FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 556-0303
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the Company (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Company
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 3, 1996
Common Stock, $0.01 par value 38,302,147 Shares
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1996
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
March 31, 1996 and December 31, 1995 2
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 1996 and 1995 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 4
Notes to Consolidated Condensed Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 1996
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the
information presented. These Consolidated Condensed Financial Statements
should be read in conjunction with the financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995.
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 9.8 $ 31.8
Accounts receivable, net 144.6 135.6
Inventories 37.7 39.8
Other current assets 51.1 74.0
Total current assets 243.2 281.2
Investments held for operating purposes 276.0 272.1
Properties (net of $553.7 and $538.1 accumulated
depreciation and amortization, respectively) 1,309.2 1,281.9
Intangibles and Other Assets, net 198.4 204.4
Total assets $ 2,026.8 $ 2,039.6
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 10.1 $ 10.4
Accounts and wages payable 83.6 96.9
Accrued liabilities 145.0 213.1
Total current liabilities 238.7 320.4
Other Liabilities:
Long-term debt 728.1 633.8
Deferred income taxes 296.2 303.6
Other deferred credits 71.2 73.1
Total other liabilities 1,095.5 1,010.5
Minority Interest in consolidated subsidiaries 9.9 13.5
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock 0.4 0.4
Capital surplus 105.1 133.9
Retained earnings 770.1 753.8
Shares held in trust (200.0) (200.0)
Total stockholders' equity 682.7 695.2
Total liabilities and stockholders' equity $ 2,026.8 $ 2,039.6
</TABLE>
See accompanying notes to consolidated condensed financial statements.<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
Revenues $ 201.3 $ 189.2
Costs and expenses 141.8 129.6
Depreciation and amortization 19.0 18.0
Operating Income 40.5 41.6
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 1.9 13.0
Other 1.3 0.1
Interest expense (12.9) (17.4)
Other, net 4.6 3.8
Pretax Income 35.4 41.1
Provision for taxes on income 12.5 12.0
Minority interest 3.0 1.7
Net Income $ 19.9 $ 27.4
Computation of Primary Earnings per Common Share
Weighted Average Primary Common
Shares Outstanding (in thousands) 40,010 45,050
Primary Earnings per Common Share $ .50 $ .61
Cash Dividends Paid:
Per Preferred Share $ .25 $ .25
Per Common Share $ .10 $ .07 1/2
</TABLE>
See accompanying notes to consolidated condensed financial statements.<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $ 19.9 $ 27.4
Adjustments to net income:
Depreciation and amortization 19.0 18.0
Deferred income taxes 1.1 7.6
Equity in undistributed earnings 0.6 (13.1)
Changes in working capital items:
Accounts receivable (8.9) (8.0)
Inventories 2.1 (0.5)
Other current assets 14.1 2.6
Accounts and wages payable (13.1) (25.0)
Accrued liabilities (59.5) (7.4)
Other, net (3.5) 1.1
Net (28.2) 2.7
INVESTING ACTIVITIES:
Property acquisitions (44.5) (25.9)
Proceeds from disposal of property 1.0 2.2
Investments in and loans with affiliates (3.8) (51.0)
Other, net (0.2) (2.0)
Net (47.5) (76.7)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 95.7 85.0
Repayment of long-term debt (1.9) (8.4)
Proceeds from stock plans 1.6 1.5
Stock repurchased (39.1) -
Cash dividends paid (3.9) (3.2)
Other, net 1.3 (0.6)
Net 53.7 74.3
CASH AND EQUIVALENTS:
Net increase (decrease) (22.0) 0.3
At beginning of year 31.8 12.7
At end of period $ 9.8 $ 13.0
</TABLE>
See accompanying notes to consolidated condensed financial statements. <PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
MARCH 31, 1996
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of normal
interim closing procedures) necessary to present fairly the financial position
of Kansas City Southern Industries, Inc. ("Company"; "KCSI") and its
subsidiary companies as of March 31, 1996 and December 31, 1995, the results
of operations for the three months ended March 31, 1996 and 1995, and cash
flows for the three months ended March 31, 1996 and 1995.
2. The results of operations for the three months ended March 31, 1996 and
1995 are not necessarily indicative of the results to be expected for the full
year 1996, nor the results experienced for the full year 1995.
3. The accompanying financial statements have been prepared consistently
with accounting principles described more fully in Note 1 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
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 completed in November 1995, the Company's ownership percentage in
DST was reduced to approximately 41% (subsequently reduced to 40% in first
quarter 1996). Accordingly, the Company's investment in DST was accounted for
under the equity method of accounting for the year ended December 31, 1995
retroactive to January 1, 1995. The DST public offering and associated
transactions are described more fully in Notes 1 and 2 to the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
4. The Company's inventories, $37.7 million at March 31, 1996 and $39.8
million at December 31, 1995, principally represent material and supplies
related to rail transportation. Other components of inventories are
immaterial.
5. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method of accounting include all entities in
which the Company or its subsidiaries have significant influence but not more
than 50% control. Investments in unconsolidated affiliates at March 31, 1996
include equity interests in DST, Midland Data Systems, Inc. and Midland Loan
Services, L.P.(collectively "Midland" - see Recent Announcements section under
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations with respect to sale of Midland in April 1996), Mexrail,
Inc. and certain other venture operations, as well as the Company's interests
in other companies. DST has a Stockholders' Rights Agreement, which includes
provisions providing that under certain circumstances following a "change in
control" of KCSI, as defined in DST's Stockholders' Rights Agreement,
substantial dilution of the Company's interest in DST could result.
Combined condensed financial information of unconsolidated affiliates is shown
below (dollars in millions):
<TABLE>
<CAPTION>
Financial Condition:
March 31, December 31,
1996 1995
<S> <C> <C>
Current assets $ 316.9 $ 250.3
Non-current assets 615.9 569.9
Assets $ 932.8 $ 820.2
Current liabilities $ 225.7 $ 178.4
Non-current liabilities 191.7 162.6
Equity of stockholders and partners 515.4 479.2
Liabilities and equity $ 932.8 $ 820.2
Investment in unconsolidated affiliates $ 224.1 $ 198.9
</TABLE>
<TABLE>
<CAPTION>
Operating Results:
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
Revenues:
DST $ 144.3 $ 112.3
All others 16.7 3.7
Total revenues $ 161.0 $ 116.0
Costs and expenses:
DST $ 125.1 $ 99.3
All others 13.9 3.9
Total costs and expenses $ 139.0 $ 103.2
Net income:
DST $ 4.4 $ 17.3
All others 1.0 (0.6)
Total net income $ 5.4 $ 16.7
</TABLE>
6. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with a maturity of generally three months or
less to be cash equivalents.
a. Supplemental Cash Flow Information (in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
Interest paid $ 18.0 $ 26.4
Income taxes paid 66.0 3.6
</TABLE>
b. Noncash Investing and Financing Activities:
The Company accrued a liability for the donation of 300,000 shares of DST
common stock ($2.7 million book value) to a charitable trust in December 1995.
These shares were delivered to the charitable trust in January 1996, resulting
in a reduction in the Company's investment in DST and associated liabilities.
Company subsidiaries and affiliates hold various investments which are
accounted for as "available for sale" securities as defined by Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities." The Company records its proportionate share of
any unrealized gains or losses related to these investments, net of taxes, in
stockholders' equity. The unrealized gain, net of taxes, related to these
investments increased $2.8 million from December 31, 1995.
During the first three months of 1995, the Company recorded expenses of $1.1
million related to its Employee Stock Ownership Plan ("ESOP"). These charges,
which were non-cash in nature, had the effect of decreasing retained earnings
and ESOP deferred compensation with no overall effect upon stockholders'
equity.
7. The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (SFAS 121) effective January 1, 1996. 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. The
adoption of SFAS 121 did not have an impact on the Company's first quarter
results of operations or financial condition.
8. On April 17, 1996, the Company filed Amendment No. 2 to its Registration
Statement on Form S-3 (File No. 33-69648) with the Securities and Exchange
Commission ("SEC"), registering $500 million in securities. The SEC declared
the Registration Statement effective on April 22, 1996; however, no securities
have been issued.
9. The Company has had no significant changes in its outstanding litigation
from that previously reported in the Company's Annual Report on Form 10-K for
the year ended December 31, 1995.
10. See the Recent Announcements section of Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations, for significant
transactions and events that will have an impact on the Company's future
results of operations and financial position.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-Q,
contains 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-Q. 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 in Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations and Item 8.
Financial Statements and Supplementary Data of the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. Readers should take these
factors into account in evaluating any such forward-looking comments.
Kansas City Southern Industries, Inc. ("Company"; "KCSI"), a Delaware
Corporation organized in 1962, is a diversified holding company with principal
operations in rail transportation, through its subsidiary The Kansas City
Southern Railway Company, and 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.
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. ("Carland"),
which leases various types of equipment including railroad rolling stock,
roadway maintenance equipment and vehicles. Carland's principal customer is
KCSR.
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"), a 40% owned affiliate, Midland Data Systems, Inc.
and Midland Loan Services, L.P. (collectively, "Midland" - 45% owned
affiliates), and Mexrail, Inc. (a 49% owned affiliate); unallocated holding
company expenses; intercompany eliminations; and other consolidated
subsidiaries, including, among others, Pabtex, Inc., Trans-Serve, Inc. and
Southern Leasing Corporation.
As more fully described in Notes 1 and 2 to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, the Company and DST completed a public offering of
DST common stock and associated transactions in November 1995, resulting in a
reduction in the Company's ownership percentage of DST to approximately 41%
(subsequently reduced to 40% in first quarter 1996). Accordingly, the
Company's investment in DST was accounted for under the equity method of
accounting for the year ended December 31, 1995 retroactive to January 1,
1995.
RECENT ANNOUNCEMENTS
Common Stock Repurchases - On May 1, 1996, the Company's Board of Directors
("Board") authorized management to repurchase an additional three million
shares of KCSI common stock. The Board had previously authorized a repurchase
of eight million shares of Company common stock. As of April 30, 1996, the
Company had repurchased approximately six million shares under the current
authorization. An additional two million shares are available for repurchase
through a financial institution at contract prices as disclosed in Note 8 to
the consolidated financial statements included in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
DST's Investment in Continuum - On April 29, 1996, DST announced that its
unconsolidated equity affiliate, The Continuum Company, Inc. ("Continuum"),
had entered into a merger agreement with Computer Sciences Corporation
("CSC"), whereby Continuum stock will be exchanged for CSC stock. The merger
is subject to regulatory and shareholder approval. DST currently owns
approximately 23% of the outstanding stock of Continuum.
If the merger is consummated, DST expects to recognize a one time gain of
approximately $150 million on the transaction, of which the Company would also
recognize a one time gain proportionate to its ownership interest in DST.
Additionally, Continuum would cease to be an equity affiliate of DST, thereby
eliminating any future Continuum equity affiliate earnings. DST recorded $3.6
million in equity earnings from Continuum in 1995. The loss of Continuum
earnings will not be material to the Company's consolidated results.
Berger Joint Venture - Berger signed a joint venture agreement with Bank of
Ireland Asset Management (U.S.) Limited, a subsidiary of Bank of Ireland, to
launch a series of international and global mutual funds. The new venture
will be called BBOI Worldwide LLC and will be headquartered in Denver,
Colorado. Bank of Ireland Asset Management (U.S.) Limited will provide
portfolio management and Berger will oversee marketing, distribution and
administration. The first no-load mutual fund product, an international
equity fund, is expected to be launched in third quarter 1996.
Joint Venture Letter of Intent - On April 18, 1996, the Company announced the
signing of a letter of intent to form a joint venture with GATX Capital
Corporation to perform certain leasing and financing activities. KCSI intends
to contribute the capital stock of its wholly-owned subsidiary, Southern
Credit Corporation ("SCC"), to the new entity.
Assuming formation of the joint venture is completed, SCC will cease to be a
consolidated subsidiary of the Company. Completion of the joint venture and
associated transactions is anticipated to result in the reduction of Company
consolidated indebtedness by approximately $140 million. The Company intends
to report the new joint venture as an equity investment.
Sale of Midland Investment - The Company completed the sale of its 45%
investment in Midland (to Midland management) in April 1996. The Company
expects to record a gain in connection with the transaction, which will not be
material to the Company's results of operations or financial position.
Union Labor Negotiations - As reported in the Company's Annual Report on Form
10-K for the year ended December 31, 1995, the Company had reached tentative
labor agreements with the United Transportation Union ("UTU") and the
Brotherhood of Locomotive Engineers ("BLE"). During first quarter 1996,
however, the UTU membership rejected this tentative agreement, but agreed to
submit to binding arbitration, which will produce a new labor agreement later
in 1996. The ratification deadline relative to the BLE tentative agreement
was extended until May 27, 1996. Negotiations with other unions are in
various stages, primarily through the National Railway Labor Conference;
however, some unions (e.g., Transportation Communications Union, the
Brotherhood of Railway Signalmen, etc.) have been released from mediation by
the National Mediation Board. As a result, there exists a possibility of a
rail work stoppage by certain negotiating unions, but based upon information
currently available, management anticipates that President Clinton will
appoint certain Presidential Emergency Boards, thereby limiting any potential
work stoppages.
RESULTS OF OPERATIONS
Segment revenues and operating income comparisons follow (dollars in
millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
Revenues:
The Kansas City Southern Railway Company $ 123.3 $ 125.5
Financial Asset Management 70.1 54.9
Corporate & Other 7.9 8.8
Total $ 201.3 $ 189.2
Operating Income:
The Kansas City Southern Railway Company $ 14.6 $ 25.3
Financial Asset Management 26.6 14.3
Corporate & Other (0.7) 2.0
Total $ 40.5 $ 41.6
</TABLE>
The Company reported first quarter 1996 earnings of $19.9 million ($.50 per
share), compared to $27.4 million or $.61 per share in first quarter 1995.
Consolidated first quarter 1996 revenues rose 6% to $201.3 million compared to
prior year, while operating income of $40.5 million declined 3% from $41.6
million in first quarter 1995. The increase in revenues was primarily due to
a 14% growth in Janus assets under management since December 31, 1995, while
the other business units reported revenues comparable to prior year. First
quarter 1996 operating income reflects a 7% increase in operating expenses
primarily resulting from customer service enhancements by KCSR, the
transportation related effects of severe winter weather conditions, and
increased compensation levels attributable to both KCSR union contract
proposals and improved investment performance of the Financial Asset
Management segment. While operating expenses were higher overall than
comparable 1995, marketing and promotional efforts at Janus were reduced by
$4.7 million (38%) compared to first quarter 1995. Equity in net earnings of
unconsolidated affiliates decreased to $3.2 million in first quarter 1996
versus $13.1 million in 1995, reflecting lower equity earnings from DST due
to: i) DST's reduced equity earnings from its Continuum investment as a result
of a non-recurring charge associated with an acquisition transaction (an
approximate $4.1 million impact to the Company in first quarter 1996); ii) the
Company's lower ownership percentage of DST - approximately 40% at March 31,
1996 versus 100% at March 31, 1995; and iii) a first quarter 1995 after-tax
gain of $4.7 million recorded by DST on the sale of its investment in
Investors Fiduciary Trust Company.
THE KANSAS CITY SOUTHERN RAILWAY COMPANY
<TABLE>
<caption Three Months
Ended March 31,
1996 1995
(in millions)
<S> <C> <C>
Revenues $ 123.3 $ 125.5
Costs and expenses 94.1 86.8
Depreciation and amortization 14.6 13.4
Operating income 14.6 25.3
Interest expense (12.1) (12.2)
Other, net 0.9 0.9
Pretax income 3.4 14.0
Income tax provision 1.4 5.7
Net Income $ 2.0 $ 8.3
</TABLE>
The Kansas City Southern Railway Company segment contributed $2.0 million to
the Company's first quarter 1996 results, a decrease from the $8.3 million in
1995. Revenues declined from first quarter 1995 to $123.3 million for the
three months ended March 31, 1996. Operating income decreased to $14.6
million in first quarter 1996 as compared to $25.3 million in 1995, primarily
from increased operating expenses associated with the adverse winter weather
and continued efforts to improve customer service.
First quarter 1996 KCSR unit coal revenues increased 12% over 1995 despite a
temporary shut-down of an electric generating plant served by KCSR for most of
the quarter. The increase reflects the resumption of shipments to another
electric generating plant (at Monticello, Texas) which had been out of service
since late 1993 and returned on line in June 1995, and increased tonnage at
other plants. General commodities revenues were lower in first quarter 1996,
primarily from a 30% reduction in carloadings from KCSR's grain, farm and food
products business unit as compared to first quarter 1995 due to an expected
decline in export grain traffic. Intermodal business, while slowing from
prior trends, continued to grow, experiencing a 7% increase in revenues over
1995.
KCSR costs and expenses increased in first quarter 1996 as compared to 1995 as
a result of adverse winter weather, higher wage accruals, increased traffic
levels in certain commodities and KCSR's continuing emphasis on providing
improved and reliable customer service. In addition, KCSR incurred costs in
first quarter 1996 for employee training programs, some of which were mandated
by the Federal Railroad Administration, while others related to reducing
injuries and derailments. KCSR operating expenses for first quarter 1996
included higher costs for salaries and wages (increased crew levels and
accruals for proposed labor agreements), materials and supplies (parts for
freight car repairs) and purchased services (track repairs performed by third
parties), offset partially by reduced car hire costs due to improved rail
system operations. Depreciation and amortization expense increased 9% from
first quarter 1995 due to the completion in early 1995 of remaining projects
related to the KCSR long-term roadway improvement program.
FINANCIAL ASSET MANAGEMENT
<TABLE>
<capiton>
Three Months
Ended March 31,
1996 1995
(in millions)
<S> <C> <C>
Revenues $ 70.1 $ 54.9
Costs and expenses 40.5 37.6
Depreciation and amortization 3.0 3.0
Operating income 26.6 14.3
Interest expense (1.1) (1.1)
Other, net 0.8 0.5
Pretax income 26.3 13.7
Income tax provision 10.6 5.7
Minority interest 3.0 1.7
Net Income $ 12.7 $ 6.3
</TABLE>
Financial Asset Management revenues rose 28% to $70.1 million in first quarter
1996, and operating income and net contribution to Company consolidated
results increased 86% and 102%, respectively, when compared to the equivalent
prior year period. These increases are indicative of growth in assets under
management from favorable product performance in a strong overall financial
market, stabilized operating expenses, and, as discussed earlier, reduced
marketing and promotional expenditures at Janus as compared to first quarter
1995.
Financial Asset Management contributed $12.7 million to KCSI's 1996 first
quarter results, an increase of $6.4 million over first quarter 1995. Assets
under management continued to grow as first quarter fund sales (net of
redemptions) of $1.7 billion, coupled with market appreciation, raised total
assets to $38.8 billion at March 31, 1996 ($35.4 billion at Janus; $3.4
billion at Berger), a 12% increase from the $34.5 billion at December 31,
1995. Shareowner accounts increased, exceeding 2.5 million accounts at March
31, 1996. The first quarter 1996 revenue growth of 28% (due to increased
assets under management) was partially offset by higher operating expenses,
but at a lower proportionate rate (7%) than the revenue growth. The increase
in expenses was generally attributable to an increase in salaries and wages
associated with achieving improved investment results, offset by a reduction
in Janus marketing and promotional expenses as discussed above.
CORPORATE & OTHER
<TABLE>
<CAPTION> Three Months
Ended March 31,
1996 1995
(in millions)
<S> <C> <C>
Revenues $ 7.9 $ 8.8
Costs and expenses 7.2 5.2
Depreciation and amortization 1.4 1.6
Operating income (loss) (0.7) 2.0
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 1.9 13.0
Other 1.3 0.1
Interest income (expense) 0.3 (4.1)
Other, net 2.9 2.4
Pretax income 5.7 13.4
Income tax provision 0.5 0.6
Net income $ 5.2 $ 12.8
</TABLE>
Corporate & Other contributed $5.2 million to the Company's first quarter 1996
results, down from the $12.8 million reported in the equivalent prior period.
The decreases in revenues and operating income are largely attributable to the
expected loss of a key customer at Pabtex, Inc. in December 1995, as
previously disclosed. The Company's approximate 40% equity investment in DST
provided $1.9 million in equity earnings for the first quarter 1996, a
decrease from the $13.0 million in 1995 (at which time DST was a 100% owned
subsidiary). DST's first quarter 1996 results were negatively impacted by
decreased equity earnings from its Continuum investment due to a non-recurring
charge caused by an acquisition transaction, resulting in an approximate $4.1
million reduction to the Company's equity earnings in DST. Additionally, a
$4.7 million (or $.10 per share) after-tax gain was recorded by DST in first
quarter 1995 related to the sale of DST's investment in Investors Fiduciary
Trust Company. Equity earnings in other unconsolidated affiliates increased
for the three months ended March 31, 1996 versus comparable 1995 as a result
of improved results at Midland and the inclusion of Mexrail, Inc., which
became an equity investment in November 1995.
Interest expense decreased by $4.4 million, primarily from lower average debt
balances in first quarter 1996 versus 1995 as a result of repayment on
outstanding credit lines using proceeds from the DST public offering and
repayment by DST of indebtedness owed to the Company in November 1995.
TRENDS AND OUTLOOK
The Company reported earnings of $.50 per share for the first quarter 1996 as
compared to $.61 per share in first quarter 1995. The Kansas City Southern
Railway Company segment reported a decline in earnings due primarily to
adverse weather conditions and overall economic declines. The Financial Asset
Management segment experienced growth in assets under management and revenues,
while stabilizing operating expenses, and doubled its contribution to KCSI
consolidated results from first quarter 1995. Corporate & Other reported
decreased earnings in first quarter 1996 versus 1995 due to reduced equity
earnings from DST as discussed previously.
A current outlook for the Company's core businesses for the remainder of 1996
is as follows:
i) The Kansas City Southern Railway Company - Unit coal revenues should
benefit from the resumption of shipments to an electric generating plant
in Monticello, Texas, but generally equalize on an annual basis.
Intermodal traffic carloadings should continue to be a growth area, while
general commodities traffic is somewhat dependent on economic trends in
the geographic region served by KCSR.
ii) Financial Asset Management - Assets under management grew 12% from
December 31, 1995 and shareholder accounts increased slightly, exceeding
2.5 million at March 31, 1996. Future growth will be largely dependent
on prevailing financial market conditions, relative performance of Janus'
and Berger's products, introduction and market reception of new products,
as well as other factors. Costs and expenses should continue at
operating levels consistent with the rate of growth, if any, in revenues.
iii) Corporate & Other - The Company expects any earnings in this segment to
derive largely from its equity ownership in DST. Other subsidiaries are
expected to remain relatively consistent with historical performance,
except for Pabtex, Inc., which will experience decreased earnings from
prior year as a result of the loss of a key customer, as disclosed
previously.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
1996 1995
<S> <C> <C>
Cash flows provided by (used for):
Operating activities $ (28.2) $ 2.7
Investing activities (47.5) (76.7)
Financing activities 53.7 74.3
Cash and equivalents:
Net increase (decrease) (22.0) 0.3
At beginning of year 31.8 12.7
At end of period $ 9.8 $ 13.0
</TABLE>
During the first quarter of 1996, the Company's cash position decreased from
$31.8 million at December 31, 1995 to $9.8 million at March 31, 1996. The
decreased cash position was caused primarily by negative operating cash flows
and cash used for property and investment acquisitions, offset partially by
proceeds from borrowings under the Company's lines of credit. Operating cash
flows for first quarter 1996 decreased $30.9 million compared to prior year.
The decrease was chiefly attributable to a decrease in accrued liabilities,
reflecting the payment of approximately $66 million in federal income taxes
resulting from the taxable gains associated with the DST public offering
completed in November 1995.
Investing activities in first quarter 1996 were focused primarily on KCSR road
property additions and Carland rolling stock acquisitions. Financing cash
flows were generated through borrowings under credit lines in excess of
repayments. Debt proceeds were primarily used for the repurchase of $39.1
million in Company common stock in connection with a stock repurchase program
authorized by the Company's Board of Directors in April 1995, and working
capital purposes (including the payment of federal income taxes associated
with the DST public offering as discussed above).
Cash flows from operations are expected to increase during the remainder of
1996 from positive operating income, which has historically resulted in
favorable cash flows. Investing activities will continue to use significant
amounts of cash. Future roadway improvement projects are expected to be
funded by KCSR operating cash flow. In connection with the expanded stock
repurchase program authorized by the Company's Board of Directors (see Recent
Announcements above), repurchases of KCSI common stock will be made throughout
1996 based on prevailing market conditions.
In addition to operating cash flows, the Company has available financing
arrangements at subsidiary levels, remaining credit of $342 million at March
31, 1996 from the Company's $400 million credit agreement, and $500 million
with respect to a Universal Shelf Registration Statement ("Registration
Statement") filed in September 1993 and most recently amended in April 1996.
The Securities and Exchange Commission declared the Registration Statement
effective on April 22, 1996; however, no securities have been issued. The
Company believes positive operating cash flows and available financing
resources are sufficient to fund working capital and other requirements for
the remainder of 1996.
The Company's debt ratio (debt as a percent of total debt plus equity) at
March 31, 1996 was 51.9% compared to 48.1% at December 31, 1995. Company
consolidated debt increased $94.0 million to $738.2 million at March 31, 1996
as a result of borrowings to repurchase Company common stock, to fund income
tax payments and for working capital purposes. Consolidated equity decreased
in first quarter 1996 due to the repurchase of $39.1 million in Company common
stock, largely offset by first quarter net income. This decrease in
consolidated equity, together with the increase in consolidated debt, resulted
in an increased debt ratio.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Note 9 to the Consolidated Condensed Financial Statements of
this Form 10-Q is hereby incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
a) The Company held its Annual Meeting of Stockholders ("Annual Meeting") on
May 2, 1996. A total of 34,015,230 shares of the Preferred stock and the
Common stock, or 87.5% of the shares of such stock outstanding on the
record date, were represented at the Annual Meeting. These shares vote
together as a single class.
b) Proxies for the meeting were solicited pursuant to Regulation 14A; there
was no solicitation in opposition to management's nominees for directors
as listed in such Proxy Statement and all such nominees were elected. The
voting was as follows:
<TABLE>
<CAPTION>
Total
Shares
<S> <C>
Election of Two Directors
(i) James E. Barnes
For 33,526,663
Withheld 661,510
Total 34,188,173
(ii) Jose F. Serrano
For 33,199,577
Withheld 642,710
Total 33,842,287
</TABLE>
c) Listed below is each of the other matters voted on at the Company's Annual
Meeting. Each of these matters is fully described in the Company's
Definitive Proxy Statement. The voting was as follows:
<TABLE>
<CAPTION>
Total
Shares
<S> <C>
Approval of Increase in Number of
Shares Authorized for Issuance
under Company's Amended and
Restated 1991 Stock Option and
Performance Award Plan ("1991 Plan")
For 21,683,909
Against 7,412,976
Abstentions 279,306
Non-votes 4,639,039
Total 34,015,230
Total
Shares
Approval of Reinstatement of Automatic
Grants of Stock Options to Company's
Outside Directors under the 1991 Plan
For 31,571,099
Against 2,081,903
Abstentions 362,228
Non-votes 0
Total 34,015,230
Approval of Extension of the Term of
the 1991 Plan through February 25, 2006
For 23,667,826
Against 5,359,641
Abstentions 348,724
Non-votes 4,639,039
Total 34,015,230
Approval of Change in Vesting Provisions
of the 1991 Plan
For 28,104,628
Against 5,502,385
Abstentions 408,217
Non-votes 0
Total 34,015,230
Approval of the 1991 Plan for Purposes of
Sections 162(m) and 422 of the
Internal Revenue Code
For 32,371,295
Against 1,192,525
Abstentions 451,410
Non-votes 0
Total 34,015,230
Ratification of the Board of Directors'
selection of Price Waterhouse LLP
as Company's Independent Accountants for 1996
For 33,559,805
Against 316,121
Abstentions 139,304
Non-votes 0
Total 34,015,230
</TABLE>
Based upon the majority of votes required for approval, each of these matters
passed.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 10.1 - 1991 Stock Option and Performance Award Plan, as Amended
and Restated
The Company's 1991 Stock Option and Performance Award Plan, as
amended and restated February 26, 1996, attached as Appendix A to
Company's Notice and Proxy Statement For The Annual Meeting of
Stockholders, dated March 25, 1996 (File No. 1-4717), is hereby
incorporated herein by reference, pursuant to Rule 12b-32, as Exhibit
10.1.
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended
March 31, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and in the capacities indicated on May
9, 1996.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President & Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Vice President & Comptroller
(Principal Accounting Officer)
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-Q, CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED CONDENSED 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> QTR-1
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 9,800,000
<SECURITIES> 0
<RECEIVABLES> 144,600,000
<ALLOWANCES> 0
<INVENTORY> 37,700,000
<CURRENT-ASSETS> 243,200,000
<PP&E> 1,862,900,000
<DEPRECIATION> 553,700,000
<TOTAL-ASSETS> 2,026,800,000
<CURRENT-LIABILITIES> 238,700,000
<BONDS> 728,100,000
<COMMON> 400,000
0
7,100,000
<OTHER-SE> 675,200,000
<TOTAL-LIABILITY-AND-EQUITY> 2,026,800,000
<SALES> 0
<TOTAL-REVENUES> 201,300,000
<CGS> 0
<TOTAL-COSTS> 160,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,900,000
<INCOME-PRETAX> 35,400,000
<INCOME-TAX> 12,500,000
<INCOME-CONTINUING> 19,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,900,000
<EPS-PRIMARY> .50
<EPS-DILUTED> 0
</TABLE>
