors of the
Company. All outstanding options include
LRs. Relevant information is summarized
below:<PAGE>
<TABLE>
<CAPTION>
1993 1992 1991
<S> <C> <C> <C>
Stock Options:
Outstanding at January 1 5,527,648 2,341,934 1,410,696
Exercised (1,987,848) (796,360) (240,136)
Cancelled/Expired (4,000) (18,500) (133,593)
Granted 400,000 1,236,750 134,000
Effect of Stock Splits 2,763,824 1,170,967
Outstanding at December 31 3,935,800 5,527,648 2,341,934
Exercisable at December 31 2,851,400 3,567,248 1,370,484
Exercise Price, December 31:
for all outstanding options$8.7969 to $41.5625 $8.50 to $22.66 $17.00 to $27.50
for exercisable options $8.7969 to $22.6563 $8.50 to $13.06 $17.00 to $23.75
</TABLE>
Shares available for future grants at
December 31, 1993 aggregated 4,899,096.
Employee Stock Ownership Plan ("ESOP").
In 1987 and 1988, KCSI and DST
established leveraged ESOP plans, which
collectively purchased $69 million of
KCSI Common stock from Treasury at a
then current market price of $49 per
share. The indebtedness, which was
guaranteed by KCSI and DST, is repayable
over ten years.
During 1990, the KCSI and DST ESOP plans
were merged into one plan known as the
KCSI ESOP. This
[Page 60]<PAGE>
<PAGE>
merger did not change any substantial
terms, repayment provisions or
guarantees of the individual components
of indebtedness.
Employee benefit expense aggregated
$8.1, $18.1 and $6.6 million in
1993-1991, respectively, for the ESOP.
Interest incurred on the indebtedness
was $1.8, $2.8 and $3.5 million in
1993-1991, respectively. Dividends used
to reduce principal balances on the
indebtedness were $.8, $1.0 and $.6
million in 1993-1991, respectively.
Employee Plan Funding Trust. On October
1, 1993, KCSI transferred one million
shares of KCSI Series B Convertible
Preferred Stock (the "Series B Preferred
Stock") to the Kansas City Southern
Industries, Inc. Employee Plan Funding
Trust ("the Trust"), a grantor trust
established by KCSI. The purchase price
of the stock, based upon an independent
valuation, was $200 million, which the
Trust financed through KCSI. The
indebtedness of the Trust to KCSI is
repayable over 27 years with interest at
6% per year, with no principal payments
in the first three years. The Trust,
which is administered by an independent
bank trustee and consolidated into the
Company's financial statements, will
repay the indebtedness to KCSI utilizing
dividends and other investment income as
well as other cash obtained from KCSI.
As the debt is reduced, shares of the
Series B Preferred Stock, or shares of
Common stock acquired on conversion,
will be released and available for
distribution to various KCSI employee
benefit plans, including its ESOP, Stock
Option Plan and Stock Purchase Plans.
No principal payments have been made and
accordingly, no shares have been
released or are available for
distribution to these plans.
The Series B Preferred Stock, which has
a $10 per share (5%) annual dividend and
a $200 per share liquidation preference,
is convertible into Common stock at an
initial ratio of four shares of Common
stock for each share of Series B
Preferred Stock. The Series B Preferred
Stock is redeemable after 18 months at a
specified premium and under certain
other circumstances.
The Series B Preferred Stock can be held
only by the Trust or its beneficiaries,
the employee benefit plans of KCSI. The
full terms of the Series B Convertible
Preferred Stock are set forth in a
Certificate of Designations approved by
the Board of Directors and filed in
Delaware.
Treasury Stock. The Company issued
1,187,224, 1,020,514 and 347,378 shares
of Common stock from Treasury, in
1993-1991, respectively, to fund the
exercise of options and subscriptions
under various employee stock option and
purchase plans. Treasury stock
previously acquired had been accounted
for as if retired. The Company purchased
5,443, 1,575,410 and 247,476 shares in
1993-1991, respectively. In fourth
quarter 1992, the Company completed the
purchase of 1,110,560 shares of KCSI
Common stock from several Deramus family
trusts for approximately $22 million.
These purchases represent substantially
all the KCSI Common stock held by the
family. KCSI expects these shares to be
used primarily to fund obligations under
existing employee stock purchase, option
and other plans.
Stock Purchase Plan. The Plan,
established in 1977, provides to
substantially all full-time employees of
the Company, certain subsidiaries and
certain other affiliated entities, the
right to subscribe to an aggregate of
7.6 million shares of Common stock. The
purchase price for shares under any
stock offering is to be 85% of the
average market price on either the
exercise date or the offering date,
whichever is lower, but in no event less
than $.98 per share.
In December 1992, the Company completed
the seventh offering under the stock
purchase plan. The purchase price under
this offering at 85% of the average
market price on the offering date was
$18.75. Employees of the Company
subscribed to 247,254 shares under this
offering.
The Company completed the eighth
offering under the stock purchase plan
in December, 1993. The purchase price
under this offering at 85% of the
average market price on the offering
date was $38.20. Employees of the
Company subscribed to 220,576 shares
under this offering. At December 31,
1993, there were 4,026,111 shares
available for future offerings.
Restricted Stock. The Company issued
7,300 and 144,500 shares of restricted
stock, in 1993 and 1992, respectively,
to senior management executives of KCSI
and certain subsidiaries at then current
market prices ranging between $14.86 -
$41.5625 per share. These shares vest
ratably over a five year period.
[Page 61]<PAGE>
Note 9. Minority Interest
Purchase Agreements. Agreements between
KCSI and Janus minority owners, contain
among other provisions, mandatory stock
purchase provisions whereby under
certain circumstances, KCSI would be
required to purchase the minority
interest. If all such provisions became
effective as of December 31, 1993, KCSI
would be required to purchase the
minority interest for approximately $160
million; the purchase price
determination is based on a multiple of
earnings.
Note 10. Profit Sharing and Other
Postretirement Benefits
Profit Sharing. Qualified profit sharing
plans are maintained for most employees
not included in collective bargaining
agreements. Contributions for the
Company and its subsidiaries are made at
the discretion of the Boards of
Directors in amounts not to exceed the
maximum allowable for federal income tax
purposes. Profit sharing expense was
$4.6, $3.8, and $2.6 million in the
years 1993-1991, respectively.
Other Postretirement Benefits. The
Company adopted Statement of Financial
Accounting Standards No. 106 "Employers'
Accounting for Postretirement Benefits
Other Than Pensions", ("SFAS 106"),
effective January 1, 1993. The Company
and its Transportation subsidiaries
provide certain medical, life and other
postretirement benefits other than
pensions to its retirees. The medical
and life plans are available to
employees not covered under collective
bargaining arrangements, who have
attained age 60 and rendered ten years
of service. Individuals employed as of
December 31, 1992 were excluded from a
specific service requirement. The
medical plan is contributory and
provides benefits for retirees, their
covered dependents and beneficiaries.
Benefit expense begins to accrue at age
40. The medical plan was amended
effective January 1, 1993 to provide for
annual adjustment of retiree
contributions and also contains,
depending on the plan coverage selected,
certain deductibles, copayments,
coinsurance and coordination with
Medicare. The life insurance plan is
non-contributory and covers retirees
only. The Companys' policy, in most
cases, is to fund benefits payable under
these plans as the obligations become
due. However, certain plan assets do
exist with respect to life insurance
benefits.
The following table displays a
reconciliation of the plans' obligations
and assets at December 31 and January 1,
1993, (in millions):
<TABLE>
<CAPTION>
December 31,January 1,
1993 1993
<S> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 8.0 $ 7.7
Fully eligible active
plan participants .9 .7
Other active plan
participants 2.0 1.6
Plan assets (1.3) (1.3)
Accrued postretirement
benefit obligation $ 9.6 $ 8.7
Net periodic postretirement benefit cost
for 1993 included the following
components (in millions):
Service cost $ .2
Interest cost .6
Return on plan assets (.1)
Net periodic postretirement
benefit cost $ .7
</TABLE>
The entire accumulated postretirement
benefit obligation was charged to
earnings in first quarter 1993 in the
amount of $5.5 million, net of
applicable income taxes. The Companys'
health care costs are limited to the
increase in the Consumer Price Index
("CPI") with a maximum annual increase
of 5%. Accordingly, health care costs in
excess of the CPI limit will be borne by
the plan participants, and therefore
assumptions regarding health care cost
trend rates are not applicable.
[Page 62]<PAGE>
The assumed annual increase in the CPI
is 4% and 3% at January 1 and December
31, 1993, respectively. Life insurance
plan assets represent bank funds on
deposit, with an expected rate of return
of 6.5%. The discount rate assumed in
determining the accumulated
postretirement benefit obligation was 8%
and 7% at January 1 and December 31,
1993, respectively, and the assumed
salary increase was 5%. The adoption of
SFAS 106 is not expected to have a
material effect on future annual
expenses of the Company.
Prior to January 1, 1993, the Company
recognized the cost of these benefits on
a "pay as you go" basis. For 1992-1991,
the cost of these benefits totalled
$722,000 and $784,000, respectively.
Note 11. Litigation
SWEPCO Litigation. As was previously
reported, KCSR is a defendant in a
lawsuit filed in the District Court of
Bowie County, Texas by Southwestern
Electric Power Company ("SWEPCO").
SWEPCO has alleged that KCSR is required
to reduce SWEPCO's coal transportation
rate due to changed circumstances that
allegedly create a "gross inequity"
under the provisions of the existing
coal transportation contract among
SWEPCO, KCSR and the Burlington-Northern
Railroad. Although the suit is pending,
KCSR and SWEPCO are negotiating for an
agreement to settle the major issues
which are the subject of this
litigation. Management is confident that
the matter will be concluded without
material adverse effect on the financial
condition or future results of
operations of the Company. SWEPCO is the
largest single customer of KCSR.
Litigation Reserves. In the opinion of
management, claims or lawsuits
incidental to the business of the
Company and its subsidiaries have been
adequately provided for in the
consolidated financial statements.
Note 12. Control
Subsidiaries. The Company and certain of
its subsidiaries have entered into
agreements with joint venture partners
whereby, upon defined circumstances
constituting a change in control of the
Company, such joint venture partners
have the right to either purchase from
the Company or sell to the Company their
entire equity interest in such joint
ventures.
DST and certain of its joint venture
affiliates, are parties to certain
processing and agency agreements that
provide for optional termination of such
agreements by their clients and or
purchase at net book value by the other
joint venture partner in the event of a
change in control of DST or the
respective other joint venture partners.
In connection with its acquisition of an
interest in Janus, the Company entered
into an agreement, which provides for
preservation of a measure of management
autonomy at the subsidiary level and for
rights of first refusal on the part of
minority stockholders, Janus and the
Company with respect to certain sales of
Janus stock by the minority
stockholders. The agreement also
requires the Company to purchase the
shares of minority stockholders in
certain circumstances. In addition, in
the event of a "change of ownership" of
the Company, as defined in the
agreement, the Company may be required
to sell its stock of Janus to the
minority stockholders or to purchase
such holders' Janus stock. Purchase and
sales transactions under the agreement
are to be made generally at a formula
price, based on a multiple of the net
earnings of Janus, as defined therein.
See Note 9 for further details.
Janus has entered into employment
contracts with certain key employees.
The contracts require minimum annual
salaries and additional compensation in
the form of bonuses and deferred
compensation based on individual
performance as well as the current and
future financial performance of Janus.
In addition, in the event of employee
termination or change in control of
Janus, as defined, Janus would be liable
for payment of additional compensation
to these key employees. The deferred
compensation, for which $15.9 million
has been accrued, is payable after
December 31, 1996.
[Page 63]<PAGE>
Under the Investment Company Act of
1940, certain changes in ownership of
Janus may result in termination of its
investment advisory agreements with the
mutual funds and other accounts it
manages, requiring approval of fund
shareholders and other account holders
to obtain new agreements.
Employees. The Company and certain of
its subsidiaries have entered into
agreements with employees whereby, upon
defined circumstances constituting a
change in control of the Company or
subsidiary, certain stock options become
exercisable, certain benefit
entitlements are automatically funded
and such employees are entitled to
specified cash payments upon termination
of employment.
Assets. The Company and certain of its
subsidiaries have established trusts to
provide for the funding of corporate
commitments and entitlements of
officers, directors, employees and
others in the event of a specified
change in control of the Company or
subsidiary. Assets held in such trusts
at December 31, 1993 were immaterial.
Depending upon the circumstances at the
time of any such change in control, the
most significant factor of which would
be the highest price paid for KCSI
Common stock by a party seeking to
control the Company, funding of the
Company's trusts could be very
substantial.
Debt. Certain loan agreements and debt
instruments entered into or guaranteed
by the Company and its subsidiaries
provide for default in the event of a
specified change in control of the
Company or particular subsidiaries of
the Company.
Preferred Stock Purchase Rights. On May
16, 1986, the Company's Board of
Directors declared a dividend
distribution of one Series A Preferred
share purchase right ("Right") for each
outstanding share of Common stock, no
par value, of the Company. The
distribution was payable on May 27, 1986
to stockholders of record on that date.
Each Right entitles the registered
holder thereof to purchase from the
Company one two-hundredth of a share of
New Series Preferred stock, Series A, $1
par value of the Company at an exercise
price of $50 per Right, subject to
adjustment.
The Rights are not exercisable or
transferable apart from the Common
shares, until the earlier of the tenth
day after the public announcement that a
person or a group has acquired
beneficial ownership of 20% or more of
the Common shares or the tenth day after
a person commences, or announces an
intention to commence a tender or
exchange offer, the consummation of
which would result in the beneficial
ownership by a person or group of 30% or
more of the Common shares. The Rights do
not have voting or dividend rights. The
exercise price and the number of Series
A Preferred shares or other securities
or property issuable upon exercise of
the Rights are subject to adjustment in
the event of certain occurrences to
prevent dilution. Furthermore, in
connection with certain business
combinations resulting in an acquisition
of the Company, dispositions of more
than 50% of Company assets or earning
power and specified "self-dealing"
transactions, a Right becomes the right
to buy shares of Common stock of the
acquiring company (or of the Company in
reverse acquisitions where the Company
survives and in "self-dealing"
transactions) having a market value of
two times the exercise price of the
Right. The Rights may be redeemed at
$.0125 per Right prior to the time that
a person or group acquires beneficial
ownership of 20% or more of the Common
shares. The Rights expire on May 27,
1996.
The Series A Preferred shares
purchasable upon exercise of the Rights
will have a cumulative quarterly
dividend rate equal to $10 per share or
400 times the dividend declared on the
Common shares for such quarter,
whichever is greater. In the event of
any merger, consolidation or other
transaction in which the Common shares
are exchanged, each Series A Preferred
share will be entitled to receive 400
times the amount and type of
consideration received per Common share.
In the event of a liquidation, the
holders of Series A Preferred shares
will be entitled to receive $100 per
share. The Series A Preferred shares
will be redeemable, upon providing
required notice, under certain
circumstances, at the Company's option,
in whole but not in part, at a
redemption price equal to 400 times the
then current market price of a Common
share. Each Preferred share will have
one vote on all matters submitted to a
vote of the stockholders of the Company,
voting together as a class with the
Company's Preferred stock, $25 par
value, and the Common shares. When
dividends on the Series A Preferred
shares are in arrears for six quarters,
the holders of the Series A Preferred
shares will have the right to elect two
directors at the next meeting of
stockholders at which directors are
elected. The vote of holders of
two-thirds of the Series A Preferred
shares, voting together as a class, will
be required for any amendment to the
Company's Certificate of Incorporation
[Page 64]
which would materially and adversely
alter or change the powers, preferences
or special rights of such shares.
Bank Holding Company Act. Because of the
Company's indirect 50% ownership of
Investors Fiduciary Trust Company and
certain amendments to the Bank Holding
Company Act of 1956, any "company"
(which may include a corporation,
partnership, trust, association or
similar organization) which acquires
ownership of enough shares of the
Company's Common stock or Preferred
stock to cause it to "control the
Company," may become a "bank holding
company." This may result in the
acquiring company violating the Bank
Holding Company Act of 1956 and in the
Company being prohibited from continuing
to hold its indirect interest in
Investors Fiduciary Trust Company. The
Federal Reserve Board, or its staff, may
make determinations or interpretations
with respect to whether presumptions of
"control" which may arise with respect
to ownership levels of 10% (5% in
certain circumstances) are rebutted or
confirmed. The Company has obtained such
interpretations with respect to certain
of its major shareholders, including its
ESOP. Failure to obtain a favorable
determination or interpretation in
advance of reaching such ownership
levels may result in the adverse
consequences described above.
Note 13. Industry Segments
The Company's three major business
activities are classified as follows:
Transportation Services. The Company
operates a Class I Common Carrier
railroad system through its wholly-owned
subsidiary, The Kansas City Southern
Railway Company. As a common carrier,
the Railway's customer base is comprised
of utilities and a wide range of
companies in the petro-chemical,
agricultural and paper processing
industries. The railroad system operates
primarily from the Midwest part of the
United States to the Gulf of Mexico and,
with the addition of the MidSouth
Corporation, a regional railroad holding
company, on an East-West axis from
Dallas, Texas to Birmingham, Alabama.
Also included in this industry segment
are transportation related real estate,
leasing and support services
subsidiaries. Transportation revenues
include $60, $64 and $66 million,
respectively, for the years 1993 through
1991 from Southwestern Electric Power
Company, the only customer which
accounted for more than 10% of
Transportation Services revenues in
those years.
Information & Transaction Processing.
DST, (a wholly-owned subsidiary) its
subsidiaries and affiliates, design,
develop and operate proprietary software
systems for the mutual fund, securities
transfer, portfolio accounting, loan
processing, asset management and
insurance industries among others and
provides administrative and transfer
agent services using DST's proprietary
systems. In addition to data processing,
subsidiaries of DST also provide various
output processing services including
computer output microfilm/microfiche,
laser printing and mailing, and are
involved in certain real estate
ventures. DST operates throughout the
United States with its base of
operations in the Midwest and, through
certain of its subsidiaries and
affiliates, internationally in Canada,
Europe, Africa and the Pacific Rim.
Financial Asset Management. Janus (an
81% owned subsidiary) manages
investments for mutual funds and private
accounts. Janus operates throughout the
United States with headquarters in
Denver, Colorado. Assets under
management at December 31, 1993, 1992
and 1991 were $22.2, $15.5, and $8.7
billion, respectively.
Eliminations, Corporate & Other.
Unallocated holding company expenses,
intercompany eliminations, and
miscellaneous investment activities are
reported in the "Eliminations, Corporate
and Other" industry segment.
Segment Financial Information. During
1992, the Company completed the process
of realigning certain subsidiaries
between segments. While these
realignments were, overall, immaterial
for financial reporting purposes, all
amounts in 1991 were reclassified to
reflect the current method of
presentation. Sales between segments are
not material and therefore not
disclosed. Industry segment financial
information follows (in millions):
[Page 65]<PAGE>
<TABLE>
Segment Financial Information, dollars in millions, years ended December 31,
<CAPTION>
JanusEliminations,
Transportation DST CapitalCorporate &
ServicesSystems, Inc.Corp. OtherConsolidated
<S> <C> <C> <C> <C> <C>
1993
Revenues $ 451.1 $ 342.2 $162.7 $ 5.1 $ 961.1
Costs & expenses 334.4 311.0 82.7 20.9 749.0
Operating income 116.7 31.2 80.0 (15.8) 212.1
Equity in net earnings of
unconsolidated
affiliates 1.9 12.0 .2 14.1
Interest expense (32.2) (10.9) (.7) (7.4) (51.2)
Pretax income 86.4 32.3 79.3 (23.0) 175.0
Income taxes 38.5 10.0 30.7 (10.2) 69.0
Income before
minority interest 47.9 22.3 48.6 (12.8) 106.0
Minority interest (.6) 9.6 9.0
Income before accounting
changes $47.9 $ 22.9 $ 39.0 (12.8) 97.0
Cumulative effect of accounting changes (6.5) (6.5)
Net income $(19.3) $ 90.5
Depreciation & amortization
expense $46.4 $ 43.4 $ 5.5 $ 1.9 $ 97.2
Capital
expenditures $108.9* $ 63.9* $ 9.2 $ .1 $ 182.1
1992
Revenues $369.2 $270.5 $ 97.5 $ 4.2 $ 741.4
Costs & expenses 293.9 252.7 51.8 17.1 615.5
Operating income 75.3 17.8 45.7 (12.9) 125.9
Equity in net earnings
of unconsolidated
affiliates (.1) 11.6 (.4) 11.1
Interest expense (12.3) (9.1) (.3) (11.4) (33.1)
Pretax income 62.9 20.3 45.4 (24.7) 103.9
Income taxes 23.0 5.0 21.2 (14.0) 35.2
Income before
minority interest39.9 15.3 24.2 (10.7) 68.7
Minority interest 4.9 4.9
Net income $39.9 $15.3 $19.3 $(10.7) $63.8
Depreciation & amortization
expense $35.9 $34.4 $ 3.4 $ .5 $74.2
Capital
expenditures $107.5 $56.5 $10.0 $ .1 $174.1
1991
Revenues $350.1 $211.1 $41.7 $ 7.3 $610.2
Costs & expenses 282.7 184.3 25.9 19.0 511.9
Operating income 67.4 26.8 15.8 (11.7) 98.3
Equity in net earnings
of unconsolidated
affiliates (.2) 8.2 (.3) 7.7
Interest expense (12.0) (7.6) (12.5) (32.1)
Pretax income 55.2 27.4 15.8 (24.5) 73.9
Income taxes 18.4 6.9 6.9 (6.2) 26.0
Income before
minority interest36.8 20.5 8.9 (18.3) 47.9
Minority interest .3 1.9 2.2
Income from continuing
operations 36.8 20.2 7.0 (18.3) 45.7
Extraordinary item (3.8) (3.8)
Net income $36.8 $20.2 $ 7.0 $(22.1) $41.9
Depreciation & amortization
expense $36.1 $20.9 $ 1.6 $ .7 $59.3
Capital
expenditures $91.5 $31.1 $ 1.6 $ .1 $124.3
*Exclusive of property additions from acquisitions
</TABLE>
[Page 66]<PAGE>
<TABLE>
Segment Financial Information, dollars in millions, years ended December 31,
<CAPTION>
JanusEliminations,
Transportation DST CapitalCorporate &
ServicesSystems, Inc.Corp. OtherConsolidated
<S> <C> <C> <C> <C> <C>
1993
ASSETS
Current assets $ 174.3 $ 115.0 $39.9 $ 6.5 $ 335.7
Investments held for operating
purposes 46.3 125.6 .2 2.4 174.5
Properties, net of
depreciation 1,039.3 134.3 14.4 4.6 1,192.6
Intangible and
other assets 139.0 53.9 17.7 3.6 214.2
Total assets $1,398.9 $ 428.8 $72.2 $ 17.1 $ 1,917.0
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 176.6 $ 88.8 $14.0 $ 9.0 $ 288.4
Long-term debt 577.9 146.0 .9 51.4 776.2
Deferred income taxes 196.8 (12.1) 184.7
Other 41.1 9.3 26.0 28.6 105.0
Net worth 406.5 184.7 31.3 (59.8) 562.7
Total liabilities &
stockholders' equity $1,398.9 $ 428.8 $72.2 $ 17.1 $ 1,917.0
1992
ASSETS
Current assets $ 109.4 $ 91.6 $24.3 $ 21.1 $ 246.4
Investments held for operating
purposes 40.8 78.3 .2 36.5 155.8
Properties, net of
depreciation 643.5 109.2 9.8 5.7 768.2
Intangible and
other assets 5.4 57.0 8.9 6.7 78.0
Total assets $ 799.1 $ 336.1 $43.2 $ 70.0 $ 1,248.4
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 115.2 $ 83.0 $ 9.0 $ 11.4 $ 218.6
Long-term debt 157.9 72.6 1.1 155.4 387.0
Deferred income taxes 108.7 (7.3) 101.4
Other 38.6 12.6 19.5 8.3 79.0
Net worth 378.7 167.9 13.6 (97.8) 462.4
Total liabilities &
stockholders' equity $ 799.1 $ 336.1 $43.2 $ 70.0 $ 1,248.4
1991
ASSETS
Current assets $ 128.8 $ 69.2 $17.0 $ 17.4 $ 232.4
Investments held for operating
purposes 39.7 68.5 2.5 4.0 114.7
Properties, net of
depreciation 580.8 77.2 1.9 6.3 666.2
Intangible and
other assets 4.6 61.2 9.9 2.9 78.6
Total assets $ 753.9 $ 276.1 $31.3 $ 30.6 $ 1,091.9
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 121.3 $ 62.0 $16.7 $ .5 $ 200.5
Long-term debt 144.7 54.0 118.4 317.1
Deferred income taxes 99.7 .1 (1.0) 98.8
Other 41.1 15.3 2.8 4.5 63.7
Net worth 347.1 144.7 11.8 (91.8) 411.8
Total liabilities &
stockholders' equity $ 753.9 $ 276.1 $31.3 $ 30.6 $ 1,091.9
</TABLE>
[Page 67]<PAGE>
Note 14. Quarterly Financial Data (Unaudited)
<TABLE>
Quarterly financial data follows (in millions, except per share amounts):
<CAPTION>
1993
Fourth Third Second First
Quarter Quarter QuarterQuarter
<S> <C> <C> <C> <C>
Operations Revenues $261.5 $253.3 $231.7 $214.6
Costs and expenses 199.2 194.9 185.3 169.6
Operating income 62.3 58.4 46.4 45.0
Equity in net earnings
of unconsolidated
affiliates 4.9 2.3 4.0 2.9
Interest expense (14.9) (13.8) (11.8) (10.7)
Pretax Pretax income 52.3 46.9 38.6 37.2
Income taxes 19.7 21.1 14.9 13.3
Income before
minority interest 32.6 25.8 23.7 23.9
Minority Minority interest 2.5 2.5 2.2 1.8
Income before cumulative
effect of accounting
changes 30.1 23.3 21.5 22.1
Accounting Change Cumulative effect of changes in
accounting for income taxes and
postretirement benefits (6.5)
Net income $ 30.1 $ 23.3 $ 21.5 $ 15.6
Per Share Primary earnings per share:
Data Income before cumulative effect
of accounting
changes $ .67 $ .52 $ .48 $ .49
Cumulative effect-
accounting changes (.14)
Total $ .67 $ .52 $ .48 $ .35
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Preferred - High $ 16 $ 16 $ 16 $15 1/4
Ranges - Low 14 3/4 15 14 13 1/2
Common - High 51 1/2 42 3/4 42 33 1/4
- Low 41 7/8 37 30 1/2 23 7/16
</TABLE>
[Page 68]<PAGE>
<TABLE>
<CAPTION>
1992
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Operations Revenues $199.0 $189.5 $177.8 $175.1
Costs and expenses 165.1 155.6 148.0 146.8
Operating income 33.9 33.9 29.8 28.3
Equity in net earnings of
unconsolidated
affiliates 2.6 2.3 3.5 2.7
Interest expense (8.3) (9.0) (8.1) (7.7)
Pretax Pretax income 28.2 27.2 25.2 23.3
Income taxes 9.5 9.4 8.4 7.9
Income before
minority interest 18.7 17.8 16.8 15.4
Minority Minority interest 1.5 1.6 1.0 .8
Net income $ 17.2 $ 16.2 $ 15.8 $ 14.6
Per Share Primary earnings per share:
Data Income from continuing
operations $ .39 $ .36 $ .35 $ .33
Total $ .39 $ .36 $ .35 $ .33
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $.075 $.075 $ .075 $ .075
Stock Price Preferred - High $ 15 $15 1/2 $14 1/2 $14 1/4
Ranges - Low 13 1/2 14 13 1/2 13 1/2
Common - High 24 7/8 20 7/8 19 3/16 19 9/16
- Low 18 9/16 17 1/8 16 5/16 14 5/8
[Page 69]
</TABLE>
<PAGE>
REPORTS
Management Report on Responsibility for
Financial Reporting
The accompanying financial statements
and related notes of Kansas City
Southern Industries, Inc. and its
consolidated subsidiaries were prepared
by management in conformity with
generally accepted accounting principles
appropriate in the circumstances. In
preparing the financial statements,
management has made judgments and
estimates based on currently available
information. Management is responsible
for not only the financial information
but also all other information in this
Annual Report. Representations contained
elsewhere in this Annual Report are
consistent with the financial statements
and supplementary financial information
contained in the Financial Section.
The Company has a formalized system of
internal accounting controls designed to
provide reasonable assurance that assets
are safeguarded and that its financial
records are reliable. Management
monitors the system for compliance, and
the Company's internal auditors measure
its effectiveness and recommend possible
improvements thereto. In addition, as
part of their audit of the consolidated
financial statements, the Company's
independent accountants, who are
selected by the stockholders, review and
test the internal accounting controls on
a selective basis to establish the
extent of their reliance thereon in
determining the nature, extent and
timing of audit tests to be applied.
The Board of Directors pursues its
oversight role in the area of financial
reporting and internal accounting
control through its Audit Committee.
This committee, composed solely of
non-management directors, meets
regularly with the independent
accountants, management and internal
auditors to monitor the proper discharge
of responsibilities relative to internal
accounting controls and to evaluate the
quality of external financial reporting.
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Kansas City Southern
Industries, Inc.
In our opinion, the accompanying
consolidated balance sheets and the
related consolidated statements of
income, of changes in stockholders'
equity and of cash flows present fairly,
in all material respects, the financial
position of Kansas City Southern
Industries, Inc. and its subsidiaries at
December 31, 1993, 1992 and 1991, and
the results of their operations and
their cash flows for the years then
ended in conformity with generally
accepted accounting principles. These
financial statements are the
responsibility of the Company's
management; our responsibility is to
express an opinion on these financial
statements based on our audits. We
conducted our audits of these statements
in accordance with generally accepted
auditing standards which require that we
plan and perform the audit to obtain
reasonable assurance about whether the
financial statements are free of
material misstatement. An audit includes
examining, on a test basis, evidence
supporting the amounts and disclosures
in the financial statements, assessing
the accounting principles used and
significant estimates made by
management, and evaluating the overall
financial statement presentation. We
believe that our audits provide a
reasonable basis for the opinion
expressed above.
As discussed in Notes 7 and 10 to the
financial statements, the Company
changed its method of accounting for
income taxes and other postretirement
benefits in 1993 to conform with
Statements of Financial Accounting
Standards Nos. 109 and 106.
/s/ Price Waterhouse
PRICE WATERHOUSE
Kansas City, Missouri
February 24, 1994
[Page 70]<PAGE>
<PAGE>
Kansas City Southern Industries, Inc.
Exhibit 12.1 File No. 1-4717
Form 10-K December 31, 1993
Page 1 of 2
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES-
EXCLUDING INTEREST ON DEPOSITS OF IFTC
(Dollars in Millions)
<CAPTION>
Years Ended December 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Pretax Income, excluding
equity in earnings of
unconsolidated affiliates $160.9 $ 92.8 $ 66.2 $ 56.3 $ 54.0
Interest expense on Indebtedness 51.2 33.1 32.1 31.4 30.2
Portion of Rents Representative
of an Appropriate
Interest Factor 11.0 8.3 5.7 5.3 5.3
Equity in Undistributed Earnings
of 50% Owned Affiliates 9.0 8.2 7.0 3.9 3.4
Distributed Earnings of Less Than
50% Owned Affiliates 0.5 0.6 0.2 0.3 0.2
Fixed Charges of
50% Owned Affiliates 1.4 1.0 1.3 1.6 1.6
Income as Adjusted $234.0 $144.0 $112.5 $ 98.8 $ 94.7
Fixed Charges:
Interest Expense on Indebtedness $ 51.2 $ 33.1 $ 32.1 $ 31.4 $ 30.2
Portion of Rents Representative
of an Appropriate Interest Factor 11.0 8.3 5.7 5.3 5.3
Fixed Charges of
50% Owned Affiliates 1.4 1.0 1.3 1.6 1.6
Total Fixed Charges $ 63.6 $ 42.4 $ 39.1 $ 38.3 $ 37.1
Ratio of Earnings to
Fixed Charges Excluding
Interest on Deposits of IFTC 3.68 3.40 2.88 2.58 2.55
</TABLE>
<PAGE>
Kansas City Southern Industries, Inc.
Exhibit 12.1 File No. 1-4717
Form 10-K December 31, 1993
Page 2 of 2
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES-
INCLUDING INTEREST ON DEPOSITS OF IFTC
(Dollars in Millions)
<CAPTION>
Years Ended December 31,
1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C>
Pretax Income, excluding
equity in earnings of
unconsolidated affiliates $160.9 $ 92.8 $ 66.2 $ 56.3 $ 54.0
Interest expense on Indebtedness 51.2 33.1 32.1 31.4 30.2
Portion of Rents Representative
of an Appropriate Interest Factor 11.0 8.3 5.7 5.3 5.3
Equity in Undistributed Earnings
of 50% Owned Affiliates 9.0 8.2 7.0 3.9 3.4
Distributed Earnings of Less Than
50% Owned Affiliates 0.5 0.6 0.2 0.3 0.2
Fixed Charges of
50% Owned Affiliates 7.8 9.8 13.0 12.3 8.3
Income as Adjusted $240.4 $152.8 $124.2 $109.5 $101.4
Fixed Charges:
Interest Expense on Indebtedness $ 51.2 $ 33.1 $ 32.1 $ 31.4 $ 30.2
Portion of Rents Representative
of an Appropriate Interest Factor 11.0 8.3 5.7 5.3 5.3
Fixed Charges of
50% Owned Affiliates 7.8 9.8 13.0 12.3 8.3
Total Fixed Charges $ 70.0 $ 51.2 $ 50.8 $ 49.0 $ 43.8
Ratio of Earnings to
Fixed Charges Including
Interest on Deposits of IFTC 3.43 2.98 2.44 2.23 2.32
</TABLE>
Kansas City Southern Industries, Inc.
Exhibit 21.1 File No. 1-4717
Form 10-K December 31, 1993
Subsidiaries of the Registrant
Kansas City Southern Industries, Inc., a Delaware Corporation, has no parent.
All subsidiaries of the Registrant listed below are included in the
consolidated financial statements unless otherwise indicated
State or
Percentage other Jurisdiction
of of Incorporation
Ownership or Organization
1026459 Ontario Inc. 100% Canada
The Kansas City Southern Railway Company 100 Missouri
Animal Resources, Inc. (4)* 49 Missouri
Argus Health Systems, Inc.(3)* 50 Delaware
Belvedere Financial Systems, Inc. (3) 100 Delaware
Berger Associates, Inc. 18 Delaware
Boston Financial Data Services, Inc. (3)* 50 Massachusetts
Broadway Square Partners (3)* 50 Missouri
Carland, Inc. (7) 100 Delaware
Clark & Tilley Ltd. (3) 96 England
Clark & Tilley Data Services Ltd. (3) 64 England
Corfax Benefit Systems Ltd. (3) 100 Canada
Corfax Information Systems, Ltd. (3) 100 Canada
DBS Systems Corporation (3) 60 North Carolina
DST Realty, Inc. (3) 100 Missouri
DST Securities, Inc. (3) 100 Missouri
DST Technologies, Inc. (3) 100 Missouri
DST Systems, Inc. 100 Missouri
DST Systems International (3) 100 Netherlands
First of Michigan Capital Corp. (3)* 21 Delaware
First President Corporation 100 Missouri
IFTC Holdings, Inc. (3)* 50 Missouri
Investors Fiduciary Trust Co. (3)* 50 Missouri
Janus Service Corp. (9) 100 Colorado
Janus Capital Corporation 81 Colorado
KCS Transport Co., Inc. (1) 100 Louisiana
Landa Motor Lines (1) 100 Texas
Louisiana, Arkansas & Texas Trans. Co. (1) 100 Delaware
Martec Pharmaceutical, Inc. (4)* 49 Delaware
MGI Output Technologies Inc. (3) 100 New York
Mid-South Microwave, Inc. 100 Delaware
Midcon Labs, Inc. (4) 100 Missouri
Midland Data Systems, Inc. (3)* 50 Missouri
Midland Loan Services L.P. (3)* 50 Missouri
Midland Commercial Properties, Inc. (3)* 35 Missouri
National Financial Data Services, Inc. (6)* 50 Massachusetts
National Realty Partners Group, Inc.(3) 100 Delaware
NRS Palmetto, Inc. (3) 100 Delaware
Output Technologies Phoenix
Litho Group, Inc. (3) 100 Missouri
Output Technologies SRI Group, Inc. (3) 100 Missouri
Output Technologies of California, Inc. 100 Missouri
Output Technologies Eastern Region, Inc. (3) 100 Delaware
Output Technologies Vital Records
Storage Group, Inc. (3) 100 Missouri
<PAGE>
Exhibit 21.1
(continued)
Output Technologies, Inc. (3) 100 Missouri
Output Technologies Central Region, Inc. (3) 100 Missouri
Output Technologies Western Region, Inc. (3) 100 Missouri
Output Technologies of Illinois, Inc. (3) 100 Illinois
Pabtex, Inc. (5) 100 Delaware
PVI, Inc. 100 Delaware
Rice-Carden Corporation 100 Missouri
Southern Leasing Corporation (7) 100 Delaware
Southern Development Company 100 Missouri
Southern Group, Inc. 100 Delaware
Southern Industrial Services, Inc. 100 Delaware
Southern Credit Corporation, Inc. (2) 100 Delaware
Talisman Services International B.V. (3)* 50 Netherlands
The Continuum Company, Inc. (3)* 29 Delaware
Tolmak, Inc. 100 Delaware
Trans-Serve, Inc. (5) (8) 100 Delaware
Veals, Inc. 100 Delaware
Wyandotte Garage Corporation 80 Missouri
* Unconsolidated Affiliate, Accounted for Using the Equity Method
(1) Subsidiary of The Kansas City Southern Railway Company
(2) Subsidiary of Southern Group, Inc.
(3) Subsidiary of DST Systems, Inc.
(4) Subsidiary of PVI, Inc.
(5) Subsidiary of Southern Industrial Services, Inc.
(6) Subsidiary of Boston Financial Data Services, Inc.
(7) Subsidiary of Southern Credit Corporation, Inc.
(8) Doing business as Superior Tie & Timber
(9) Subsidiary of Janus Capital Corporation
Subsidiaries and Affiliates not shown, if taken in the aggregate, would not
constitute a significant subsidiary of the Registrant.
Kansas City Southern Industries, Inc.
Exhibit 99.1 File No. 1-4717
Form 10-K December 31, 1993
Financial Statements
Investors Fiduciary Trust Company
Years ended December 31, 1993, 1992 and 1991
with Report of Independent Auditors
<PAGE>
Investors Fiduciary Trust Company
Financial Statements
Years ended December 31, 1993, 1992 and 1991
Contents
Report of Independent Auditors . . . . . . . . . . . . . . . 1
Audited Financial Statements
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . 2
Statements of Income and Retained Earnings . . . . . . . . . 3
Statements of Cash Flows . . . . . . . . . . . . . . . . . . 4
Notes to Financial Statements. . . . . . . . . . . . . . . . 6
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholder
Investors Fiduciary Trust Company
We have audited the accompanying balance sheets of Investors Fiduciary Trust
Company (the Company) as of December 31, 1993 and 1992, and the related
statements of income and retained earnings and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Investors Fiduciary Trust
Company at December 31, 1993 and 1992, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1993, in conformity with generally accepted accounting principles.
January 12, 1994
/s/ Ernst & Young
1
<PAGE>
Investors Fiduciary Trust Company
Balance Sheets
<TABLE>
<CAPTION>
December 31
1993 1992
(In Thousands)
Assets
<S> <C> <C>
Cash and due from banks $ 73,449 $ 63,183
Federal funds sold 70,000 65,000
Trading securities 82,012 24,259
Available-for-sale -securities 559,113
Short-term investments 348,799
Investment securities 174,847
Interest receivable and other assets 30,886 38,128
Total assets $815,460 $714,216
Liabilities and stockholder s equity
Deposits:
Noninterest-bearing demand $525,801 $349,208
Money market 71,533 135,120
Time 74,334 85,409
Total deposits 671,668 569,737
Borrowings under repurchase agreements 39,570 57,395
Accounts payable and accrued liabilities 25,226 11,436
Total liabilities 736,464 638,568
Stockholder s equity:
Common stock, $10 par value; 60,000 shares
authorized and outstanding 600 600
Capital surplus 12,064 12,064
Retained earnings 62,726 62,984
75,390 75,648
Net unrealized gain on
available-for-sale securities 3,606
Total stockholder s equity 78,996 75,648
Total liabilities and
stockholder s equity $815,460 $714,216
See accompanying notes.
</TABLE>
2
<PAGE>
Investors Fiduciary Trust Company
Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
Year ended December 31
1993 1992 1991
(In Thousands)
Interest and dividend income:
<S> <C> <C> <C>
Federal funds sold and short-term
investments $14,951 $14,715 $22,873
Mortgage-backed securities 8,386 102,510
Corporate debt securities 2,682 5,283 5,990
U.S. municipalities and foreign
government issues 977 4,271 1,332
Trading securities 1,639 3,716
Equity securities 1,744 1,922 2,244
Total interest and dividend income 30,379 40,759 44,949
Interest expense:
Money market deposits 2,522 4,670 9,682
Time deposits 8,559 10,406 10,209
Borrowings under repurchase
agreements 1,752 2,492 3,470
Total interest expense 12,833 17,568 23,361
Net interest and dividend income 17,546 23,191 21,588
Other income:
Fiduciary fees 29,250 33 ,868 29,766
Gain on sale of investment securities 600 5,082 71
Gain (loss) from trading activities 152 (716)
Other 2,133 2,422 2,704
32,135 40,656 32,541
Other expenses:
Servicing and processing expenses 14,803 17,140 14,590
Salaries and employee benefits 13,097 12,253 11,439
General and administrative expenses 5,130 5,116 4,873
Operating expenses 1,702 2,109 3,310
Occupancy expenses 1,032 1,134 1,164
Provision for investment security
losses (150) 936 1,220
Foreign currency exchange rate losses 552 11,066 1,491
36,166 49,754 38,087
Income before income taxes 13,515 14,093 16,042
Provision for income taxes:
Current 3,008 5,016 5,055
Deferred 1,066 (450) (1,064)
4,074 4,566 3,991
Net income 9,441 9,527 12,051
Retained earnings at beginning
of year 62,984 64,291 52,540
Distributions (9,699) (10,834) (300)
Retained earnings at end of year $62,726 $62,984 $64,291
See accompanying notes.
</TABLE>
3
<PAGE>
Investors Fiduciary Trust Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended December 31
1993 1992 1991
(In Thousands)
Operating activities
<S> <C> <C> <C>
Net income $ 9,441 $ 9,527 $12,051
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation 942 1,305 1,311
Deferred income tax expense (benefit) 1,066 (450) (1,064)
Increase in unrealized foreign
currency exchange rate losses
5,360 3,102
Provision for investment security losses (150) 936 1,220
(Gain ) loss on trading activities (152) 716
Gain on sale of investment securities (600) (5,082) (71)
Purchases of trading securities (187,242) (74,813)
Proceeds from sales and maturities
of trading securities
129,981 91,876
Discount accretion and premium
amortization, net (9,903) (8,624) (14,342)
Changes in assets and liabilities, net:
Decrease (increase) in interest
receivable and other assets 6,020 5,820 (6,285)
(Decrease) increase in accounts payable
and accrued liabilities 6,139 (5,920) 3,036
Net cash provided by (used in)
operating activities (44,458) 20,651 (1,042)
Investing activities
Proceeds from maturities and
sales of investment securities
94,166 139,538 76,912
Purchases of investment securities (136,417) (119,798) (119,063)
Proceeds from maturities of
short-term investments 1,793,021 1,839,337 1,580,698
Purchases of short-term investments(1,766,441) (2,046,893) (1,479,419)
Net cash provided by (used in)
investing activities (15,671) (187,816) 59,128
</TABLE>
4<PAGE>
Investors Fiduciary Trust Company
Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
Year ended December 31
1993 1992 1991
(In Thousands)
Financing activities
<S> <C> <C> <C>
Net increase in demand and
money market deposits $113,006 $ 91,174 $ 41,791
Net increase (decrease) in time deposits (11,075) (34,426) 19,493
Net increase (decrease) in borrowings
under repurchase agreements (17,825) 2,146 19,572
Capital contribution from parent 300
Cash dividends paid (8,711) (3,725) (300)
Net cash provided by financing activities 75,395 55,469 80,556
Net increase (decrease) in cash and
cash equivalents 15,266 (111,696) 138,642
Cash and cash equivalents at
beginning of year 128,183 239,879 101,237
Cash and cash equivalents at end of year $143,449 $128,183 $239,879
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 12,386 $ 19,137 $22,997
Income taxes (net of refunds) $ 1,429 $ 5,748 $ 5,545
See accompanying notes.
</TABLE>
5
<PAGE>
Investors Fiduciary Trust Company
Notes to Financial Statements
December 31, 1993, 1992 and 1991
1. Accounting Policies
Investors Fiduciary Trust Company (the Company) is regulated under the banking
laws of the state of Missouri and by the Federal Deposit Insurance Corporation
(FDIC).
Ownership
The Company is a wholly-owned subsidiary of IFTC Holdings, Inc., which is
owned 50% each by DST Systems, Inc. (DST) and Kemper Financial Services, Inc.
(KFS). During the years ended December 31, 1993 and 1992, the Company paid
cash dividends of $8,711,000 and $3,725,000 and dividends-in-kind (in the form
of investment securities) of $988,000 and $7,109,000, respectively, to IFTC
Holdings, Inc. Such dividends-in-kind were recorded at the net book value of
the securities at the time of the transaction.
Accounting Changes
In February 1992, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. The Company adopted the provisions of the new standard in its
financial statements effective January 1, 1993. As permitted by the
Statement, prior period financial statements have not been restated to reflect
the change in accounting principle. The change did not have a material effect
on the current year financial statements.
In May 1993, the FASB issued SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities. As permitted under the Statement, the Company
has elected to adopt the provisions of the new standard as of December 31,
1993. In accordance with the Statement, prior period financial statements
have not been restated to reflect the change in accounting principle. The
cumulative effect as of December 31, 1993 of adopting SFAS No. 115 was not
material. The ending balance of stockholder s equity was increased by
$3,606,000 (which is net of $2,360,000 in deferred income taxes) to reflect
the net unrealized holding gain on securities classified as available-for-sale
previously carried at amortized cost or lower of cost or market and the net
unrealized loss on interest rate swap agreements which were designated as a
hedge of certain available-for-sale securities at the time of adoption of SFAS
No. 115 (see Note 7).
6<PAGE>
1. Accounting Policies (continued)
Trading Securities
Trading securities are held for resale in anticipation of short-term market
movements. Trading securities, which are stated at fair value, consisted of
certain U.S. government and federal agency debt securities at December 31,
1993. Trading securities at December 31, 1992 consisted of foreign
denominated debt securities. Gains and losses, both realized and unrealized,
are included in gain (loss) from trading activities in the accompanying
statement of income and retained earnings.
Available-For-Sale Securities
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet
date. Debt securities are classified as held-to-maturity when the Company has
the positive intent and ability to hold the securities to maturity. The
Company had no held-to-maturity securities at December 31, 1993.
Debt securities not classified as held-to-maturity or trading and marketable
equity securities not classified as trading are classified as available-for-
sale. Available-for-sale securities are stated at fair value, with the
unrealized gains and losses, net of income taxes, reported in a separate
component of stockholder s equity.
The cost of debt securities classified as available-for-sale is adjusted for
amortization of premiums and accretion of discounts to maturity, or in the
case of mortgage-backed securities, over the estimated life of the security.
Such amortization and accretion are included in interest income. The cost of
securities sold is based on the specific identification method.
Short-Term Investments and Investment Securities
Upon adoption of SFAS No. 115 at December 31, 1993, the Company reclassified
securities previously classified as held for investment of $559,113,000 to the
available-for-sale portfolio.
7<PAGE>
1. Accounting Policies (continued)
Prior to the adoption of SFAS No. 115, short-term investments were stated at
amortized cost, which approximated fair value. Investment securities (i.e.,
securities which the Company had the ability and general intention to hold for
long-term purposes) were stated at amortized cost. Additionally, equity
securities, excluding money market preferred equities, were stated at the
lower of aggregate cost or fair value.
Provision for Investment Security Losses
The provision for investment security losses charged to earnings is an amount
which, based on management s estimate, is necessary to maintain a general
valuation allowance sufficient to absorb possible credit losses within the
Company s investment portfolio. These provisions are made based on the
results of continuing reviews by management of the investment portfolio which
include analysis of issuer financial data and assessment of an issuer s
ability to continue to meet its obligations.
Borrowings Under Repurchase Agreements
The Company enters into sales of securities under agreements to repurchase
(repurchase agreements). Fixed-coupon repurchase agreements are treated as
financings, and the obligations to repurchase securities sold are reflected as
a liability in the balance sheets. The dollar amount of securities underlying
the agreements remains in the asset accounts. Repurchase agreements mature
in less than one year from the original date of sale.
Income Taxes
The results of operations of the Company are included in the consolidated
federal and state income tax returns of its parent, IFTC Holdings, Inc.
Income tax expense or benefit of the Company is calculated as if it were
reporting its income and expenses as a separate entity. Tax-related balances
due to or from IFTC Holdings, Inc. for the years ended 1993 and 1992 are not
material.
For the years ended 1993, 1992 and 1991, the amount of actual income tax
expense differs from the expense that would result from applying federal
statutory tax rates to pretax income due principally to state taxes, the
dividends received deduction and tax-exempt interest.
8<PAGE>
1. Accounting Policies (continued)
At December 31, 1993, deferred income tax assets and liabilities amounted to
$652,000 and $2,498,000, respectively, due to temporary differences in the
determination of income for financial statement purposes and income tax
purposes. Such temporary differences relate principally to the timing of
taxability of certain dividend income, gains on forward exchange contracts,
unrealized gains and losses on securities resulting from the adoption of SFAS
No. 115 (amounting to deferred liabilities of $2,360,000) and interest rate
swap agreements and depreciation. The Company did not record any valuation
allowances against deferred tax assets at December 31, 1993.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, due from banks, federal funds sold and investments in tax-exempt
money market mutual funds. Generally, federal funds are sold for one-day
periods.
Fair Values of Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheets, for which it is practicable
to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash, cash equivalents and short-term investments: The carrying amounts
reported in the balance sheet for these instruments approximate their fair
values.
9<PAGE>
1. Accounting Policies (continued)
Trading and available-for-sale securities: Fair values for trading and
available-for-sale securities are based on quoted market prices, where
available, and are recognized in the balance sheet. If quoted market
prices are not available, fair values are based on quoted market prices of
comparable instruments.
Investment securities (prior to the adoption of SFAS No. 115): Fair values
for investment securities are based on quoted market prices, where
available. If quoted market prices were not available, fair values were
based on quoted market prices of comparable instruments.
Interest rate swap agreements: Fair values for interest rate swap
agreements are based on pricing models or formulas using current
assumptions.
Deposit liabilities: The fair values disclosed for noninterest-bearing
demand deposits and money market deposits are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying
amounts). Fair values for fixed-rate time deposits are estimated using a
discounted cash flow calculation that applies interest rates currently
being offered on certificates of deposit to a schedule of expected monthly
cash flows on time deposits.
Short-term borrowings: The carrying amounts of borrowings under repurchase
agreements approximate their fair values.
Reclassifications
Certain amounts for 1992 and 1991 have been reclassified to conform to the
current year presentation.
10<PAGE>
2. Investment Securities
The amortized cost and fair values (carrying value) of available-for-sale
securities at December 31, 1993, are as follows:
<TABLE>
<CAPTION>
Gross Gross (Carrying
Amortized Unrealized Unrealized Value)
Cost Gains Losses Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 98,819 $ 3,474 $ (273) $102,020
Corporate debt securities 283,705 809 (80) 284,434
U.S. governments 29,910 1 (2) 29,909
U.S. municipalities 55,575 153 (1) 55,727
Total debt securities 468,009 4,437 (356) 472,090
Equity securities 79,849 7,217 (43) 87,023
Total available-for-
sale securities $547,858 $ 11,654 $ (399) $559,113
</TABLE>
The amortized cost (carrying value) and fair values of investment securities
at December 31, 1992, are as follows:
<TABLE>
<CAPTION>
(Carrying
Value) Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 106,606 $ 5,869 $ (276) $ 112,199
Corporate debt securities 37,605 565 (1,838) 36,332
U.S. municipalities and
foreign government issues 2,876 34 (11) 2,899
Total debt securities 147,08 76,468 (2,125) 151,430
Equity securities 27,760 8,416 (208) 35,968
Total investment securities $ 174,847 $ 14,884 $ (2,333) $ 187,398
</TABLE>
2. Investment Securities (continued)
The amortized cost and estimated fair value of available-for-sale debt
securities at December 31, 1993 and investment debt securities at December 31,
1992, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
1993 1992
Cost Fair Value Cost Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Due in one year or less $291,893 $292,118 $ 6,029 $ 6,063
Due in one year through
five years 57,1525 7,590 22,150 22,196
11
Due in five years through
10 years 4,221 4,317 10,760 9,437
Due after 10 years 15,982 16,103 1,752 1,743
369,248 370,128 40,691 39,439
Mortgage-backed securities 98,819 102,020 106,606 112,199
Total debt securities
before allowance $468,067 $472,148 $147,297 $151,638
</TABLE>
Proceeds from sales of investment securities during 1993 and 1992 were
$63,357,000 and $71,735,000, respectively. Proceeds from calls or tenders of
investment securities during 1993 and 1992 were $3,122,000 and $5,419,000,
respectively. Gross gains realized on sales, calls and tenders during 1993
and 1992 were $1,433,000 and $5,083,000, respectively. Gross losses realized
on sales, calls and tenders during 1993 and 1992 were $833,000 and $1,000,
respectively.
Proceeds from sales of trading securities during 1993 and 1992 were
$48,920,000 and $33,863,000, respectively. Gross gains realized on sales
during 1993 and 1992 were $384,000 and $12,000, respectively. Gross losses
realized on sales during 1993 and 1992 were $232,000 and $347,000,
respectively.
The fair value of securities pledged to secure time deposits was $518,000 and
$1,196,000 at December 31, 1993 and 1992, respectively. The fair value of
securities pledged to secure borrowings under repurchase agreements was
$41,402,000 and $57,539,000 at December 31, 1993 and 1992, respectively. The
fair value of securities and cash pledged to the Depository Trust Company as a
requirement to utilize its securities settlement system was $3,716,000 at
December 31, 1993.
12<PAGE>
2. Investment Securities (continued)
In addition, certain interest rate swap agreements require the Company to
maintain eligible collateral with fair values aggregating $4,243,000 and
$5,218,000 in 1993 and 1992, respectively.
The table below provides an analysis of changes in the allowance for security
losses for the three years ended December 31, 1993:
<TABLE>
<CAPTION>
1993 19921991
(In Thousands)
<S> <C> <C> <C>
Allowance, beginning of year $ 208 $1,372 $ 152
Provision for investment
security losses (150) 936 1,220
Charge-offs, net of recoveries (2,100)
Allowance, end of year $ 58 $ 208 $ 1,372
</TABLE>
3. Deposits
The carrying amounts and fair values of deposits consisted of the following at
December 31, 1993 and 1992. For deposits with no defined maturities, SFAS
No. 107 defines fair value as the amount payable on demand:
<TABLE>
<CAPTION>
1993 1992
Carrying Carrying
Value Fair Value Value Fair Value
(In Thousands)
<S> <C> <C> <C> <C>
Noninterest-bearing demand $525,801 $525,801 $349,208 $349,208
Money market accounts 71,533 71,533 135,120 135,120
Time 74,334 76,880 85,409 88,516
Total deposits $671,668 $674,214 $569,737 $572,844
</TABLE>
13<PAGE>
4. Commitments
The Company leases office space and certain equipment from DST. Rental
expense paid to DST amounted to $1,032,000 in 1993, $1,084,000 in 1992 and
$1,144,000 in 1991. The Company s leases expire on December 31, 1997. Future
annual minimum rentals under noncancelable leases are as follows:
<TABLE>
<CAPTION>
Year ending
December 31
<S> <C>
1994 $601,000
1995 608,000
1996 616,000
1997 620,000
</TABLE>
5. Employee Benefit Plan
The Company s full-time employees participate in a noncontributory, trusteed
profit-sharing plan after completing one year of service. The plan is
administered by the plan s advisory committee, and the assets of the plan are
commingled with the assets of the DST Profit-Sharing Plan.
The Company s contributions to the profit-sharing plan are approved by the
Board of Directors and were $836,000 plus forfeitures in 1993, $810,000 plus
forfeitures in 1992 and $720,000 plus forfeitures in 1991.
6. Related Parties
A significant portion of the Company s fiduciary fees and noninterest-bearing
deposit liability arise from its capacity as trustee for various investment
products sponsored by KFS and from other mutual fund clients serviced by DST.
Effective January 1, 1993, KFS and DST revised their methods of allocating
certain trustee fee income to the Company, which resulted in lower net income
for 1993 in the approximate amount of $4,200,000. The Company incurred DST
and KFS fees for servicing, processing and advisory services of approximately
$7,989,000 in 1993, $11,388,000 in 1992 and $10,853,000 in 1991. Amounts
prepaid to DST for processing services were $4,000,000 at December 31, 1993.
14<PAGE>
6. Related Parties (continued)
DST provides transfer agent services to certain mutual fund clients of the
Company. Amounts paid to DST for these services equal the amount received by
the Company from the mutual fund clients and are not presented in the
accompanying statements of income and retained earnings. Amounts paid to DST
for these services were $13,618,000 in 1993, $4,384,000 in 1992 and $1,801,000
in 1991.
Kemper Service Company (KSC), a wholly-owned subsidiary of KFS, provides
transfer agent services to certain mutual fund clients of the Company.
Amounts paid to KSC for these services equal the amount received by the
Company from the mutual fund clients and are not presented in the accompanying
statements of income and retained earnings. Amounts paid to KSC for these
services were $66,470,000 in 1993, $61,147,000 in 1992 and $54,184,000 in
1991.
Janus Service Corporation (JSC), an affiliate of DST, provides transfer agent
services to certain mutual fund clients of the Company. Amounts paid to JSC
for these services equal the amount received by the Company from the mutual
fund clients and are not presented in the accompanying statements of income
and retained earnings. The amount paid to JSC for these services was
$28,003,000 in 1993, $17,416,000 in 1992 and $6,549,000 in 1991.
Midland Loan Services, L.P., which is an investee of DST, maintains
noninterest-bearing demand deposits and money market demand deposits of the
Company. Such deposits amounted to $5,745,000 and $91,033,000 at December 31,
1993 and 1992, respectively.
7. Interest Rate Swap Agreements
Prior to 1993, the Company entered into interest rate swap agreements with
various investment banking firms, and designated such contracts as liability
hedges designed to extend the duration of certain short-term repricing
liabilities in order to reduce the impact of changes in interest rates on the
Company s cost of funds. These agreements, which expire from 1994 to 1997,
require the Company to make fixed-rate payments with an average rate of 9.45%
in exchange for LIBOR-based interest payments on notional amounts aggregating
to $56,000,000. Payments associated with the swap agreements are made on a
net basis and have been recorded as an adjustment to interest expense.
Effective December 31, 1993, in connection with the adoption of SFAS No. 115,
as described in Note 1, the Company designated substantially all of such
contracts for use, prospectively, as hedges of certain available-for-sale
assets. The fair value of the
15<PAGE>
7. Interest Rate Swap Agreements (continued)
Company s liabilities under these contracts amounts to $5,289,000. This
amount, net of deferred income taxes of $2,091,000, has been included in the
separate component of stockholder s equity at December 31, 1993, in connection
with the adoption of SFAS No. 115. Net payments made under the terms of these
contracts in the future will be accounted for as an adjustment of interest
income, and changes in the value of the contracts, together with the changes
in the value of the related available-for-sale assets, will be included in the
separate component of stockholder s equity, as provided by SFAS No. 115.
The Company is exposed to credit risk in the event of default by the
counterparties to the extent of any receivable amounts that have been recorded
in the balance sheets and market risk as a result of potential future
decreased in LIBOR. The Company was in a net payable position at December 31,
1993.
8. Borrowings Under Repurchase Agreements
Information regarding borrowings under repurchase agreements is presented
below (in thousands):
<TABLE>
<CAPTION>
Year ended December 31, 1993
Weighted
Maximum Average
Weighted Average Outstanding Balance at Rate at
Average Balance at any December 31, December 31,
Rate Outstanding Month End 1993 1993
<C> <C> <C> <C> <C>
3.63% $48,214 $55,787 $39,570 3.47%
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31, 1992
Weighted
Maximum Average
Weighted Average Outstanding Balance at Rate at
Average Balance at any December 31, December 31,
Rate Outstanding Month End 1992 1992
<C> <C> <C> <C> <C>
4.44% $56,299 $59,059 $57,395 3.59%
</TABLE>
16
Kansas City Southern Industries, Inc.
Exhibit 99.2 File No. 1-4717
Form 10-K December 31, 1993
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
<TABLE>
EXPLANATION OF GRAPHICS USED IN THE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<CAPTION>
MD&A
Graph
Reference Description (Years ended December 31,)
<S> <C> <C> <C> <C> <C>
1 KCSR Locomotive Power - the number of locomotive units is displayed
along with the average horsepower per unit.
1989 1990 1991 1992 1993
Number of Locomotive Units 277 263 241 228 255
Average Horsepower per Unit 2,372 2,479 2,529 2,593 2,617
2 KCSR Net Ton Miles - thousands of net ton miles is displayed along
with average revenue per thousand net ton mile.
1989 1990 1991 1992 1993
Net Ton Miles, in millions 11.8 12.1 12.2 13.3 13.8
Average Revenue per
Net Ton Miles $25.05 $24.93 $24.94 $23.88$23.74
3 KCSR Revenues - graph displays the components of KCSR revenue
summarized in three categories; general commodity, coal and other.
(in millions)
1989 1990 1991 1992 1993
General Commodities $190.1 $196.3 $198.6 $212.8 $222.2
Coal 106.3 105.9 106.5 105.5 106.2
Other 19.0 17.7 17.1 17.3 17.1
4 KCSR Fuel - total fuel costs are displayed graphically along with the
number of diesel fuel gallons consumed.
1989 1990 1991 1992 1993
Total Cost of Fuel,
in millions $18.1 $22.8 $19.9 $19.3 $18.6
Gallons of Fuel Consumed,
in millions 35.4 34.1 31.6 32.9 34.6
5 DST Revenues - DST revenue components are displayed and summarized
into four categories; transaction processing and computer services,
output services, insurance software sales and processing and other.
(in millions)
1989 1990 1991 1992 1993
Transaction Processing &
Computer Services $87.5 $103.2 $123.3 $139.7 $173.2
Output Services 29.6 33.9 54.2 86.9 116.4
Insurance Software
Sales & Processing 2.3 5.0 26.6 38.7 32.6
Other 7.9 7.4 7.0 5.2 20.0
6 Janus Assets Under Management - growth in total assets under
management along with Janus revenue growth is displayed.
1989 1990 1991 1992 1993
Janus Revenues, in millions $10.3 $19.1 $41.7 $97.5 $162.7
Janus Assets Under Management,
in billions $ 1.8 $ 3.1 $ 8.7 $15.5 $ 22.2
7 Net Cash Flow from Operations as Compared to Net Income - operating
cash flows are contrasted with net income. (in millions)
1989 1990 1991 1992 1993
Net Income $ 47.9 $41.4 $ 41.9 $ 63.8 $ 90.5
Operating Cash Flows 117.9 77.6 111.4 122.9 189.2
8 Debt as a Percent of Total Debt + Equity - the debt ratio is
displayed in this graph.
1989 1990 1991 1992 1993
Debt to Debt+Equity Ratio 49.9% 50.9% 46.7% 49.2% 59.9%
</TABLE>
