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, 1995
[ ] 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 Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Company'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%, Noncumulative New York Stock Exchange
Common Stock, $.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU". As of February 29, 1996, 38,604,196 shares
of common stock and 242,170 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 $1,794,325,936 (amount computed based on
closing prices of Preferred and common stock on New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Form 10-K as indicated:
Part of Form 10-K into
Document which incorporated
Company's Definitive Proxy Statement for the 1996 Part III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 1995
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1995 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART i
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . 4
Item 4. Submission of Matters to a Vote of Security Holders. . . . 4
Executive Officers of the Company. . . . . . . . . . . . . 4
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters. . . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . 6
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . 8
Item 8. Financial Statements and Supplementary Data. . . . . . . . 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . . . 70
PART III
Item 10. Directors and Executive Officers of the Company. . . . . . 71
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . 71
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . 71
Item 13. Certain Relationships and Related Transactions . . . . . . 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . . . . . . 72
Signatures . . . . . . . . . . . . . . . . . . . . . . . . 76
ii
<PAGE> 1
Part i
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 8 through 33 of this Form 10-K is incorporated
by reference in response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
The information set forth in response to Item 101 of Regulation S-K relative
to financial information by industry segment for the three years ended
December 31, 1995 under Part II Item 8 Financial Statements and Supplementary
Data at Note 13. Industry Segments on pages 64 through 67 of this Form 10-K is
incorporated by reference in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 8 through 33 of this Form 10-K is incorporated
by reference in partial response to this Item 1.
Employees. As of December 31, 1995, Kansas City Southern Industries, Inc.
("Company" or "KCSI") and its majority owned subsidiaries employed
approximately 4,100 persons, with approximately 2,940 employed in The Kansas
City Southern Railway Company, 925 in Financial Asset Management, and 235
in Corporate & Other. In addition, unconsolidated affiliates of the Company
and its subsidiaries employed approximately 5,500 persons, including 5,000 at
DST Systems, Inc., the largest employer of such ventures.
<PAGE>
<PAGE> 2
Item 2. Properties
The Kansas City Southern Railway Company
The Kansas City Southern Railway Company ("KCSR") owns and operates
approximately 2,738 miles of main and branch lines and approximately 1,114
miles of other tracks. In addition, approximately 193 miles of main and
branch lines and 86 miles of other tracks are operated by KCSR under trackage
rights and leases.
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 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, customer service
center, material warehouses and fueling facilities totaling approximately
227,000 square feet. KCSR owns a major diesel locomotive repair facility in
Pittsburg, Kansas, of approximately 108,000 square feet. KCSR owns freight
and truck maintenance buildings in Dallas, Texas totaling approximately
125,000 square feet. KCSR and KCSI executive offices are located in an eight
story office building in Kansas City, Missouri and are leased from a
subsidiary of the Company.
At December 31, 1995, KCSR's fleet of rolling stock consisted of 422 diesel
locomotives, of which 23 were leased from non-affiliates; 15,343 freight cars,
of which 8,732 were leased from non-affiliates; and 3,839 tractors, trucks and
trailers, of which 3,832 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
regulatory accounting rules, which include depreciation) for the three years
ended December 31, 1995 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>
1995 $ 88.0 17.5% $108.8 21.7%
1994 73.6 15.6 83.4 17.6
1993* 64.4 18.6 54.5 15.8
</TABLE>
*Excludes information for MidSouth Corporation, acquired by the Company in
1993.
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 Systems, Inc. ("DST").
Financial Asset Management
Janus Capital Corporation ("Janus"). Janus leases 227,000 square feet of
office space in three facilities from non-affiliated companies for
administrative, investment, and shareowner processing operations. In
addition, Janus leases approximately 34,000 square feet from a non-affiliated
entity for mail processing and storage requirements. Corporate offices and
mail processing facilities are located in Denver, Colorado, with a customer
service and telephone center in Kansas City, Missouri. Janus also leases
1,400 square feet of office space in London, England for securities research
and trading.
<PAGE> 3
Berger Associates, Inc. ("Berger"). Berger leases approximately 21,000 square
feet of office space in Denver, Colorado from a non-affiliated entity for its
administrative and corporate functions.
Corporate & Other
The Company is an 80% owner of Wyandotte Garage Corporation, a parking
facility in downtown Kansas City, Missouri. The facility is located adjacent
to the Company's and KCSR's headquarters building, and consists of 1,147
parking spaces which are utilized by the Company's and affiliates' employees
and the public.
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.
Pabtex, Inc. owns a 70 acre coal and petroleum coke bulk handling facility in
Port Arthur, Texas.
Southern Leasing Corporation 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 Company 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.
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.
Unconsolidated Affiliates, primarily DST
DST, the Company's largest unconsolidated affiliate, owns an 160,000 square
foot Data Center, located in Kansas City, commonly known as its Winchester
Data Center.
DST master-leases three downtown Kansas City office buildings consisting of
approximately 353,000 square feet in which DST or its affiliates occupy
approximately 183,000 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's subsidiaries own additional facilities in Kansas City, Missouri,
comprising approximately 1,195,000 square feet, and lease 764,000 square feet
in various locations throughout the United States. DST also has international
properties with an aggregate 120,000 square feet of office space.
DST owns or leases mainframe computers and 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.
Mexrail, Inc., a 49% owned affiliate, owns 100% of The Texas Mexican Railway
Company ("Tex-Mex") and certain other assets, including the northern U.S. half
of a rail traffic bridge at Laredo, Texas spanning the Rio Grande river. This
bridge is a significant entry point for rail traffic between Mexico and the
U.S. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi
to Laredo, Texas.
<PAGE> 4
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under Part
II Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 29 through 30 of this Form 10-K is incorporated
by reference in response to this Item 3. In addition, see discussion in Part
II Item 8 Financial Statements and Supplementary Data at Note 11. Commitments
and Contingencies on page 62 of this Form 10-K.
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, 1995.
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-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, 1995. All executive officers are elected annually and
serve at the discretion of the Board of Directors. Certain of the executive
officers have employment agreements with the Company.
Name Age Position(s)
L.H. Rowland 58 President and Chief Executive Officer, Director
M.R. Haverty 51 Executive Vice President, Director
P.S. Brown 59 Vice President and Associate General
Counsel and Assistant Secretary
R.P. Bruening 57 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 49 Vice President - Finance and Tax
A.P. McCarthy 49 Treasurer
J.D. Monello 50 Vice President and Chief Financial Officer
H.H. Salisbury 70 Vice President - Public Affairs
L.G. Van Horn 37 Comptroller
Mr. Rowland has continuously served as President since July 1983 and Chief
Executive Officer since January 1987. He has been employed by the Company
since 1980, serving in numerous management positions and has served as a
director of the Company continuously since 1983. He also serves as
Chairman of the Board of KCSR and as a director of Janus and Berger.
Mr. Haverty has continuously served as Executive Vice President and as a
director of the Company since May 1995. From 1993 to 1995, he served as
Chairman and Chief Executive Officer of Haverty Corporation. From 1991 to
1993, he was an independent executive transportation adviser. From 1989 to
1991, he served as the President and Chief Operating Officer of the Atchison,
Topeka and Santa Fe Railway Company, and for several years prior held numerous
positions within that organization. He also serves as President and Chief
Executive Officer of KCSR.
Mr. Brown has continuously served as Vice President and Associate General
Counsel and Assistant Secretary since July 1992. From 1981 to July 1992, he
served as Vice President - Governmental Affairs.
Mr. Bruening has continuously served as Vice President, General Counsel and
Corporate Secretary since July 1995. From May 1982 to July 1995, he served as
Vice President and General Counsel. He also serves as Senior Vice President
and General Counsel of KCSR.
<PAGE> 5
Mr. Carpenter has continuously served as Vice President - Finance and Tax
since May 1995. He was Vice President - Tax from June 1993 to May 1995. From
1978 to June 1993, he was a member in the law firm of Watson & Marshall L.C.,
Kansas City, Missouri. He also serves as Vice President - Finance and
Tax of KCSR.
Mr. McCarthy has continuously served as Treasurer since December 1989. He
also serves as Treasurer of KCSR.
Mr. Monello has continuously served as Vice President and Chief Financial
Officer since March 1994. From October 1992 to March 1994 he served as Vice
President - Finance. 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. He also serves as Senior Vice
President and Chief Financial Officer of KCSR.
Mr. Salisbury has continuously served as Vice President - Public Affairs since
May 1986.
Mr. Van Horn 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. He also
serves as Vice President and Comptroller of KCSR.
There are no arrangements or understandings between the executive officers and
any other person pursuant to which he was or is to be selected as an officer,
except with respect to the executive officers who have entered into employment
agreements, which agreements designate the position(s) to be held by the
executive officer.
None of the above officers are related to one another by family.
<PAGE> 6
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters
The information set forth in response to Item 201 of Regulation S-K on the
cover (page i) under the heading "Company Stock", and in Part II Item 8
Financial Statements and Supplementary Data at Note 14. Quarterly Financial
Data (Unaudited) on pages 68 through 69 of this Form 10-K is incorporated by
reference in partial response to this Item 5.
The Company's Board of Directors authorized a 33% increase in its common stock
dividend in January 1996. 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 Company
at December 31, 1995 were $348 million.
At December 31, 1995, there were 5,622 holders of the Company'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)
The selected financial data below should be read in conjunction with the
financial statements and the related notes thereto and the auditor's report
thereon included in this Form 10-K, and such selected financial data is
qualified by reference thereto.
<TABLE>
<CAPTION>
1995* 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Revenues $ 775.2 $1,088.4 $ 946.0 $ 722.3 $ 624.9
Income from continuing
operations $ 236.7 $ 104.9 $ 97.0 $ 63.8 $ 45.7
Income from continuing
operations per
common share $ 5.41 $ 2.32 $ 2.16 $ 1.43 $ 1.08
Total assets $2,039.6 $2,230.8 $1,917.0 $1,248.4 $1,091.9
Long-term obligations $ 633.8 $ 928.8 $ 776.2 $ 387.0 $ 317.1
Cash dividends per
common share $ .30 $ .30 $ .30 $ .30 $ .27
Ratio of earnings to
fixed charges
(Exhibit 12.1 hereto) 6.14 ** 3.28 3.68 3.40 2.88
</TABLE>
* Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to
the DST public offering and associated transactions completed in November
1995, which resulted in a reduction of Company ownership of DST to
approximately 41% and deconsolidation of DST from the Company's
consolidated financial statements. The public offering and associated
transactions resulted in a $144.6 million after-tax gain, or $3.31 per
share to the Company (see Note 2 to the consolidated financial statements
included in this Form 10-K).
<PAGE> 7
** Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1995 reflects DST as a
majority owned unconsolidated subsidiary through October 31, 1995, and an
unconsolidated 41% owned affiliate thereafter, in accordance with
applicable Securities and Exchange Commission rules and regulations. If
the ratio was computed to exclude the one time pretax gain of $296.3
million associated with the public offering and associated transactions,
the 1995 ratio of earnings to fixed charges would have been 3.04.
All years reflect the reclassification of certain income/expense items from
"Revenues" and "Costs and Expenses" to a separate "Other, net" line item in
the Consolidated Statements of Income.
Above amounts reflect the 2-for-1 common stock split to shareholders of record
on February 19, 1993, paid March 17, 1993 and the 2-for-1 common stock split
to shareholders of record on February 14, 1992, paid March 17, 1992.
The information set forth in response to Item 301 of Regulation S-K under Part
II Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 8 through 33 of this Form 10-K is incorporated
by reference in partial response to this Item 6.
<PAGE>
<PAGE> 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-K,
contains forward-looking comments. Such comments are based upon information
currently available to management and management's perception thereof as of
the date of this Form 10-K. Actual results of the Company's operations could
materially differ from those forward-looking comments. The differences could
be caused by a number of factors or combination of factors including, but not
limited to, those factors identified throughout this Item 7 discussion and in
Part II Item 8 Financial Statements and Supplementary Data at Note 13.
Industry Segments on pages 64 through 67. Readers should take these factors
into account in evaluating any such forward-looking comments.
Kansas City Southern Industries, Inc. ("KCSI" or "Company"), a Delaware
corporation organized in 1962, is a diversified holding company with principal
operations in rail transportation, through its subsidiary The Kansas City
Southern Railway Company, and Financial Asset Management businesses. The
Company supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other
"non-operating" and more passive investments. This presentation is intended
to clarify and focus on the results of operations, liquidity, capital
structure and business developments of the Company and should be read in
conjunction with the Consolidated Financial Statements and Notes and
the Report of Independent Accountants thereon contained in this Form 10-K.
The Company's business activities by industry segment and principal subsidiary
companies are:
The Kansas City Southern Railway Company - A 100% owned subsidiary, The Kansas
City Southern Railway Company ("KCSR") operates a Class i Common Carrier
Railroad system. Also included in this segment is Carland, Inc., which leases
various types of equipment including railroad rolling stock, roadway
maintenance equipment and vehicles. KCSR is the principal customer of
Carland, Inc.
Financial Asset Management - Management of investments for mutual funds,
private and other accounts through Janus Capital Corporation ("Janus"), an 83%
owned subsidiary, and Berger Associates, Inc. ("Berger"), an 80% owned
subsidiary.
Corporate & Other - Equity in earnings in unconsolidated affiliates, primarily
DST Systems, Inc. ("DST"), formerly a wholly-owned subsidiary, but now a 41%
owned affiliate (see "DST Public Offering" below); unallocated holding company
expenses; intercompany eliminations; and other less significant consolidated
subsidiaries, including, among others, Pabtex, Inc., Trans-Serve, Inc. and
Southern Leasing Corporation.
RECENT ANNOUNCEMENTS
Dividend Increase and Reinvestment Program. On January 25, 1996, the
Company's Board of Directors declared a 10 cent quarterly dividend on the
Company's outstanding common stock. The dividend represents a 33% increase
over the previous quarter's dividend and is payable on March 19, 1996. Also,
a dividend reinvestment plan, announced in September 1995, was implemented on
January 1, 1996. The reinvestment plan allows registered common stockholders
to reinvest all or a portion of dividends received in common shares.
Senior Management Employment Agreements. On January 16, 1996, the Company
announced the adoption of a performance based compensation plan for senior
management of KCSI and KCSR. Senior officers agreed to freeze their salaries
for three years effective January 1, 1996, and to forego cash incentive
compensation for the same three years in exchange for performance stock
options, which provide returns based upon appreciation of the Company's market
value.
<PAGE> 9
TMM Partnership. On December 12, 1995, the Company and Transportacion
Maritima Mexicana, S.A. de C.V. ("TMM") announced that they had reached an
agreement to form a joint venture that will compete for concessions to operate
Mexico's railroad lines in the forthcoming privatization process.
RESULTS OF OPERATIONS
Significant Developments. Consolidated operating results during 1993-1995
were affected by the following significant developments.
DST Public Offering. On October 31, 1995, DST and the Company effected an
initial public offering for a total of 22 million shares of DST common stock.
In conjunction with the offering, the Company completed an exchange of DST
shares for 1.8 million shares of KCSI common stock held by the KCSI Employee
Stock Ownership Plan ("ESOP"). On November 6, 1995, an over-allotment option
was exercised by the underwriters of the DST common stock offering for an
additional 3.3 million shares of DST common stock held by KCSI, effectively
completing the public offering. An after-tax gain of approximately $145
million was recorded by the Company during the fourth quarter of 1995 from
this transaction, representing $3.45 per share in fourth quarter 1995 and
$3.31 per share for the year ended December 31, 1995. As a result of the
offering and associated transactions, the Company's investment in DST was
reduced to approximately 41%, and has been accounted for as an equity
investment retroactive to January 1, 1995.
The purpose of the offering was to obtain market recognition of DST's
performance and to obtain proceeds for the retirement of debt, repurchase of
Company common stock and general corporate purposes. The net proceeds to the
Company from the offering and repayment of indebtedness by DST totaled
approximately $200 million, after applicable income taxes.
As a result of the DST public offering and associated transactions, the
Company has realigned its business segments to reflect the Company's ongoing
focus in The Kansas City Southern Railway Company and Financial Asset
Management operations. In connection with this realignment, several of the
Company's less significant consolidated subsidiaries, which were previously
reported together with KCSR, will be included in the Corporate & Other
segment. The Corporate & Other segment will also include the Company's equity
investment in DST and other unconsolidated affiliates.
Mexrail, Inc. Investment. On November 10, 1995, the Company purchased a 49%
interest in the common stock of Mexrail, Inc. ("Mexrail"), including Mexrail's
wholly-owned subsidiary, The Texas Mexican Railway Company ("Tex-Mex"), from
TMM. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi
to Laredo, Texas. The purchase price of $23 million (which is subject to
certain conditions) was financed through existing credit lines. The
investment is being accounted for under the equity method of accounting. The
transaction resulted in the recording of intangibles as the purchase price
exceeded the fair value of the underlying net assets. The intangible amounts
will be amortized over a period of 40 years.
Stock Repurchase Program. On April 24, 1995, the Company's Board of Directors
authorized management to repurchase up to six million shares of KCSI common
stock in open market transactions as market conditions permit. In November
1995, the total shares authorized to be repurchased was increased to eight
million shares. As of December 31, 1995, approximately 3.2 million shares
were repurchased at an aggregate cost of approximately $139 million and an
additional 1.8 million shares were acquired through the exchange of DST stock
with the ESOP, representing a value of approximately $85 million. The
repurchases were financed through proceeds received in connection with the DST
public offering and DST debt repayment to KCSI, and through existing credit
lines. In addition, the Company entered into a forward stock purchase
contract for the repurchase of shares. See discussion in "Financial
Instruments and Purchase Commitments" below.
<PAGE> 10
New KCSR Management. In May 1995, the Company's Board of Directors elected
Michael R. Haverty to the offices of President and Chief Executive Officer of
KCSR, and Executive Vice President of KCSI. He was also appointed a Director
of KCSI. Mr. Haverty brings more than 25 years of railroad experience to
KCSR, and his position as Executive Vice President and Director of the Company
highlights the renewed focus the Company has placed on its railroad
operations. The Company also filled several other important KCSR senior
management positions, bringing numerous years of relevant industry experience
to the organization.
KCSR Unusual Costs. During the first and second quarter of 1995, KCSR
recorded approximately $19.2 million, after tax, or approximately $0.44 per
share, of unusual costs and expenses related to employee separations and other
personnel related activities, unusual system operational related expenses, and
reserves for contracts, leases and property.
Railroad Industry Trends and Competition. In 1994 and 1995, and continuing
into 1996, the railroad industry has experienced ongoing consolidation.
Specifically, Burlington Northern, Inc. and Santa Fe Pacific Corporation were
merged in 1995. KCSR competes with both of these railroads in its
marketplace. In 1995, the Union Pacific Railroad ("UP") acquired the Chicago
and North Western Transportation Company. KCSR is in direct competition with
the UP for certain freight traffic moving between Kansas City and Gulf Ports
served by KCSR. On August 3, 1995, the UP and the Southern Pacific Rail
Corporation ("SP") announced plans to merge. The merger of the UP and SP has
not been approved by the Interstate Commerce Commission, nor its successor the
Surface Transportation Board of the Department of Transportation. The Company
is opposed to the planned UP/SP merger on the basis of substantially reduced
competition. KCSR is in direct competition with both of these companies. As
these transactions are not completed or have only recently been completed, the
Company cannot predict their ultimate outcome or effect on KCSR.
KCSR and the UP have a haulage and trackage rights agreement, which gives KCSR
haulage rights in Nebraska, Iowa, Kansas, Missouri and Texas. The haulage
rights require the UP to move KCSR traffic in UP trains and the trackage
rights allow KCSR to operate its own trains over UP tracks.
In addition to competition within the railroad industry, highway carriers
compete with KCSR throughout its operating area. 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, have
placed a greater emphasis on competing in the intermodal marketplace, working
together to provide end-to-end transportation of products. Mississippi and
Missouri River barge traffic also competes with KCSR in the transportation of
bulk commodities such as grains, steel, and petroleum products.
Debt Securities Registration and Offerings. On December 18, 1995, the Company
issued $100 million of 7% Debentures due 2025. The Debentures are redeemable
at the option of the Company at any time, in whole or in part, at a redemption
price equal to the greater of (a) 100% of the principal amount of such
Debentures and (b) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the date of
redemption on a semiannual basis at the Treasury Rate (as defined in the
Debentures agreement) plus 20 basis points, plus in each case accrued interest
thereon to the date of redemption. The net proceeds of this transaction were
used to repay indebtedness on the Company's existing credit lines and for
acquisition of KCSI common stock.
On June 24, 1993, the Company issued $100 million of debt securities comprised
of Notes bearing interest at a rate of 5.75% and maturing in 1998. The net
proceeds of this transaction, along with proceeds from the Company's then
existing $250 million credit agreement, were used to refinance certain
indebtedness associated with the MidSouth Corporation ("MidSouth") acquisition
in July 1993.
On March 3, 1993, the Company issued $100 million of debt securities as 6.625%
Notes due 2005. The Company used the net proceeds for general corporate
purposes, including subsidiary debt repayments, working capital, capital
expenditures, acquisitions of or investments in businesses and assets, and
acquisitions of the Company's common stock.
<PAGE> 11
On September 29, 1993, the Company filed a Registration Statement, registering
$500 million in securities. The securities may be offered in the form of
Common Stock, New Series Preferred Stock $1 par value, Convertible Debt
Securities, or other Debt Securities (collectively, "the Securities"). Net
proceeds from the sale of the Securities are expected to be added to the
general funds of the Company and used principally for general corporate
purposes, including working capital, capital expenditures and acquisitions of
or investments in businesses and assets. The Company has not yet sought to
have the Registration Statement declared effective by the Securities and
Exchange Commission and no securities have been issued.
KCSI Credit Agreements. On May 5, 1995, the Company established a new credit
agreement in the amount of $400 million. The credit agreement replaced
approximately $420 million of then existing Company credit agreements which
had been in place for varying periods since 1992. Proceeds of the
facility have been and are anticipated to be used for general corporate
purposes. The agreement contains a facility fee ranging from .07-.25% per
annum, interest rates below prime and terms ranging from one to five years.
The Company also has various other lines of credit totaling $200 million, with
interest rates below prime and terms of less than one year. At December 31,
1995, the Company had no indebtedness outstanding under these facilities.
During 1994 and 1993, the Company established or increased credit agreements
with several lending institutions, increasing the Company's borrowing ability
by $150 million to $450 million. In 1994, these agreements were utilized to
finance the Berger acquisition and subsidiary working capital requirements.
During 1993, proceeds were used to fund the acquisition of MidSouth and
refinance certain MidSouth indebtedness. All of these agreements were
replaced by the new credit agreement established on May 5, 1995, as discussed
above.
KCSR Equipment Trust Certificates. In late 1994, KCSR completed the private
placement of financing for locomotives and rolling stock using Equipment Trust
Certificates ("ETC's"). The ETC's were placed for an aggregate of $54.7
million representing 31 locomotives, 625 boxcars and 300 covered hoppers,
which had been placed in service during 1993 and 1994. The financing
represents 85% of equipment value, bears interest at a rate of 8.56% and
matures in 2006.
Berger Acquisition. On October 14, 1994, the Company completed the
acquisition of a controlling interest in Berger. Berger is the investment
advisor to The Berger One Hundred Fund, The Berger Growth and Income Fund
(formerly The Berger One Hundred and One Fund) and The Berger Small Company
Growth Fund, as well as to private and other accounts. In 1994, the Company
made payments of $47.5 million in cash, pursuant to a Stock Purchase Agreement
(the "Agreement"). The Agreement also provides for additional purchase price
payments totaling approximately $62.4 million, contingent upon Berger
attaining certain levels (up to $10 billion) of assets under management, as
defined in the Agreement, over a five year period. Approximately $3.1 million
of contingent payments were made during 1995.
The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% (acquired in 1992) to
over 80%. Adjustments to appropriate asset and liability balances have been
recorded based upon estimated fair values of such assets and liabilities. The
transaction resulted in the recording of intangibles as the purchase price
exceeded the fair value of underlying tangible assets. Any additional
payments made under the contingency clause of the Agreement as discussed above
will be reflected as an adjustment to the purchase price. The intangible
amounts are being amortized over their estimated economic life of 15 years.
The financial statements of Berger were consolidated into the Company
effective with the closing of the transaction. Assuming the transaction had
been completed on January 1, 1994, the addition of Berger's revenues and net
income, including adjustments to reflect the effects of the acquisition on a
pro forma basis, as of and for the year ended December 31, 1994, would have
had an immaterial effect on the consolidated results of the Company.
<PAGE> 12
Janus Compensation Arrangements Termination/Berger Stock Bonus. In fourth
quarter 1994, the Company recorded certain one time charges to earnings from
its Financial Asset Management segment. These one time items resulted from
the early termination of employment and earnings related compensation
arrangements for certain Janus key employees, and for establishment of
additional minority stock ownership of Berger for key Berger employees.
The Janus compensation arrangements, which began in 1991, permitted
individuals to earn units which vested over time, based upon Janus earnings.
These arrangements were scheduled to be fully vested at the end of 1996 and
would have continued to accrue benefits in subsequent years. The Company
negotiated the early termination of the arrangements, which resulted in
payments by Janus of $48 million in cash, of which approximately $21 million
had been accrued. Termination of the arrangements resulted in a net reduction
in Janus' 1994 contribution to KCSI's consolidated earnings of $13.6 million
or $.30 per share. By terminating this program, 1995 Janus operating expenses
were approximately $10 million lower than what they would have been if the
compensation arrangements were still in effect. Future years should continue
to benefit from this transaction through reductions in Janus operating
expenses.
The Berger stock transaction established minority stock ownership for certain
key employees and resulted in a one time pretax increase in Berger's operating
expenses of $1.8 million. The additional minority stock provides ownership
incentive to key employees for future growth of Berger and was anticipated in
the acquisition discussed earlier. These Janus and Berger transactions
reduced KCSI's consolidated 1994 earnings by $.32 per share.
Completion of the Kansas City Southern Railway Track and Structure Rebuilding
Program/Acceleration of MidSouth Corporation Rebuilding Program. During 1994,
KCSR concluded the major portions of a rail track and structure program which
first began in 1986. In addition, as part of the MidSouth acquisition, a
planned upgrade of the existing MidSouth roadbed was added to the program.
Increased traffic levels on both the original KCSR route and the MidSouth,
however, accentuated the need to accelerate the MidSouth portion of the
program. By the end of 1994, KCSR had essentially completed the MidSouth
upgrade program thereby improving the capacity, efficiency and safety of the
East/West MidSouth route. Accordingly, KCSR capital expenditures (including
Carland, Inc.) for 1994 were $191 million versus $100 million in 1993.
Acceleration of the MidSouth program and completion of the KCSR program
resulted in a reduction of railway capital expenditures to $110 million in
1995.
MidSouth Acquisition. The Company completed the acquisition of MidSouth, a
regional railroad holding company headquartered in Jackson, Mississippi, on
June 10, 1993. The purchase price for the acquisition of the MidSouth common
stock aggregated approximately $213.5 million, paid in cash. The MidSouth
acquisition was accounted for as a purchase. Results of operations of the
Company for the year ended December 31, 1993 include the operations of
MidSouth as a consolidated subsidiary effective with the closing of the
transaction. Excluding the effect of additional tax expense for federal tax
rate increases related to deferred accruals applicable to 1993, the
transaction did not result in any dilution in the Company's 1993 or 1994
earnings. As a result of this acquisition, the Company acquired operating
loss carryforwards, of which $54 million remained at December 31, 1995.
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 MidSouth acquisition provides an important East/West rail line, as a
complement to KCSR's predominantly North/South route. This East/West line,
running from Dallas, Texas to Meridian, Mississippi, has allowed the Company
to be more competitive in the transcontinental intermodal transportation
market, among others. In mid-November 1994, KCSR began dedicated through
train service between Dallas, Texas and Atlanta, Georgia for intermodal
traffic. This new dedicated service was initiated in conjunction with Norfolk
Southern Railway Company ("NS"), which interchanges with KCSR at Meridian,
Mississippi, for transport of intermodal traffic to destinations on the NS in
the Southeastern and Eastern United States. This intermodal route competes
directly with truck carriers along the Interstate 20 corridor and offers
service times which are competitive with both truck and other rail carriers.
<PAGE> 13
Acquisition of the MidSouth also adds customers in the South Central U.S. to
KCSR's traffic base and has provided opportunities for the rerouting of
certain commodity movements over less circuitous routes. Effective January 1,
1994, MidSouth was operationally and administratively merged into KCSR.
1993 Tax Legislation. On August 10, 1993, President Clinton signed into law
the Omnibus Budget Reconciliation Act of 1993. This tax legislation changed
numerous provisions of the then existing tax law. The most significant of
these changes affect the Company's KCSR operations. The new tax law increased
the corporate tax rate from 34% to 35%. Accordingly, the Company's 1993
earnings include additional income tax expense attributable to the tax rate
increase retroactive to January 1, 1993. These charges, which are included in
the provision for taxes on income, represent $3.4 million ($.08 per share)
related to deferred tax accruals and $900,000 ($.02 per share) related to 1993
earnings.
Union Labor Negotiations. Collective bargaining agreements with KCSR union
employees, representing approximately 85% of KCSR's workforce, were executed
in 1991 and 1992. These agreements allowed for implementation of productivity
improvements and cost sharing arrangements with contract employees.
Productivity improvements have been realized by modifications in the operation
of trains through reduced crew sizes and elimination of certain unproductive
work rules. These productivity improvements were necessary to enable the
railroad industry to remain competitive with other modes of transportation.
These labor agreements reopened for negotiation at the end of 1994 for most
bargaining unions while others reopened for negotiation in varying periods
beginning in 1995. In December 1995, KCSR reached a tentative agreement with
the United Transportation Union. A similar tentative agreement was also
reached with the Brotherhood of Locomotive Engineers in February 1996.
Collectively, these two bargaining groups represent approximately 40% of
KCSR's workforce, and include trainmen, conductors, engine service personnel,
yardmasters and locomotive engineers. KCSR management is currently in the
process of meeting with these and other unions representing its employees
through the National Railway Labor Conference (along with other Class I
railroads), seeking to negotiate issues on a national level. Discussions with
these unions are ongoing.
As a result of the labor agreements executed in 1991 and 1992, management
believes the Company is better positioned to compete effectively with
railroads contiguous to its lines as well as other forms of transportation.
However, railroads remain restricted by certain remaining antiquated operating
rules and are thus prevented from achieving optimum productivity.
KCSR and other railroads continue to be affected by labor regulations which
are more burdensome than those governing non-rail industries, including its
principal trucking competitors. The Railroad Retirement Act requires up to a
23.75% contribution by railroads on eligible wages, while the Social Security
and Medicare Acts only require a 7.65% employer contribution on similar wage
bases. Other programs, such as The Federal Employees Liability Act (FELA),
when compared to worker's compensation laws vividly illustrate the competitive
disadvantage placed upon the rail industry by federal labor regulations.
Safety and Quality Programs. KCSR continued implementation and emphasis of
important safety and quality programs during 1995. Related benefits are
expected to be recurring in nature and realizable over future years. In 1995,
the Company reported a 16% decrease from 1994 in Federal Railroad
Administration reportable employee injuries. However, in 1994, the Company
experienced a doubling of reportable employee injuries compared to 1993,
primarily attributable to the merger of the MidSouth into KCSR (MidSouth
statistics were not included prior to 1994). Despite the decrease in
reportable injuries in 1995, associated operating expenses did not decrease
similarly based on the nature of the injuries. With respect to 1994, although
overall employee injuries increased over 1993, associated operating expenses
did not rise in the same proportion as the number of injuries, primarily as a
result of KCSR's active safety programs coupled with the lesser severity of
1994 injuries. In 1993, the Company experienced a 31% reduction in employee
injuries as compared to 1992. "Safety" and "Quality" programs comprise two
important ongoing elements of railroad management's goal of reducing employee
injuries. Associated expenses are not anticipated to have a material impact
on operating results in future years.
DST Business Developments 1995. DST equity in earnings included in the
Company's 1995 results was impacted by three significant transactions in
addition to the previously discussed public offering.
<PAGE> 14
In fourth quarter 1995, DST's 29% owned equity investment, The Continuum
Company, Inc. ("Continuum"), recorded a non-recurring charge related to
Continuum's December 1995 acquisition of SOCS Groupe, S.A., a French insurance
software firm. DST recognized an estimated $8.4 million loss for its share of
Continuum's non-recurring charge, of which the Company's approximate 41% share
is included in equity in earnings from unconsolidated affiliates.
On January 31, 1995, DST completed the sale of its 50% interest in Investors
Fiduciary Trust Company Holdings, Inc. ("IFTC") to State Street Boston
Corporation ("State Street"). At closing, DST received 2,986,111 shares of
State Street common stock in a tax free exchange (representing an approximate
4% ownership interest in State Street). As a result of this transaction, the
Company recognized a net gain of $4.7 million in first quarter 1995. With the
closing of the transaction, IFTC ceased to be an unconsolidated affiliate of
DST and no further equity in earnings of IFTC were recorded by DST. The
Company recognized equity in earnings from IFTC of $6.5 and $4.8 million in
1994 and 1993, respectively. DST received approximately $1.5 million in
dividends from State Street during 1995.
DST Business Developments 1994 and 1993.
Developmental and International Business Units. During 1994, combined
operating and net losses from DST's developmental and international business
units had an unfavorable impact on DST results. During 1993, DST began an
expansion of certain of its product offerings and geographic presence. It
increased its Portfolio Accounting product offerings with the acquisitions of
Clarke & Tilley, Ltd. (a United Kingdom entity), a developer and distributor
of investment accounting software, and Belvedere Financial Systems, which
develops and markets an investment accounting product. DST expanded its
mutual fund product offerings with the 1993 acquisition of Corfax Benefit
Systems, Ltd. and the formation of Clarke & Tilley Data Services, Ltd., a 50%
owned United Kingdom entity. Additionally, DST expanded marketing and product
support activities for its image-based work management product (Automated Work
DistributorTM, "AWD(R)") internationally, using direct marketing and
Continuum, which distributes AWD(R) to the insurance industry. DST also
acquired a 60% interest in DBS Systems Inc., which has proprietary software to
provide billing services for DirecTVTM, a commercial direct broadcast
satellite system.
These business units invested in expanded product development and marketing
expenditures during 1994, which reduced DST profitability for 1994 as compared
to 1993. In addition, when compared with DST core businesses, a higher
percentage of revenues from these developmental businesses was derived from
software licensing activities. Therefore, operating results were affected
greatly by the timing of software license activities.
Output Technologies, Inc. ("OTI"). DST's output processing businesses, OTI,
continued to experience growth trends in 1994. OTI printed 802 million pages
of output in 1994, up 20% from the 669 million pages in 1993, resulting in
improved earnings.
Vantage/Continuum Transaction. Effective September 30, 1993, DST completed
the merger of its 90.5% owned subsidiary, Vantage Computer Systems, Inc.
("Vantage"), into a subsidiary of Continuum, a publicly traded international
consulting and computer services firm. Vantage and its wholly-owned
subsidiary, Vantage P&C Systems, Inc., provide policyholder record keeping
data processing and software for the life and property/casualty insurance
industries. In the transaction, DST received approximately 3.6 million shares
of Continuum stock. As a result of this transaction and additional Continuum
stock purchases, DST owned approximately 24% of the outstanding common stock
of Continuum at December 31, 1993. In 1994, DST purchased additional
Continuum shares through privately negotiated transactions. At December 31,
1994, DST owned approximately 29% of Continuum's outstanding common stock (5.5
million shares). In the initial exchange, DST exchanged Vantage stock with a
book value of approximately $17 million for Continuum stock with a then
current market value of approximately $62 million. DST accounted for the
initial exchange as a non-cash, non-taxable exchange in investment basis of
Vantage for an investment in Continuum. Accordingly, no gain recognition was
associated with the transaction. Effective October 1, 1993, Vantage results
were no longer consolidated with DST and Continuum earnings were included in
DST results on the equity basis.
<PAGE> 15
INDUSTRY SEGMENT RESULTS
The Company's major business activities are classified as follows (in
millions):
<TABLE>
<CAPTION>
1995* 1994 1993
<S> <C> <C> <C>
Revenues
KCSR $ 502.1 $ 472.5 $ 413.0
Financial Asset Management 239.8 186.3 159.9
Information & Transaction Processing 401.7 341.2
Corporate & Other 33.3 27.9 31.9
Total $ 775.2 $1,088.4 $ 946.0
% Change from Prior Year (28.8)% 15.1% 31.0%
Operating Income
KCSR $ 66.6 $ 106.7 $ 97.5
Financial Asset Management 92.7 51.1 77.2
Information & Transaction Processing 31.2 29.9
Corporate & Other (0.1) (1.8) (2.8)
Total $ 159.2 $ 187.2 $ 201.8
% Change from Prior Year (15.0)% (7.2)% 77.5%
</TABLE>
* Financial information for the year ended December 31, 1995 has been
restated to reflect DST as an unconsolidated affiliate as of January 1,
1995 as a result of the DST public offering and associated transactions
completed in November 1995, which reduced the Company's ownership in DST to
approximately 41%. The above noted segments reflect a reclassified
presentation of the Company's KCSR and Corporate & Other segments, as
discussed previously. In addition, all years reflect the reclassification
of certain other income/expense items from "Revenues" and "Costs and
Expenses" to a separate "Other, net" line item in the Consolidated
Statements of Income.
The presentation hereon reflects a restated 1995 versus historical years 1994
and 1993. If fiscal years 1994 and 1993 were restated to a comparable basis
(i.e., DST would be reflected as an unconsolidated affiliate), consolidated
revenues and operating income would have been as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues $ 775.2 $ 691.2 $ 607.9
% Change from Prior Year 12.2% 13.7% 31.0%
Operating Income $ 159.2 $ 155.9 $ 171.9
% Change from Prior Year 2.1% (9.3)% 73.5%
</TABLE>
The Kansas City Southern Railway Company
The Kansas City Southern Railway Company defined segment operations are
comprised of KCSR (a wholly-owned subsidiary) and Carland, Inc., a
wholly-owned subsidiary of the Company through various holding companies.
KCSR operates a rail system of 2,931 main and branch line route miles and
4,131 total track miles in a nine state region, including Missouri, Kansas,
Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas.
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
accesses the states of Nebraska and Iowa, and serves the ports of Houston and
Galveston, Texas. Kansas City, Missouri, as
<PAGE> 16
the second largest rail center in the United States, represents an important
gateway for KCSR where it interchanges freight with other major rail carriers.
KCSR also has important interchange gateways in New Orleans and Shreveport,
Louisiana; Dallas and Beaumont, Texas; and Jackson and Meridian, Mississippi.
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. Carland, Inc. leases various types of
equipment to KCSR, including railroad rolling stock, roadway maintenance
equipment and vehicles.
In 1995, The Kansas City Southern Railway Company segment contributed $11.4
million to the Company's consolidated results as compared to $42.4 million in
1994. The significant decrease in 1995 is attributable to the increased costs
and expenses experienced through second quarter 1995 as discussed earlier,
some continuing system operating difficulties into third quarter 1995 and
additional expenses required to satisfy KCSR customer service needs.
The following summarizes components of KCSR's revenues (in millions per Form
R-1):
<TABLE>
<CAPTION>
1995 1994 1993*
<S> <C> <C> <C>
General Commodities $ 339.8 $ 324.6 $ 205.1
Coal 102.6 101.7 106.2
Intermodal 39.0 25.5 17.1
Other 20.7 20.7 17.1
Total $ 502.1 $ 472.5 $ 345.5
</TABLE>
*Excludes information for MidSouth Corporation, acquired by the Company in
1993.
KCSR revenues were 6% higher in 1995 than 1994 from increased volumes in all
areas - general commodities (3%), coal (4%) and intermodal (48%). Continued
downward pressure on rates partially offset this volume growth. Revenues in
1994 grew significantly over 1993 as a result of additional revenues from the
MidSouth acquisition and operating synergies created by the combination. As
domestic economic conditions improved in 1994, KCSR carloading volumes also
increased. In 1993, KCSR revenues increased modestly, principally from volume
increases in both general commodity and coal trains offset by downward
pressure on rates.
In general, competition, most directly from over the road truck
transportation, is the primary cause of downward pressure on rates as trucks
have eroded the railroad industry's share of transportation dollars. Changing
regulations, subsidized highway improvement programs and favorable labor
regulations have improved the competitive position of trucks as an alternative
mode of surface transportation for many commodities. In recent years,
railroad industry management has sought avenues for improving its competitive
positions and forged alliances with truck companies in order to provide
faster, safer and more efficient service to its customers. KCSR has joined
this industry trend by entering into agreements with several truck companies
and initiation of through train intermodal service between Dallas, Texas and
Meridian, Mississippi in conjunction with Norfolk Southern Railway Company
("NS"). This new intermodal service began in mid-November 1994. In 1995,
business volumes benefited from a full year associated with this new
intermodal service, and together with continued intermodal growth in general,
reflect a $13.5 million (53%) increase in revenues over comparable 1994. The
Company's growth in intermodal volumes in 1995 reflects an emphasis on
competing not only with other railroads, but also with the trucking industry.
Coal continues to be the largest single commodity handled by KCSR, generating
20% of total revenue carloadings in 1995. KCSR delivers coal to six electric
generating plants located at Amsterdam, Missouri; Flint Creek, Arkansas;
Welsh, Texas; Mossville, Louisiana; Kansas City, Missouri; and Pittsburg,
Kansas. Two coal customers, Southwestern Electric Power Company and Gulf
States Utility Company, comprised approximately 88% of total coal revenues
generated by KCSR in 1995. KCSR also delivers lignite to an electric
generating plant at Monticello, Texas ("TUMCO"). 1995 unit coal revenue was
slightly higher than comparable 1994 due to increased volumes, primarily from
the resumption of shipments to TUMCO, which had been out of service since late
1993 and returned on line in June 1995.
<PAGE> 17
Petroleum and chemicals, serviced via tank and hopper cars primarily to
markets in the Southeast and Northeast through interchange with other rail
carriers, as a combined group represent the largest commodity to KCSR in terms
of revenue ($128.2 million in 1995 versus $121.5 million in 1994). Revenue
growth in 1995 was driven by a 5% increase in petroleum and chemical
carloadings over 1994. KCSR also had an 18% increase in pulp/paper revenues
in 1995 as compared to 1994, due to a strong market for paper, coupled with
reduced 1994 revenues attributable to service interruption caused by the Soo
Line strike. KCSR, the third largest railroad in terms of pulp and paper
carload originations in the U.S., serves eleven paper mills directly
(including International Paper Co. and Georgia Pacific, among others) and six
others indirectly through short-line connections, transporting pulpwood,
woodchips, poles and raw fiber used in the production of paper, pulp and
paperboard.
Revenues for farm products increased approximately 12% in 1995 versus 1994,
largely due to weak results in 1994 from slow export grain traffic and the
Company's increased focus on the domestic market in 1995.
The increased traffic levels in 1995, together with the unusual costs and
expenses through second quarter 1995 discussed earlier, resulted in increased
costs and expenses to $380.2 million versus $318.0 million in 1994. Higher
costs were particularly evident in the transportation, maintenance of way and
maintenance of equipment areas, largely due to increases in the number of
employees (e.g., train crews to manage higher volumes). Also, during fourth
quarter 1995, KCSR recorded an expense of approximately $3.1 million, pretax,
for expected payments to employees upon ratification of new labor agreements
currently in negotiation, but retroactive to 1995. KCSR depreciation and
amortization expense, including Carland, Inc., increased 16% to $55.3 million
in 1995 versus $47.8 in 1994 due to the completion, in late 1994, of KCSR's
substantial track and roadbed rebuilding program, and interest expense was 29%
higher than 1994 primarily from higher average debt levels related to prior
year capital programs. KCSR's operating ratio, a common efficiency
measurement among Class i railroads, increased to 84.8% for the year ended
December 31, 1995 versus 76.2% for 1994, primarily as a result of the unusual
first and second quarter 1995 costs and expenses discussed earlier. Excluding
these unusual costs and expenses, the operating ratio would have been 78.9%,
with the increase over 1994 largely due to increased depreciation as noted
above.
KCSR 1994 revenues rose 2% from 1993, including the full year from MidSouth in
1993. General commodity carloadings rose 6% for 1994 from increased
intermodal traffic (which experienced a 46% improvement), but were somewhat
offset by lower unit coal carloadings discussed below. Carloadings of
chemicals, petroleum and food products were also higher in 1994 but were
somewhat offset by a decline in export grain traffic, which was weak for much
of 1994. Reduced pulp/paper carloadings were attributable to the Soo Line
strike, which had a disproportionate effect on KCSR. The increased intermodal
traffic was the result of improved volumes in the Kansas City/Dallas route and
initiation of through train service over the Dallas/Atlanta route in
conjunction with NS in late 1994. Unit coal revenues declined 4% in 1994
compared to prior year from reduced carloadings in large part as a result of
the absence of shipments to the TUMCO plant served by KCSR. This plant
accounted for 2.2 million net tons and 247 unit coal trains in 1993, which
were temporarily lost to KCSR because of a smoke stack collapse at the plant.
Improved traffic levels in 1994 also translated into increased operating
expenses. Increased expenses were experienced in salaries and wages (train &
enginemen), car hire (intermodal equipment usage and system congestion),
maintenance of equipment (intermodal traffic) and interest expense (related to
the indebtedness associated with the MidSouth acquisition). Even though
operating expenses were higher in 1994, KCSR was able to reduce its operating
ratio from 77.0% in 1993 to 76.2% in 1994.
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
<PAGE> 18
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.
KCSR operations are constantly faced with substantial costs related to fuel,
labor and maintenance of equipment and of its roadbed. KCSR locomotive fuel
usage represented 7% of railroad operating costs in 1995. Fuel costs are
affected by traffic levels, efficiency of operations and equipment, and
petroleum market conditions. Although diesel fuel prices have stabilized in
recent years, control of fuel expenses is a constant concern of management and
fuel savings remains a top priority. In order to help control these costs,
the Company has entered into purchase commitments for diesel fuel in 1996.
See "Financial Instruments and Purchase Commitments" below for additional
information.
A roadway improvement program was begun by KCSR in 1986. This program was
implemented to upgrade the roadway in order to reduce operating costs, improve
safety, increase the capabilities of KCSR and increase quality of service to
customers. In 1990, KCSR completed bridge and related modifications to
support unrestricted transportation of double stack containers. Removal of
restrictions to the double stack operation along with the addition of an
East/West MidSouth rail line have permitted KCSR to compete more effectively
with other carriers in the transcontinental intermodal markets. In 1994, KCSR
accelerated the remaining portions of its program on the original KCSR route
and also those related to the upgrade and expansion of the MidSouth track and
roadbed. Acceleration of this program resulted in increased capital spending.
By the end of 1994, both the KCSR and MidSouth track had been essentially
rebuilt and MidSouth traffic capability was expanded by the additions of new
track sidings. Acceleration of the program became necessary to handle the
increased business volumes at faster train speeds while still improving
safety. While certain portions of the program continued into 1995, capital
expenditures declined significantly from 1994 levels. The roadway maintenance
program has been and will continue to be funded with internally generated cash
flows.
Portions of roadway maintenance costs are capitalized and other portions
expensed, as appropriate. Expenses aggregated $49, $43 and $40 million for
1995, 1994 and 1993, 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 regulatory accounting
rules.
Assuming no major economic deterioration occurs in the region serviced by
KCSR, management expects moderate growth in business during 1996. Intermodal
activity should continue to grow, benefiting from investment in and
modernization of the Company's intermodal facilities. Additionally, KCSR
expects to benefit from the actions taken by management during 1995 to curtail
system operating difficulties and to improve KCSR's customer service
capabilities.
Financial Asset Management
Financial Asset Management contributed $43.8 million to 1995 consolidated
results, a 79% increase over the $24.5 million for comparable 1994. Excluding
from 1994 results the one time charge of $14.5 million from the early
termination of employment and earnings related compensation arrangements at
Janus and establishment of additional minority ownership at Berger, discussed
earlier, 1995 Financial Asset Management results were 12% higher than 1994.
Increases in assets under management, coupled with successful cost containment
initiatives, helped to improve operating income to $92.7 million, up
approximately 24% over 1994 (exclusive of the one time charges discussed
above). These improved earnings were partially offset by higher promotional
and marketing expenses at Janus (up $4.2 million over 1994) and increased
intangible amortization ($5.2 million in 1995 versus $1.9 million in 1994) and
interest expense ($2.9 million in 1995 versus $0.6 million in 1994) related to
the Berger acquisition in late 1994, along with the acquisitions of additional
ownership in Janus in 1995.
<PAGE> 19
The following table highlights assets under management and revenues:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Assets Under Management (in billions):
Janus No-Load Funds $ 24.6 $ 17.3 $ 17.0
IDEX Load Funds 1.1 0.9 1.2
WRL Insurance Products Funds 1.7 1.2 1.2
Institutional and Separately
Managed Accounts * 3.7 3.5 2.8
Total Janus $ 31.1 $ 22.9 $ 22.2
Berger Funds 3.4 3.0 -
Total $ 34.5 $ 25.9 $ 22.2
Revenues (in millions):
Janus $ 207.8 $ 178.5 $ 159.9
Berger $ 32.0 $ 7.8 ** $ -
</TABLE>
* 1994 and 1993 include Cash Equivalent Funds of $0.8 and $0.7 billion,
respectively, which were serviced by Janus, but advised by an unaffiliated
party. In February 1995, Janus introduced its own line of Money Market
funds, replacing the Cash Equivalent Funds
** since acquisition, October 1994
Financial Asset Management revenues and operating income increases are a
direct result of increases in assets under management and processing services.
Assets under management and shareholder accounts have grown in recent years
from a combination of new money investments or fund sales and market
appreciation. Fund sales have risen in response to marketing efforts,
favorable fund performance and the current popularity of no-load mutual funds.
Market appreciation has resulted from increases in stock investment values.
However, a decline in the stock and bond markets and/or an increase in the
rate of return of alternative investments could negatively impact Financial
Asset Management revenues and operating income. In addition, the mutual fund
market, in general, faces increasing competition as the number of mutual funds
continues to increase, marketing and distribution channels become more
creative and complex, and investors place greater emphasis on published fund
recommendations and investment category rankings. These factors could also
affect the Company's Financial Asset Management businesses and negatively
impact revenues and operating income.
Janus. Janus' 1995 results reflect the results experienced by the mutual
funds market, in general. 1995 operating income increased significantly over
1994 due to growth in assets under management, coupled with depressed results
in 1994 as a result of the one time charge of $13.6 million ($27.1 million
pretax increase in operating expenses) from the early termination of
employment and earnings related compensation arrangements, as discussed
earlier. Janus assets under management rebounded from slower growth in the
second half of 1993 and throughout 1994, increasing 36% to $31.1 billion at
December 31, 1995 as compared to $22.9 billion at December 31, 1994. Total
fund sales were $11.4 billion during fiscal 1995 versus $6.5 billion in 1994.
In 1994, operating income declined when compared to 1993. This decline in
operating income was primarily attributable to the one time net charge
discussed above. Excluding this charge, operating income would have risen
compared to 1993 but not at levels experienced in prior years. 1994 was a
difficult year for equity money managers as rising interest rates affected
market conditions in general and, when coupled with increased expenses for
advanced customer services capabilities and marketing and promotional efforts,
Janus' earnings were negatively affected. While assets under management were
relatively stable in 1994, fund sales continued strong at $6.5 billion.
<PAGE> 20
On November 1, 1995, the Janus Twenty Fund reopened to new share sales for the
first time since February 1993. Additionally, in December 1995, the Janus
Olympus Fund, an equity fund, and Janus High Yield Fund, a bond fund, were
introduced. As mentioned previously, Janus introduced its own line of Money
Market funds in 1995, which had assets under management approximating $1.2
billion at December 31, 1995.
In 1994, Janus introduced the Janus Overseas Fund, an international equity
fund, and expanded its product offerings for the Janus Aspen Series (variable
annuity funds). As overall fund sales growth slowed in 1994, Janus focused
its efforts on increased marketing and promotional activities in an effort to
increase recognition of the Janus brand name and reach a class of potential
investors who have not typically used mutual funds as an investment
alternative. This initiative led to the launching of a major print, radio and
television marketing campaign begun in late 1994, which continued into the
first half of 1995.
During 1993, Janus continued to expand the distribution channels of the Janus
funds by participating in mutual fund "supermarkets", such as Charles Schwab's
Mutual Fund "OneSource" service, as well as a similar program offered by
Fidelity Investments. In addition, Janus introduced three new Janus fund
portfolios in 1993: Janus Mercury Fund, an equity fund; Janus Federal Tax
Exempt Fund, a tax exempt income fund; and the Janus Aspen Series, which
consists of portfolios funded through variable annuity contracts, such as the
Janus Retirement Advantage.
At December 31, 1995, approximately 13.5% of Janus' total assets under
management were generated through the mutual fund "supermarkets" discussed
above.
Janus has expanded its assets under management by marketing advisory services
directly to pension plan sponsors and insurance, banking and brokerage firms
for their proprietary investment products. These relationships generated
approximately $980, $948 and $920 million in gross new assets in 1995, 1994
and 1993, respectively.
Berger. Berger is the investment advisor of The Berger One Hundred Fund, The
Berger Growth and Income Fund (formerly The Berger One Hundred and One Fund)
and The Berger Small Company Growth Fund, as well as private and other
accounts, (collectively "Berger Funds"). The Company made its first
investment in Berger in 1992 when it acquired an 18% interest. In October
1994, the Company acquired a controlling interest in Berger, increasing its
ownership to over 80%, as discussed earlier. At the date of closing of the
transaction, Berger became a consolidated subsidiary of KCSI.
During 1995, Berger contributed essentially breakeven results to KCSI
consolidated earnings. Gains in assets under management of 13% (from $3.0
billion at December 31, 1994 to $3.4 billion at December 31, 1995) were offset
by amortization and interest expense increases (up $2.4 million and $2.3
million, respectively, over 1994) associated with the additional acquisitions
made in 1994. Berger shareholder accounts remained stable from 1994 to 1995,
totaling approximately 381,000 at December 31, 1995. Berger expenses in 1995
were comparable to 1994, reflecting Berger's efforts to contain costs.
Berger also participates in expanded distribution channels through mutual fund
"supermarkets," which generated approximately 31% of Berger's total assets
under management at December 31, 1995.
For the period from the acquisition of a controlling interest in October 1994
to December 31, 1994, Berger contributed breakeven results to KCSI
consolidated earnings. The earnings included all acquisition related costs
and, if not for the one time charge to earnings discussed earlier, Berger
would have contributed positively to KCSI's results. Berger assets under
management grew rapidly in 1994, beginning the year at $1.9 billion and ending
on December 31, 1994 at $3.0 billion.
Management believes Berger has good name recognition in the industry, has
continued to have favorable fund performance for certain products and, through
the use of marketing and promotional efforts, has attracted increasing fund
sales and investors.
<PAGE> 21
Corporate & Other
The Corporate & Other segment in 1995 consists of equity in earnings of DST,
Midland Data Systems, Inc./Midland Loan Services, L.P. (collectively
"Midland"), Mexrail and other unconsolidated affiliates, earnings of less
significant consolidated subsidiaries, unallocated KCSI Holding Company
operating expenses, intercompany eliminations, and miscellaneous other
investment activities. For 1994 and 1993, DST was consolidated and its
results included as a separate segment, Information & Transaction Processing
(see discussion below). Additionally, several of the less significant
consolidated subsidiaries now a part of the Corporate & Other business segment
were included in 1994 and 1993 in the Transportation Services segment.
Consolidated subsidiaries in this segment include: Trans-Serve, Inc., an
owner and operator of a railroad wood tie treating facility and a vehicle
fleet maintenance operation; Southern Leasing Corporation, involved in finance
leasing and other forms of secured financing, generally for equipment
acquisition by small to medium sized businesses; Pabtex, Inc., located in Port
Arthur, Texas, with deep water access to the Gulf of Mexico, is the owner and
operator of a bulk materials handling facility which stores and transfers coal
and petroleum coke from trucks and rail cars to ships and barges primarily for
export; Mid-South Microwave, Inc., which owns and leases a 1,600 mile
industrial frequency microwave transmission system that is the primary
communications facility used by KCSR; Rice-Carden Corporation and Tolmak,
Inc., both owning and operating various industrial real estate and spur rail
trackage contiguous to the KCSR right-of-way; and Southern Development
Company, the owner of the headquarters building of the Company and KCSR
located in downtown Kansas City, Missouri.
Corporate & Other contributed $181.5 million to the Company's 1995
consolidated results versus $6.0 million in 1994, reflecting the $144.6
million after-tax gain associated with the DST public offering and
associated transactions. Additionally, equity in earnings of DST totaling
$24.6 million are included for the year ended December 31, 1995 as if DST were
an unconsolidated affiliate as of January 1, 1995. In 1994 and 1993, equity
in earnings included in the Corporate & Other segment represent only minor
investments. See additional discussion in "Unconsolidated Affiliates" below.
Earnings of consolidated subsidiaries were not material in 1995. Pabtex, Inc.
experienced an earnings increase in 1995 of approximately $1.5 million as
compared to 1994 associated with increased volumes at the petroleum coke
export facility. Future earnings for Pabtex, Inc. will be substantially
decreased, however, due to the loss of a key customer, who constructed its own
storage facility. The impact to the Company's consolidated operating results
is not expected to be material.
In 1994, net operating losses declined from previous years due to a
combination of lower unallocated holding company expenses and a shift in net
interest income/expense as intercompany debt amounts and costs were fully
allocated to subsidiary operations as opposed to being borne at the holding
company level. In addition, lower expenses in 1994 resulted from the reversal
of certain employment related tax and interest accruals (amounting to
approximately $.06 per share) due to the favorable outcome of long-standing
tax issues regarding the status of KCSI Holding Company employees under the
Railroad Retirement Tax Act. However, these expense reductions were partially
offset by expenses recognized by the Company in connection with the proposed
merger of the Company's KCSR operations with Illinois Central Corporation,
which reduced 1994 net income by $.04 per share.
Information & Transaction Processing (1994 and 1993)
The Company's previously wholly-owned subsidiary, DST, comprised the
Information & Transaction Processing segment in 1994 and 1993. DST, formed in
1968, together with its subsidiaries and joint ventures (principally
Continuum, Boston Financial Data Services, Inc., IFTC and Argus Health
Systems, Inc.) provides sophisticated information processing and computer
software services and products, primarily to mutual funds, insurance
providers, banks and other financial services organizations. Historically,
the majority of DST revenue was generated from full-service and remote-service
record keeping for the mutual fund industry. In early 1991, DST formed Output
Technologies, Inc. ("OTI") as a
<PAGE> 22
holding company for DST's business' involved in the financial printing,
mailing, output processing and related business lines. DST's principal
product lines include: Mutual Fund Shareowners Accounting System, Securities
Transfer and Portfolio Accounting Systems, Automated Work Distributor TM, and
products/services for international markets.
DST revenues increased in 1994 compared to 1993 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" below.
DST's contribution to KCSI's consolidated results rose 40% to $32.0 million in
1994 compared to prior year, while 1994 revenues rose 18% from 1993. These
improved results are reflective of the growth trends experienced by DST
throughout 1994 as mutual fund shareowner accounts serviced reached a record
32.1 million. OTI business volumes increased and earnings from DST's
unconsolidated affiliates rose significantly over 1993. Increased earnings
from unconsolidated affiliates were attributable to a full year of earnings
from Continuum along with improved earnings from DST's other affiliates.
These earnings increases in 1994 were, however, hampered by operating and net
losses of its developmental and international businesses, discussed earlier.
During 1994, these developmental and international businesses reported
revenues and net losses of $39.3 million and $5.3 million, respectively,
versus revenues and net losses of $11.0 million and $2.3 million,
respectively, in 1993.
OTI continued to grow, with revenues increasing 9% in 1994 compared to 1993,
primarily from increased print processing as laser click volumes rose 20%.
OTI achieved growth through acquisitions and location expansion. Also in
1994, DST sought greater market penetration of its AWD(R) product in the
insurance marketplace through its licensing agreement with Continuum and
directly into non-insurance markets through DST's international subsidiaries.
By the end of 1994, DST had international locations in the United Kingdom,
Netherlands and South Africa, with more than 8,000 AWD(R) workstations in use
worldwide (a 90% increase over 1993), of which approximately 27% were
installed in insurance company operations. Beginning in 1991, DST continued
its focus on internal and external expansion of its service presence in the
mutual fund, insurance and financial services industries. DST's total service
to the insurance industry increased as DST continued to process the Vantage
policyholder accounts, added processing of all Continuum policyholder accounts
and other services, as well as gaining access to Continuum's market for DST's
AWD(R) imaging product.
Unconsolidated Affiliates
In 1995, earnings from unconsolidated affiliates consist principally of DST,
Midland (a 45% owned affiliate), and Mexrail, Inc., a 49% owned affiliate. In
1994 and 1993, earnings from unconsolidated affiliates were attributable to
DST's equity in the earnings of IFTC, a 50% owned DST affiliate prior to the
sale of IFTC discussed earlier, Boston Financial Data Services, Inc. ("BFDS,"
a 50% owned DST affiliate), Continuum, a 29% owned DST affiliate, Argus Health
Systems, Inc. ("Argus," a 50% owned DST affiliate) and Midland. During 1995,
DST sold its interest in Midland to the Company, and accordingly, Midland
earnings are included in the Company's earnings from unconsolidated
affiliates.
1995. Equity in earnings of DST of $24.6 million have been included for the
year ended December 31, 1995 as if DST had been an unconsolidated affiliate as
of January 1, 1995. DST's 1995 results were impacted by, among other things:
a 20% increase in revenues over 1994; a 14% increase in mutual fund shareowner
accounts serviced; an $8.4 million loss recorded in the fourth quarter 1995
resulting from acquisition related expenses of DST's Continuum equity
investment; the sale of IFTC in first quarter 1995 resulting in a net gain to
the Company of $4.7 million; reduced equity earnings to DST as a result of the
sale of IFTC; and continued efforts to develop and integrate developmental and
international business units during 1995.
<PAGE> 23
Midland equity in earnings were $5.2 million in 1995 versus $1.7 million in
1994. The significant increase in 1995 is due to the receipt of incentive
payments under certain contracts during fourth quarter 1995.
Equity in earnings from Mexrail, Inc. were minimal during 1995 as they were
included as an equity investment for less than two months in 1995. Mexrail
earnings are not anticipated to have a significant impact on future
consolidated earnings.
1994 and 1993. IFTC experienced growth in assets under custody in 1994 and
1993 ($126 billion in 1994 from $106 billion in 1992), resulting in Company
equity earnings of $6.5 and $4.8 million in 1994 and 1993, respectively.
Improved 1994 earnings resulted from the increasing interest rate environment
in 1994 along with improved mutual fund industry growth.
BFDS, a full service transfer agency for open and closed end mutual funds and
corporations utilizing DST's proprietary systems, contributed equity in
earnings to DST of $5.1 and $2.1 million in 1994 and 1993, respectively,
through increases in mutual fund and corporate shareowner accounts processed,
efficient operating practices and expanded services.
As discussed earlier, Continuum became a DST equity affiliate when DST
exchanged its interest in Vantage for an equity interest in Continuum in late
1993. Accordingly, Continuum was an unconsolidated affiliate for all of 1994
and contributed $7.2 million in equity earnings to DST as compared to $0.7
million in 1993.
Argus, which provides insurance processing services to the health care
industry through a pharmaceutical claims processing system, experienced
increased claims volumes in 1994 and 1993, leading to equity in earnings
growth to DST from $2.3 million in 1993 to $3.7 million in 1994.
Midland's earnings contribution to DST improved to $1.7 million in 1994
compared to $0.9 million in 1993, due to greater commercial loan conversion
volumes, but somewhat offset by a decline in Midland's Resolution Trust
Corporation ("RTC") loan processing work as the RTC converted off of the
Midland system.
Interest Expense
Consolidated interest expense increased 22% in 1995 to $65.5 million as
compared to $53.6 million in 1994. This increase is primarily a result of
higher average debt balances throughout 1995 (although ending balances were
lower due to the reduction of debt through repayment of credit lines using the
proceeds received from the DST public offering and associated transactions).
The increased debt balances resulted from borrowings to finance the
acquisition of a controlling interest in Berger in late 1994 along with
additional purchase price payments in 1995, purchase of additional ownership
in Janus in early 1995 and the Company's stock repurchase program. A
significant portion of the Company's debt at December 31, 1995 represents
fixed rate debt instruments, thereby reducing the Company's risk to increasing
interest rates.
Consolidated interest expense rose 5% in 1994 to $53.6 million from $51.2
million in 1993. This rise in interest expense was primarily attributable to
an increase in debt balances in 1994, principally associated with borrowings
to finance the acquisition of Berger, additional Continuum stock purchases by
DST, KCSR equipment requirements and subsidiary working capital, as well as
higher interest rates. Interest expense in 1994 was also affected by the
reversal of interest accruals ($3.0 million) related to KCSI Railroad
Retirement Tax issues discussed earlier, which reduced consolidated interest
expense.
<PAGE> 24
Other, Net
Generally, modest fluctuations have occurred within this component for the
three years from 1993 to 1995. The increase in 1995 from 1994 primarily
relates to interest income earned by the Company from advances to DST during
1995, partially offset by the exclusion of DST interest income, resulting from
the deconsolidation of DST from KCSI's consolidated results in 1995. The
increase in 1994 from 1993 is largely due to the reversal in second quarter
1994 of certain employment tax accruals as a result of the favorable outcome
of a long standing employment tax issues.
LIQUIDITY
Operating Cash Flow. The Company's cash flow from operations has historically
been positive and sufficient to fund operations, KCSR roadway capital
improvements, DST systems development and operating capacity costs (prior to
DST public offering), 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 repurchases. Operating cash flows have
risen steadily in each year from 1993 to 1995.
The following table summarizes operating cash flow information. Financial
information for the year ended December 31, 1995 has been restated to reflect
DST as an unconsolidated affiliate as of January 1, 1995 as a result of the
DST public offering and associated transactions completed in November 1995,
which reduced the Company's ownership in DST to approximately 41%. Financial
information for the years ended December 31, 1994 and 1993 reflect historical
results which include DST as a consolidated entity.
(in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net income $ 236.7 $ 104.9 $ 90.5
Depreciation and amortization 75.0 119.1 97.2
Equity in undistributed earnings (29.8) (23.9) (12.6)
Gain on sale of investment, net (144.6) *
Dividends from investments 150.0
Change in working capital items 19.4 ** 14.4 (37.7)
Deferred income taxes 26.0 ** 20.0 29.6
Other 14.7 0.8 22.2
Net operating cash flow $ 347.4 $ 235.3 $ 189.2
</TABLE>
* Primarily sale of DST
** Exclusive of the tax components related to the gain on sale of investment
Operating cash flows in 1995 were $347.4 million, a 48% increase over 1994.
The improved operating cash flow in 1995 was primarily due to the $150 million
dividend paid by DST in May 1995, partially offset by lower net income, after
adjustment for the net gain on the sale of DST, and non-cash depreciation and
amortization. Depreciation and amortization decreased in 1995 due to the
deconsolidation of DST, offset somewhat by increased amortization associated
with the purchase of additional ownership interests in Berger and Janus and
higher depreciation at KCSR due to the completion, in late 1994, of its
substantial track and roadbed rebuilding program.
Operating cash flows in 1994 rose 24% over 1993 to $235.3 million. The
improved operating cash flow resulted from higher net income, increased
non-cash depreciation and amortization (MidSouth, Berger and DST related
acquisitions and property additions along with increased road and equipment
property additions at KCSR), and changes in working capital items. 1993
operating cash flows increased 54% from 1992 to $189.2 million. This increase
primarily related to higher net income, increased non-cash depreciation and
amortization (MidSouth and DST acquisitions along with KCSR road property
additions), and increased deferred income taxes.
<PAGE> 25
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash flows provided by (used for):
Operating activities $ 347.4 $ 235.3 $ 189.2
Investing activities 73.8 (333.6) (394.7)
Financing activities (402.1) 104.4 196.7
Net increase (decrease) in cash
and equivalents 19.1 6.1 (8.8)
Cash and equivalents at beginning of year 12.7 6.6 15.4
Cash and equivalents at end of year $ 31.8 $ 12.7 $ 6.6
</TABLE>
Financing and Investing Cash Flows. These cash flows include: (i) new
financings of $98, $201 and $447 million in 1995, 1994 and 1993, respectively;
(ii) repayment of indebtedness in the amounts of $371, $66 and $231 million
in 1995, 1994 and 1993, respectively, and (iii) cash dividends of $10, $13 and
$13 million in 1995, 1994 and 1993, respectively.
Proceeds from the issuance of debt in 1995 were used for stock repurchases
($12 million) and subsidiary refinancing and working capital ($86 million).
Generally, operating cash flows and borrowings under credit lines were used to
finance property acquisitions and investments in and loans with affiliates
during 1995. Proceeds from the issuance of debt in 1994 were used for KCSR
equipment purchases ($64 million), DST Continuum stock purchases ($18
million), the Berger acquisition ($48 million), ESOP contributions ($12
million) and DST property additions ($59 million). Proceeds from issuance of
debt in 1993 were used for MidSouth acquisition ($214 million), Continuum
stock purchases ($20 million), refinancing of MidSouth indebtedness ($129
million) and subsidiary refinancing and working capital ($84 million).
Repayment of indebtedness includes scheduled maturities and refinancings. In
1995, proceeds received from the DST public offering and repayment by DST of
indebtedness to KCSI were used to repay outstanding amounts under existing
credit lines.
See discussion under "Financial Instruments and Purchase Commitments" for
information relative to certain anticipated 1996 cash expenditures.
CAPITAL STRUCTURE
Capital Requirements. The Company has traditionally funded KCSR capital
expenditures using Equipment Trust Certificates for major purchases of
locomotive and rolling stock, and negotiated term financing for other
equipment and Janus operations. Conversely, capital improvements for roadway
track structure have historically been funded with cash flow from operations.
The MidSouth acquisition required completion of a capital improvement program
for MidSouth roadbed, locomotives and facilities. This program contemplated a
multi-year time frame to upgrade and expand MidSouth's track to handle greater
traffic levels at higher train speeds. During 1994, the Company accelerated
its time table with respect to major upgrades of the MidSouth program, which
included welded rail replacement and construction of new track sidings.
Acceleration of the program was necessary to handle increased traffic,
especially with respect to intermodal business. By the end of 1994 the major
portions of the MidSouth program were complete. The Company funded MidSouth
capital requirements with historical funding sources. These same sources were
used in funding 1995 KCSR capital programs and are expected to be used in
funding 1996 capital programs, currently estimated at $110 million, comparable
to the $110 million expended in 1995 and a significant decline from the $191
million expended in 1994.
<PAGE> 26
Funding requirements for the KCSR long-term roadway improvement program, which
began in the mid-1980's, has used significant portions of KCSR's operating
cash flow. This program, initially scheduled for completion in 1995, was
essentially completed in 1994. While certain portions of this program were
ongoing in 1995, KCSR's capital expenditures were reduced 42% to $110 million
in 1995. In addition, KCSR acquired locomotives and rolling stock equipment
during 1994 through the issuance of $55 million in privately placed Equipment
Trust Certificates.
Southern Leasing Corporation ("SLC"), included in the Corporate & Other
business segment, funds growth in its lease portfolio through SLC credit lines
and Company financing arrangements and intends to continue to do so in the
future.
Relative to 1994 and 1993, DST capital requirements typically consisted of
mainframe, peripheral and other data processing computer equipment. In order
to accommodate continuing customer growth demands, DST began a physical
expansion of its Winchester Data Center during 1994. The Data Center
expansion was essentially completed in 1995, and effectively doubled the size
of the facility to allow for increased DST processing capacity. During 1994,
DST entered into transactions for the termination of certain mainframe
computer equipment leases and purchase of other mainframe equipment in the
amount of $11 million, which was funded through vendor arranged financing. In
1993, DST purchased data processing equipment in the amount of $26 million
through bank term financing. Additionally, in 1993, DST entered into a
sale/leaseback transaction of certain mainframe computer equipment in the
amount of $16.6 million.
In the last several years, Janus has upgraded its customer service
capabilities through new equipment and technology enhancements. Janus'
capital requirements are typically funded with existing cash flows and
negotiated indebtedness, when necessary. Berger's current business structure
requires minimal capital, with any requirements being funded with existing
cash flows.
Capital. The Company's consolidated debt ratio (debt as a percent of total
debt plus equity) declined significantly as of December 31, 1995 to 48.1%
versus 59.6% on December 31, 1994. Total debt at December 31, 1995 declined
$341.0 million or 35% to $644.2 million from December 31, 1994, primarily due
to the use of proceeds from the DST public offering and repayment by DST of
indebtedness owed to KCSI to repay credit lines. The decrease in the debt
ratio is attributable to this decline in debt together with the gain on the
sale of DST common stock, offset partially by significant repurchases of the
Company's common stock (approximately $223.7 million including the exchange of
DST common stock for KCSI common stock owned by the ESOP).
The debt ratio as of December 31, 1994 declined slightly to 59.6% as compared
to 59.9% at December 31, 1993. The Company's total debt increased to $985.2
million at December 31, 1994 from $839.7 million at December 31, 1993. This
increase in debt was, however, accompanied by increases in stockholders'
equity from earnings and decreases in ESOP deferred compensation in keeping
the debt ratio at approximately 60%. The MidSouth acquisition, completed in
1993, added significant amounts of new indebtedness to the Company's balance
sheet. These higher debt amounts were expected as the Company fully absorbed
MidSouth operations.
Management anticipates that the debt ratio will increase slightly in future
years through continued repurchases of Company common stock, but will be
substantially offset by profitable operations, which are expected to generate
positive cash flow for debt retirement. Additionally, completion of the DST
stock offering significantly reduced the Company's debt ratio and strengthened
its capital structure and financial position.
<PAGE> 27
Components of capital are shown as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Debt due within one year $ 10.4 $ 56.4 $ 63.5
Long-term debt 633.8 928.8 776.2
Total debt 644.2 985.2 839.7
Stockholders' equity 695.2 667.2 562.7
Total debt plus equity $1,339.4 $1,652.4 $1,402.4
Debt as a percent of total
debt plus equity 48.1% 59.6% 59.9%
</TABLE>
In 1995, 1994 and 1993, the Company repurchased $138.9, $10.3 and $9.5
million, respectively, of its common stock in accordance with the stock
repurchase and stock option plans approved by the Company's Board of
Directors. Also in 1995, in connection with the DST public offering, the
Company exchanged DST common stock for KCSI shares owned by the ESOP totaling
$84.8 million.
Minority Purchase Agreements. Agreements between KCSI and certain Janus
minority owners contain, among other provisions, mandatory stock purchase
provisions whereby under certain circumstances, KCSI would be required to
purchase the minority interest of Janus at a purchase price based upon a
multiple of Janus earnings. In late 1994, the Company was notified that
certain Janus minority owners made effective the mandatory purchase provisions
for a certain percentage of their ownership. In the aggregate, the shares
made effective for mandatory purchase totaled $59 million. Concurrent with
the early termination of the Janus compensation arrangements, discussed
earlier, recipients of the amounts paid to terminate the arrangements used
their after-tax net proceeds to purchase certain portions of the shares made
effective for mandatory purchase, in early January 1995. In addition, the
Janus minority group was restructured to allow for minority ownership by other
key Janus employees. These employees purchased other portions of the minority
shares made effective for mandatory purchase through payment of cash and
creation of recourse loans financed by KCSI in the amount of $10.5 million.
The remaining minority shares made effective for mandatory purchase were
purchased by Janus for treasury ($6.1 million) and by KCSI for $12.7 million.
As a result of the combination of KCSI acquiring additional Janus shares and
the reduction of outstanding shares with Janus' treasury purchase, KCSI
increased its ownership in Janus from approximately 81% to 83% upon closing of
the transaction in January 1995. Additional purchases were made by minority
holders during 1995, financed through recourse loans by KCSI in the amount of
$8.8 million. The Company also purchased shares in 1995 thereby maintaining
its respective ownership percentage. The KCSI share purchases resulted in the
recording of intangibles as the purchase price exceeded the value of
underlying tangible assets. The intangibles are being amortized over their
estimated economic lives. A restructuring of the Janus minority ownership
group provides for less concentrated stock ownership and establishes a greater
emphasis on the growth of Janus.
The new minority owners of Janus also have stock purchase provisions which
under certain circumstances require KCSI to purchase the minority interest at
fair market value. If all of the provisions of the Janus minority owner
agreements became effective, KCSI would be required to purchase the respective
minority interests, currently estimated at approximately $137 million.
The purchase price for the mandatory provisions is based upon a multiple of
earnings and/or fair market value determinations depending upon specific
agreement terms. In the event such provisions became effective, KCSI would be
required to meet such commitments.
Agreements between KCSI and Berger minority owners contain mandatory stock
purchase provisions, which under certain circumstances require Berger or KCSI
to purchase the minority interest at a purchase price based upon a multiple of
Berger's net investment company advisory fees. If all of the provisions
relative to mandatory stock repurchase became effective, KCSI would be
required to purchase the respective minority interests, currently estimated at
approximately $32 million.
<PAGE> 28
Overall Liquidity. During the 1993-1995 period, the Company continued to grow
and strengthen its relative position in The Kansas City Southern Railway
Company and Financial Asset Management businesses. In addition, completion of
the DST stock offering strengthened the Company's financial position while
providing an investment with market liquidity. Based on DST's stated dividend
policy, the Company does not anticipate receiving any dividends from DST in
the foreseeable future. Exclusive of any dividends the Company may receive
from DST in the future, the Company believes it has adequate liquid resources,
which include sufficient lines of credit and businesses which have
historically been positive cash flow generators, to meet future operating,
capital and debt service requirements.
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 principal
subsidiaries.
Financial Instruments and Purchase Commitments. During 1995, the Company
entered into a forward stock purchase contract as a means of securing a
potentially favorable price for the repurchase of its common stock. The
contract allows the Company to purchase two million shares of the Company's
common stock over various time periods at an aggregate price of $87.7 million.
In addition, the contract includes an escalating transaction premium which
approximated $1.3 million if the contract would have been settled at December
31, 1995. The contract also contains provisions which allow the Company to
elect a net cash or net share settlement in lieu of physical settlement of the
shares.
The Company has also entered into forward purchase commitments for diesel fuel
as a means of securing a competitive price. The contracts require the Company
to purchase certain quantities of diesel fuel at defined prices established at
the origination of the contract. As of December 31, 1995, approximately 50%
of the Company's anticipated fuel requirements for 1996 had been secured
through these forward purchase commitments. In general, these fuel purchase
commitments approximate current market prices.
In general, the Company enters into transactions such as those discussed above
in limited situations based on management's assessment of current market
conditions and perceived risks. Historically, the Company has engaged in very
few such transactions and their impact has been insignificant. However, the
Company intends to respond to evolving business and market conditions in order
to manage risks and exposures associated with the Company's various
operations, and in doing so, may enter into transactions similar to those
discussed above.
New Accounting Pronouncements. The Financial Accounting Standards Board
issued Statement 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" ("SFAS 121"), during 1995. The new
statement establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill, as well as for
long-lived assets and certain identifiable intangibles which are to be
disposed. If events or changes in circumstances of a long-lived asset
indicate that the carrying amount of an asset may not be recoverable, the
company must estimate the future cash flows expected to result from the use of
the asset and its eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest) is lower than the carrying
amount of the asset, an impairment loss must be recognized to the extent that
the carrying amount of the asset exceeds its fair value. Adoption of SFAS 121
is mandatory for the Company in first quarter 1996. The adoption of SFAS 121
is not expected to have a material impact on the Company.
The Financial Accounting Standards Board also issued Statement 123 "Accounting
for Stock-Based Compensation" ("SFAS 123"), in October 1995. The new
statement allows companies to continue under the current approach set forth in
Accounting Principles Board Opinion 25 "Accounting for Stock Issued to
Employees" ("APB 25"), for recognizing stock-based expense in the financial
statements, but encourages
<PAGE> 29
companies to adopt the new accounting method based on the estimated fair value
of employee stock options. If a company elects to retain the current method
under APB 25, pro forma disclosures of net income and earnings per share as if
they had adopted the fair value accounting method under SFAS 123 will be
required in the company's notes to financial statements. The disclosure
provisions of SFAS 123 are effective for fiscal years beginning after December
15, 1995. The Company intends to retain its current accounting approach under
APB 25, and will present the applicable pro forma disclosures in the notes to
consolidated financial statements for the year ending December 31, 1996
pursuant to the requirements of SFAS 123.
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 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.
Accounting Change - Income Taxes. The Company also adopted Statement of
Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"), effective January 1, 1993. SFAS 109 was issued as an amendment to
Statement of Financial Accounting Standards No. 96 "Accounting for
Income Taxes" ("SFAS 96"). The adoption of SFAS 109 resulted in a charge to
earnings in first quarter 1993 of $970,000. As a result of the Company's
previous adoption of SFAS 96, the adoption of SFAS 109 did not have a material
impact on the components of income tax expense or the effective income tax
rates applicable to continuing operations versus the U.S. federal income tax
statutory rate.
Litigation. The Company and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
While the ultimate outcome of the various legal proceedings involving the
Company and its subsidiaries cannot be predicted with certainty, it is the
opinion of management, after consultation with legal counsel, that these legal
actions currently are not material to the consolidated financial position of
the Company. Based upon information currently available, the Company believes
that its litigation reserves are adequate.
Environmental Matters. The Company and certain of its subsidiaries are
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. In particular, the Company 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, the Federal Water Pollution
Control Act, commonly known as the "Clean Water Act", and the Hazardous
Materials Transportation Act. 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 Company does not foresee that compliance with the
requirements imposed by the environmental legislation will impair its
competitive capability or result in any material additional capital
expenditures, operating or maintenance costs. As part of serving the
petroleum and chemicals industry, KCSR transports hazardous materials and has
a Shreveport, Louisiana-based hazardous materials emergency team available to
handle environmental issues which might occur in the transport of such
materials. Additionally, the Company performs ongoing review and evaluation
of the various environmental issues that arise in the Company's operations,
and takes actions, as necessary, to limit the Company's exposure to potential
liability.
The Company has identified a property for which it is performing clean up
activities on a voluntary basis. The Company is not under any directive to
clean up this property. Anticipated costs to complete this voluntary clean up
have been provided for in the Company's consolidated financial statements and
the resolution is not expected to have a material impact on the Company's
consolidated results of operations or financial position. The Company has
filed suit against various parties, including the former tenant of the
property, seeking reimbursement of any costs incurred relative to this
property.
<PAGE> 30
As previously reported, KCSR has been named as a "potentially responsible
party" by the Louisiana Department of Environmental Quality in a state
environmental proceeding, Louisiana Department of Environmental Quality,
Docket No. IAS 88-0001-A, 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 1993. The court found that
Joslyn Manufacturing Company ("Joslyn"), an operator of the plant, was and is
required to indemnify KCSR for damages arising out of plant operations.
(KCSR's potential liability is as a property owner rather than as a generator
or transporter of contaminants.) The case was appealed to the United States
Court of Appeals for the Fifth Circuit, which Court affirmed the U.S. District
Court ruling in favor of KCSR.
In early 1994, the Environmental Protection Agency ("EPA") added the Lincoln
Creosoting site to its CERCLA national priority list. Since major remedial
work has been performed at this site by Joslyn, and KCSR has been held by the
Federal District and Appeals Courts to be entitled to indemnity for such
costs, it would appear that KCSR should not incur significant remedial
liability. At this time, it is not possible to evaluate the potential
consequences of further remediation at the site. In another proceeding,
Louisiana Department of Environmental Quality, Docket No. IE-0-91-0001, KCSR
was named as a party in the alleged contamination of Capitol Lake, Baton
Rouge, Louisiana. During 1994, the list of potentially responsible parties
was significantly expanded to include the State of Louisiana, and the City and
Parish of Baton Rouge, among others. 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 Company.
In the Ilada Superfund Site located in 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.
The Mississippi Department of Environmental Quality ("MDEQ") initiated a
demand on all railroads operating in Mississippi to clean up their refueling
facilities and investigate any soil and groundwater impacts resulting from
past refueling activities. KCSR has six facilities located in Mississippi.
KCSR has developed a plan, together with the State of Mississippi, that will
satisfy the MDEQ's initiative. Estimated costs to complete the studies and
expected remediation have been provided for in the Company's consolidated
financial statements and the resolution is not expected to have a material
impact on the Company's consolidated results of operations or financial
position.
The Company has recorded liabilities with respect to various environmental
issues, which represent its best estimates of remediation and restoration
costs that may be required to comply with present laws and regulations. At
December 31, 1995, these recorded liabilities were not material. Although
these costs cannot be predicted with certainty, management believes that the
ultimate outcome of identified matters will not have a material adverse effect
on the Company's consolidated results of operations or financial condition.
Regulatory Influence. In addition to the environmental agencies mentioned
above, KCSR operations are subject to the regulatory jurisdiction of the
Surface Transportation Board ("STB") within the Department of Transportation,
various state regulatory agencies, and the Occupational Safety and Health
Administration ("OSHA"). Prior to January 1, 1996, the Interstate Commerce
Commission ("ICC") had 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. In connection with various other legislation, as of January 1,
1996, Congress abolished the ICC and transferred regulatory responsibility to
the STB. State agencies regulate some aspect of rail operations with respect
to health and safety and in some instances, intrastate freight rates. OSHA
has jurisdiction over certain health and safety features of railroad
operations.
<PAGE> 31
Financial Asset Management businesses 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.
The Company 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 effect on operations.
Stockholder Rights Plan. On September 19, 1995, the Company's Board of
Directors approved a Stockholder Rights Plan. The Board declared a dividend
of one right for each share of the Company's common stock outstanding. Each
right entitles the holder to purchase from the Company 1/1000ths of a share of
Series A Preferred Stock or in some circumstances, common stock, other
securities, cash or other assets as the case may be, at a price of $210 per
share, subject to adjustment. Distribution of the rights under the plan have
no dilutive effect, do not affect reported earnings per share, are not taxable
to the Company or stockholders and do not change the manner in which the
Company's shares are presently traded. The rights will not be exercisable and
will be inseparable from and trade automatically with the Company's common
stock until certain events occur (as defined in the plan) which would trigger
provisions of the rights. The full terms of the rights and associated Series
A Preferred Stock are set forth in the Stockholder Rights Plan approved by the
Board. The previous plan was terminated in 1994.
Strategic Review. KCSI, as a holding company, is responsible for the
management of its primary assets: investments in its subsidiaries.
Accordingly, KCSI management continually evaluates its position as to the most
effective utilization of these assets. The Company's strategic plan is
intended to utilize the strength of the Company's business lines and
capabilities, provide for future growth opportunities and achieve the
Company's strategic financial objectives. This section is intended to
summarize several of the items previously discussed to emphasize their
connection to these strategic plans. 1993 through 1995, and future years,
have been and will be affected by these strategic decisions.
* In the period 1993-1995, KCSI management has followed these strategies:
- Drive its strongest businesses
- Capitalize on advantages of location and market leadership
- Leverage earnings with productivity gains for itself and its customers
- Link new directions to present market and technical strengths.
* KCSI management has applied its cash flows primarily as follows:
- Strategic and operating needs of The Kansas City Southern Railway
Company and Financial Asset Management businesses (and DST in 1994 and
1993) to the enhancement of KCSI market leadership positions
- Reduction of debt
- Repurchase of KCSI common stock to the extent possible
- Improvement of the cash return to KCSI stockholders.
These plans have produced the following significant actions:
* On October 31, 1995, DST and the Company successfully effected a public
offering of DST shares at an initial public offering price of $21 per
share, as discussed previously. In accordance with the Company's strategic
focus, the purpose of the offering was to obtain better market recognition
of DST's performance and to obtain proceeds for the retirement of debt,
repurchase of KCSI common stock and general corporate purposes.
* In May 1995, the Company's Board of Directors elected Michael R. Haverty to
the offices of President and Chief Executive Officer of KCSR, and Executive
Vice President of KCSI. He was also appointed a Director of KCSI. Mr.
Haverty brings more than 25 years of railroad experience to KCSR and his
position as Executive Vice President and Director of the Company highlights
the renewed focus the Company has placed on its railroad operations.
<PAGE> 32
* The Company and TMM announced that they had concluded an agreement to form
a joint venture that will compete for concessions to operate Mexico's
railroad lines in the forthcoming privatization process. Management
expects that, as trade between the United States and Mexico continues to
expand due to the North American Free Trade Agreement, an increasing
portion of trade volume between the two countries will be transported by
rail.
While formation of a joint venture (which has not been completed) to
participate in the privatization of Mexico's rail system presents certain
business opportunities for the Company, it also entails certain risks.
These risks include, among others, foreign currency exchange, varying labor
and operating practices, cultural differences, and differences between the
U.S. and Mexican economies. In addition, the Mexican government has not
issued the rules and procedures with respect to the privatization process.
As the Company continues its involvement with this process, it plans to
minimize these risks to the extent possible.
* The Company's consolidated debt at December 31, 1995 declined $341.0
million or 35% to $644.2 million from December 31, 1994, primarily due to
the use of proceeds from the DST public offering and repayment by DST of
indebtedness owed to KCSI to repay credit lines.
* During the period 1993-1995, the Company repurchased $243.5 million of its
common stock (including the exchange of DST common stock for KCSI common
stock owned by the ESOP) in accordance with stock repurchase and stock
option plans approved by the Company's Board of Directors.
* The Company's dividend to stockholders was increased by 33% as approved by
the Board of Directors in January 1996.
* The Kansas City Southern Railway Company new management team is committed
to growth in its service area and intends to expand through short-line rail
acquisitions and strategic joint ventures. This commitment is evidenced by
the following activity:
- In November 1995, the Company purchased a 49% interest in Mexrail, Inc.
and its wholly-owned subsidiary, the Tex-Mex, providing an outlet for
participation in the important North/South structure linked to the
Mexican rail system.
- In 1995, KCSR filed a petition with the regulatory agencies seeking
approval for construction of an approximate nine mile rail line from
KCSR's main line into the Geismar, Louisiana industrial area, which was
requested by three major chemical manufacturers. The Geismar area is a
large industrial corridor, which includes companies engaged in the
petro-chemical industry, and is currently served by only one rail
carrier. With the numerous issues facing the Surface Transportation
Board, approval could be delayed to 1997 or possibly 1998.
- In June 1993, KCSI completed the acquisition of MidSouth Corporation.
This acquisition provides the Company an East/West rail line, which
presents the opportunity to be a significant competitor in the intermodal
transportation market. Additionally, the acquisition increased and
diversified KCSR's market share in its trade territory, as well as
helping to reduce KCSR's dependence on coal traffic (as MidSouth's
primary commodity traffic was in the pulp/paper and forest products
area).
These transactions fit within the strategic business plan for extension of
KCSR rail property and increase of the Company's traffic and industry base.
* KCSI has been committed to the mutual fund industry since 1962 and intends
to continue and expand that commitment in seeking strong mutual fund growth
and increase in its mutual fund servicing businesses.
<PAGE> 33
- On November 1, 1995, the Janus Twenty Fund reopened to new share sales
for the first time since 1993. Additionally, in December 1995, the Janus
Olympus Fund and Janus High Yield Fund were introduced.
- In 1994, Janus introduced the Janus Overseas Fund and expanded product
offerings for the Janus Aspen Series. During 1993, Janus introduced
three new fund products: Janus Mercury Fund; Janus Federal Tax Exempt
Fund; and the Janus Aspen Series. During 1992, Janus introduced three
mutual funds: Janus Enterprise Fund; Janus Balanced Fund; and Janus
Short-Term Bond Fund.
- In 1994, KCSI acquired a controlling interest in Berger by increasing its
ownership to over 80% from an 18% interest purchased in 1992. Berger is
the investment advisor to The Berger One Hundred Fund, The Berger Growth
and Income Fund (formerly The Berger One Hundred and One Fund), The
Berger Small Company Growth Fund as well as private and other accounts.
Consideration of the Company's strategic alternatives, including the items
mentioned above, are expected to continue and to present growth opportunities
in future years.<PAGE>
<PAGE> 34
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Management Report on Responsibility for Financial Reporting. . . . 35
Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . 35
Consolidated Statements of Income for the three
years ended December 31, 1995 . . . . . . . . . . . . . . . 36
Consolidated Balance Sheets at December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . 37
Consolidated Statements of Cash Flows for the three
years ended December 31, 1995 . . . . . . . . . . . . . . . 38
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 1995. . . . . . 39
Notes to Consolidated Financial Statements . . . . . . . . . 40
Financial Statement Schedules:
All schedules are omitted because they are not applicable, insignificant or
the required information is shown in the financial statements or notes
thereto.
<PAGE> 35
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 on Form 10-K.
Representations contained elsewhere in this Annual Report on Form 10-K are
consistent with the consolidated financial statements and related notes
thereto.
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.
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,
1995, 1994 and 1993, and the results of their operations and their cash flows
for the years then ended in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Notes 7 and 10 to the financial statements, the Company
changed its method of accounting for income taxes and other postretirement
benefits in 1993 to conform with Statements of Financial Accounting Standards
Nos. 109 and 106.
/s/ Price Waterhouse LLP
Kansas City, Missouri
February 22, 1996
<PAGE> 36
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Dollars in Millions, Except per Share Amounts
Years Ended December 31
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Revenues $ 775.2 $1,088.4 $ 946.0
Costs and expenses 541.0 782.1 647.0
Depreciation and amortization 75.0 119.1 97.2
Operating income 159.2 187.2 201.8
Gain on sale of equity investment (Note 2) 296.3
Equity in net earnings of unconsolidated
affiliates (Notes 4, 13):
DST Systems, Inc. 24.6
Other 5.2 24.8 14.1
Interest expense (65.5) (53.6) (51.2)
Other, net 20.3 15.3 10.3
Pretax income 440.1 173.7 175.0
Income tax provision (Note 7) 192.9 63.5 69.0
Minority interest in consolidated
earnings (Note 9) 10.5 5.3 9.0
Income before cumulative effect
of accounting changes 236.7 104.9 97.0
Cumulative effect of changes in
accounting for income taxes and
postretirement benefits, net of
taxes (Notes 7, 10) (6.5)
Net income $ 236.7 $ 104.9 $ 90.5
Per Share Data:
Primary earnings per share
Before cumulative effect of accounting
changes $ 5.41 $ 2.32 $ 2.16
Cumulative effect of accounting changes (.14)
Total $ 5.41 $ 2.32 $ 2.02
Weighted average primary
common shares outstanding (in thousands) 43,737 45,061 44,728
Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ .30 $ .30 $ .30
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
Dollars in Millions at December 31
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 31.8 $ 12.7 $ 6.6
Accounts receivable, net (Note 5) 135.6 232.3 194.7
Inventories 39.8 46.6 48.3
Other current assets (Note 5) 74.0 88.5 86.1
Total current assets 281.2 380.1 335.7
Investments held for operating
purposes (Note 4) 272.1 214.6 174.5
Properties, net (Note 5) 1,281.9 1,415.3 1,192.6
Intangibles and other assets,
net (Notes 2, 5) 204.4 220.8 214.2
Total assets $2,039.6 $2,230.8 $1,917.0
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year (Note 6) $ 10.4 $ 56.4 $ 63.5
Accounts and wages payable 96.9 140.8 70.9
Accrued liabilities (Note 5) 213.1 142.4 154.0
Total current liabilities 320.4 339.6 288.4
Other Liabilities:
Long-term debt (Note 6) 633.8 928.8 776.2
Deferred income taxes (Note 7) 303.6 204.2 184.7
Other deferred credits 73.1 80.5 99.1
Commitments and contingencies
(Notes 2, 7, 8, 9, 11, 12)
Total other liabilities 1,010.5 1,213.5 1,060.0
Minority interest in consolidated
subsidiaries (Note 9) 13.5 10.5 5.9
Stockholders' Equity:
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$1 par, Series B convertible, Preferred
stock (Note 8) 1.0 1.0 1.0
$.01 par, Common stock (Note 8) 0.4 0.4 30.9
Capital surplus 133.9 338.0 303.9
Retained earnings 753.8 530.1 439.0
Shares held in trust (Note 8) (200.0) (200.0) (200.0)
ESOP deferred compensation (8.4) (18.2)
Stockholders' equity (Notes 6, 8) 695.2 667.2 562.7
Total liabilities and
stockholders' equity $2,039.6 $2,230.8 $1,917.0
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 38
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Dollars in Millions
Years Ended December 31
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR):
Operating Activities:
Net income $ 236.7 $ 104.9 $ 90.5
Adjustments to net income:
Depreciation and amortization 75.0 119.1 97.2
Deferred income taxes 99.1 20.0 29.6
Equity in undistributed earnings (29.8) (23.9) (12.6)
Dividend from DST Systems, Inc. 150.0
Gain on sale of equity investment (296.3)
Employee benefit expenses not
requiring operating cash 8.4 4.3 10.1
Changes in working capital items:
Accounts receivable (2.4) (35.8) (29.1)
Inventories 1.3 1.6 (14.5)
Accounts payable (5.5) 69.8 20.3
Accrued liabilities 106.7 (20.6) 12.1
Other working capital items, net (2.1) (0.6) (26.5)
Other, net 6.3 (3.5) 12.1
Net 347.4 235.3 189.2
Investing Activities:
Property acquisitions (121.1) (287.7) (159.2)
Proceeds from disposal of property 9.9 19.2 14.6
Investments in and loans with affiliates (94.5) (24.6) (31.8)
Net proceeds from DST
Systems, Inc. public offering 112.1
DST Systems, Inc. loan repayments 164.1
Purchase of companies, net of cash acquired (42.6) (197.8)
Proceeds from disposal of other investments 4.5 3.9
Other, net 3.3 (2.4) (24.4)
Net 73.8 (333.6) (394.7)
Financing Activities:
Proceeds from issuance of long-term debt 97.8 200.6 446.5
Repayment of long-term debt (370.9) (66.3) (231.4)
Proceeds from stock plans 7.1 4.9 7.3
Stock repurchased (127.0) (10.3) (9.5)
Cash dividends paid (9.9) (13.3) (12.9)
Other, net 0.8 (11.2) (3.3)
Net (402.1) 104.4 196.7
Cash and Equivalents:
Net increase (decrease) 19.1 6.1 (8.8)
At beginning of year 12.7 6.6 15.4
At end of year (Note 3) $ 31.8 $ 12.7 $ 6.6
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 39
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions
<TABLE>
<CAPTION>
$1 Par
$25 Par Series B $.01 Par Shares ESOP
Preferred Preferred Common Capital Retained Held Deferred
Stock Stock Stock Surplus Earnings In Trust Compensation Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1992 $ 6.3 $ - $ 30.0 $ 89.5 $361.4 $ - $ (24.8) $462.4
Net income 90.5 90.5
Dividends (12.9) (12.9)
Stock repurchased (0.2) (9.3) (9.5)
Options exercised and
stock subscribed 0.9 22.4 23.3
Issuance of Series B
Preferred stock 1.0 199.0 (200.0) -
Contribution accruals 6.6 6.6
Other 2.3 2.3
Balance at
December 31, 1993 6.1 1.0 30.9 303.9 439.0 (200.0) (18.2) 562.7
Net income 104.9 104.9
Dividends (13.3) (13.3)
Stock repurchased (10.3) (10.3)
Options exercised and
stock subscribed 0.3 13.1 13.4
Stock plan shares issued
from treasury 0.2 4.4 4.6
Establishment of a par
value of common stock (31.0) 31.0 -
Redemption of common
stock rights (0.5) (0.5)
Contribution accruals 9.8 9.8
Other (4.1) (4.1)
Balance at
December 31, 1994 6.1 1.0 0.4 338.0 530.1 (200.0) (8.4) 667.2
Net income 236.7 236.7
Dividends (13.0) (13.0)
Stock repurchased (138.9) (138.9)
Options exercised and
stock subscribed 11.9 11.9
Exchange of DST stock
for KCSI stock held by
ESOP (Notes 2, 3) (84.8) (84.8)
Contribution accruals 8.4 8.4
Other 7.7 7.7
Balance at
December 31, 1995 $ 6.1 $ 1.0 $ 0.4 $ 133.9 $753.8 $ (200.0) $ - $695.2
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 40
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified
holding company, comprised of businesses engaged in railroad transportation
through The Kansas City Southern Railway Company ("KCSR") and Financial Asset
Management through its subsidiaries Janus Capital Corporation ("Janus") and
Berger Associates, Inc. ("Berger"), as well as significant equity investments.
Note 13 further describes the operations of the Company.
The accounting and financial reporting policies of the Company conform with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
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.
As a result of the public offering of DST Systems, Inc. ("DST"), formerly a
wholly-owned and consolidated subsidiary of the Company, and associated
transactions which reduced the Company's ownership percentage in DST to
approximately 41% (see Note 2), the Company realigned its business segments to
reflect the Company's ongoing focus in KCSR and Financial Asset Management
operations. In connection with this realignment, several of the Company's
less significant consolidated subsidiaries which were previously reported
together with KCSR under Transportation Services, will be included in the
Corporate & Other segment. The Corporate & Other segment will also include
the Company's equity investment in DST and other unconsolidated affiliates.
Principles of Consolidation. The consolidated financial statements include
all majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Certain amounts in the prior years'
consolidated financial statements have been reclassified to conform to the
current year presentation.
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.
As a result of the DST public offering and associated transactions completed
in November 1995 (see Note 2), the Company owns approximately 41% of DST and
has accounted for its investment in DST under the equity method of accounting
for the year ended December 31, 1995 retroactive to January 1, 1995. For 1994
and 1993, DST is included as a consolidated subsidiary.
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.
<PAGE> 41
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, succeeded by the Surface Transportation Board of the United States
Department of Transportation, approves the depreciation rates used by KCSR.
KCSR evaluates depreciation rates for properties and equipment and implements
approved rates. Periodic revision of rates have not had a material effect on
operating results. Unit depreciation methods, employing both accelerated and
straight-line rates, are employed in other business segments. Accelerated
depreciation is used for income tax purposes. The ranges of annual
depreciation rates for financial statement purposes are:
<TABLE>
<S> <C>
Transportation
Road and structures 1% - 19%
Rolling stock and equipment 1% - 24%
Other equipment 2% - 6%
Industrial and rental property 2% - 25%
Capitalized leases 5% - 17%
</TABLE>
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.
The Financial Accounting Standards Board issued Statement 121 "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of" ("SFAS 121"), during 1995. The new statement establishes accounting
standards for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill, as well as for long-lived assets and certain
identifiable intangibles which are to be disposed. If events or changes in
circumstances of a long-lived asset indicate that the carrying amount of an
asset may not be recoverable, the company must estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest)
is lower than the carrying amount of the asset, an impairment loss must be
recognized to the extent that the carrying amount of the asset exceeds its
fair value. Adoption of SFAS 121 is mandatory for the Company in first
quarter 1996. The adoption of SFAS 121 is not expected to have a material
impact on the Company.
Revenue Recognition. Revenue is recognized by KCSR based upon the percentage
of completion of a commodity movement. Revenue is recognized by Janus and
Berger primarily as a percentage of the assets under management. Relative to
1994 and 1993, computer processing and output services revenues generated by
DST are recognized upon completion of the service provided, and software
license fees recognized as services are provided and all customer obligations
have been met. Other subsidiaries, in general, recognize revenue when the
product is shipped or as services are performed.
Software Development. Purchased software is recorded at cost and amortized
over the estimated economic life. DST expenses, as incurred, development and
maintenance expenditures for its proprietary software. Capitalizable costs of
internally developed software that will be exclusively sold or licensed to
third parties have not been material and have been expensed as incurred.
Advertising. The Company expenses all advertising as incurred. Direct
response advertising for which future economic benefits are probable and
specifically attributable to the advertising is not material.
<PAGE> 42
Intangibles. Intangibles principally represent the excess of cost over the
fair value of net underlying assets of acquired companies using purchase
accounting and are amortized using the straight-line method over periods
ranging from 7 to 40 years. On an annual basis, the Company reviews the
recoverability of goodwill. The measurement of possible impairment is based
primarily on the ability to recover the balance of the goodwill for each
investment from expected future operating cash flows of each of the
investments on a discounted basis.
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.
Treasury Stock. The excess of par over cost of the Preferred shares held in
Treasury is credited to capital surplus. Common shares held in Treasury are
accounted for as if they were retired and the excess of cost over par value of
such shares is charged to capital surplus.
Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year
they are exercised.
The Financial Accounting Standards Board issued Statement 123 "Accounting for
Stock-Based Compensation" ("SFAS 123"), in October 1995. The new statement
allows companies to continue under the current approach set forth in
Accounting Principles Board Opinion 25 "Accounting for Stock Issued to
Employees" ("APB 25"), for recognizing stock-based expense in the financial
statements, but encourages companies to adopt the new accounting method based
on the estimated fair value of employee stock options. If a company elects to
retain the current method under APB 25, pro forma disclosures of net income
and earnings per share as if they had adopted the fair value accounting method
under SFAS 123 will be required in the company's footnotes. The disclosure
provisions of SFAS 123 are effective for fiscal years beginning after December
15, 1995. The Company intends to retain its current accounting approach under
APB 25, and will present the applicable pro forma disclosures in the notes to
the consolidated financial statements for the year ending December 31, 1996
pursuant to the requirements of SFAS 123.
Indebtedness with respect to the leveraged Employee Stock Ownership Plan
("ESOP") was retired in full during 1995. Prior to its retirement, ESOP loan
principal payments were accounted for as employee benefit expense, interest
payments recorded as interest expense, and quarterly dividends paid from
retained earnings on the ESOP stock used to partially service the ESOP loan.
Because the ESOP loan was guaranteed by KCSI, the borrowings were reported as
long-term debt and corresponding amounts, representing "ESOP deferred
compensation," were reduced as the related compensation expense was 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.
Appropriate share and per share data have been restated to reflect the stock
split.
The Company uses the Primary method for computing earnings per share. The
difference between the Primary and Fully-Diluted methods is not material.
<PAGE> 43
Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 1995 follows:
<TABLE>
<CAPTION>
Shares Shares
Authorized Issued
<S> <C> <C>
$25 Par, 4% noncumulative,
Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B, Preferred stock 1,000,000 1,000,000
$.01 Par, Common stock 400,000,000 48,402,192
</TABLE>
The Company's Series B Preferred stock, issued in 1993, has a $200 per share
liquidation preference and is convertible to common stock at a ratio of 4 to
1.
Shares outstanding are as follows at December 31, (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
$25 Par, Preferred stock 242 243 243
$.01 Par, Common stock 39,063 43,518 42,798
</TABLE>
Retained earnings include equity in unremitted earnings of unconsolidated
affiliates of $34.7, $78.3 and $53.2 million at December 31, 1995, 1994 and
1993, respectively.
Note 2. Dispositions, Mergers and Acquisitions
DST Public Offering. On October 31, 1995, DST, formerly a wholly-owned
subsidiary of the Company, and the Company effected an initial public offering
for a total of 22 million shares of DST common stock. The initial offering
price was $21 per share. Of the 22 million shares, 19,450,000 and 2,550,000
were offered by DST and the Company, respectively. On November 6, 1995, an
over-allotment option, granted by the Company to the underwriters, for an
additional 3,300,000 DST shares owned by the Company was exercised,
effectively completing the DST offering. The approximate $384.0 million net
proceeds received by DST were used to reduce outstanding indebtedness to the
Company and borrowings on bank credit lines, and for working capital. The
approximate $276 million in proceeds received by the Company from sale of DST
stock and repayment of indebtedness by DST have been used for repayment of
debt, repurchase of Company common stock and general corporate purposes. In
conjunction with the offering, the Company completed an exchange of 4,253,508
shares of DST common stock for 1,820,000 shares of Company common stock held
by the DST portion of the Employee Stock Ownership Plan. The 1,820,000 shares
received in the exchange have been accounted for as treasury shares by the
Company. With the completion of all associated transactions, the Company's
ownership in DST was reduced to approximately 41%, and a pretax gain of
approximately $296.3 million was recognized during fourth quarter 1995. The
Company recorded approximately $78.6 million in income taxes currently payable
and $73.1 million in deferred income taxes in connection with the public
offering and associated transactions, resulting in an after-tax gain of
approximately $144.6 million.
DST is no longer included in the Company's consolidation, and has been
accounted for as an equity investment (in accordance with the Company's
accounting policy described more fully in Note 1) in the Consolidated
Statement of Income for the year ended December 31, 1995 as if it was an
unconsolidated subsidiary as of January 1, 1995. The Consolidated Statements
of Income for the years ended December 31, 1994 and 1993 reflect DST as a
consolidated subsidiary of the Company.
In order to provide a more relevant comparison of the current operations of
the Company to previous years, selected financial information for the years
ended December 31, 1994 and 1993 has been reclassified below to reflect DST as
a 100% owned unconsolidated subsidiary accounted for under the equity method
of accounting. The information reflected below was derived by eliminating all
DST assets,
<PAGE> 44
liabilities and the various income statement line items from historical
consolidated KCSI results as well as consideration of elimination entries
required for consolidation, and including only the Company's investment in DST
(as an equity investment) and the equity in earnings of DST for each of the
years ended December 31, 1994 and 1993. This information does not include any
pro forma adjustments which would be required to fully reflect the effects of
the DST stock offering as if it had occurred on January 1, 1994 or 1993.
(in millions):
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Current assets $ 256.0 $ 224.1
Investments 397.6 331.7
Properties, net 1,233.9 1,058.3
Other non-current assets 169.8 160.6
Total Assets $ 2,057.3 $ 1,774.7
Current liabilities $ 218.8 $ 204.0
Long-term debt 895.3 737.3
Other non-current liabilities 276.0 280.7
Stockholders' equity 667.2 552.7
Total Liabilities and Stockholders' equity $ 2,057.3 $ 1,774.7
Operating results:
Revenues $ 691.2 $ 607.9
Costs and expenses 473.5 382.2
Depreciation and amortization 61.8 53.8
Operating Income 155.9 171.9
Equity in net earnings 32.3 25.0
Interest expense (48.0) (45.0)
Other, net 20.2 13.7
Pretax income 160.4 165.6
Income tax provision 49.1 59.0
Minority interest 6.4 9.6
Income before cumulative
effect of accounting changes $ 104.9 $ 97.0
</TABLE>
Mexrail, Inc. Investment. On November 10, 1995, the Company completed the
purchase of 49% of the common stock of Mexrail, Inc. ("Mexrail"), including
Mexrail's wholly-owned subsidiary, The Texas Mexican Railway Company
("Tex-Mex"), from Transportacion Maritima Mexicana, S.A. de C.V. Tex-Mex
operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas.
The purchase price of $23 million, which is subject to certain conditions, was
financed through the Company's existing credit lines. The investment will be
accounted for under the equity method of accounting. The transaction resulted
in the recording of intangibles as the purchase price exceeded the fair value
of underlying net assets. The intangible amounts will be amortized over a
period of 40 years. Assuming the transaction had been completed January 1,
1995, inclusion of Mexrail results on a pro forma basis, as of and for the
year ended December 31, 1995, would have had an immaterial effect on the
consolidated results of the Company.
Berger Associates, Inc. On October 14, 1994, the Company completed the
acquisition of a controlling interest in Berger. The Company made payments of
$47.5 million in cash, pursuant to a Stock Purchase Agreement (the
"Agreement"). The Agreement also provides for additional purchase price
payments, totaling approximately $62.4 million, contingent upon attaining
certain levels (up to $10 billion) of assets under management, as defined in
the Agreement, over a five year period. In 1995, contingent payments were
made totaling $3.1 million, resulting in an adjustment to the purchase price
recorded. Any future
<PAGE> 45
contingent payments will also be reflected as an adjustment to the purchase
price. The acquisition, which was accounted for as a purchase, increased the
Company's ownership in Berger from approximately 18% to over 80%. Adjustments
to appropriate asset and liability balances have been recorded based upon
estimated fair values of such assets and liabilities. The transaction
resulted in the recording of intangibles as the purchase price exceeded the
fair value of underlying tangible assets. The intangible amounts are being
amortized over their estimated economic life of 15 years. The financial
statements of Berger were consolidated into the Company effective with the
closing of the transaction. Assuming the transaction had been completed on
January 1, 1994, the addition of Berger's revenues and net income, including
adjustments to reflect the effects of the acquisition on a pro forma basis, as
of and for the year ended December 31, 1994, would have had an immaterial
effect on the consolidated results of the Company.
MidSouth Corporation. The Company completed the acquisition of MidSouth
Corporation ("MidSouth") on June 10, 1993. The purchase price for the
acquisition of the MidSouth common stock aggregated approximately $213.5
million, paid in cash by KCSI to holders of MidSouth's common stock and in
connection with the exercise of certain options held by MidSouth employees and
others. Liabilities were assumed in the amount of $306.9 million.
The MidSouth transaction, which was accounted for as a purchase, represented a
significant transaction for the Company. Results of operations of the Company
for the years ended December 31, 1993 and 1994 include the operations of
MidSouth as a consolidated subsidiary effective with the closing of the
transaction.
Adjustments were recorded to appropriate asset and liability balances based
upon the fair value of such assets and liabilities. Based upon these
adjustments, the total purchase price exceeded the fair value of the
underlying net assets by a total of approximately $98 million, and the
resulting intangible is being amortized over a period of 40 years. Additional
assets are being depreciated over lives ranging from 5 to 35 years.
Certain unaudited pro forma financial information regarding results of
operations assuming the MidSouth transaction had been completed on January 1,
1993 follows (in millions, except per share amounts):
<TABLE>
<CAPTION>
Year Ended
December 31, 1993
<S> <C>
Revenues $ 1,010.2
Income before cumulative effect of accounting changes 98.5
Net income 93.4
Primary earnings per share:
Before cumulative effect of accounting changes $ 2.19
After cumulative effect of accounting changes 2.08
</TABLE>
DST Transactions. On January 31, 1995, DST completed the sale of its 50%
interest in Investors Fiduciary Trust Company Holdings, Inc. ("IFTC"), which
wholly-owns Investors Fiduciary Trust Company, to State Street Boston
Corporation ("State Street"). At closing, DST received 2,986,111 shares of
State Street common stock in a tax free exchange (representing an approximate
4% ownership interest in State Street). As a result of this transaction, in
first quarter 1995, the Company recognized a net gain of $4.7 million, after
consideration of appropriate tax effects, on the sale of an equity investment.
With the closing of the transaction, IFTC ceased to be an unconsolidated
affiliate of DST and no further equity in earnings of IFTC have been recorded
by DST. The Company recognized equity in earnings from IFTC of $6.5 and
$4.8 million in 1994 and 1993, respectively.
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"), a publicly traded international
consulting and computer services firm. DST received approximately 3.6
million shares of Continuum stock. As a result of this transaction and
through additional purchases of
<PAGE> 46
Continuum stock, DST owned approximately 24% of the outstanding Continuum
common stock at December 31, 1993. In 1994, DST purchased additional
Continuum shares through privately negotiated transactions. Accordingly, at
December 31, 1994, DST owned approximately 29% (5.5 million shares) of
Continuum's outstanding common stock. In the initial exchange, DST exchanged
Vantage stock with a book value of approximately $17 million for Continuum
stock with a then current market value of approximately $62 million. DST
accounted for the initial exchange as a non-cash, non-taxable exchange in
investment basis of Vantage for an investment in Continuum. Accordingly, no
gain recognition was associated with the transaction.
During second quarter 1993, DST completed the acquisitions of Clarke & Tilley
Ltd. (100% owned), a United Kingdom company which markets investment
management software primarily for use in Europe and the Pacific Rim; Corfax
Benefit Systems, Ltd. (100% owned), a Canadian company which processes
shareowner transactions for mutual funds and pension accounts in Canada; and
DBS Systems Corporation (60% owned), a United States company which has
developed a software billing system for the direct broadcast satellite
industry. During the third quarter 1993, DST acquired Belvedere Financial
Systems, Inc. (100% owned), which develops and markets portfolio accounting
and investment management systems. Each of these transactions was accounted
for as a purchase. The excess of the total purchase price over the fair value
of the underlying net assets is being amortized over periods ranging from 7 to
20 years. Cash paid for these transactions was approximately $15.3 million
and liabilities assumed were $10.3 million.
Note 3. Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Cash payments (in millions):
Interest $ 72.0 $ 67.5 $ 47.4
Income taxes 20.0 15.5 24.1
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities. In
connection with the DST public offering in fourth quarter 1995, the Company
exchanged DST shares for 1,820,000 shares of KCSI common stock owned by the
ESOP with a value of approximately $84.8 million. No cash was exchanged in
connection with this transaction.
At December 31, 1995, the Company had repurchased $11.9 million of its common
stock for which cash had not been exchanged prior to year end. The Company
recorded a liability for these repurchases, with an offsetting reduction of
stockholders' equity.
The Company's Board of Directors declared a quarterly dividend on November 15,
1995 totaling approximately $3.1 million, payable on January 2, 1996.
Accordingly, the dividend declaration effectively reduced retained earnings
and established a liability as of December 31, 1995, requiring no cash outlay
until 1996.
In fourth quarter 1995, KCSI issued approximately 53,950 shares of common
stock under the Eighth Offering of the Employee Stock Purchase Plan. These
shares, totaling a purchase price of approximately $2.1 million, were
subscribed and paid for through employee payroll deductions in 1994 and 1995.
In first quarter of 1994, KCSI issued approximately 234,000 shares of common
stock under the Seventh Offering of the Employee Stock Purchase Plan. These
shares, totaling a purchase price of approximately $4.4 million, were
subscribed and paid for through employee payroll deductions in 1993.
As described in greater detail in Note 6, the Company issued $100 million in
Debentures in 1995, and $200 million in Notes in 1993. As part of these
transactions, the Company incurred $2.2 million and $2.5
<PAGE> 47
million, respectively, in discount and underwriting fees which were
transferred directly to the underwriter. The discount and underwriting fees
represent non-cash amounts, which are being amortized over the respective
terms of the Debentures and Notes.
DST acquired $29.7 and $21.0 million in 1994 and 1993, respectively, in
computer mainframe equipment and software for the Winchester Data Center.
These purchases were financed through bank term loans, with equipment
manufacturers and/or software vendors, and accordingly, required no direct
outlay of cash.
In 1993, DST entered into a sale/leaseback of certain mainframe computer
equipment. As part of this transaction, the buyer assumed certain debt
obligations related to the computer equipment in the amount of $16.6 million,
which provided no cash flow to DST.
Property acquired under capital leases was $3.4 and $1.3 million for 1994 and
1993, respectively. Such acquisitions require no direct outlay of cash.
Note 4. Investments
Investments held for operating purposes include investments in unconsolidated
affiliates as follows (in millions):
<TABLE>
<CAPTION>
Percentage
Ownership
Company Name December 31, 1995 Carrying Value
1995 1994 1993
<S> <C> <C> <C> <C>
DST Systems, Inc. (a) 41% $ 189.9 $ - $ -
Mexrail, Inc. 49% 22.4
Midland (b) 45% 10.2 4.8 3.2
Berger Associates, Inc. (c) 1.2
The Continuum Company, Inc. (d) 62.5 37.1
Investors Fiduciary Trust Co. (d) 52.9 50.2
Boston Financial Data Services, Inc. (d) 15.5 11.4
Argus Health Systems, Inc. (d) 9.8 6.1
First of Michigan Capital Corp. (d) 7.6 7.6
Partnerships 1.4 1.5
Equipment Finance Receivables (e) 41.8 40.0 42.8
Other 10.8 23.0 20.5
Market Valuation Allowances (3.0) (2.9) (7.1)
Total (f) $ 272.1 $ 214.6 $ 174.5
</TABLE>
(a) as a result of the DST public offering and associated transactions
completed in November 1995 (discussed in Note 2), the Company's
investment in DST was reduced to approximately 41%. Fair market value at
December 31, 1995 (based on the New York Stock Exchange closing market
price) was approximately $582.7 million
(b) Midland is comprised of Midland Data Systems, Inc. and Midland Loan
Services, L.P. (both 45% owned KCSI affiliates at December 31, 1995)
(c) in 1994, the Company acquired a controlling interest in Berger by
increasing its ownership percentage from approximately 18% to over 80%,
resulting in Berger's inclusion in the Company's consolidation
(d) owned by DST or a subsidiary of DST in 1994 and/or 1993
(e) fair market value based upon rates currently offered was approximately
$42.3 million at December 31, 1995
(f) fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value
<PAGE> 48
Additionally, the Company's unconsolidated affiliate, DST, holds an investment
in the common stock of State Street which it accounts for as an "available for
sale" security as defined by Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities". The
Company records its proportionate share of any unrealized DST gains or losses
related to State Street, net of taxes, in stockholders' equity.
Transactions With and Between Unconsolidated Affiliates. DST had loans
outstanding to the Company throughout the first ten months of 1995, which were
repaid in connection with the public offering. The Company recognized
approximately $8.8 million in interest income related to this indebtedness
during 1995. Additionally, DST paid a special dividend of $150 million to the
Company in May 1995.
Janus and Berger recognized approximately $3.8 and $0.7 million, respectively,
in expenses associated with various services provided by DST in 1995.
During 1995, DST sold its interest in Midland Data Systems, Inc. ("MDS") and
Midland Loan Services L.P. ("MLS") to the Company. MDS, now a corporate joint
venture of KCSI, had 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 1994, the RTC converted off the MDS system; however, MDS continued to
perform programming work for the RTC related to the system. MLS provides
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.
1994 and 1993. Boston Financial Data Services, Inc. ("BFDS"), is a corporate
joint venture of DST and State Street Boston Corporation, the parent of State
Street Bank and Trust Company. BFDS performs shareholder accounting services
for companies using State Street Bank and Trust Company as their transfer
agent and DST's data processing services, mutual fund recordkeeping and
shareholder accounting systems, and securities transfer system.
Prior to the sale of DST's interest in IFTC, discussed in Note 2, IFTC was a
corporate joint venture of DST and Kemper Financial Services, Inc. IFTC
provides transfer agent and custodial services primarily to the mutual fund
industry and utilizes DST's portfolio accounting, securities transfer, and
mutual fund systems. DST received advance payments from IFTC for services to
be provided in the subsequent fiscal year. There were no such advance
payments at December 31, 1994 and $4 million at December 31, 1993.
Argus Health Systems, Inc. ("Argus"), a corporate joint venture of DST
providing pharmaceutical claims processing services for the health care
industry, uses DST's data processing services. DST received cash advances
from Argus totaling $5 million as of December 31, 1993.
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 began to provide all of
Continuum's North American operations data processing requirements
through use of DST's Winchester Data Center.
<PAGE> 49
DST revenues associated with the above unconsolidated affiliates were $76 and
$74 million for 1994 and 1993, respectively. Accounts receivable include
amounts due from unconsolidated affiliates of $14 and $16 million for 1994 and
1993, respectively, for services provided by DST in the ordinary course of
business and payable at usual trade terms.
Financial Information. Combined financial information of all unconsolidated
affiliates, principally DST in 1995 and DST related affiliates in 1994 and
1993, which the Company and its subsidiaries account for under the equity
method is as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Investment in unconsolidated affiliates $ 198.9 $ 166.5 $ 126.3
Equity in net assets of
unconsolidated affiliates 195.8 159.1 117.3
Dividends and distributions received
from unconsolidated affiliates 150.0 1.0 1.5
Financial condition:
Current assets $ 250.3 $1,129.7 $1,047.7
Non-current assets 569.9 143.6 150.1
Assets $ 820.2 $1,273.3 $1,197.8
Current liabilities $ 178.4 $ 933.9 $ 856.8
Non-current liabilities 162.6 73.2 122.9
Equity of stockholders and partners 479.2 266.2 218.1
Liabilities and equity $ 820.2 $1,273.3 $1,197.8
Operating results:
Revenues $ 542.0 $ 652.1 $ 383.8
Costs and expenses $ 477.1 $ 597.3 $ 354.1
Net Income $ 40.0 $ 54.8 $ 29.7
</TABLE>
Financial information with respect to DST for 1995 and for IFTC Holdings, Inc.
and its wholly-owned subsidiary, Investors Fiduciary Trust Company, for 1994
and 1993, which are included in the amounts shown above, is as follows (in
millions):
<PAGE>
<PAGE> 50
<TABLE>
<CAPTION>
DST IFTC
1995 1994 1993
<S> <C> <C> <C>
Financial condition:
Current assets $ 188.5 $ 814.0 $ 835.5
Non-current assets 561.0 4.5 1.4
Assets $ 749.5 $ 818.5 $ 836.9
Current liabilities $ 135.1 $ 712.6 $ 711.2
Non-current liabilities 148.1 25.2
Equity of stockholders 466.3 105.9 100.5
Liabilities and equity $ 749.5 $ 818.5 $ 836.9
Operating results:
Revenues $ 484.1 $ 63.6 $ 51.2
Costs and expenses $ 443.3 $ 50.7 $ 41.6
Net income $ 27.7 $ 12.9 $ 9.6
</TABLE>
Other. Interest income on cash and equivalents was $1.3, $1.6 and $1.8
million in 1995, 1994 and 1993, respectively.
Berger. At December 31, 1993, the Company had acquired an approximate 18%
interest in Berger. During 1994, the Company acquired a controlling interest
(over 80%) of Berger (see Note 2).
Note 5. Other Balance Sheet Captions
Accounts Receivable. Accounts receivable include the following allowances (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Accounts receivable $ 140.2 $ 237.6 $ 199.0
Allowance for doubtful accounts (4.6) (5.3) (4.3)
Accounts receivable, net $ 135.6 $ 232.3 $ 194.7
Doubtful account expense $ 1.8 $ 3.3 $ 2.1
</TABLE>
Other Current Assets. Other current assets include the following items (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Maturities of equipment finance receivables
(Southern Leasing Corp.) $ 27.0 $ 25.4 $ 25.6
Deferred income taxes 10.6 17.9 23.8
Marketable investments
(cost approximates market) 21.2 17.6 19.0
Other 15.2 27.6 17.7
Total $ 74.0 $ 88.5 $ 86.1
</TABLE>
<PAGE> 51
Properties. Properties and related accumulated depreciation and amortization
are summarized below (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Properties, at cost
KCSR
Road properties $ 1,206.2 $ 1,173.3 $ 1,052.8
Equipment, including
$15.4, $15.5 and $12.9
financed under capital leases 459.3 431.3 351.7
Land and Facilities 2.8 2.8 2.9
Financial Asset Management, including
$1.4, $1.6 and $1.6 equipment
financed under capital leases 35.0 30.1 21.7
Information & Transaction Processing,
including $0, $5.9 and $5.6 equipment
financed under capital leases 351.0 262.8
Corporate & Other 116.7 112.8 100.1
Total $ 1,820.0 $ 2,101.3 $ 1,792.0
Accumulated depreciation and amortization
KCSR
Road properties $ 281.7 $ 280.2 $ 247.5
Equipment, including $9.5,
$8.9 and $8.6 for capital leases 187.8 178.4 174.4
Facilities 0.4 0.4 0.4
Financial Asset Management,
including $1.0, $0.8 and $0.5
for equipment capital leases 21.8 14.5 7.2
Information & Transaction Processing,
including $0, $4.4 and $3.7
for equipment capital leases 169.6 128.5
Corporate & Other 46.4 42.9 41.4
Total $ 538.1 $ 686.0 $ 599.4
Net Properties $ 1,281.9 $ 1,415.3 $ 1,192.6
</TABLE>
Intangibles and Other Assets. Intangibles and other assets include the
following items (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Intangibles $ 202.9 $ 244.9 $ 194.6
Accumulated amortization (29.2) (39.8) (31.3)
Net 173.7 205.1 163.3
Other assets 30.7 15.7 50.9
Total $ 204.4 $ 220.8 $ 214.2
</TABLE>
<PAGE> 52
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Prepaid freight charges due other railroads $ 36.8 $ 35.1 $ 32.2
Current interest payable on indebtedness 16.3 25.4 18.9
Federal income taxes currently payable 66.4 0.3
Other 93.6 81.6 102.9
Total $ 213.1 $ 142.4 $ 154.0
</TABLE>
Note 6. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
KCSI
Competitive Advance & Revolving Credit
Facilities, through May 2000 $ - $ 319.0 $ 231.0
Rate: Below Prime
Notes and Debentures, due July
1998 to December 2025 500.0 400.0 400.0
Unamortized discount (3.4) (2.3) (2.6)
Rate: 5.75% to 8.8%
ESOP secured term loan 13.2 22.8
KCSR
Equipment trust indebtedness, due
serially to June 2009 104.7 115.4 67.8
Rate: 7.151% to 15.0%
Subordinated and senior notes and short-term
renewable lease financing working capital
lines, due April 1996 to December 1999 1.6 19.6 24.4
Rate: 8.0% to 10.58%
DST
Secured and unsecured term loans,
promissory and mortgage notes 59.2 58.2
Other
Short-term renewable lease
financing working capital lines 29.0 38.7 19.3
Rate: Below prime
Subordinated and senior notes,
and industrial revenue bonds, due
November 1997 to May 2004 12.3 22.4 18.8
Rate: 7.13% to 9.93%
Total 644.2 985.2 839.7
Less: debt due within one year 10.4 56.4 63.5
Long-term debt $ 633.8 $ 928.8 $ 776.2
</TABLE>
KCSI Credit Agreements. On May 5, 1995, the Company established a new credit
agreement in the amount of $400 million. The credit agreement replaces
approximately $420 million of then existing Company credit agreements which
had been in place for varying periods since 1992 (see below).
<PAGE> 53
Proceeds of the facility are anticipated to be used for general corporate
purposes. The agreement contains a facility fee ranging from .07 - .25% per
annum, interest rates below prime and terms ranging from one to five years.
The Company also has various other lines of credit lines totaling $200
million. These lines, which are available for general corporate purposes,
have interest rates below prime and terms of less than one year. At December
31, 1995, the Company had no indebtedness outstanding under any of these
facilities. Among other provisions, the agreements limit subsidiary
indebtedness and sale of assets, and require certain coverage ratios to be
maintained.
During 1994 and 1993, the Company established or increased credit agreements
with several lending institutions, which increased the Company's borrowing
ability to approximately $450 million. The agreements bore interest rates
below prime. Proceeds from these agreements were used to finance the Berger
and MidSouth acquisitions, refinance certain MidSouth indebtedness and for
general corporate purposes. All of these agreements were replaced by the new
credit agreement established on May 5, 1995 as discussed above.
Public Debt Transactions. On December 18, 1995, the Company issued $100
million of 7% Debentures due 2025. The Debentures are redeemable at the
option of the Company at any time, in whole or in part, at a redemption price
equal to the greater of (a) 100% of the principal amount of such Debentures
and (b) the sum of the present values of the remaining scheduled payments of
principal and interest thereon discounted to the date of redemption on a
semiannual basis at the Treasury Rate (as defined in the Debentures agreement)
plus 20 basis points, plus in each case accrued interest thereon to the date
of redemption. The net proceeds of this transaction were used to repay
indebtedness on the Company's existing credit lines and for the repurchase of
KCSI common stock.
On June 24, 1993, the Company issued $100 million of 5.75% Notes due in 1998.
The Notes are not redeemable prior to maturity. The net proceeds were used to
refinance certain MidSouth debt.
On March 3, 1993, the Company issued $100 million of 6.625% Notes due 2005.
The Notes are not redeemable prior to maturity. Proceeds were used for debt
repayment by DST and Southern Credit Corporation, working capital, capital
expenditures, acquisition of or investments in businesses, and
repurchase of KCSI common stock.
On July 1, 1992, the Company issued $100 million 7.875% Notes due 2002 and
$100 million 8.8% Debentures due 2022. The 7.875% Notes are not redeemable
prior to their maturity in 2002, 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 or
investments in businesses and assets, and acquisition of the Company's common
stock.
This debt was issued at a total discount of $4.1 million which is being
amortized over the respective debt maturities on a straight-line basis, which
is not materially different from the interest method.
KCSI ESOP. In 1988, the Company established a $39 million leveraged ESOP (see
Stockholders' Equity Note 8). Related indebtedness was guaranteed by the
Company.
In 1995, the Company retired the remaining ESOP indebtedness through
contributions of $13.2 million, which included $9.0 million in accelerated
payments.
Railway Indebtedness. KCSR has purchased rolling stock under conditional
sales agreements, equipment trust certificates and capitalized lease
obligations, which has been pledged as collateral for the related
indebtedness.
<PAGE> 54
Credit Lines. Unused lines of credit at December 31, 1995 follow (in
millions)
<TABLE>
<CAPTION>
Commitment Lines of Credit
Fee Total Unused
<S> <C> <C> <C>
KCSI .070 to .250% $ 600.0 $ 600.0
Southern Credit Corporation .125 to .375% 65.0 36.0
KCSR .1875% 5.0 5.0
Total $ 670.0 $ 641.0
</TABLE>
Other Agreements, Provisions and Restrictions. As previously noted, the
Company has debt agreements containing restrictions on subsidiary
indebtedness, advances and transfers of assets and sale and leaseback
transactions, as well as requiring compliance with various financial
covenants. At December 31, 1995, the Company was in compliance with the
provisions and restrictions of these agreements. Unrestricted retained
earnings at December 31, 1995 were $348 million.
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 $30, $53 and $33 million for the years 1995, 1994 and 1993, 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):
<TABLE>
<CAPTION>
Capital Leases
Minimum Net
Lease Less Present Other Operating
Payments Interest Value Debt Total Leases
<S> <C> <C> <C> <C> <C> <C>
1996 $ 2.1 $ 0.6 $ 1.5 $ 8.9 $ 10.4 $ 20.0
1997 1.4 0.4 1.0 13.1 14.1 17.1
1998 0.9 0.4 0.5 109.8 110.3 13.7
1999 0.8 0.3 0.5 9.7 10.2 7.9
2000 0.8 0.3 0.5 9.7 10.2 6.2
Later years 4.6 1.2 3.4 485.6 489.0 25.3
Total $ 10.6 $ 3.2 $ 7.4 $ 636.8 $ 644.2 $ 90.2
</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 $679, $959 and $903 million at December 31, 1995, 1994 and
1993, respectively.
Note 7. Income Taxes
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). 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.
<PAGE> 55
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):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Current
Federal $ 78.7 $ 40.2 $ 31.7
State and local 15.2 3.3 3.2
Total current 93.9 43.5 34.9
Deferred
Federal 86.2 16.0 24.5
Federal enacted rate change 3.4
State and local 12.8 4.0 6.2
Total deferred 99.0 20.0 34.1
Total income tax expense $ 192.9 $ 63.5 $ 69.0
</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 federal deferred tax expense (benefit) applicable to continuing
operations are as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Depreciation $ 19.8 $ 16.7 $ 19.5
Investment in DST common stock 56.3
Deferred revenue 0.3 (0.3) (1.6)
Alternative Minimum Tax ("AMT") credit
and Net Operating Loss ("NOL") carryovers 6.6 (5.9) (0.3)
Other expenses for financial
reporting purposes not currently
deductible for tax purposes 4.6 4.3 9.0
Other, net (1.4) 1.2 1.3
Total $ 86.2 $ 16.0 $ 27.9
</TABLE>
<PAGE> 56
The federal and state deferred tax liabilities (assets) recorded on the
Consolidated Balance Sheets at December 31, 1995, 1994 and 1993, respectively,
follow (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Liabilities:
Depreciation $ 281.1 $ 259.2 $ 242.5
Investment in DST common stock 73.6
Equity, unconsolidated affiliates 0.4 5.1 1.3
Other, net 0.3
Gross deferred tax liabilities 355.4 264.3 243.8
Assets:
NOL and AMT credit carryovers (26.5) (31.7) (23.2)
Book reserves not currently deductible
for tax (26.4) (20.0) (23.2)
Deferred compensation and other
employee benefits (2.5) (13.1) (14.4)
Deferred revenue (4.6) (5.0) (4.7)
Vacation accrual (2.6) (3.5) (2.8)
Other, net (5.8) (5.9)
Gross deferred tax assets (62.6) (79.1) (74.2)
Net deferred tax liability $ 292.8 $ 185.2 $ 169.6
</TABLE>
Based upon the Company's history of prior operating earnings and its
expectations for the future, management has determined that operating income
of the Company will, more likely than not, be sufficient to recognize fully
the above gross deferred tax assets.
Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax statutory
rates of 35% in 1995, 1994 and 1993, are as follows (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Income tax expense using the
statutory rate in effect $ 154.1 $ 60.8 $ 61.2
Tax effect of:
Earnings of equity investees (1.4) (6.3) (3.7)
DST transactions 20.5
Charitable contributions of
appreciated property (3.2)
Cumulative effect of enacted
1% federal tax rate increase 3.4
Other, net (5.1) 1.7 (1.3)
Federal income tax expense 164.9 56.2 59.6
State and local income tax expense 28.0 7.3 9.4
Total $ 192.9 $ 63.5 $ 69.0
Effective tax rate 43.8% 36.6% 39.4%
</TABLE>
<PAGE> 57
Tax Carryovers. At December 31, 1995, the Company had $3.4 million of
alternative minimum tax credit carryover generated by the MidSouth prior to
its acquisition by the Company. This credit can be carried forward
indefinitely and is available on a "tax return basis" to reduce future federal
income taxes payable.
The amount of federal net operating loss carryover generated by the MidSouth
prior to its acquisition was $54.0 million with expiration dates beginning in
the year 2001. The use of preacquisition net operating losses and tax credit
carryovers is subject to limitations imposed by the Internal Revenue Code.
The Company does not anticipate that these limitations will affect utilization
of the carryovers prior to their expiration.
Tax Examinations. Examinations of the consolidated federal income tax returns
by the Internal Revenue Service ("IRS") have been completed for the years
1984-1989 and the IRS has proposed certain tax assessments for these years.
In addition, other taxing authorities have also completed examinations
principally through 1992, and have proposed additional tax assessments for
which the Company believes it has recorded adequate reserves.
Since most of these asserted tax deficiencies represent temporary differences,
subsequent payments of taxes will not require additional charges to income tax
expense. In addition, accruals have been made for interest (net of tax
benefit) for estimated settlement of the proposed tax assessments. Thus,
management believes that final settlement of these matters will not have a
material adverse effect on the consolidated results of operations or financial
condition.
Note 8. Stockholders' Equity
Forward Stock Purchase Contract. During 1995, the Company entered into a
forward stock purchase contract ("the contract") as a means of securing a
potentially favorable price for the repurchase of its common stock in
connection with the stock repurchase program authorized by the Company's Board
of Directors on April 24, 1995. The contract, which is not held for trading
purposes, allows the Company to purchase from a financial institution two
million shares of the Company's common stock over various time periods at an
aggregate price of $87.7 million. In addition to the aggregate market price,
the contract includes an escalating transaction premium which approximated
$1.3 million if the contract were to have been settled as of December 31,
1995. The contract also contains provisions which allow the Company to
elect a net cash or net share settlement in lieu of physical settlement of the
shares. The transaction will be recorded in the Company's financial
statements upon settlement of the contract in accordance with the Company's
accounting policies described in Note 1. If either the net cash or net share
settlement provisions are elected by the Company, any appreciation or
depreciation associated with the forward contract will be reflected as an
equity component upon settlement of the contract. On December 31, 1995, the
fair value of two million shares of the Company's common stock was $91.5
million, based on quoted market prices.
The contract involves, to varying degrees, elements of credit and market risk;
however, the Company does not anticipate any material adverse effect on its
financial position resulting from its involvement in this contract, nor does
it anticipate nonperformance by the counter party. The contract is unsecured.
Stock Option Plans. Employee Stock Option Plans established in 1978, 1983,
1987 and 1991, as amended, provide for the granting of options to purchase up
to 18.6 million shares (after stock splits) of the Company's common stock by
officers and other designated employees. In addition, the Company established
a 1993 Directors' Stock Option Plan with a maximum of 120,000 shares for
grant. Such options have been granted at 100% of the average market price of
the Company's stock on the date of grant and generally 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.
<PAGE> 58
The Plans include provisions for stock appreciation rights and limited rights
("LRs"). All outstanding options include LRs, except for those related to the
Directors' Stock Option Plan. Relevant information is summarized below:
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Stock Options:
Outstanding at January 1 3,280,515 3,935,800 5,527,648
Exercised (664,543) (904,235) (1,987,848)
Canceled/Expired (372,600) (30,000) (4,000)
Granted 1,432,000 278,950 400,000
Outstanding at December 31 3,675,372 3,280,515 3,935,800
Exercisable at December 31 2,146,372 2,488,665 2,851,400
Exercise Price, December 31:
for all outstanding
options $8.80 to $49.00 $8.80 to $49.00 $8.80 to $41.56
for exercisable options $8.80 to $49.00 $8.80 to $41.56 $8.80 to $22.66
</TABLE>
Shares available for future grants at December 31, 1995 aggregated 3,259,846,
all of which will be available for grant up to May 31, 1996, at which time the
grants will expire.
Employee Stock Ownership Plan ("ESOP"). In 1987 and 1988, KCSI and DST
established leveraged ESOPs for employees not covered by collective bargaining
agreements by collectively purchasing $69 million of KCSI common stock from
Treasury at a then current market price of $49 per share ($12.25 per share
effected for stock splits). During 1990, the two plans were merged into one
plan known as the KCSI ESOP. The indebtedness was retired in full during
1995. In October 1995, the ESOP became a multiple employer plan covering both
KCSI employees and DST employees.
Employee benefit expense aggregated $5.7, $15.5 and $8.1 million in 1995, 1994
and 1993, respectively, for the ESOP. Interest incurred on the indebtedness
was $0.8, $1.2 and $1.8 million in 1995, 1994 and 1993, respectively.
Dividends used to service the ESOP indebtedness were $1.6, $1.3 and $0.8
million in 1995, 1994 and 1993, respectively.
In December 1993, the American Institute of Certified Public Accountants
issued Statement of Position No. 93-6 ("SOP 93-6") "Employers Accounting for
Employee Stock Ownership Plans," which became effective for fiscal years
beginning after December 15, 1993. Certain of the Company's ESOP shares are
grandfathered under the provisions of SOP 93-6. In 1994, the Company
contributed $11.5 million to the ESOP which was used by the trustee to
purchase 352,000 shares of KCSI common stock in the open market for allocation
to plan participants. These ESOP shares were not grandfathered under the
provisions of SOP 93-6. Disclosures regarding the Company's ESOP plan follow,
(in millions at December 31, 1995):
<TABLE>
<S> <C>
Number of grandfathered common shares
allocated to plan participants 4.6
Number of not grandfathered common shares
allocated to plan participants 0.4
Total number of common shares allocated
to plan participants 5.0
Cost of unallocated grandfathered ESOP shares $ 10.1
</TABLE>
<PAGE> 59
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 shares of common stock from Treasury -
523,320 in 1995, 721,431 in 1994 and 1,187,224 in 1993 - 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 shares as follows: 4,978,457 in 1995, 1,376
in 1994 and 5,443 in 1993.
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 the par
value of the shares.
In the fourth quarter 1995, the Company initiated the ninth offering under the
Employee Stock Purchase Plan. Approximately 97,137 shares of Company common
stock were subscribed to under this offering, which will be funded through
employee payroll deductions, over a one year period, at a price of $38.46 per
share. At December 31, 1995, there were approximately 4.0 million shares
available for future offerings.
The Company initiated the eighth offering under the stock purchase plan in
December 1993. The purchase price under this offering at 85% of the average
market price on the offering date was $38.20.
Employees of the Company subscribed to 220,576 shares under this offering, of
which 53,950 shares were issued in 1995 and 101,541 were issued in January
1996.
In December 1992, the Company initiated the seventh offering under the stock
purchase plan. The purchase price under this offering at 85% of the average
market price on the offering date was $18.75. Employees of the Company
subscribed to 247,254 shares under this offering, of which 233,926 shares
were issued in January 1994.
Restricted Stock. The Company issued 7,300 shares of restricted stock in 1993
to senior management executives of KCSI and certain subsidiaries at then
current market prices ranging between $39.25 to $41.56 per share. These
shares vest ratably over a five year period.
<PAGE> 60
Establishment of Par Value for Common Stock. On May 6, 1994, the Company
amended its certificate of incorporation to set a par value for the common
stock and increase its authorized shares. The amendment established a par
value of $.01 per common share, which had previously been no par, and had the
effect of reallocating amounts between categories within stockholders' equity,
but had no overall effect upon the total amount of stockholders' equity. In
addition, the number of authorized common shares was increased from 100
million to 400 million.
Note 9. Minority Interest
Purchase Agreements. Agreements between KCSI and Janus minority owners
contain, among other provisions, mandatory stock purchase provisions whereby
under certain circumstances, KCSI would be required to purchase the minority
interest at a purchase price based upon a multiple of Janus earnings.
In late 1994, the Company was notified that certain Janus minority owners made
effective the mandatory purchase provisions for a certain percentage of their
ownership. In the aggregate, the shares made effective for mandatory purchase
totaled $59 million. Concurrent with the notification of these mandatory
purchase provisions, the Company negotiated the early termination of certain
Janus compensation arrangements, which began in 1991. The compensation
arrangements permitted individuals to earn units (which vested over time)
based upon Janus earnings. These arrangements were scheduled to be fully
vested at the end of 1996 and would have continued to accrue benefits in
subsequent years. The negotiated termination resulted in payments of $48
million in cash by Janus, of which approximately $21 million had been accrued.
In early 1995, recipients of amounts paid to terminate the arrangements used
their after-tax net proceeds to purchase certain portions of the shares made
effective for mandatory purchase. In addition, the Janus minority group was
restructured to allow for minority ownership by other key Janus employees.
These employees purchased other portions of the minority shares made effective
for mandatory purchase through payment of cash and creation of recourse loans
financed by KCSI in the amount of $10.5 million. The remaining minority
shares made effective for mandatory purchase were purchased by Janus for
treasury, $6.1 million, and by KCSI for $12.7 million. As a result of the
combination of KCSI acquiring additional Janus shares and the reduction of
outstanding shares with Janus' treasury purchase, KCSI increased its ownership
in Janus from approximately 81% to 83%, upon closing of the transaction in
January 1995. Additional purchases were made by minority holders during 1995,
financed through recourse loans by KCSI in the amount of $8.8 million.
The Company also purchased shares thereby maintaining its respective ownership
percentage. The KCSI share purchases resulted in the recording of intangibles
as the purchase price exceeded the value of underlying tangible assets. The
intangibles are being amortized over their estimated economic lives.
The new minority owners of Janus also have mandatory stock purchase provisions
which under certain circumstances require KCSI to purchase the minority
interest at fair market value. If all of the provisions of the Janus minority
owner agreements became effective, KCSI would be required to purchase the
respective minority interests, currently estimated at approximately $137
million. The purchase price for the mandatory provisions is based upon a
multiple of earnings and/or fair market value determinations depending upon
specific agreement terms.
Agreements between KCSI and Berger minority owners contain mandatory stock
purchase provisions, which under certain circumstances require Berger or KCSI
to purchase the minority interest at a purchase price based upon a multiple of
Berger's net investment company advisory fees. If all of the provisions
relative to mandatory stock repurchase became effective, KCSI would be
required to purchase the respective minority interests, currently estimated at
approximately $32 million.
<PAGE> 61
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. There was no profit sharing expense for the year ended December
31, 1995. Profit sharing expense was $0.8 and $4.6 million in the years 1994
and 1993, 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 several of its 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 Company's policy, in
most cases, is to fund benefits payable under these plans as the obligations
become due. However, certain plan assets do exist with respect to life
insurance benefits.
The following table displays a reconciliation of the plans' obligations and
assets at December 31 (in millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Accumulated postretirement
benefit obligation:
Retirees $ 7.7 $ 7.9 $ 8.0
Fully eligible active
plan participants 0.9 1.1 0.9
Other active plan
participants 1.9 1.4 2.0
Plan assets (1.7) (1.3) (1.3)
Accrued postretirement
benefit obligation $ 8.8 $ 9.1 $ 9.6
</TABLE>
Net periodic postretirement benefit cost included the following components (in
millions):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Service cost $ 0.3 $ 0.4 $ 0.2
Interest cost 0.7 0.8 0.6
Return on plan assets (0.1) (0.1) (0.1)
Net periodic postretirement
benefit cost $ 0.9 $ 1.1 $ 0.7
</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 Companies' 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
The assumed annual increase in the CPI is 3%, 4% and 3% at December 31, 1995,
1994 and 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
7.25%, 8.5% and 7% at December 31, 1995, 1994 and 1993, respectively. The
assumed salary increase was 4%, 5% and 5% at December 31, 1995, 1994 and 1993,
respectively.
Note 11. Commitments and Contingencies
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.
Purchase Commitments. The Company has commitments to purchase approximately
$14 million of diesel fuel over the next twelve month period, representing
approximately 50% of projected fuel requirements for 1996. In general, these
fuel purchase commitments approximate current market prices.
Environmental Reserves. The Company's transportation operations are subject
to extensive regulation under environmental protection laws and its land
holdings have been used for transportation purposes or leased to third-parties
for commercial and industrial purposes. The Company records liabilities for
remediation and restoration costs related to past activities when the
Company's obligation is probable and the costs can be reasonably estimated.
Costs of ongoing compliance activities to current operations are
expensed as incurred.
The Company's recorded liabilities for these issues represent its best
estimates of remediation and restoration costs that may be required to comply
with present laws and regulations. At December 31, 1995, these recorded
liabilities were not material. Although these costs cannot be predicted with
certainty, management believes that the ultimate outcome of identified matters
will not have a material adverse effect on the Company's consolidated results
of operations or financial condition.
Note 12. Control
Subsidiaries and Affiliates. In connection with its acquisition of an
interest in Janus, the Company entered into an agreement which provides for
preservation of a measure of management autonomy at the subsidiary level and
for rights of first refusal on the part of minority stockholders, Janus and
the Company with respect to certain sales of Janus stock by the minority
stockholders. The agreement also requires the Company to purchase the shares
of minority stockholders in certain circumstances. In addition, in the event
of a "change of ownership" of the Company, as defined in the agreement, the
Company may be required to sell its stock of Janus to the minority
stockholders or to purchase such holders' Janus stock. Purchase and sales
transactions under the agreements are to be made based upon a multiple of the
net earnings of Janus and/or fair market value determinations, as defined
therein. See Note 9 for further details.
Under the Investment Company Act of 1940, certain changes in ownership of
Janus or Berger may result in termination of its investment advisory
agreements with the mutual funds and other accounts it manages, requiring
approval of fund shareholders and other account holders to obtain new
agreements.
DST, a 41% owned unconsolidated affiliate of the Company, has a Stockholders'
Rights Agreement. Under certain circumstances following a "change in control"
of KCSI, as defined in DST's Stockholders' Rights Agreement, substantial
dilution of the Company's interest in DST could result.
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.
<PAGE> 63
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,
1995 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.
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the
Company declared a dividend distribution of one Right for each outstanding
share of the Company's common stock, $.01 par value per share (the "Common
Stock"), to the stockholders of record on October 12, 1995. Each Right
entitles the registered holder to purchase from the Company 1/1,000ths of a
share of Series A Preferred Stock (the "Preferred Stock") or in some
circumstances, Common Stock, other securities, cash or other assets as the
case may be, at a price of $210 per share, subject to adjustment.
The Rights, which are automatically attached to the Common Stock, are not
exercisable or transferable apart from the Common Stock until the tenth
calendar day following the earlier to occur of (unless extended by the Board
of Directors and subject to the earlier redemption or expiration of the
Rights): (i) the date of a public announcement that an acquiring person
acquired, or obtained the right to acquire, beneficial ownership of 20 percent
or more of the outstanding shares of the Common Stock of the Company (or 15
percent in the case that such person is considered an "adverse person"), or
(ii) the commencement or announcement of an intention to make a tender offer
or exchange offer that would result in an acquiring person beneficially owning
20 percent or more of such outstanding shares of Common Stock of the Company
(or 15 percent in the case that such person is considered an "adverse
person"). Until exercised, the Right will have no rights as a stockholder of
the Company, including, without limitation, the right to vote or to receive
dividends. In connection with certain business combinations resulting in the
acquisition of the Company or dispositions of more than 50% of Company assets
or earnings power, each Right shall thereafter have the right to receive, upon
the exercise thereof at the then current exercise price of the Right, that
number of shares of the highest priority voting securities of the acquiring
company (or certain of its affiliates) that at the time of such transaction
would have a market value of two times the exercise price of the Right. The
Rights expire on October 12, 2005, unless earlier redeemed by the Company as
described below.
At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common Stock of the Company, the Company may redeem the Rights
in whole, but not in part, at a price of $0.005 per Right . In addition, the
Company's right of redemption may be reinstated following an inadvertent
trigger of the Rights (as determined by the Board) if an acquiring person
reduces its beneficial ownership to 10 percent or less of the outstanding
shares of Common Stock of the Company in a transaction or series of
transactions not involving the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will
have a cumulative quarterly dividend rate set by the Board of Directors or
equal to 1,000 times the dividend declared on the Common Stock for such
quarter. Each share will have the voting rights of one vote on all matters
voted at a meeting of the stockholders for each 1/1000th share of preferred
stock held by such stockholder. 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 an amount equal to 1,000 times the
amount to be received per common share. In the event of a liquidation, the
holders of Series A Preferred shares will be entitled to receive $1,000 per
share or an amount per share equal to 1,000 times the aggregate amount to
be distributed per share to holders of Common Stock. The shares will not be
redeemable. The vote of holders of a majority of the Series A Preferred
shares, voting together as a class, will be required for any amendment to the
Company's Certificate of Incorporation which would materially and adversely
alter or change the powers, preferences or special rights of such shares.
<PAGE> 64
Note 13. Industry Segments
Subsequent to the DST public offering, the Company's major business activities
were realigned to reflect the Company's current areas of operations. The
three segments are as follows:
The Kansas City Southern Railway Company. The Company operates a Class I
Common Carrier railroad system through its wholly-owned subsidiary, KCSR. As
a common carrier, KCSR'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 in the United States from
the Midwest to the Gulf of Mexico and on an East-West axis from Dallas, Texas
to Meridian, Mississippi. Also included in this industry segment is Carland,
Inc., a subsidiary of Southern Credit Corporation. Carland, Inc. leases
various types of equipment including railroad rolling stock, roadway
maintenance equipment and vehicles. KCSR is Carland's principal customer.
KCSR's revenues and earnings are dependent on providing reliable service to
its customers at competitive rates, the general economic conditions in the
geographic region it serves, and its ability to effectively compete against
alternative forms of surface transportation, such as over-the-road truck
transportation. KCSR's ability to construct and maintain its roadway in order
to provide safe and efficient transportation service is important to its
ongoing viability as a rail carrier. As has been evident during 1995,
consolidation in the rail industry places increased competitive pressure
on KCSR to effectively maintain its presence as an alternative route for the
movement of commodities. Additionally, the containment of costs and expenses
is important in maintaining a competitive market position, particularly
relative to employee costs as approximately 85% of the KCSR's employees are
covered under various collective bargaining agreements.
Financial Asset Management. Janus (an 83% owned subsidiary) and Berger (an
80% owned subsidiary) manage investments for mutual funds and private
accounts. Both companies operate throughout the United States with
headquarters in Denver, Colorado. Janus assets under management (including
those Cash Equivalent Funds serviced by Janus but advised by an unaffiliated
party) at December 31, 1995, 1994 and 1993 were $31.1, $22.9 and $22.2
billion, respectively. Berger assets under management at December 31, 1995,
1994 and 1993 were $3.4, $3.0 and $1.9 billion, respectively.
Financial Asset Management revenues and operating income are driven by growth
in assets under management, and a decline in the stock and bond markets and/or
an increase in the rate of return of alternative investments could negatively
impact results. 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.
Corporate & Other. Earnings of various less significant consolidated
subsidiaries (e.g., Pabtex, Inc., Southern Leasing Corporation, etc.), the
Company's equity in earnings from its investments in unconsolidated
affiliates, unallocated holding company expenses, intercompany
eliminations, and miscellaneous investment activities are reported in the
Corporate & Other industry segment. In 1995, DST is included as an equity
investment (see Note 1 for further discussion). In 1994 and 1993, DST was
reported as a separate segment, Information & Transaction Processing, as
discussed below.
The earnings of DST, the Company's largest unconsolidated affiliate, are
dependent in part upon the further growth of the mutual fund industry in the
United States, DST's ability to continue to adapt its technology to meet
increasingly complex and rapidly changing requirements and various other
factors including, but not limited to: reliance on a centralized processing
facility; continued equity in earnings from joint ventures; and competition
from other third party providers of similar services and products as well as
from in-house providers.
<PAGE> 65
Information & Transaction Processing (1994 and 1993 only). DST, its
subsidiaries and affiliates, provide sophisticated information processing and
computer software services and products, primarily to mutual funds, insurance
providers, banks and other financial services organizations. 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. As discussed in Note 2, DST and the
Company completed a public offering of DST common stock and associated
transactions in November 1995, resulting in the reduction of the Company's
ownership in DST to approximately 41%. Accordingly, Information & Transaction
Processing is not reported as a separate segment in 1995.
Segment Financial Information. Sales between segments are not material and
therefore not disclosed. The year ended December 31, 1995 reflects DST as an
unconsolidated affiliate as of January 1, 1995 as a result of the DST public
offering and associated transactions completed in November 1995, as discussed
in Note 2. The years ended December 31, 1994 and 1993 present DST as a
consolidated subsidiary. Certain amounts in prior years' segment information
have been reclassified to conform to the current year presentation.
<PAGE>
<PAGE> 66
Segment Financial Information, dollars in millions, years ended December 31,
<TABLE>
<CAPTION>
The Kansas Financial Information &
City Southern Asset Transaction Corporate &
Railway Company Management Processing Other Consolidated
<S> <C> <C> <C> <C> <C>
1995
Revenues $ 502.1 $ 239.8 $ - $ 33.3 $ 775.2
Costs and expenses 380.2 133.9 26.9 541.0
Depreciation and
amortization 55.3 13.2 6.5 75.0
Operating income 66.6 92.7 (0.1) 159.2
Gain on sale of equity
investment 296.3 296.3
Equity in net earnings of
unconsolidated affiliates 29.8 29.8
Interest expense (50.7) (4.9) (9.9) (65.5)
Other, net 3.4 4.3 12.6 20.3
Pretax income 19.3 92.1 328.7 440.1
Income taxes 7.9 37.8 147.2 192.9
Minority interest 10.5 10.5
Net income $ 11.4 $ 43.8 $ - $ 181.5 $ 236.7
Capital expenditures $ 110.2 $ 5.6 $ - $ 5.3 $ 121.1
1994
Revenues $ 472.5 $ 186.3 $ 401.7 $ 27.9 $1,088.4
Costs and expenses 318.0 126.2 313.2 24.7 782.1
Depreciation and
amortization 47.8 9.0 57.3 5.0 119.1
Operating income 106.7 51.1 31.2 (1.8) 187.2
Equity in net earnings of
unconsolidated affiliates 24.5 0.3 24.8
Interest expense (39.3) (2.1) (14.0) 1.8 (53.6)
Other, net 3.4 2.0 3.5 6.4 15.3
Pretax income 70.8 51.0 45.2 6.7 173.7
Income taxes 28.4 20.1 14.3 0.7 63.5
Minority interest 6.4 (1.1) 5.3
Net income $ 42.4 $ 24.5 $ 32.0 $ 6.0 $ 104.9
Capital expenditures $ 190.7 $ 7.8* $ 102.0* $ 17.4 $ 317.9
1993
Revenues $ 413.0 $ 159.9 $ 341.2 $ 31.9 $ 946.0
Costs and expenses 273.4 77.2 267.9 28.5 647.0
Depreciation and
amortization 42.1 5.5 43.4 6.2 97.2
Operating income 97.5 77.2 29.9 (2.8) 201.8
Equity in net earnings of
unconsolidated affiliates 2.1 12.0 14.1
Interest expense (30.7) (0.7) (10.9) (8.9) (51.2)
Other, net 4.2 2.8 1.3 2.0 10.3
Pretax income 73.1 79.3 32.3 (9.7) 175.0
Income taxes 31.8 30.7 10.0 (3.5) 69.0
Minority interest 9.6 (0.6) 9.0
Income before
accounting changes 41.3 39.0 22.9 (6.2) 97.0
Cumulative effect of
accounting changes (6.5) (6.5)
Net income $ 41.3 $ 39.0 $ 22.9 $ (12.7) $ 90.5
Capital expenditures $ 99.5* $ 9.2 $ 63.9* $ 9.5 $ 182.1
</TABLE>
*Exclusive of property additions from acquisitions
<PAGE> 67
Segment Financial Information, dollars in millions, as of
December 31,
<TABLE>
<CAPTION>
The Kansas Financial Information &
City Southern Asset Transaction Corporate &
Railway Company Management Processing Other Consolidated
<S> <C> <C> <C> <C> <C>
1995
ASSETS
Current assets $ 155.2 $ 93.5 $ - $ 32.5 $ 281.2
Investments held
for operating purposes 9.3 0.9 261.9 272.1
Properties, net 1,198.4 13.2 70.3 1,281.9
Intangible and other assets 103.0 78.4 23.0 204.4
Total assets $1,465.9 $ 186.0 $ - $ 387.7 $2,039.6
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 201.1 $ 25.5 $ - $ 93.8 $ 320.4
Long-term debt 604.2 48.0 (18.4) 633.8
Deferred income taxes 226.2 0.5 76.9 303.6
Other 35.8 12.6 38.2 86.6
Net worth 398.6 99.4 197.2 695.2
Total liabilities and
stockholders' equity $1,465.9 $ 186.0 $ - $ 387.7 $2,039.6
1994
ASSETS
Current assets $ 158.6 $ 70.4 $ 131.6 $ 19.5 $ 380.1
Investments held
for operating purposes 10.6 0.7 167.0 36.3 214.6
Properties, net 1,148.4 15.6 181.4 69.9 1,415.3
Intangible and other assets 106.8 57.3 51.7 5.0 220.8
Total assets $1,424.4 $ 144.0 $ 531.7 $ 130.7 $2,230.8
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 201.1 $ 32.5 $ 129.4 $ (23.4) $ 339.6
Long-term debt 597.1 48.2 175.8 107.7 928.8
Deferred income taxes 200.3 3.9 204.2
Other 29.5 11.1 19.8 30.6 91.0
Net worth 396.4 52.2 206.7 11.9 667.2
Total liabilities and
stockholders' equity $1,424.4 $ 144.0 $ 531.7 $ 130.7 $2,230.8
1993
ASSETS
Current assets $ 144.0 $ 39.9 $ 115.0 $ 36.8 $ 335.7
Investments held
for operating purposes 11.1 0.2 125.6 37.6 174.5
Properties, net 985.0 14.4 134.3 58.9 1,192.6
Intangible and other assets 138.8 17.7 53.9 3.8 214.2
Total assets $1,278.9 $ 72.2 $ 428.8 $ 137.1 $1,917.0
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities $ 166.4 $ 14.0 $ 88.8 $ 19.2 $ 288.4
Long-term debt 521.7 0.9 146.0 107.6 776.2
Deferred income taxes 191.9 (7.2) 184.7
Other 40.6 26.0 9.3 29.1 105.0
Net worth 358.3 31.3 184.7 (11.6) 562.7
Total liabilities and
stockholders' equity $1,278.9 $ 72.2 $ 428.8 $ 137.1 $1,917.0
</TABLE>
<PAGE> 68
Note 14. Quarterly Financial Data (Unaudited)
Quarterly financial data follows. The four quarters for 1995 have been
restated to reflect DST as an unconsolidated affiliate as of January 1, 1995
as a result of the DST public offering and associated transactions completed
in November 1995 and resultant reduction in Company ownership of DST to
approximately 41%. Certain amounts in the quarterly financial data have been
reclassified to conform to the current year presentation.
(in millions, except per share amounts):
<TABLE>
<CAPTION>
1995
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 198.0 $ 199.2 $ 188.8 $ 189.2
Costs and expenses 137.2 125.9 148.3 129.6
Depreciation and amortization 19.0 18.9 19.1 18.0
Operating income 41.8 54.4 21.4 41.6
Gain on sale of equity investment 296.3
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 1.7 4.6 5.3 13.0
Other 4.7 0.2 0.2 0.1
Interest expense (16.3) (15.6) (16.2) (17.4)
Other, net 5.5 5.4 5.6 3.8
Pretax income 333.7 49.0 16.3 41.1
Income taxes 158.9 16.9 5.1 12.0
Minority interest 2.9 3.2 2.7 1.7
Net income $ 171.9 $ 28.9 $ 8.5 $ 27.4
Primary earnings per share:
Income from continuing
operations* $ 4.11 $ 0.65 $ 0.19 $ 0.61
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Ranges:
Preferred - High $ 19.000 $ 20.000 $ 15.500 $ 16.000
- Low 15.500 14.500 14.500 14.500
Common - High 48.625 47.375 41.250 40.875
- Low 44.625 35.750 35.875 31.000
</TABLE>
* The accumulation of 1995's four quarters for primary earnings per share of
income from continuing operations is greater than the primary earnings per
share for the year ended December 31, 1995 due to significant repurchases of
Company common stock in the fourth quarter.
<PAGE> 69
(in millions, except per share amounts):
<TABLE>
<CAPTION>
1994
Fourth Third Second First
Quarter Quarter Quarter Quarter
<S> <C> <C> <C> <C>
Revenues $ 289.4 $ 271.0 $ 264.3 $ 263.7
Costs and expenses 231.2 187.8 181.9 181.2
Depreciation and amortization 32.8 30.7 27.4 28.2
Operating income 25.4 52.5 55.0 54.3
Equity in net earnings of
unconsolidated affiliates 6.9 6.8 5.1 6.0
Interest expense (13.9) (15.2) (9.5) (15.0)
Other, net 5.2 4.6 3.6 1.9
Pretax income 23.6 48.7 54.2 47.2
Income taxes 7.4 18.4 20.1 17.6
Minority interest (0.7) 1.7 2.3 2.0
Net income $ 16.9 $ 28.6 $ 31.8 $ 27.6
Primary earnings per share:
Income from continuing
operations $ 0.37 $ 0.64 $ 0.70 $ 0.61
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .075 $ .075 $ .075 $ .075
Stock Price Ranges:
Preferred - High $ 20.000 $ 18.750 $ 20.000 $ 16.500
- Low 15.000 16.000 14.000 14.625
Common - High 36.250 44.500 52.125 52.625
- Low 29.875 33.625 37.000 42.375
</TABLE>
<PAGE> 70
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>
<PAGE> 71
Part III
The Company has incorporated by reference certain responses to the Items of
this Part III pursuant to Rule 12b-23 under the Exchange Act and General
Instruction G(3) to Form 10-K. The Company's definitive proxy statement for
the annual meeting of stockholders scheduled for May 2, 1996 will be filed no
later than 120 days after December 31, 1995.
Item 10. Directors and Executive Officers of the Company
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal 1 - Election of Two Directors" and "The Board of Directors"
in the Company's definitive proxy statement in connection with the annual
meeting of stockholders scheduled for May 2, 1996 is incorporated herein by
reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation
S-K under "Executive Officers of the Company" an unnumbered Item in Part I
(immediately following Item 4 Submission of Matters to a Vote of Security
Holders) on pages 4 through 5 of this Form 10-K is incorporated herein by
reference in partial response to this Item 10.
The information set forth in response to Item 405 of Regulation
S-K under the heading "Compliance with Section 16(a) of the Securities
Exchange Act of 1934" in the Company's definitive proxy statement in
connection with the annual meeting of stockholders scheduled for May 2, 1996
is incorporated herein by reference in partial response to this Item 10.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation
S-K under "Management Compensation" in the Company's definitive proxy
statement in connection with the annual meeting of stockholders scheduled for
May 2, 1996, (other than The Compensation and Organization Committee Report on
Executive Compensation and the Stock Performance Graph) is incorporated by
reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders" and "Stock Owned Beneficially by Directors
and Certain Officers" in the Company's definitive proxy statement in
connection with the annual meeting of stockholders scheduled for May 2, 1996
is hereby incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at
a subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under the
heading "Certain Transactions" in the Company's definitive proxy statement in
connection with the annual meeting of stockholders scheduled for May 2, 1996
is incorporated herein by reference in response to this Item 13.
<PAGE> 72
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 LLP dated February 22, 1996, appear in Part II Item 8 Financial
Statements and Supplementary Data on pages 34 through 69 of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in Part
II Item 8 Financial Statements and Supplementary Data under the Index to
Financial Statements on page 34 of this Form 10-K.
(3) List of Exhibits
(2) Plan of acquisition, reorganization, arrangement, liquidation or
succession
(Inapplicable)
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
- Exhibit 4*** to Company's Registration Statement on Form S-8, Commission
File No. 33-8880
- Certificate of Designation Establishing the New Series Preferred Stock,
Series A, of Company, dated May 16, 1986 which is detailed as Exhibit
A*** to Company's Report on Form 10-Q for the quarter ended June 30,
1986, Commission File No. 1-4717
- Exhibit 4.1*** to Company'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
- Exhibit 3.1***Amendment to Company's Certificate of Incorporation to set
par value for common stock and increase the number of authorized common
shares dated May 6, 1994, to Company's Form 10-K for the fiscal year
ended December 31, 1994, Commission File No. 1-4717
Bylaws
- Exhibit 3.1***, Company's By-Laws, as amended and restated November 7,
1991, to Company'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
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32
<PAGE> 73
- Item 5*** to Company'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
- Exhibit 99***to Company's Form 8-A dated October 24, 1995 (Commission
File No. 1-4717), which is the Stockholder Rights Agreement by and
between the Company and Harris Trust and Savings Bank dated as of
September 19, 1995
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
- The Director Indemnification Agreement attached as Exhibit i*** to
Company's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717 and Exhibit B*** to Company's Definitive
Proxy Statement for 1987 Annual Stockholder Meeting, dated April 6, 1987
- The Indenture, dated July 1, 1992, to (i) a $300 million Shelf
Registration of Debt Securities attached as Exhibit 4*** to Company's
Form S-3 Commission File No. 33-47198, filed June 19, 1992 (ii) a $200
million Medium Term Notes Registration of Debt Securities, attached as
Exhibit 4(a)*** to Company's Form S-3 Commission File No. 33-60192,
filed March 29, 1993
- The 1978 Employee Stock Option Plan as amended attached as Exhibit D***
to Company'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 Company'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 Company'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 Company'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
Company's Form 10-K, for the fiscal year ended December 31, 1987, C
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 Company's Form 10-K, for
the fiscal year ended December 31, 1987, Commission File No. 1-4717
- Exhibit 10.1*** Employee Stock Ownership Plan and Trust Note Agreement
dated December 1, 1989 to Company's Form 10-K, for the fiscal year ended
December 31, 1989, Commission File No. 1-4717
- Exhibit 10.4*** Description of the Company's 1991 incentive compensation
plan to Company's Form 10-K, for the fiscal year ended December 31,
1990, Commission File No. 1-4717
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32
<PAGE> 74
- Exhibit 10.2*** The Company's Directors Deferred Fee Plan, adopted
August 20, 1982, amended and restated September 13, 1991, to Company's
Form 10-K, for fiscal year ended December 31, 1991, 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 Company's Form 10-K, for
fiscal year ended December 31, 1992, Commission File No. 1-4717
- Exhibit 99***The Company's 1991 Stock Option and Performance Award Plan,
as amended and restated May 4, 1993, to Company's Form S-8 (Commission
File 33-50517) dated September 15, 1993
- Exhibit 10.1***Five-Year Competitive Advance and Revolving Credit
Facility Agreement dated May 5, 1995, by and between the Company and the
lenders named therein, to the Company's Form 10-Q for the quarterly
period ended June 30, 1995, Commission File No. 1-4717
- Exhibit 10.2***Employment Agreement, dated May 15, 1995, by and between
the Company, The Kansas City Southern Railway Company and Michael R.
Haverty, to the Company's Form 10-Q for the quarterly period ended June
30, 1995, Commission File No. 1-4717
- Exhibit 10.4 in the DST Systems, Inc. Registration Statement on Form S-1
(Registration No. 33-96526), dated October 30, 1995*** Tax
Disaffiliation Agreement, dated October 23, 1995, by and between the
Company and DST Systems, Inc.
- Exhibit 10.6 in the DST Systems, Inc. Registration Statement on Form S-1
(Registration No. 33-96526), dated October 30, 1995*** Form of KCSI
Employee Stock Ownership Plan, as amended, dated September 1, 1995, by
and between the Company, DST Systems, Inc. and the Employee Stock
Ownership Plan
- Exhibit 10.1 attached to this Form 10-K
- Exhibit 10.2 attached to this Form 10-K
(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
(Inapplicable)
(16) Letter Re Change in Certifying Accountant
(Inapplicable)
(18) Letter Re Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Company
- Exhibit 21.1 attached to this Form 10-K
___________________________
*** Incorporated by reference pursuant to Rule 12b-32
<PAGE> 75
(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23) Consents of Experts and Counsel
- Exhibit 23.1 attached to this Form 10-K
(24) Power of Attorney
(Inapplicable)
(27) Financial Data Schedule
- Exhibit 27.1 attached to this Form 10-K
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)
(99) Additional Exhibits
(Inapplicable)
(b) Reports on Form 8-K
The Company filed a Form 8-K dated December 6, 1995 under items 5 and 7,
reporting the computations of the Company's Historical Ratio of Earnings to
Fixed Charges for the nine months ended September 30, 1995 and 1994 and Pro
Forma Ratio of Earnings to Fixed Charges for the nine months ended September
30, 1995 and year ended December 31, 1994.
<PAGE>
<PAGE> 76
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Kansas City Southern Industries, Inc.
March 4, 1996 By: /s/ L.H. Rowland
L.H. Rowland, President,
Chief Executive Officer and Director
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 Company
and in the capacities indicated on March 4, 1996.
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/ M.R. Haverty Executive Vice President
M.R. Haverty and Director
/s/ J.D. Monello Vice President and Chief
Financial Officer
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.I. Sosland Director
M.I. Sosland<PAGE>
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1995 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 14(a)(3)
No. Document Exhibit No.
10.1 Employment Agreement, as amended and restated 10
January 1, 1996, by and between the Company,
The Kansas City Southern Railway Company and
Michael R. Haverty
10.2 Employment Agreement, dated January 1, 1996, by 10
and between the Company and Richard P. Bruening
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consent of Independent Accountants 23
27.1 Financial Data Schedule 27
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of January,
1996, by and between The Kansas City Southern Railway Company, a Missouri
corporation ("Railway"), Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI") and Michael R. Haverty, an individual ("Executive").
WHEREAS, Executive is now employed by Railway, and Railway, KCSI and
Executive desire for Railway to continue to employ Executive on the terms and
conditions set forth in this Agreement and to provide an incentive to
Executive to remain in the employ of Railway hereafter, particularly in the
event of any change in control or ownership of KCSI or Railway (as herein
defined), thereby establishing and preserving continuity of management of
Railway.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Railway, KCSI and Executive as
follows:
1. Employment. Railway hereby continues the employment of Executive as
its President and Chief Executive Officer to have general supervision over,
responsibility for and control of the day-to-day business and affairs of
Railway, subject to the powers vested in the Railway Board and in the
stockholder of Railway. Executive shall have such other powers, duties and
responsibilities consistent with his position as President and Chief Executive
Officer of Railway as may be prescribed from time to time by the Board. KCSI
shall cause Executive to continue to be elected and retained as an Executive
Vice President of KCSI and as a Director of Railway and shall use its best
efforts to cause Executive to continue to be elected as a Director of KCSI.
Executive shall faithfully perform his duties under this Agreement to the best
of his ability and shall devote substantially all of his working time and
efforts to the business and affairs of Railway and its affiliates; provided,
however, that to an extent consistent with the needs of Railway and its
affiliates, Executive shall be entitled to expend a reasonable amount of time
on civic and philanthropic activities and the management of personal and
family investments.
2. Compensation.
(a) Base Compensation. Railway shall pay Executive as compensation
for his services hereunder an annual base salary at the rate of Five Hundred
Thousand Dollars ($500,000.00). Such rate shall not be increased prior to
January 1, 1999 and shall not be reduced except as agreed by the parties or
except as part of a general salary reduction program imposed by Railway for
non-union employees and applicable to all officers of Railway.
(b) Incentive Compensation. For the years 1996, 1997 and 1998,
Executive shall not be entitled to participate in the KCSI or Railway
Incentive Compensation Plan, except as otherwise provided in Paragraph 7
following a change in control of KCSI.
(c) Stock Options. Executive acknowledges that he has been granted
KCSI stock options as follows:
(i) Options for 100,000 shares of KCSI common stock pursuant
to a stock option agreement dated May 15, 1995, representing options at
the option price of $38.3125 awarded at the time of Executive s initial
employment by Railway in accordance with the Employment Agreement between
Executive, Railway, and KCSI dated May 15, 1995 (the "1995 Employment
Agreement").
(ii) Options for the purchase of 150,000 shares of KCSI common
stock, pursuant to a stock option agreement dated November 6, 1995,
representing options at the option price of Forty-Six Dollars ($46.00)
granted to Executive in lieu of Performance Shares which Executive was to
have the right to earn under the 1995 Employment Agreement.
(iii) Options to purchase 45,000 shares of KCSI common,
pursuant to a stock option agreement dated January 25, 1996, representing
stock options at the option price of $43.1875 awarded to Executive in
lieu of a cash bonus for the period of May 15, 1995 through December 31,
1995 as previously provided in the 1995 Employment Agreement.
Executive acknowledges and agrees that he has received the stock options
specified in subparagraphs (ii) and (iii) above in lieu of performance shares
and a cash bonus as previously provided in the 1995 Employment Agreement and
that Executive has no right or claim under the 1995 Employment Agreement or
otherwise for said performance shares or said cash bonus.
3. Benefits. During the period of his employment hereunder, Railway
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Railway,
provided (a) Railway shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b)
Executive acknowledges that stock options and other stock and equity
participation awards are granted in the discretion of the Board of Directors
of KCSI (the "KCSI Board") or the Compensation Committee of the KCSI Board and
that Executive has no right to receive stock options or other equity
participation awards or any particular number or level of stock options or
other awards. In determining contributions, coverage and benefits under any
disability insurance policy and under any cash compensation-based plan
provided to Executive by Railway, it shall be assumed that the value of
Executive s annual compensation, pursuant to this Agreement, is 175% of
Executive s annual base salary. Executive acknowledges that all rights and
benefits under benefit plans and programs shall be governed by the official
text of each such plan or program and not by any summary or description
thereof or any provision of this Agreement (except to the extent this
Agreement expressly modifies such benefit plans or programs) and that
neither KCSI nor Railway is under any obligation to continue in effect or to
fund any such plan or program, except as provided in Paragraph 7 hereof.
Railway also shall reimburse Executive for ordinary and necessary travel and
other business expenses in accordance with policies and procedures established
by Railway.
4. Termination.
(a) Termination by Executive. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to Railway, except that in the event of any material breach of
this Agreement by Railway, or KCSI, Executive may terminate this Agreement and
his employment hereunder immediately upon notice to Railway and KCSI.
(b) Death or Disability. This Agreement and Executive's employment
hereunder shall terminate automatically on the death or disability of
Executive, except to the extent employment is continued under Railway s
disability plan. For purposes of this Agreement, Executive shall be deemed to
be disabled if he qualifies for disability benefits under Railway s long-term
disability plan.
(c) Termination by Railway For Cause. Railway may terminate this
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7),
termination "for cause" shall mean termination based upon any one or more of
the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Railway, KCSI or any
subsidiary of Railway or KCSI;
(iii) Gross negligence or willful misconduct in the
performance of Executive's duties as determined in good faith by the KCSI
Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the Railway Board or KCSI Board concerning the operations
or business of Railway or any subsidiary of Railway;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Railway Other Than For Cause.
(i) Railway may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive, and
in such event, Railway shall provide severance benefits to Executive in
accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraphs 7 or 8 of this
Agreement are applicable, if Executive's employment is terminated under
Paragraph 4(d)(i), Railway shall continue, for a period of one (1) year
following such termination, (A) to pay to Executive as severance pay a
monthly amount equal to one-twelfth (1/12th) of the annual base salary
referenced in Paragraph 2(a) above, at the rate in effect immediately
prior to termination, and, (B) to reimburse Executive for the cost
(including state and federal income taxes payable with respect to this
reimbursement) of continuing the health insurance coverage provided
pursuant to this Agreement or obtaining health insurance coverage
comparable to the health insurance provided pursuant to this Agreement,
and obtaining coverage comparable to the life insurance provided pursuant
to this Agreement, unless Executive is provided comparable health or life
insurance coverage in connection with other employment. The foregoing
obligations of Railway shall continue until the end of such one (1) year
period notwithstanding the death or disability of Executive during said
period (except, in the event of death, the obligation to reimburse
Executive for the cost of life insurance shall not continue). In the
year in which termination of employment occurs, Executive shall be
eligible to receive benefits under the Railway Incentive Compensation
Plan and the KCSI Executive Plan (if such Plans then are in existence and
Executive was entitled to participate immediately prior to termination)
in accordance with the provisions of such plans then applicable, and
severance pay received in such year shall be taken into account for the
purpose of determining benefits, if any, under the Railway Incentive
Compensation Plan but not under the KCSI Executive Plan. After the year
in which termination occurs, Executive shall not be entitled to accrue or
receive benefits under the Railway Incentive Compensation Plan or the
KCSI Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Railway.
After termination of employment, Executive shall not be entitled to
accrue or receive benefits under any other employee benefit plan or
program, except that Executive shall be entitled to participate in the
KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the
KCSI Section 401(k) Plan (if Railway employees then still participate in
such plans) in the year of termination of employment only if Executive
meets all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times
after any termination of this Agreement, Executive shall not, either directly
or indirectly, use or disclose any Railway trade secret, except to the extent
necessary for Executive to perform his duties for Railway while an employee.
For purposes of this Agreement, the term "Railway trade secret" shall mean any
information regarding the business or activities of Railway or any subsidiary
or affiliate, including any formula, pattern, compilation, program, device,
method, technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and (b) is the subject of efforts
of Railway or its subsidiary or affiliate that are reasonable under the
circumstance to maintain its secrecy. In the event of any breach of this
Paragraph 5 by Executive, Railway shall be entitled to terminate any and all
remaining severance benefits under Paragraph 4(d)(ii) or Paragraph 8(c) and
shall be entitled to pursue such other legal and equitable remedies as may be
available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by Railway or
Executive for any reason, Executive shall immediately return to Railway all
Railway trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Railway and all direct and indirect subsidiaries and
affiliates of Railway as may be requested by Railway and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Railway may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
Agreement shall survive any termination of this Agreement by Railway or
Executive, and the provisions of Paragraph 4(d)(ii), or, if applicable,
Paragraph 8, shall survive any termination of this Agreement by Railway under
Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of KCSI.
(a) Continuation of Employment. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control of KCSI
(as defined in Paragraph 7(d)) at any time during the term of this Agreement,
Executive will remain in the employ of Railway for a period of an additional
three years from the date of such Change in Control of KCSI (the "Control
Change Date"). In the event of a Change in Control of KCSI, subject to the
terms and conditions of this Paragraph 7, Railway shall, for the three year
period (the "Three-Year Period") immediately following the Control Change
Date, continue to employ Executive at not less than the executive capacity
Executive held immediately prior to the Change in Control of KCSI.
During the Three-Year Period, Railway shall continue to pay Executive base
salary on the same basis, at the same intervals, and at a rate not less than
that, paid to Executive at the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of
the following KCSI or Railway plans (together, the "Specified Benefits") in
existence, and in accordance with the terms thereof, at the Control Change
Date:
(i) any incentive compensation plan;
(ii) any benefit plan, and trust fund associated therewith,
related to (A) life, health, dental, disability, accidental death
and
dismemberment insurance or accrued but unpaid vacation time, (B)
profit
sharing, thrift or deferred savings (including deferred
compensation,
such as under Sec. 401(k) plans), (c) retirement or pension
benefits,
(D)ERISA excess benefits and (E) tax favored employee stock ownership
(such as under ESOP, and Employee Stock Purchase programs); and
(iii) any other benefit plans hereafter made generally
available to executives of Executive's level or to the employees of
Railway generally.
In addition, all outstanding options held by Executive under any stock option
plan of KCSI or its affiliates shall become immediately exercisable on the
Control Change Date, except that such options shall not be exercisable earlier
than six months after the date such options were granted.
(c) Payment. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits as a general obligation of Railway which has not been separately
funded (including specifically, but not limited to, those referred to under
Paragraphs 7(b)(i) and 7(b)(ii)(D) above), Executive shall receive within five
(5) days after such date full payment in cash (discounted to then present
value on the basis of a rate of seven percent (7%) per annum) of all amounts
to which he is then entitled thereunder.
(d) Change in Control of KCSI. For purposes of this Agreement, a
"Change in Control of KCSI" shall be deemed to have occurred if (i) for any
reason at any time less than seventy-five percent (75%) of the members of the
KCSI Board shall be individuals who fall into any of the following categories:
(A) individuals who were members of the KCSI Board on the date of this
Agreement; or (B) individuals whose election, or nomination for election by
KCSI's stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were members
of the KCSI Board on the date of this Agreement; or (c) individuals whose
election or nomination for election by KCSI s stockholders, was approved by a
vote of at least seventy-five percent (75%) of the members of the KCSI Board
then still in office who were elected in the manner described in (A) or (B)
above, or (ii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) shall
have become, according to a public announcement or filing, without the prior
approval of the KCSI Board, the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of KCSI
representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof,
40%) or more (calculated in accordance with Rule 13d-3) of the combined voting
power of KCSI's then outstanding voting securities (such "person" hereafter
referred to as a "Major Stockholder"); or (iii) the stockholders of KCSI shall
have approved a merger, consolidation or dissolution of KCSI or a sale, lease,
exchange or disposition of all or substantially all of KCSI's assets, or a
Major Stockholder shall have proposed any such transaction, unless any such
merger, consolidation, dissolution, sale, lease, exchange or disposition shall
have been approved by a least seventy-five percent (75%) of the members of the
KCSI Board who were individuals who fall into any of the categories described
in (i)(A), (B) or (c) of this Paragraph 7(d).
(e) Termination After Control Change Date. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change
Date, Railway may, through its Board, terminate the employment of Executive
(the "Termination"), but within five (5) days of the Termination it shall pay
to Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment")
equal to the product (discounted to then present value on the basis of a rate
of seven percent (7%) per annum) of his annual base salary specified in
Paragraph 7(a) hereof multiplied by the number of years and any portion
thereof remaining in the Three-Year Period (or if the balance of the
Three-Year Period after Termination is less than one year, for one year (such
one year period is hereinafter called the "Extended Period")). Specified
Benefits to which Executive was entitled immediately prior to Termination
shall continue until the end of the Three-Year Period (or the Extended Period,
if applicable); provided that if any plan pursuant to which Specified Benefits
are provided immediately prior to Termination would not permit continued
participation by Executive after Termination, then Railway shall pay to
Executive within five (5) days after Termination a lump sum payment equal to
the amount of Specified Benefits Executive would have received if Executive
had been fully vested in maximum benefits available to Executive (regardless
of any limitations based on the earnings or performance of KCSI or Railway)
and a continuing participant in such plan to the end of the Three-Year Period
or the Extended Period, if applicable.
(f) Resignation After Control Change Date. In the event of a
Change in Control of KCSI, thereafter, upon good reason (as defined below),
Executive may, at any time during the Three-Year Period or the Extended
Period, in his sole discretion, on not less than thirty (30) days' written
notice to the Secretary of Railway and effective at the end of such notice
period, resign his employment with Railway (the "Resignation"). Within five
(5) days of such a Resignation, Railway shall pay to Executive his full base
salary through the effective date of such Resignation, to the extent not
theretofore paid, plus a lump sum amount equal to the Special Severance
Payment (computed as provided in the first sentence of Paragraph 7(e), except
that for purposes of such computation all references to "Termination" shall be
deemed to be references to "Resignation"). Upon Resignation of Executive,
Specified Benefits to which Executive was entitled immediately prior to
Resignation shall continue on the same terms and conditions as provided in
Paragraph 7(e) in the case of Termination (including equivalent payments
provided for therein). For purposes of this Agreement, Executive shall have
"good reason" if there occurs without his consent (i) a reduction in the
character of the duties assigned to Executive or in executive's level of work
responsibility or conditions; (ii) a reduction in Executive's base salary
as in effect immediately prior to the Control Change Date or as the same may
have been increased thereafter; (iii) a failure by Railway to (A) continue any
of the plans of the type referred to in Paragraph 7(b) which shall have been
in effect at the Control Change Date (including those providing for Specified
Benefits) or to continue Executive as a participant in any of such plans on at
least the basis in effect immediately prior to the Control Change Date; or (B)
provide other plans under which at least equivalent compensation and benefits
are available and in which Executive continues to participate on a basis at
least equivalent to his participation in the Railway plans in effect
immediately prior to the Control Change Date; or (c) to make payment required
under Paragraph 7(c); (iv) requiring Executive to be based in any city
different than the city in which Executive was based immediately prior to the
Control Change Date, except for required travel on Railway's business to an
extent substantially consistent with Executive's obligations immediately prior
to the Control Change Date; or (v) any breach by Railway of this Agreement to
the extent not previously specified.
(g) Termination for Cause After Control Change Date.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by Railway "for cause"
without notice and without any payment hereunder only if such termination is
for an act of dishonesty by Executive constituting a felony under the laws of
the State of Missouri which resulted or was intended to result in gain or
personal enrichment of Executive at Railway's expense.
(h) Gross-Up Provision. If any portion of any payments received by
Executive from Railway on or after the Control Change Date (whether payable
pursuant to the terms of this Agreement or any other plan, agreement or
arrangement with Railway or any person whose actions result in a Change of
Control of KCSI), shall be subject to the tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended, or any successor statutory
provision ("Parachute Payments"), Railway shall pay to Executive, within five
(5) days of Executive's Termination or Resignation such additional amounts as
are necessary so that, after taking into account any tax imposed by such
Section 4999 or any successor statutory provision on any such Parachute
Payments (as well as any income tax or Section 4999 tax on payments made
pursuant to this sentence), Executive is in the same after-tax position that
Executive would have been in if such Section 4999 or any successor statutory
provision did not apply and no payments were made pursuant to this sentence.
(i) Expenses. If any dispute should arise under this Agreement
after the Control Change Date involving an effort by Executive to protect,
enforce or secure rights or benefits claimed by Executive hereunder, Railway
shall pay (promptly upon demand by Executive accompanied by reasonable
evidence of incurrence) all reasonable expenses (including attorneys' fees)
incurred by Executive in connection with such dispute, without regard to
whether Executive prevails in such dispute except that Executive shall repay
Railway any amounts so received if a court having jurisdiction shall make a
final, non-appealable determination that Executive acted frivolously or in bad
faith by such dispute. To assure Executive that adequate funds will be made
available to discharge Railway's obligations set forth in the preceding
sentence, Railway has established a trust and upon the occurrence of a Change
in Control of KCSI shall promptly deliver to the trustee of such trust to hold
in accordance with the terms and conditions thereof that sum which the Railway
Board shall have determined is reasonably sufficient for such purpose.
(j) Prevailing Provisions. On and after the Control Change Date,
the provisions of this Paragraph 7 shall control and take precedence over any
other provisions of this Agreement which are in conflict with or address the
same or a similar subject matter as the provisions of this Paragraph 7.
8. Termination of Employment Upon Change of Ownership .
(a) Change of Ownership. For purposes of this paragraph 8, a
"Change of Ownership" shall be deemed to have occurred if:
(i) Any " person," as such term is used in Sections 13(d)
and 14(d)(2) of the Exchange Act (other than KCSI, Railway, any trustee or
other fiduciary holding securities under any employee benefit plan of KCSI or
Railway, or any corporation owned, directly or indirectly, by
t he stockholders of KCSI or Railway in substantially the same
proportions as their ownership of the stock of KCSI or Railway), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly, of securities of KCSI or Railway
representing 50% or more of the combined voting power of such corporation's
then outstanding securities;
(ii) The stockholders of KCSI or Railway approve a merger or
consolidation of such corporation with any other corporation, other than
(A) a merger or consolidation which would result in the voting
securities of such corporation outstanding immediately prior there to
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) mo re than
50% of the combined voting power of the voting securities of such
corporation or such surviving entity outstanding immedi ately after such
merger or consolidation or (B) a merger or consolidation effected to implement
a recapitalization of such corporation (or similar transaction) in which no
"person" (as defined in Paragraph 8(a)(i)) acquires 50% or more of the
combined voting power of such corporation's then outstanding securities; or
(iii) The stockholders of KCSI or Railway approve a plan of
complete liquidation of such corporation or an agreement for the sale or
disposition by such corporation of all or substantially all of such
corporation s assets, unless immediately after such liquidation or
disposition of assets KCSI or Railway is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) directly or
indirectly of securities or interests of the transferee of the assets of
such corporation, representing more than 50% of the combined voting
power of such transferee's then outstanding securities or other
ownership interests.
(b) Termination Other Than For Cause. Executive shall be entitled to
the severance benefits set forth in Paragraph 8(c) below, if, within three (3)
years after a Change of Ownership, Executive's employment is terminated by
Railway other than for cause, and
(i) Railway does not offer Executive "similar employment" (as
defined below), or
(ii) Railway terminates such similar employment other than for
cause within three (3) years after a Change of Ownership.
For purposes of this Paragraph 8(b) and Paragraph 8(c) below, Executive's
employment shall be deemed to be terminated other than for cause if Executive
resigns because Executive's employment is altered other than for cause and
without Executive's consent so it is no longer similar employment. For
purposes of this Paragraph 8(b), similar employment shall mean an employment
position having duties of a character similar to the duties previously
assigned to Executive and a base salary, determined in accordance with
Paragraph 2(a) above, equal to or greater than Executive s base salary in
effect immediately prior to the Change of Ownership, but an employment
position shall constitute similar employment whether or not the position
involves similar or comparable levels of responsibility and, provided
Executive s relocation costs are paid by Railway, regardless of whether the
similar employment is in a different city or other location within the
continental United States. If Executive's employment is terminated other than
for cause, and Railway offers Executive similar employment but Executive does
not accept such similar employment, Executive shall be entitled to benefits
only under Paragraph 4(d)(ii) above and shall not receive any benefits under
Paragraph 8(c) below.
(c) Severance Benefits. When Paragraph 8(b) above is applicable,
and subject to the limitations of Paragraph 8(d) below, Railway, for the
period from the date of termination of employment or similar employment,
whichever is later, through the end of three (3) years following the Change of
Ownership, or for a period of one (1) year, whichever period is longer,
(A) shall pay to Executive as severance pay a monthly amount equal to
one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a)
above, at the rate in effect immediately prior to the Change of Ownership and,
(B) shall reimburse Executive for the cost (including state and federal income
taxes payable with respect to this reimbursement) of continuing the health
insurance coverage provided pursuant to this Agreement or obtaining health
insurance coverage comparable to the health insurance provided pursuant to
this Agreement, and obtaining coverage comparable to the life insurance
provided pursuant to this Agreement, unless Executive is provided comparable
health or life insurance coverage in connection with other employment.
The foregoing obligations shall continue until the end of the period provided
herein notwithstanding the death or disability of Executive during said period
(except, in the event of death, the obligation to reimburse Executive for the
cost of life insurance shall not continue). In addition, notwithstanding the
terms of any option agreement dated prior to the execution of this Agreement,
upon a termination of Executive's employment other than for cause which
entitles Executive to the severance benefits set forth in this Paragraph 8(c),
all outstanding options held by Executive under any stock option plan of KCSI
or its affiliates shall become immediately exercisable, except that no such
options shall be exercisable earlier than one year after the date such options
were granted. For purposes of the underlying option agreements, all such
options shall be deemed to be exercisable immediately prior to such
termination of Executive's employment, and the underlying options agreements
hereby are amended to reflect the provisions of this Agreement. If any of
Executive s stock options do not become exercisable because Executive s
termination of employment occurs within one year of the grant date of the
options, Railway immediately shall pay Executive the aggregate difference
between the option price of such options and the fair market value of the KCSI
stock on the date of termination of Executive s employment (or on the date of
the Change of Ownership, if KCSI stock no longer exists or is not publicly
traded on the date of termination of employment). In the year in which
termination of employment occurs, Executive shall be eligible to receive
benefits under the Railway Incentive Compensation Plan and the KCSI Executive
Plan (if such Plans then are in existence and Executive was entitled to
participate immediately prior to termination) in accordance with the
provisions of such plans then applicable, and severance pay received in such
year shall be taken into account for the purpose of determining benefits, if
any, under the Railway Incentive Compensation Plan but not under the KCSI
Executive Plan. After the year in which termination occurs, Executive shall
not be entitled to accrue or receive benefits under the Railway Incentive
Compensation Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of Railway. After termination of employment,
Executive shall not be entitled to accrue or receive benefits under any other
employee benefit plan or program, except that Executive shall be entitled to
participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership
Plan and the KCSI Section 401(k) Plan (if Railway employees then still
participate in such plans) in the year of termination of employment only if
Executive meets all requirements of such plans for participation in such year.
(d) Prevailing Provisions. If a Change in Control of KCSI (as
defined in Paragraph 7(d) above) occurs prior to or simultaneously with a
Change of Ownership (as defined in this Paragraph 8), Executive shall be
entitled only to the benefits provided in Paragraph 7 of this Agreement and
shall have no rights or benefits under this Paragraph 8. In any circumstance
in which the provisions of Paragraph 8(c) above are applicable, Executive
shall not be entitled to receive any benefits provided in Paragraph 4(d)(ii)
of this Agreement.
9. Mitigation and Other Employment. After a termination of
Executive s employment pursuant to Paragraph 4(d)(i), a Change in Control of
KCSI or a Change of Ownership, Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment or otherwise, and except as otherwise specifically provided in
Paragraphs 4(d)(ii) or 8(c) with respect to health and life insurance, no
such other employment, if obtained, or compensation or benefits payable in
connection therewith shall reduce any amounts or benefits to which Executive
is entitled hereunder. Such amounts or benefits payable to Executive under
this Agreement shall not be treated as damages but as severance compensation
to which Executive is entitled because Executive s employment has been
terminated.
10. KCSI Not An Obligor. Notwithstanding that KCSI has executed this
Agreement, it shall have no obligation for the payment of salary, benefits, or
other compensation hereunder, and all such obligations shall be the sole
responsibility of Railway.
11. Notice. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have
been given when personally delivered, delivered by facsimile or deposited in
the United States mail by certified or registered mail, postage prepaid,
addressed, in the case of Railway or KCSI, to Railway or KCSI at 114
West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in
the case of the Executive, to him at 1909 West 69th Street, Shawnee Mission,
Kansas 66208, or to such other address as a party shall designate by notice to
the other party.
12. Amendment. No provision of this Agreement may be amended,
modified, waived or discharged unless such amendment, waiver, modification or
discharge is agreed to in a writing signed by Executive, the Chairman of
Railway and the President of KCSI. No waiver by any party hereto at any time
of any breach by another party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the time
or at any prior or subsequent time.
13. Successors in Interest. The rights and obligations of KCSI and
Railway under this Agreement shall inure to the benefit of and be binding in
each and every respect upon the direct and indirect successors and assigns of
KCSI and Railway, regardless of the manner in which such successors or assigns
shall succeed to the interest of KCSI or Railway hereunder, and this Agreement
shall not be terminated by the voluntary or involuntary dissolution of KCSI or
Railway or by any merger or consolidation or acquisition involving KCSI or
Railway, or upon any transfer of all or substantially all of KCSI s or
Railway's assets, or terminated otherwise than in accordance with its terms.
In the event of any such merger or consolidation or transfer of assets, the
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the surviving corporation or the corporation or other person to
which such assets shall be transferred. Neither this Agreement nor any of the
payments or benefits hereunder may be pledged, assigned or transferred by
Executive either in whole or in part in any manner, without the prior written
consent of Railway.
14. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
15. Controlling Law and Jurisdiction. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
16. Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the terms of Executive's employment
or severance arrangements, including without limitation, the 1995 Employment
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
By /s/ Landon H. Rowland
Landon H. Rowland, Chairman of the Board
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Landon H. Rowland
Landon H. Rowland, President
/s/ Michael R. Haverty
Michael R. Haverty
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made and entered into as of this 1st day of January,
1996, by and between Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI") and Richard P. Bruening, an individual ("Executive").
WHEREAS, Executive is now employed by KCSI, and KCSI and Executive desire
for KCSI to continue to employ Executive on the terms and conditions set forth
in this Agreement and to provide an incentive to Executive to remain in the
employ of KCSI hereafter, particularly in the event of any change in control
or ownership (as herein defined) of KCSI or The Kansas City Southern Railway
Company, a Missouri corporation ("Railway") thereby establishing and
preserving continuity of management of KCSI.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between KCSI and Executive as follows:
1. Employment. KCSI hereby continues the employment of Executive as
its Senior Vice President & General Counsel to serve at the pleasure of the
Board of Directors of KCSI (the "KCSI Board") and to have such duties, powers
and responsibilities as may be prescribed or delegated from time to time by
the President or other officer to whom Executive reports, subject to the
powers vested in the KCSI Board and in the stockholders of KCSI. Executive
shall faithfully perform his duties under this Agreement to the best of his
ability and shall devote substantially all of his working time and efforts to
the business and affairs of KCSI and its affiliates.
<PAGE>
2. Compensation.
(a) Base Compensation. KCSI shall pay Executive as compensation
for his services hereunder an annual base salary at the rate in effect on the
date of this Agreement. Such rate shall not be increased prior to January 1,
1999 and shall not be reduced except as agreed by the parties or except as
part of a general salary reduction program imposed by KCSI and applicable to
all officers of KCSI.
(b) Incentive Compensation. For the years 1996, 1997 and 1998,
Executive shall not be entitled to participate in any KCSI or Railway
incentive compensation plan, except as otherwise provided in Paragraph 7
following a change in control of KCSI.
3. Benefits. During the period of his employment hereunder, KCSI shall
provide Executive with coverage under such benefit plans and programs as are
made generally available to similarly situated employees of KCSI, provided (a)
KCSI shall have no obligation with respect to any plan or program if Executive
is not eligible for coverage thereunder, and (b) Executive acknowledges that
stock options and other stock and equity participation awards are granted in
the discretion of the KCSI Board or the Compensation Committee of the KCSI
Board and that Executive has no right to receive stock options or other equity
participation awards or any particular number or level of stock options or
other awards. In determining contributions, coverage and benefits under any
disability insurance policy and under any cash compensation-based plan
provided to Executive by KCSI, it shall be assumed that the value of Executive
s annual compensation, pursuant to this Agreement, is 175% of Executive s
annual base salary. Executive acknowledges that all rights and benefits under
benefit plans and programs shall be governed by the official text of each such
plan or program and not by any summary or description thereof or any provision
of this Agreement (except to the extent this Agreement expressly modifies such
benefit plans or programs) and that KCSI is not under any obligation to
continue in effect or to fund any such plan or program, except as
provided in Paragraph 7 hereof. KCSI also shall reimburse Executive for
ordinary and necessary travel and other business expenses in accordance with
policies and procedures established by KCSI.
4. Termination.
(a) Termination by Executive. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to KCSI, except that in the event of any material breach of
this Agreement by KCSI, Executive may terminate this Agreement and his
employment hereunder immediately upon notice to KCSI.
(b) Death or Disability. This Agreement and Executive's employment
hereunder shall terminate automatically on the death or disability of
Executive, except to the extent employment is continued under KCSI s
disability plan. For purposes of this Agreement, Executive shall be deemed to
be disabled if he qualifies for disability benefits under KCSI s long-term
disability plan.
(c) Termination by KCSI For Cause. KCSI may terminate this
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7),
termination "for cause" shall mean termination based upon any one or more of
the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving KCSI or any
subsidiary of KCSI;
(iii) Gross negligence or willful misconduct in the
performance of Executive's duties as determined in good faith by the
KCSI Board;
(iv) Willful failure by Executive to follow reasonable
instructions of the President or other officer to whom Executive
reports concerning the operations or business of KCSI or any
subsidiary of KCSI;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by KCSI Other Than For Cause.
(i) KCSI may terminate this Agreement and Executive's
employment other than for cause immediately upon notice to Executive,
and in such event, KCSI shall provide severance benefits to Executive
in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraphs 7 or 8 of this
Agreement are applicable, if Executive's employment is terminated
under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1)
year following such termination, (A) to pay to Executive as severance
pay a monthly amount equal to one-twelfth (1/12th) of the annual base
salary referenced in Paragraph 2(a) above, at the rate in effect
immediately prior to termination, and, (B) to reimburse Executive for
the cost (including state and federal income taxes payable with
respect to this reimbursement) of continuing the health insurance
coverage provided pursuant to this Agreement or obtaining health
insurance coverage comparable to the health insurance provided
pursuant to this Agreement, and obtaining coverage comparable to the
life insurance provided pursuant to this Agreement, unless Executive
is provided comparable health or life insurance coverage in connection
with other employment. The foregoing obligations of KCSI shall
continue until the end of such one (1) year period notwithstanding the
death or disability of Executive during said period (except, in the
event of death, the obligation to reimburse Executive for the cost of
life insurance shall not continue). In the year in which termination
of employment occurs, Executive shall be eligible to receive benefits
under the KCSI Incentive Compensation Plan and the KCSI Executive Plan
(if such Plans then are in existence and Executive was entitled to
participate immediately prior to termination) in accordance with the
provisions of such plans then applicable, and severance pay received
in such year shall be taken into account for the purpose of
determining benefits, if any, under the KCSI Incentive Compensation
Plan but not under the KCSI Executive Plan. After the year in which
termination occurs, Executive shall not be entitled to accrue or
receive benefits under the KCSI Incentive Compensation Plan or the
KCSI Executive Plan with respect to the severance pay provided herein,
notwithstanding that benefits under such plan then are still generally
available to executive employees of KCSI. After termination of
employment, Executive shall not be entitled to accrue or receive
benefits under any other employee benefit plan or program, except that
Executive shall be entitled to participate in the KCSI Profit Sharing
Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section
401(k) Plan in the year of termination of employment only if Executive
meets all requirements of such plans for participation in such year.
5. Non-Disclosure. During the term of this Agreement and at all times
after any termination of this Agreement, Executive shall not, either directly
or indirectly, use or disclose any KCSI trade secret, except to the extent
necessary for Executive to perform his duties for KCSI while an employee. For
purposes of this Agreement, the term "KCSI trade secret" shall mean any
information regarding the business or activities of KCSI or any subsidiary or
affiliate, including any formula, pattern, compilation, program, device,
method, technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent economic
value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain
economic value from its disclosure or use, and (b) is the subject of efforts
of KCSI or its subsidiary or affiliate that are reasonable under the
circumstance to maintain its secrecy. In the event of any breach of this
Paragraph 5 by Executive, KCSI shall be entitled to terminate any and all
remaining severance benefits under Paragraph 4(d)(ii) or Paragraph 8(c) and
shall be entitled to pursue such other legal and equitable remedies as may be
available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by KCSI or
Executive for any reason, Executive shall immediately return to KCSI all KCSI
trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of KCSI and all direct and indirect subsidiaries and
affiliates of KCSI as may be requested by KCSI and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as KCSI may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this
Agreement shall survive any termination of this Agreement by KCSI or
Executive, and the provisions of Paragraph 4(d)(ii), or, if applicable,
Paragraph 8, shall survive any termination of this Agreement by KCSI under
Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of KCSI.
(a) Continuation of Employment. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control of KCSI
(as defined in Paragraph 7(d)) at any time during the term of this Agreement,
Executive will remain in the employ of KCSI for a period of an additional
three years from the date of such Change in Control of KCSI (the "Control
Change Date"). In the event of a Change in Control of KCSI, subject to the
terms and conditions of this Paragraph 7, KCSI shall, for the three year
period (the "Three-Year Period") immediately following the Control Change
Date, continue to employ Executive at not less than the executive capacity
Executive held immediately prior to the Change in Control of KCSI. During the
Three-Year Period, KCSI shall continue to pay Executive base salary on the
same basis, at the same intervals, and at a rate not
less than that, paid to Executive at the Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of
the following KCSI plans (together, the "Specified Benefits") in existence,
and in accordance with the terms thereof, at the Control Change Date:
(i) any incentive compensation plan;
(ii) any benefit plan, and trust fund associated
therewith, related to (A) life, health, dental, disability, accidental
death and dismemberment insurance or accrued but unpaid vacation time,
(B) profit sharing, thrift or deferred savings (including deferred
compensation, such as under Sec. 401(k) plans), (c) retirement or
pension benefits, (D) ERISA excess benefits and (E) tax favored
employee stock ownership (such as under ESOP, and Employee Stock
Purchase programs); and
(iii) any other benefit plans hereafter made generally
available to executives of Executive's level or to the employees of
KCSI generally.
In addition, all outstanding options held by Executive under any stock
option plan of KCSI or its affiliates shall become immediately exercisable on
the Control Change Date, except that such options shall not be exercisable
earlier than six months after the date such options were granted.
(c) Payment. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits as a general obligation of KCSI which has not been separately funded
(including specifically, but not limited to, those referred to under
Paragraphs 7(b)(i) and 7(b)(ii)(D) above), Executive shall receive within five
(5) days after such date full payment in cash (discounted to then present
value on the basis of a rate of seven percent (7%) per annum) of all amounts
to which he is then entitled thereunder.
(d) Change in Control of KCSI. For purposes of this Agreement, a
"Change in Control of KCSI" shall be deemed to have occurred if (i) for any
reason at any time less than seventy-five percent (75%) of the members of the
KCSI Board shall be individuals who fall into any of the following categories:
(A) individuals who were members of the KCSI Board on the date of this
Agreement; or (B) individuals whose election, or nomination for election by
KCSI's stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were members
of the KCSI Board on the date of this Agreement; or (c) individuals whose
election or nomination for election by KCSI's stockholders, was approved by a
vote of at least seventy-five percent (75%) of the members of the KCSI Board
then still in office who were elected in the manner described in (A) or (B)
above, or (ii) any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange
Act")) shall have become, according to a public announcement or filing,
without the prior approval of the KCSI Board, the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of KCSI representing thirty percent (30%) (or, with respect to
Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3)
of the combined voting power of KCSI's then outstanding voting securities
(such "person" hereafter referred to as a "Major Stockholder"); or (iii) the
stockholders of KCSI shall have approved a merger, consolidation or
dissolution of KCSI or a sale, lease, exchange or disposition of all or
substantially all of KCSI's assets, or a Major Stockholder shall have
proposed any such transaction, unless any such merger, consolidation,
dissolution, sale, lease, exchange or disposition shall have been approved by
a least seventy-five percent (75%) of the members of the KCSI Board who were
individuals who fall into any of the categories described in (i)(A), (B) or
(c) of this Paragraph 7(d).
(e) Termination After Control Change Date. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change
Date, KCSI may, through its Board, terminate the employment of Executive (the
"Termination"), but within five (5) days of the Termination it shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment")
equal to the product (discounted to then present value on the basis of a rate
of seven percent (7%) per annum) of his annual base salary specified in
Paragraph 7(a) hereof multiplied by the number of years and any portion
thereof remaining in the Three-Year Period (or if the balance of the
Three-Year Period after Termination is less than one year, for one year (such
one year period is hereinafter called the "Extended Period")). Specified
Benefits to which Executive was entitled immediately prior to Termination
shall continue until the end of the Three-Year Period (or the Extended Period,
if applicable); provided that if any plan pursuant to which Specified Benefits
are provided immediately prior to Termination would not permit continued
participation by Executive after Termination, then KCSI shall pay to
Executive within five (5) days after Termination a lump sum payment equal to
the amount of Specified Benefits Executive would have received if Executive
had been fully vested in maximum benefits available to Executive (regardless
of any limitations based on the earnings or performance of KCSI) and a
continuing participant in such plan to the end of the Three-Year Period or the
Extended Period, if applicable.
(f) Resignation After Control Change Date. In the event of a
Change in Control of KCSI, thereafter, upon good reason (as defined below),
Executive may, at any time during the Three-Year Period or the Extended
Period, in his sole discretion, on not less than thirty (30) days' written
notice to the Secretary of KCSI and effective at the end of such notice
period, resign his employment with KCSI (the "Resignation"). Within five (5)
days of such a Resignation, KCSI shall pay to Executive his full base salary
through the effective date of such Resignation, to the extent not theretofore
paid, plus a lump sum amount equal to the Special Severance Payment (computed
as provided in the first sentence of Paragraph 7(e), except that for purposes
of such computation all references to "Termination" shall be deemed to be
references to "Resignation"). Upon Resignation of Executive, Specified
Benefits to which Executive was entitled immediately prior to Resignation
shall continue on the same terms and conditions as provided in Paragraph 7(e)
in the case of Termination (including equivalent payments provided for
therein). For purposes of this Agreement, Executive shall have "good reason"
if there occurs without his consent (i) a reduction in the character of the
duties assigned to Executive or in Executive's level of work responsibility or
conditions; (ii) a reduction in Executive's base salary as in effect
immediately prior to the Control Change Date or as the same may have been
increased thereafter; (iii) a failure by KCSI to (A) continue any of the plans
of the type referred to in Paragraph 7(b) which shall have been in effect at
the Control Change Date (including those providing for Specified Benefits) or
to continue Executive as a participant in any of such plans on at least the
basis in effect immediately prior to the Control Change Date; or (B) provide
other plans under which at least equivalent compensation and benefits are
available and in which Executive continues to participate on a basis at least
equivalent to his participation in the KCSI plans in effect immediately prior
to the Control Change Date; or (c) to make the payment required under
Paragraph 7(c); (iv) requiring Executive to be based in any city different
than the city in which Executive was based immediately prior to the Control
Change Date, except for required travel on KCSI's business to an extent
substantially consistent with Executive's obligations immediately prior to the
Control Change Date; or (v) any breach by KCSI of this Agreement to the extent
not previously specified.
(g) Termination for Cause After Control Change Date.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by KCSI "for cause" without
notice and without any payment hereunder only if such termination is for an
act of dishonesty by Executive constituting a felony under the laws of the
State of Missouri which resulted or was intended to result in gain or personal
enrichment of Executive at KCSI's expense.
(h) Gross-Up Provision. If any portion of any payments received by
Executive from KCSI on or after the Control Change Date (whether payable
pursuant to the terms of this Agreement or any other plan, agreement or
arrangement with KCSI or any person whose actions result in a Change of
Control of KCSI), shall be subject to the tax imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended, or any successor statutory
provision ("Parachute Payments"), KCSI shall pay to Executive, within five (5)
days of Executive's Termination or Resignation such additional amounts as are
necessary so that, after taking into account any tax imposed by such Section
4999 or any successor statutory provision on any such Parachute Payments (as
well as any income tax or Section 4999 tax on payments made pursuant to this
sentence), Executive is in the same after-tax position that Executive would
have been in if such Section 4999 or any successor statutory provision did not
apply and no payments were made pursuant to this sentence.
(i) Expenses. If any dispute should arise under this Agreement
after the Control Change Date involving an effort by Executive to protect,
enforce or secure rights or benefits claimed by Executive hereunder, KCSI
shall pay (promptly upon demand by Executive accompanied by reasonable
evidence of incurrence) all reasonable expenses (including attorneys' fees)
incurred by Executive in connection with such dispute, without regard to
whether Executive prevails in such dispute except that Executive shall repay
KCSI any amounts so received if a court having jurisdiction shall make a
final, non-appealable determination that Executive acted frivolously or in bad
faith by such dispute. To assure Executive that adequate funds will be made
available to discharge KCSI's obligations set forth in the preceding sentence,
KCSI has established a trust and upon the occurrence of a Change in Control of
KCSI shall promptly deliver to the trustee of such trust to hold in accordance
with the terms and conditions thereof that sum which the Board shall have
determined is reasonably sufficient for such purpose.
(j) Prevailing Provisions. On and after the Control Change Date,
the provisions of this Paragraph 7 shall control and take precedence over any
other provisions of this Agreement which are in conflict with or address the
same or a similar subject matter as the provisions of this Paragraph 7.
8. Termination of Employment Upon Change of Ownership .
(a) Change of Ownership. For purposes of this paragraph 8, a
"Change of Ownership" shall be deemed to have occurred if:
(i) Any " person," as such term is used in Sections 13(d) and
14(d)(2) of the Exchange Act (other than KCSI, Railway, any trustee or
other fiduciary holding securities under any employee benefit plan of
KCSI or Railway, or any corporation owned, directly o r indirectly, by
the stockholders of KCSI or Railway in substantially the same
proportions as their ownership of the stock of KCSI or Railway), is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) directly or indirectly, of securities of KCSI or Railway
representing 50% or more of the combined voting power of such
corporation's then outstanding securities;
(ii) The stockholders of KCSI or Railway approve a merger or
consolidation of such corporation with any other corporation, other than
(A) a merger or consolidation which would result in the voting
securities of such corporation outstanding immediately prior there to
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50%
of the combined voting power of the voting securities of such corporation
or such surviving entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of such corporation (or similar transaction) in which no
"person" (as defined in Paragraph 8(a)(i)) acquires 50% or more of the
combined voting power of such corporation's then outstanding securities;
or
(iii) The stockholders of KCSI or Railway approve a
plan of complete liquidation of such corporation or an agreement for
the sale or disposition by such corporation of all or substantially all
of such corporation s assets, unless immediately after such liquidation
or disposition of assets KCSI or Railway is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) directly or
indirectly of securities or interests of the transferee of the
assets of such corporation, representing more than 50% of the combined
voting power of such transferee s then outstanding securities or other
ownership interests.
(b) Termination Other Than For Cause. Executive shall be entitled to
the severance benefits set forth in Paragraph 8(c) below, if, within three (3)
years after a Change of Ownership, Executive's employment is terminated by
KCSI other than for cause, and
(i) KCSI does not offer Executive "similar employment"
(as defined below), or
(ii) KCSI terminates such similar employment other than
for cause within three (3) years after a Change of Ownership.
For purposes of this Paragraph 8(b) and Paragraph 8(c) below, Executive's
employment shall be deemed to be terminated other than for cause if Executive
resigns because Executive's employment is altered other than for cause and
without Executive's consent so it is no longer similar employment. For
purposes of this Paragraph 8(b), similar employment shall mean an employment
position having duties of a character similar to the duties previously
assigned to Executive and a base salary, determined in accordance with
Paragraph 2(a) above, equal to or greater than Executive s base salary in
effect immediately prior to the Change of Ownership, but an employment
position shall constitute similar employment whether or not the position
involves similar or comparable levels of responsibility and, provided
Executive s relocation costs are paid by KCSI, regardless of whether the
similar employment is in a different city or other location within the
continental United States. If Executive's employment is terminated other than
for cause, and KCSI offers Executive similar employment but Executive does not
accept such similar employment, Executive shall be entitled to benefits only
under Paragraph 4(d)(ii) above and shall not receive any benefits under
Paragraph 8(c) below.
(c) Severance Benefits. When Paragraph 8(b) above is applicable,
and subject to the limitations of Paragraph 8(d) below, KCSI, for the period
from the date of termination of employment or similar employment, whichever is
later, through the end of three (3) years following the Change of Ownership,
or for a period of one (1) year, whichever period is longer, (A) shall pay to
Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of
the annual base salary referenced in Paragraph 2(a) above, at the rate in
effect immediately prior to the Change of Ownership and, (B) shall reimburse
Executive for the cost (including state and federal income taxes payable with
respect to this reimbursement) of continuing the health insurance coverage
provided pursuant to this Agreement or obtaining health insurance coverage
comparable to the health insurance provided pursuant to this Agreement, and
obtaining coverage comparable to the life insurance provided pursuant to this
Agreement, unless Executive is provided comparable health or life insurance
coverage in connection with other employment. The foregoing obligations shall
continue until the end of the period provided herein notwithstanding the death
or disability of Executive during said period (except, in the event of death,
the obligation to reimburse Executive for the cost of life insurance shall not
continue). In addition, notwithstanding the terms of any option agreement
dated prior to the execution of this Agreement, upon a termination of
Executive's employment other than for cause which entitles Executive to the
severance benefits set forth in this Paragraph 8(c), all outstanding options
held by Executive under any stock option plan of KCSI or its affiliates shall
become immediately exercisable, except that no such options shall be
exercisable earlier than one year after the date such options were granted.
For purposes of the underlying option agreements, all such options shall be
deemed to be exercisable immediately prior to such termination of Executive's
employment, and the underlying options agreements hereby are amended to
reflect the provisions of this Agreement. If any of Executive s stock options
do not become exercisable because Executive s termination of employment occurs
within one year of the grant date of the options, KCSI immediately shall pay
Executive the aggregate difference between the option price of such options
and the fair market value of the KCSI stock on the date of termination of
Executive s employment (or on the date of the Change of Ownership, if KCSI
stock no longer exists or is not publicly traded on the date of termination of
employment). In the year in which termination of employment occurs, Executive
shall be eligible to receive benefits under the KCSI Incentive Compensation
Plan and the KCSI Executive Plan (if such Plans then are in existence and
Executive was entitled to participate immediately prior to termination) in
accordance with the provisions of such plans then applicable, and severance
pay received in such year shall be taken into account for the purpose of
determining benefits, if any, under the KCSI Incentive Compensation Plan but
not under the KCSI Executive Plan. After the year in which termination
occurs, Executive shall not be entitled to accrue or receive benefits under
the KCSI Incentive Compensation Plan with respect to the severance pay
provided herein, notwithstanding that benefits under such plan then are still
generally available to executive employees of KCSI. After termination of
employment, Executive shall not be entitled to accrue or receive benefits
under any other employee benefit plan or program, except that Executive shall
be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee
Stock Ownership Plan and the KCSI Section 401(k) Plan (if KCSI employees then
still participate in such plans) in the year of termination of employment only
if Executive meets all requirements of such plans for participation in such
year.
(d) Prevailing Provisions. If a Change in Control of KCSI (as
defined in Paragraph 7(d) above) occurs prior to or simultaneously with a
Change of Ownership (as defined in this Paragraph 8), Executive shall be
entitled only to the benefits provided in Paragraph 7 of this Agreement and
shall have no rights or benefits under this Paragraph 8. In any circumstance
in which the provisions of Paragraph 8(c) above are applicable, Executive
shall not be entitled to receive any benefits provided in Paragraph 4(d)(ii)
of this Agreement.
9. Mitigation and Other Employment. After a termination of Executive s
employment pursuant to Paragraph 4(d)(i), a Change in Control of KCSI or a
Change of Ownership, Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise, and except as otherwise specifically provided in Paragraphs
4(d)(ii) or 8(c) with respect to health and life insurance, no such other
employment, if obtained, or compensation or benefits payable in connection
therewith shall reduce any amounts or benefits to which Executive is entitled
hereunder. Such amounts or benefits payable to Executive under this Agreement
shall not be treated as damages but as severance compensation to which
Executive is entitled because Executive s employment has been terminated.
10. Notice. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have
been given when personally delivered, delivered by facsimile or deposited in
the United States mail by certified or registered mail, postage prepaid,
addressed, in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City,
Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him
at 606 West Meyer Boulevard, Kansas City, Missouri 64113, or to such other
address as a party shall designate by notice to the other party.
11. Amendment. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge
is agreed to in a writing signed by Executive and the President of KCSI. No
waiver by any party hereto at any time of any breach by another party hereto
of, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the time or at any prior or subsequent
time.
12. Successors in Interest. The rights and obligations of KCSI under
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of KCSI,
regardless of the manner in which such successors or assigns shall succeed to
the interest of KCSI hereunder, and this Agreement shall not be terminated by
the voluntary or involuntary dissolution of KCSI or Railway or by any merger
or consolidation or acquisition involving KCSI or Railway, or upon any
transfer of all or substantially all of KCSI s or Railway's assets, or
terminated otherwise than in accordance with its terms. In the event of any
such merger or consolidation or transfer of assets, the provisions of this
Agreement shall be binding upon and shall inure to the benefit of the
surviving corporation or the corporation or other person to which such assets
shall be transferred. Neither this Agreement nor any of the payments or
benefits hereunder may be pledged, assigned or transferred by Executive either
in whole or in part in any manner, without the prior written consent of KCSI.
13. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
14. Controlling Law and Jurisdiction. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
15. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and terminates
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the terms of Executive's employment
or severance arrangements, including the Employment Agreement between the
parties dated April 1, 1992, except that Paragraph 2(c) of the April 1, 1992
Employment Agreement relating to Restricted Stock shall continue in effect and
is incorporated herein and made a part of this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the
day and year first above written.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Landon H. Rowland
Landon H. Rowland, President
/s/ Richard P. Bruening
Richard P. Bruening
Page 1 of 2
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<CAPTION>
Years Ended December 31,
1995* 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax Income, excluding
equity in earnings of
unconsolidated affiliates $ 484.5 $ 148.9 $ 160.9 $ 92.8 $ 66.2
Interest expense on Indebtedness 77.0 53.6 51.2 33.1 32.1
Portion of Rents Representative
of an Appropriate Interest Factor 17.2 17.7 11.0 8.3 5.7
Equity in Undistributed Net Earnings
of 50% Owned Affiliates 5.7 15.6 9.0 8.2 7.0
Distributed Earnings of Less Than
50% Owned Affiliates 0.9 0.1 0.5 0.6 0.2
Fixed Charges of
50% Owned Affiliates 1.3 0.9 1.4 1.0 1.3
Income as Adjusted $ 586.6 $ 236.8 $ 234.0 $ 144.0 $ 112.5
Fixed Charges:
Interest Expense on Indebtedness$ 77.0 $ 53.6 $ 51.2 $ 33.1 $ 32.1
Portion of Rents Representative
of an Appropriate Interest Factor 17.2 17.7 11.0 8.3 5.7
Fixed Charges of
50% Owned Affiliates 1.3 0.9 1.4 1.0 1.3
Total Fixed Charges $ 95.5 $ 72.2 $ 63.6 $ 42.4 $ 39.1
Ratio of Earnings to
Fixed Charges 6.14 3.28 3.68 3.40 2.88
* Financial information from which the ratio of earnings to fixed charges is
computed for the year ended December 31, 1995 reflects DST Systems, Inc.
("DST") as a majority owned unconsolidated subsidiary through October 31,
1995, and as an unconsolidated affiliate beginning November 1, 1995, as a
result of the DST public offering and associated transactions (as discussed
in Note 2 to the Consolidated Financial Statements in this Form 10-K),
which reduced the Company's ownership in DST to approximately 41%.
</TABLE>
Page 2 of 2
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES-
EXCLUDING ONE TIME GAIN ON SALE OF DST SYSTEMS, INC.
(Dollars in Millions)
<CAPTION>
Year Ended
December 31, 1995
<S> <C>
Earnings:
Pretax Income, excluding equity in
earnings of unconsolidated affiliates
and one time gain on sale of
DST Systems, Inc. $188.2
Interest expense on Indebtedness 77.0
Portion of Rents Representative
of an Appropriate Interest Factor 17.2
Equity in Undistributed Net Earnings
of 50% Owned Affiliates 5.7
Distributed Earnings of Less Than
50% Owned Affiliates, 0.9
Fixed Charges of
50% Owned Affiliates 1.3
Income as Adjusted $290.3
Fixed Charges:
Interest Expense on Indebtedness $ 77.0
Portion of Rents Representative
of an Appropriate Interest Factor 17.2
Fixed Charges of
50% Owned Affiliates 1.3
Total Fixed Charges $ 95.5
Ratio of Earnings to
Fixed Charges Excluding One Time
Gain on Sale of DST Systems, Inc. 3.04
Financial information from which the ratio of earnings to fixed charges is
computed for the year ended December 31, 1995 reflects DST Systems, Inc.
("DST") as a majority owned unconsolidated subsidiary through October 31,
1995, and as an unconsolidated affiliate beginning November 1, 1995, as a
result of the DST public offering and associated transactions (as discussed in
Note 2 to the Consolidated Financial Statements in this Form 10-K), which
reduced the Company's ownership in DST to approximately 41%. However, the
computation excludes the one time pretax gain of $296.3 million recognized in
connection with the DST public offering and associated transactions.
</TABLE>
Subsidiaries of the Company
Kansas City Southern Industries, Inc., a Delaware Corporation, has no parent.
All subsidiaries of the Company listed below are included in the consolidated
financial statements unless otherwise indicated
State or
Percentage other Jurisdiction
of of Incorporation
Ownership or Organization
Animal Resources, Inc. (3)* 49% Missouri
Berger Associates, Inc. 80 Delaware
Carland, Inc. (5) 100 Delaware
DST Systems, Inc.* 41 Missouri
Fountain Investments, Inc. 100 Missouri
Janus Service Corp. (7) 100 Colorado
Janus Capital Corporation 83 Colorado
Janus Capital International Ltd (7) 100 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. (3)* 49 Delaware
Mexrail, Inc.* 49 Delaware
Mid-South Microwave, Inc. 100 Delaware
Midland Data Systems, Inc.* 45 Missouri
Midland Loan Services L.P. (8)* 45 Missouri
Pabtex, Inc. (4) 100 Delaware
PVI, Inc. 100 Delaware
Rice-Carden Corporation 100 Missouri
Southern Leasing Corporation (5) 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
The Kansas City Southern Railway Company 100 Missouri
Tolmak, Inc. 100 Delaware
TransFin Insurance, Ltd. 100 Vermont
Trans-Serve, Inc. (4) (6) 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 PVI, Inc.
(4) Subsidiary of Southern Industrial Services, Inc.
(5) Subsidiary of Southern Credit Corporation, Inc.
(6) Conducting business as Superior Tie & Timber
(7) Subsidiary of Janus Capital Corporation
(8) Subsidiary of Fountain Investments, Inc.
Subsidiaries and Affiliates not shown, if taken in the aggregate, would not
constitute a significant subsidiary of the Company. Subsidiaries and
affiliates of DST Systems, Inc. are not shown.
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
Prospectus constituting part of the Registration Statement on Form S-3 (No.
33-69648) of Kansas City Southern Industries, Inc. of our report dated
February 22, 1996, appearing on page 35 of this Form 10-K.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 5, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-K, CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET
AND STATEMENT OF INCOME OF KANSAS CITY SOUTHERN INDUSTRIES, INC., COMMISSION
FILE NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 31,800,000
<SECURITIES> 0
<RECEIVABLES> 140,200,000
<ALLOWANCES> 4,600,000
<INVENTORY> 39,800,000
<CURRENT-ASSETS> 281,200,000
<PP&E> 1,820,000,000
<DEPRECIATION> 538,100,000
<TOTAL-ASSETS> 2,039,600,000
<CURRENT-LIABILITIES> 320,400,000
<BONDS> 633,800,000
<COMMON> 400,000
0
7,100,000
<OTHER-SE> 687,700,000
<TOTAL-LIABILITY-AND-EQUITY> 2,039,600,000
<SALES> 0
<TOTAL-REVENUES> 775,200,000
<CGS> 0
<TOTAL-COSTS> 616,000,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,800,000
<INTEREST-EXPENSE> 65,500,000
<INCOME-PRETAX> 440,100,000
<INCOME-TAX> 192,900,000
<INCOME-CONTINUING> 236,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 236,700,000
<EPS-PRIMARY> 5.41
<EPS-DILUTED> 0
</TABLE>
