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, 19931994
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission file number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (816) 556-0303
Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
Preferred Stock, Par Value $25 Per Share,
4% Maximum Dividend, Noncumulative New York Stock Exchange
Common Stock, Without$.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 Registrant (1) has filed all reports requiredre-
quire to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
Indicate 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 Registrant'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. [ ]
As of March 4, 1994, 43,369,8073, 1995, 43,565,233 shares of Common stock and 243,170 shares of
voting Preferred stock were outstanding. On such date, the aggregate market
value of the voting Common and Preferred stock held by non-affiliates was
$1,982,638,164$1,642,728,650 (amount computed based on closing prices of Preferred and
Common stock on New York Stock Exchange).
iDOCUMENTS INCORPORATED BY REFERENCEREFERENCE:
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
Registrant's 19931994 Annual Report to Stockholders Parts I, II and IV
for the fiscal year ended December 31, 1993,1994,
Exhibit 13.1 hereto
are incorporated by
reference into Parts I, II, and IV.
Portions of the Registrant's Definitive Proxy StatementStatements for the 19941995 Part III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 1993, are incorporated by reference into Part III.
Financial statements and related notes, together with the report of Ernst &
Young, for Investors Fiduciary Trust Company for the fiscal year ended
December 31, 1993, Exhibit 99.1 hereto, are incorporated by reference into
Part IV.1994
A listing of explanations of graphics used in the
Management's Discussion and Analysis of Financial Part II
Condition and Results of Operations for the year
ended December 31, 1993,1994, Exhibit 99.299.1 hereto are incorporated by reference into
Part II.
ii
KANSAS CITY SOUTHERN INDUSTRIES, INC.
19931994 FORM 10-K ANNUAL REPORT
Table of contents
Page
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . 2220
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . 2523
Item 4. Submission of Matters to a Vote of Security Holders. 2624
PART II
Item 5. Market for the Registrant's Common Stock and
Related Stockholder Matters. . . . . . . . . . . 2826
Item 6. Selected Financial Data. . . . . . . . . . . . . 2826
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . 2927
Item 8. Financial Statements and Supplementary Data. . . 2927
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . 2927
PART III
Item 10. Directors and Executive Officers of the Registrant . 3028
Item 11. Executive Compensation . . . . . . . . . . . . . 3028
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . 3028
Item 13. Certain Relationships and Related Transactions . 3028
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K. . . . . . . . . . . . . . . . . . . 3129
Signatures . . . . . . . . . . . . . . . . . . . 36
iii33
ii
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF REGISTRANT BUSINESS
The major business developments of Kansas City Southern Industries, Inc.
("Registrant" or "KCSI") and the Registrant's subsidiaries for 19931994 are as
follows:
General
1993 Tax LegislationTransportation Services
Illinois Central Transaction. On August 10, 1993, President Clinton signedJuly 19, 1994, the Registrant announced that
it had entered into law the Omnibus Budget
Reconciliation Acta letter of 1993intent with Illinois Central Corporation
("the 1993 Tax Act"IC"). This new tax legislation
changed numerous provisions to the then existing tax law. The most
significant for merger of these changes, affect the Registrant's Transportation Services operations.operations with
IC. The new tax law increasedRegistrant incurred expenses related to this transaction in 1994
totalling $.04 per share.
On October 24, 1994, the corporate tax rate from 34%Registrant and IC jointly announced that they
mutually agreed to 35%.
Accordingly,terminate the Registrant's 1993 earnings include additional income tax
expense attributableletter of intent between them. The
Registrant and the IC were not able to reach a definitive agreement on a
number of issues. Pursuant to the tax rate increases retroactiveletter of intent with IC, the Registrant is
unable to January 1, 1993.
These charges, which are included in the provision for taxes on income,
represent $3.4 million ($.08 per share) relatedenter into certain types of business combinations prior to deferred tax accruals and
$900,000 ($.02 per share) relatedOctober
1995, without payment of a fee to current year earnings. In addition, the
new tax law included provisions for higher fuel tax rates, which resulted in
an additional expense to Transportation operations during 1993IC of $400,000.
Transportation Services$25 million.
MidSouth Acquisition. As previously disclosed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1992, the Registrant and
MidSouth Corporation ("MidSouth") signed a definitive merger agreement on
September 21, 1992. The merger agreement provided that holders of MidSouth
Common stock receive $20.50 per share in cash. The transaction was approved
by both boards of directors. At its Annual Meeting of Stockholders on April
30, 1993, MidSouth stockholders approved the merger agreement and on June 4,
1993 the Interstate Commerce Commission announced their approval of the
transaction. On June 10, 1993, the Registrant
closed the acquisition of MidSouth pursuant to the merger agreement. The purchase price for the
acquisition of the MidSouth common stock aggregated approximately $213.5
million paid in cash by the Registrant to holders of MidSouth's common stock
and in connection with the exercise of certain options held by MidSouth
employees and others. Liabilities were assumed in the amount of $306.9
million. The acquisition was funded with proceeds from the Registrant's $250
million credit agreement.
The MidSouth transaction, which was accounted for as a purchase, represents a
significant transaction for the Registrant. Results of operations of the
Registrant for the year ended December 31, 1993 include the operations of
MidSouth as a consolidated subsidiary effective with the closing of the
transaction.
Adjustments were recorded to appropriate asset and liability balances based
upon the fair value of such assets and liabilities. Based upon these
adjustments, the total purchase price exceeded the fair value of the
underlying net assets by a total of approximately $98.3 million and is being
amortized over a period of 40 years. Additional assets are depreciated over
lives ranging from 5-35 years.
1
Certain unaudited proforma financial information regarding results of
operations assuming the MidSouth transaction had been completed on January 1,
1993 and 1992, respectively, follows (in millions, except per share amounts):
Years Ended
December 31,
1993 1992
Revenues $ 1,010.2 $ 856.1
Income before cumulative effect
of accounting changes 98.5 67.9
Net income 93.4 67.9
Primary Earnings Per Share:
Before cumulative effect of
accounting changes $ 2.19 $ 1.53
After cumulative effect of
accounting changes 2.08 1.53
June 10, 1993.
Effective January 1, 1994, MidSouth was operationally and administratively
merged into The Kansas City Southern Railway Company ("KCSR", a wholly-owned
subsidiary of the Registrant).The previous MidSouth geographic area is now
called the KCSR Eastern Division.
SWEPCO Litigation. As was previously disclosed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993, KCSR was a defendant
in a lawsuit filed in the District Court of Bowie County, Texas by
Southwestern Electric Power Company ("SWEPCO"). In that case, SWEPCO alleged
that KCSR was required to reduce SWEPCO's coal transportation rate due to
changed circumstances allegedly creating a "gross inequity" under the
provisions of the coal transportation contract existing among SWEPCO, KCSR and
the Burlington Northern Railroad. SWEPCO is KCSR's largest single customer.
KCSR and SWEPCO have settled this litigation and the case against KCSR has
been dismissed. This matter was concluded without material adverse effect on
the financial condition or future results of operations of the Registrant.
Other Transportation Services ActivityActivity. In May 1992, KCSR signed an
agreement with the Atchison, Topeka, and Santa Fe Railway ("Santa Fe") to
purchase portions of its rail line in the Dallas, Texas area. The sale
consists of approximately 90 miles of track and an 80 acre piggyback intermodal
facility. The agreement is beingwill be implemented in phases over a two year periodseveral years and
will
gainhas gained KCSR direct access to the Dallas/Ft. Worth marketsDallas market for the first time in the
Registrant's history. Phase I of this agreement, was completed on October 31,
1993. Phase I1993, included the portion of Santa Fe's line between Farmersville, Texas and
a switch at ZackaZacha Junction, Texas. Phase II was partially completed in April
1994 and included the Zacha Junction intermodal facility. It is anticipated
that the final portion of Phase II of the acquisition, which includes certain
industry access', is anticipated to be completed in second quarterthe first half of 1995.
During 1994, to acquire the Zacka
Junction facility.
In April 1992, KCSR signed a letter of intent for the purchase of all of the
capital stock of the Graysonia, Nashville & Ashdown Railroad ("GNA") from
Holnam, Inc. The GNA, which was wholly-owned by Holnam, connects with KCSR at
Ashdown, Arkansas and extends 32 miles east. Acquisition of the GNA closed on
December 31, 1992 and was operated in trust until ICC approval was obtained in
June 1993, at which time it was merged into KCSR.
During 1993, KCSR continued emphasis of important safety and quality programs,
which includes the Safety Training Observation Program (S.T.O.P. - originally
established by E.I. DuPont). The S.T.O.P. program is designed to curtail
employee injuries through elimination of unsafe acts in the workplace.
Increased safety awareness achieved positive results during 1991-1993in 1992 and 1993 with an
approximate 31% reduction in Federal Railroad Administration reportable
employee injuries in 1993 as compared to 1992 and an approximate 28% reduction
in employee injuries in 1992 when compared to 1991. The transportation
businessIn 1994, however, the
Company experienced a doubling of Federal Railroad Administration reportable
[Page 1]
employee injuries compared to 1993. This significant increase in injuries is
primarily attributable to the merger of the MidSouth into KCSR, (MidSouth
statistics are not included prior to 1994). KCSR continued its substantial
commitment towards a safer work environment in 19931994 and remains committed to
continuing safety awareness.
Fuel costs represent approximately 7% of KCSR's operating expenses and have
been declining as diesel fuel prices have decreased each of the past three
years. The average 1993 price of fuel declined 8% from 1992 average prices.
Fuel prices stabilized in 1992-1993 due to a general oversupply of crude oil
in world petroleum markets.During 1994, KCSR operations experienced lower fuel prices in
1992 and 1991, particularly in the latter half of 1991, stemming from
resolution of the 1990-1991 Gulf War and stabilization of relations in the
2
Middle East region. Average per gallon diesel fuel prices were 7% lower in
1992 compared to 1991 and were 6% lower in 1991 compared to 1990, resulting in
lower transportation operating costs. Overall fuel costs are also affected by
the ratio of fuel gallons consumed to gross ton miles. This ratio had
declined in both 1991 and 1992, but rose slightly in 1993 from variances in
traffic mix and length of haul. Fuel efficiencies are attributable to more
efficient railway operating practices related to train schedules, reallocation
of locomotive power and general fuel conservation. Fuel usage was also
improved by the purchase of additional new fuel efficient locomotives during
the period 1989-1991, totalling 46 new SD-60 locomotives placed in service.
Additionally, as part of KCSR's locomotive fleet modernization program, 16
GP40 locomotives were refurbished in 1991 and another 17 GP40 used units were
purchased and refurbished in 1993 and early 1994. In 1991, KCSR issued $32.2
million of privately placed Equipment Trust Certificates ("ETC's") to fund
acquisition of 24 of the new locomotive units.
The 46 new locomotive purchases during the period 1989-1991, have caused an
improvement in the average age of KCSR's locomotive fleet. These new fuel
efficient locomotives additionally helped effect a 1% reduction in fuel
gallons consumed per gross ton miles in 1992 compared to 1991 and an 8%
reduction in 1991 compared to 1990. However, in 1993 the ratio of fuel
gallons consumed per gross ton miles increased 2% from a combination of
increased carloading volumes, and variances in traffic mix and length of haul.
KCSR 1993 revenues, including full year MidSouth for comparative
purposes, rose 3% compared to 1992.1993. General commodity revenues, excluding
intermodal traffic, rose 5.5% on generallyslightly higher traffic volumes. The higher
traffic volumes resulted, in part, from a strengthening of U.S.
economic conditions
which have continued to rise slowly from a recessionary
period in 1990-1992.the Registrant's service area. Higher traffic levelsvolumes were experienced in
carloadings of chemicals, petroleum products, non-metallic ores, food
products, and stone/clay. Offsetting these somewhat were lower carload
volumes in farm products particularly corn & wheat, non-metallic ores, lumber/where the reduced grain supplies as a result of the
flood of 1993 caused export grain shipments to decline; and paper and wood -
pulp/paper, chemicaldue
mainly to connection problems from the strike affected SOO Line. Intermodal
units increased (+46%) in 1994. Increased volume on the Kansas City/Dallas
corridor and petroleum shipments. Intermodal carloadings declined
8%initiation of through train service from Atlanta, Georgia through
the Meridian, Mississippi gateway, to Dallas, Texas, in 1993 as KCSR continuesconjunction with the
process of upgrading its current "on-off
ramp" loading facilitiesNorfolk Southern Railway Company commencing in anticipation of greater intermodal traffic inmid-November 1994, contributed
to the future.increased carloadings. Unit coal revenues rose modestly inwere down 4% from 1993, on overall increased tonnage
but were adversely affected by variances in length of haul and rates. As
evidenced bydue
for the increased farm products carloadings, KCSR continues to use
haulage rights with the Union Pacific Railroad (discussed later) allowing KCSR
market accessmost part to the corn belt regionsabsence of Iowashipments to the Monticello, Texas,
electric generating plant. This plant was shut down in 1994 due to a smoke
stack collapse in late 1993. The plant is expected to be back on line in late
1995.
In late 1994, KCSR completed a transaction for the private placement of
financing of locomotives and Nebraska.rolling stock using Equipment Trust Certificates
("ETC's"). The floodingETC's were placed for an aggregate of $54.7 million
representing 31 locomotives, 625 boxcars and 300 covered hopper cars, 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.
During 1994, KCSR completed the Midwest regionmajor portion of a rail track and structure
program which first began in 1986. In addition, as part of the United States during 1993 did not
materially affectMidSouth
Corporation acquisition, a planned upgrade of the Registrant's rail transportation operations. KCSR's
trackage, facilities and physical properties were not directly hampered by the
rising flood waters. However, a washout of trackage in the Pittsburg, Kansas
area occurred during heavy rains. While none of KCSR's properties were
directly affected, many of KCSR's interchange partners in the Kansas City
gateway were affected, which resulted in congestion, rerouting of certain
traffic and delays of commodity movements, particularly for grain and coal
shipments. KCSR experienced revenue declines, during third quarter 1993, in
certain commodities dueexisting MidSouth roadbed
was added to the inabilityprogram. Increased traffic levels on both the original KCSR
route and the recently acquired MidSouth, however, accentuated the need to
interchange shipments with other
railroads. Overallaccelerate the financial impact was immaterial.
Transportation Division results also benefittedMidSouth 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, now called
the KCSR Eastern Division. Accordingly, total capital expenditures for 1994
were $207.9 million, versus $108.9 million in 1993 from revenue and net
income additions of MidSouth and continuing favorable operations at1993.
During 1994, Pabtex, Inc. ("Pabtex") the Registrant's petroleum coke export
facility, (Pabtex, Inc.), which experienced
increased volumescontinued improvements in 1993. MidSouth contributed $67.8 million in revenues to
1993 Transportation Division results, which surpassed comparative prior year
revenuesoperating income on increased carloadings. MidSouth's 1993 earnings, netvolumes.
Southern Leasing Corporation, the Registrant's leveraged lease finance
subsidiary, also showed improvement in operating income on improved business
volumes.
In February 1995, KCSR filed a petition with the Interstate Commerce
Commission ("ICC") seeking approval for construction of all
acquisition related expenses, were positivean approximate nine
mile rail line from KCSR's main line into the Geismar, Louisiana industrial
area. 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. The rail line would expect to be completed in
approximately 12 to 18 months after excludingICC approval. The Geismar project extends
KCSR's rail line and could be a significant source of traffic and revenues
thereby complementing its business in the effectpetro-chemical industry. The KCSR
Geismar line extension has received the support of certain shippers in the
federal income tax rate increase.
3Geismar industrial area and would provide those shippers with additional rail
storage facilities, production efficiencies and competitive transportation
service.
[Page 2]
Information and Transaction Processing
DST Systems, Inc. ("DST")
DST Public Offering. On January 26, 1995, the Registrant announced that its
Board of Directors had authorized development of a plan for a public offering
by DST Systems, Inc. ("DST"), a wholly-owned subsidiary of the Registrant, of
approximately 51% of DST's common equity.
The purpose of the offering would be to obtain better market recognition of
DST's performance and to obtain proceeds for the retirement of debt, including
debt owed to the Registrant, and for general corporate purposes. Payments
received by the Registrant from DST for debt repayment may be used by the
Registrant to reduce its own debt, to repurchase Registrant common stock, and
for general corporate purposes. Any such offering would be made only pursuant
to a prospectus filed as part of a DST registration statement with the
Securities and Exchange Commission ("SEC"). Any repurchase of the
Registrant's common stock would occur only after public announcement and in
compliance with SEC regulations.
Sale of Investors Fiduciary Trust Company. On July 19, 1994, the Registrant
announced that DST and Kemper Financial Services, Inc. ("Kemper") had entered
into a letter of intent for the acquisition of their jointly owned affiliate
Investors Fiduciary Trust Company ("IFTC") by State Street Boston Corporation
("State Street"). On September 27, 1994, the Registrant announced that DST
and Kemper entered into a definitive agreement with State Street for the sale
to State Street of all of the outstanding stock of IFTC Holdings, Inc., which
wholly owns IFTC. On January 31, 1995, the Registrant announced that DST had
completed the sale of its 50% interest to State Street. At closing of the
transaction DST received 2,986,111 shares of State Street common stock in a
tax free exchange. This represents an approximate 4% ownership interest by
DST in State Street. DST recognized a net gain, after consideration of
appropriate tax effects, of approximately $4.7 million on the transaction in
first quarter 1995.
With the closing of the transaction, IFTC ceases to be an unconsolidated
affiliate of DST and no further equity in earnings of IFTC will be recorded by
DST. DST recognized equity in earnings from IFTC of $6.5, $4.8 and $4.8
million in 1994, 1993, and 1992, respectively. If State Street continues its
prior history with respect to the payment of dividends, DST will record
dividend income on any dividends from State Street.
Kemper Transactions. In early March 1995, DST signed a definitive agreement
to purchase substantially all of the assets and business operations of
Supervised Service Company, Inc. ("SSC"), a subsidiary of Kemper. SSC,
headquartered in Kansas City, Missouri, provides mutual fund transfer agency
services to non-Kemper mutual fund companies (approximately 250,000 accounts),
financial institutions and financial services firms. In conjunction with and
subject to the SSC transaction, DST also agreed to enter into long term
contracts with Kemper to provide mutual fund shareholder system services and
portfolio accounting system services for the Kemper Mutual Funds. Kemper is
the investment advisor to the Kemper Mutual Fund Group. As a result of these
transactions, DST expects to continue to process approximately 2 million
Kemper accounts, which had been anticipated to be converted from the DST
system in 1995. The SSC transaction is subject to regulatory approval.
Vantage Computer Systems, Inc./The Continuum Company, Inc. Transaction.
Effective September 30, 1993, the Registrant's wholly-owned subsidiary, DST,
completed the merger of its 90.5% owned subsidiary, Vantage Computer Systems,
Inc. ("Vantage"), into a subsidiary of The Continuum Company, Inc.
("Continuum"). In the transaction, DST and the minority shareholder of Vantage received a total
of 4approximately 3.6 million
shares of Continuum stock -- 2,939,000 shares at closing and the
remainder after Continuum shareholder approval was obtained in late 1993.stock. As a result of this transaction, and additional
Continuum stock purchases made by DST, DST owned approximately 24% of the
outstanding common stock of Continuum at December 31, 1993. In January 1994, DST
acquiredpurchased additional Continuum shares through privately negotiated
transactions. Accordingly, at December 31, 1994, DST currently
ownsowned approximately 29%
of Continuum's outstanding common stock. In the
initial exchange, DST exchanged Vantage stock with a book value of
approximately $17(5.5 million for Continuum stock with a market value of
approximately $62 million. DST accounted for the initial exchange as a non-
cash, non-taxable exchange in investment basis of Vantage for an investment in
Continuum. Accordingly, no gain recognition was associated with the
transaction. Vantage revenues for the nine months ended September 30, 1993,
were $32.6 million and $38.7 million forshares). For the year
ended December 31, 1992.1994, Continuum contributed $7.2 million before tax to the
Registrant's earnings.
[Page 3]
Continuum is a publicly traded international consulting and computer services
firm based in Austin, Texas, which primarily serves the needs of life and
property and casualty insurance companies for computer software and services.
Continuum has annual revenues of approximately $250 million and total assets
of approximately $160 million.
The Vantage/Continuum transaction will allow DST to expand its presence in the
information processing market for the insurance industry and combine the
strengths of both Vantage and Continuum. Prior to the merger, Vantage's
business was primarily centered in the U.S. domestic market while Continuum
has a significant international and domestic presence. Subsequent to this
transaction, DST assumed all of the North American operations data processing
functions for Continuum. DST and Continuum signed an agreement whereby DST
will make available the capabilities of the Winchester Data Center for
Continuum processing requirements. This processing agreement will reduce
overall Continuum processing costs, provide a revenue source for DST and
present opportunities for greater Continuum growth.
Other DST Activity. Financial institutions within the industries served by
DST will continue to evaluate whether to internalize or outsource their
servicing and technology needs. This process will have both positive and
negative effects on DST's results; however, on an overall basis, DST's
customer base is expected to grow. In 1993,1994, DST experienced an overall
increase in the number of mutual fund accounts serviced; at December 31, 1993,1994,
DST serviced a record total of 2832.1 million mutual fund accounts, a 5.64.1
million account increase over the 22.428 million accounts serviced at December 31,
1992.1993. The 19931994 account increase is a result of overall mutual fund account
growth. Kemper Financial Services ("Kemper"), a DST customer, began conversioncontinued the
processing of approximately 2 million of its mutual fund shareowner processing,accounts,
which will resultwere anticipated to be removed in the removal of its accounts1994 from the DST system. The total number of Kemper accounts, approximately 2.5 million, will
be converted from the DST system in stages by the end of 1994. In early July
1993, the first stage, which encompassed 500,000 Kemper accounts were
converted from the DST system. The loss of 500,000 accounts in 1993 was
offset by account growth from other mutual fund customers and accordingly, did
not have a material financial impact. DST
serviced 22.428 million mutual fund
4 accounts at December 31, 1992,1993, a 3.75.6 million
increase from the 18.722.4 million accounts serviced at December 31, 19911992 and 20.418.7
million accounts at December 31, 1990. The 1991 account decrease is in large part a result of the loss of
the Vanguard group of funds in September 1991, comprising approximately 2.7
million shareowner accounts and the removal of 800,000 broker based accounts
of Prudential Bache in late 1991.
Excluding the loss of the Vanguard and
Prudential Bache accounts, mutual fund accounts serviced by DST increased 1.8
million accounts in 1991 when compared to 1990.
During 1993,1994, DST continued marketing of its Automated Work Distributor TM
System ("AWD" TM)AWD "), an image-based clerical work management system which was
completed and placed in service during 1990. The AWD System's image
technology can also be combined with principles of an intelligent work
station. AWD was initially implemented in several mutual fund transfer
agencies, but through expansion, now resides on more than 4,2008,000 work stations
in companies throughout the worldworldwide (a 75%90% increase since December 31, 1992)1993) and is used to
service approximately 53%54% of the mutual fund shareowner accounts on DST's
system. AWD is also used in industries such as insurance, banking and health
care. Concurrent with the
Continuum/Vantage merger, discussed earlier, DST and Continuum reached a license agreement, whereby Continuum will
market AWD for use in insurance industry applications.
During 1993,1994, DST continued marketing of its record keeping system for 401(k)
plans, TRAC-2000 TM. TRAC-2000 TM, introduced in late 1991, represents a
major commitment by DST to offer the mutual fund industry a fully integrated
service for such plans. Integrated with TA2000 TM, DST's mutual fund record
keeping system, TRAC-2000 TM delivers comprehensive 401(k) record keeping and
ancillary services including full compliance testing in accordance with
Department of Labor regulations.
DST's printed output processing businesses, Output Technologies, Inc. ("OTI")
continued to expand in 1993. During 1993, OTI completed the internal
reorganization of its subsidiaries, which included renaming of certain
subsidiaries and merging of certain operations. The overall objective of this
reorganization was consolidation of output related activities, identification
of businesses with the OTI name and alignment into geographic operating
regions.1994. OTI serves as a holding company for businesses
which perform printed output processing, commercial printing,
telecommunications and fulfillment, graphics design, computer output
microfilm/microfiche and printing and mailing of laser printed output,
primarily for DST's mutual fund clients but also for a wide range of
customers. The OTI concept, which was originally launched in
1990, achieved further growth in 1993 through acquisition and location
expansion. At December 31, 1993, OTI operated in 35 locations throughout the
U.S. During 19931994 OTI's laser click volume was 669802 million pages of
printed output, an increase of 45%20% over the 460669 million pages in 1992.1993.
Management expects growth in the OTI business will result from DST mutual fund
account growth along with expansion and acquisitions in future years.
DuringDST's core business operations continued to experience improvements in both
revenue growth and profitability in 1994. DST's mutual fund shareowner
accounts serviced continued to grow in 1994 rising 15% from 1993, even in a
difficult year for many mutual funds. This growth in shareowner accounts also
lead to an increase of 20% in the volume of pages printed by DST's output
processing businesses. While improved core business volumes resulted in
revenue and profitability growth, these profitability improvements were,
however, unfavorably affected by lower results from DST's developmental and
international business units. As previously disclosed in the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1993, DST completedbegan an
expansion of certain of its product offerings and geographic locations. It
increased its Portfolio Accounting product offerings with the acquisition of
Clarke & Tilley, Ltd., (96.25%
owned) ("Clarke & Tilley", a United Kingdom company, which marketsentity) and
Belvedere Financial Systems, ("Belvedere"). Clarke & Tilley develops and
distributes investment managementaccounting software, primarily for use in Europe, South Africa,
and Australia. Belvedere develops and markets an investment accounting
product (the Global Portfolio System) that has potential worldwide
applications. DST expanded its mutual fund product offerings with the Pacific Rim;1993
[Page 4]
acquisition of Corfax Benefit Systems, Ltd.,
(100% owned) ("Corfax", a Canadian company, which processes shareowner transactions for
mutual fundsCompany),
and pension accounts in Canada; DBS Systems Corporation, (60%
owned)the formation of Clarke & Tilley Data Services, Ltd., ("CTDS", a United
States company, whichKingdom entity). Corfax develops and distributes mutual fund shareowner
accounting software and provides pension administration processing services.
CTDS is developing a software billingunit trust accounting system for the U.K. and Luxembourg
markets incorporating DST work management technology. In 1994 DST entered
into a series of transactions with State Street wherein DST acquired State
Street's 3.75% ownership interest in Clarke & Tilley in exchange for one sixth
ownership in Clarke & Tilley Data Services from DST. The net ownership result
after these transactions is that DST now owns 100% of Clarke & Tilley and 50%
of Clarke & Tilley Data Services, with State Street owning the other 50%. DST
also acquired DBS Systems, Inc., a 60% owned subsidiary, which has developed
software to provide billing services for DirecTV TM, a commercial direct
broadcast satellite industry;system.
As a result of rising levels in business volumes, DST began a physical
expansion of its Winchester Data Center in 1994. This expansion, which is
expected to be completed in 1995, will approximately double the square footage
of this facility and Belvedere Financial Systems,
Inc. (100% owned), which develops and markets portfolio accounting, and
investment management systems. Each of these transactions was accounted for
as a purchase. The total purchase price exceeded the fair value of the
underlying net assets, which will be amortizedis projected to cost slightly over a period of 7-20 years.
Cash paid for these transactions was $15.3 million and liabilities assumed
were $10.3$24 million.
5
Financial Asset Management
Janus Capital Corporation
Janus Compensation Arrangements Termination. In the fourth quarter 1994, the
Registrant recorded certain one time charges to earnings for Janus Capital
Corporation ("Janus") resulting from the Janus early termination of employment
and earnings related compensation arrangements for certain key 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. The
Company negotiated the early termination of the arrangements, which resulted
in payments of $48 million, by Janus, in cash in late 1994 and early 1995, of
which approximately $21 million had been accrued, upon vesting, in 1994 and
previous years. Termination of the arrangements resulted in a net reduction
in Janus' contribution to KCSI's consolidated earnings of $13.6 million or
$.30 per share. By terminating these arrangements, future years will benefit
from a decline in Janus operating expenses amounting to approximately $8
million pretax annually, based on 1994 earnings.
Minority Interest Ownership Restructuring. Agreements between the Registrant
and Janus minority owners contain, among other provisions, mandatory stock
purchase provisions whereby, under certain circumstances, the Registrant would
be required to purchase the minority interest. In late 1994, the Registrant
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 totalled $59
million. Concurrent with the early termination of the Janus compensation
arrangements, discussed above, 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 early 1995. 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 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 effective for mandatory purchase were purchased by
Janus for treasury, $6.1 million, and by the Registrant for $12.7 million. As
a result of the combination of the Registrant acquiring additional Janus
shares and the reduction of outstanding shares with Janus' treasury purchase,
the Registrant increased its ownership in Janus from approximately 81% to 83%,
upon closing of the transaction in January 1995. The shares purchased by the
Registrant resulted in the recording of intangibles as the purchase price
exceeded the value of underlying tangible assets and will be amortized over
its estimated economic life.
Other Janus Activity. Janus Capital Corporation ("Janus"), which manages
[Page 5]investments for the Janus group of mutual funds, and the IDEX equity funds,
insurance companies and other institutional accounts, continued to experience significantexperienced moderate
growth in terms of assets under management and accounts serviced during 1993.1994. Janus assets under
management grew from $15.5 billion at December 31, 1992 to a record $22.2 billion at December 31, 1993, from account growth and market appreciation. The
number of Janus and IDEX Funds shareholders increased from 1.5 millionto $22.9 billion at
December 31, 19921994. This growth was chiefly attributable to continued strong
fund sales of $6.5 billion, exceeding fund redemptions of $5.3 billion and net
fund depreciation of $.5 billion. Growth occurred in a record 2.0 million atdifficult year for
investment managers as rising interest rates affected market conditions in
general. Total number of shareholders remained essentially unchanged from
December 31, 1993. Janus'
revenues and profitability both increased in 1993 as a result of the increased
assets under management and greater number of shareholder accounts serviced.
Whileto December 31, 1994, at 2 million.
Janus operations experienced significant growth duringin 1993 muchand 1992 with
operating income comprising 38% and 36%, respectively, of that growth
occurredthe Registrant's
consolidated operating income. In 1994, however, operating income declined
compared to 1993 while revenues rose 11%. This decline in operating income is
primarily attributable to the one time charge to earnings of $13.6 million,
$27.1 million pre-tax, from the early termination of compensation
arrangements, discussed earlier. Excluding this charge, operating income
would have risen compared to 1993, but not at levels seen in prior years. In
late 1994, Janus embarked on a new marketing program, which incorporates an
extensive multimedia advertising campaign. Initial outlays for production and
placement of advertisements were completed in 1994, with further expenditures
for placing advertisements continuing into 1995.
In 1994 Janus introduced two new fund portfolios; Janus Overseas Fund, an
international equity fund in the first halfJanus family, and; Janus International Fund,
part of 1993. During the third and fourth quartersAspen Series, both of 1993 growthwhich opened in assets under management slowed. Total fund sales were $3.3
billion during the second half of 1993 versus $5.5 billion during the first
six months of 1993, while fund redemption increased to $2.2 billion versus
$1.6 billion, respectively.May 1994.
During 1993, Janus continued to expand the distribution channels of the Janus
funds by participating in "Schwabs'Schwab's Mutual Fund OneSource""OneSource" service of Charles
Schwab as well as a similar program offered by Fidelity Investments.Investments, both
begun in 1992. In addition, Janus introduced two new Janus fund portfolios;
Janus Mercury Fund, an equity fund; Janus Federal Tax Exempt Fund, a tax
exempt income fund; and the Janus Aspen Series, which consists of six
portfolios funded through variable annuity contracts, such as the Janus
Retirement Advantage. During 1992, Janus introduced three funds; Janus
Enterprise Fund, an equity fund; Janus Balanced Fund, a combination
equity/fixed income fund and Janus Short-
TermShort-Term Bond Fund, an income fund.
Additional portfolio managers and research analysts have joined the Janus
staff concurrent with the growth in assets under management and new investment
products.
Janus has expanded its assets under management by marketing advisory services
directly to pension plan sponsors, insurance, banking and brokerage firms for
their proprietary investment products. These relationships generated
approximately $948, $920, million and $340 million in new assets in 1994, 1993, and
1992, respectively.
Berger Associates, Inc.
On October 14, 1994, the Registrant completed the acquisition of a controlling
interest in Berger Associates, Inc. ("Berger"). Berger is the investment
advisor to The Berger One Hundred Fund, The Berger One Hundred and One Fund
and The Berger Small Company Growth Fund, as well as to private and other
accounts, (collectively, "Berger Funds"). Berger had a total of approximately
$3 billion in assets under management at December 31, 1994. The Registrant
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, totalling 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.
The acquisition, which was accounted for as a purchase, increased the
Registrant'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. The intangible amounts
[Page 6]
will be amortized over their estimated economic life of 15 years, subject to
completion of an economic life analysis. The financial statements of Berger
were consolidated into the Registrant 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 twelve months ended December 31, 1994, would have had an immaterial effect
on the consolidated results of the Registrant.
Berger established minority stock ownership for certain key employees which
resulted in a one-time pretax increase in Berger's operating expenses of $1.8
million in fourth quarter 1994. The additional minority stock provides
ownership incentive to key employees for future growth of Berger and had been
anticipated in the acquisition discussed earlier. Combined, the one-time
Janus and Berger transactions reduced KCSI's consolidated 1994 earnings by
$.32 per share.
Financial Asset Management revenues and operating income increases are a
direct result of increases in assets under management and Janus processing
services. Assets under management and shareholder accounts have grown in
recent years from a combination of new money investments or fund sales and
market appreciation. Fund sales have risen in response to marketing efforts,
favorable fund performance and the current popularity of no-load mutual funds.
Market appreciation has resulted from increases in stock investment values.
However, a decline in the stock and bond markets and/or an increase in the
rate of return of alternative investments could negatively impact JanusFinancial
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 JanusFinancial Asset Management and negatively impact revenues and operating
income.
Unconsolidated Affiliates (primarily DST related)
A significant portion of DST and RegistrantRegistrant's consolidated earnings are
derived from operations of unconsolidated affiliates, primarily connected with
DST. 1994 earnings from such unconsolidated affiliates increased 76% over
1993, from $14.1 million to $24.8 million. Major developments during 1993 for
unconsolidated affiliates during 1994 were:
(i) Investors Fiduciary Trust Company ("IFTC", a 50% owned affiliate of DST)
6equity earnings for 1994 were up 35% ($1.7 million) from 1993. Although
assets under custody increasedwere only slightly higher at $125.9 billion compared to
$125.1 billion at December 31, 1993, from
$106.3 billion at Decemberhigher interest earnings and gains on securities
sales accounted for the improvement. As disclosed earlier, DST sold its 50%
interest in IFTC to State Street effective January 31, 1992. IFTC earnings for 1993 were flat
compared to 1992. While IFTC assets under custody grew, results were reduced
by a change in the fiduciary fee arrangement between IFTC and its parent
companies and lower investment earnings. Excluding the change in fiduciary
fees, IFTC results were improved over 1992;1995.
(ii) as previously discussed, The Continuum Company Inc. ("Continuum") became an equity, approximately 29% owned affiliate of
DST) increased equity earnings $6.5 million over 1993's $700,000 contribution.
This was due primarily to DST on
September 30, 1993, when DST exchanged its 90.5% interest in Vantage Computer
Systems, Inc.recognizing their share of Continuum for an
equity interestentire year as opposed to three months (fourth quarter) in 1993, but also to
improved year to year revenues and earnings for Continuum. DST's ownership position
inImproved revenues
included several new agreements for Continuum is approximately 29% of the outstanding common stock. DST
recorded equity in earnings from Continuum, which contributed positively to DST 1993 results;provide outsource data
processing for customers.
(iii) Boston Financial Data Services Inc. ("BFDS", a 50% owned affiliate of DST)
recorded significantly improvedequity earnings in 1993
primarilyfor 1994 were 143% ($3 million) over 1993. Increased earnings
were driven by a combination of credits on account balances from volume relatedState Street
(the owner of the remaining 50% of BFDS) and higher mutual fund growth;volumes.
(iv) Argus Health Systems, Inc. ("Argus", a 50% owned affiliate of DST)
recorded improvedequity earnings for 1994 were 57% ($1.3 million) higher than 1993 on an
increase inrecord
volumes of pharmaceutical insurancebenefit claims processing volumes.processed. Argus processed
approximately 78106 million claims in 1994 compared to 78 million in 1993, versus approximately 49
million claims in 1992, an increase of 59%;a 36%
increase.
(v) First of Michigan Capital
Corp. ("FOM", a 21% owned affiliate of DST) recorded slightly lower earnings
on costs incurred as a result of a failed merger with Comerica, Incorporated,
discussed below; and (vi) Midland Data Systems, Inc. and Midland Loan Services, L.P. (collectively
"Midland", 45-50%45% owned affiliates of DST) reported sharply lowerhad higher earnings in($850,000 or 99%)
than 1993, compared to 1992 from a continuing
trend of lowermainly on improved margins on loan securitizationssecuritizations.
[Page 7]
Corporate and delays on receipt of
certain loan processing workOther
New KCSI Credit Agreements. During 1994 the Registrant established or
increased credit agreements with several lending institutions. These new or
expanded credit lines increased the Company's borrowing ability by $150
million to $450 million. The agreements bear interest rates below prime. In
1994, these agreements were utilized to finance the Berger acquisition and
subsidiary working capital requirements. Remaining credit capacity under
these agreements is intended for the RTC. Midland provides operation of an
Asset Management System and a Control Totals Module System for use by the
Resolution Trust Corporation as well as commercial loan servicing for
performing and non-performing commercial loans.
In the Registrant's Annual Report on Form 10-K for the year endedgeneral corporate purposes. At December 31,
1992,1994, the Registrant reported that Comerica Incorporated ("Comerica") and
Firsthad an aggregate of Michigan Capital Corporation ("FOM") had signed a definitive merger
agreement in January 1993. According to the agreement, Comerica was to
acquire all$115 million of theindebtedness
outstanding stock of FOM in exchange for approximately $45
million in Comerica stock. In late March 1993, Comerica abandoned its efforts
to acquire FOM. Accordingly, FOM remains an unconsolidated affiliate of DST.
Corporate and Otheron these agreements.
Debt Securities Registration and Offerings - 1993
On March 3, 1993, the Registrant issued the remaining $100 million of debt
securities under a $300 million debt securities Registration Statement on Form
S-3 filed in 1992. The Registrant issued the $100 million in debt securities
as 6 5/8% Notes due 2005. Proceeds of this debt offering, net of discount and
underwriting fees, of $98.5 million were delivered to the Registrant on March
10, 1993. In March 1993, $60 million of proceeds from this debt offering were
transferred to DST and Southern Credit Corporation for use in repayment of
debt and working capital needs. The Registrant used the remaining net
proceeds for general corporate purposes, including debt repayments, working
capital, capital expenditures, acquisitions of or investments in businesses
and assets and acquisitions of the Registrant's capital stock. The Registrant filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission
("SEC") on March 29, 1993, (File No. 33-60192), registering $200 million in
debt securities to be offered in the form of Medium Term Notes. The
Registrant's Form S-3 was amended on May 3, 1993 and declared effective on May
10, 1993. Proceeds from the sale of the debt securities arewere expected to be
added to the general funds of the Registrant and used to principally repay
debt and for other general corporate purposes, including working capital,
capital expenditures and acquisitions of or investments in businesses or
assets. On June 24, 1993, pursuant to an Indenture and Purchase Agreement,
the Registrant issued $100 million of debt
7 securities under this Registration
Statement. The transaction, which closed on July 8, 1993, is comprised of
Notes bearing interest at a rate of 5.75% maturing in 1998. The net proceeds
of this transaction of $99 million, along with certain proceeds from the
Registrant's $250 million credit agreement, were used to refinance certain
MidSouth debt in July 1993.
$500 Million "Universal Shelf" RegistrationRegistration. On September 29, 1993, the
Registrant filed a Registration Statement on Form S-3 with the SEC (File No.
33-69648), registering $500 million in securities. The securities may be
offered in the form of no par Common Stock, New Series Preferred Stock $1 par value,
Convertible Debt Securities, or other Debt Securities or
Equipment Trust Certificates (collectively, "the
Securities"). Net proceeds from the sale of the Securities are expected to be
added to the general funds of the Registrant and used principally for general
corporate purposes, including working capital, capital expenditures and
acquisitions of or investments in businesses and assets. The SEC has cleared
the Registration Statement without review, but the Registrant has not yet
requested that it be declared effective and no securities have been issued.
Series B Convertible PreferredTermination of Common Stock On October 1, 1993, KCSI transferred one million shares of KCSI Series B
Convertible Preferred Stock (the "Series B Preferred Stock") to the Kansas
City Southern Industries, Inc. Employee Plan Funding Trust ("the Trust"), a
grantor trust established by KCSI. The purchase price of the stock, based
upon an independent valuation, was $200 million, which the Trust financed
through KCSI. The indebtedness of the Trust to KCSI is repayable over 27
years with interest at 6% per year, with no principal payments in the first
three years. The Trust, which is administered by an independent bank trustee,
and is consolidated into the Registrant's financial statements, will repay the
indebtedness to KCSI utilizing dividends and other income as well as other
cash obtained from KCSI. As the debt is reduced, shares of the Series B
Preferred Stock, or shares of common stock acquired on conversion, will be
released and available for distribution to various KCSI employee benefit
plans, including its ESOP, Stock Option Plan and Stock Purchase Plans. No
principal payments have been made and accordingly, no shares have been
released or are available for distribution to these plans.
The Series B Preferred stock, which has a $10 per share (5%) annual dividend
and a $200 per share liquidation preference, is convertible into common stock
at an initial ratio of 4 shares of common stock for each share of Series B
Preferred Stock. The Series B Preferred Stock is redeemable after 18 months
at a specified premium and under certain other circumstances.
The Series B Preferred Stock can be held only by the Trust or its
beneficiaries, the employee benefit plans of KCSI. The full terms of the
Series B Convertible Preferred Stock are set forth in a Certificate of
Designations approved by the Board of Directors and filed in Delaware.
Accounting Changes
Postretirement Benefits - The Registrant adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions", ("SFAS 106"), effective January 1, 1993. The
Registrant and its Transportation subsidiaries provide certain medical, life
and other postretirement benefits other than pensions to its retirees. The
medical and life plans are available to employees not covered under collective
bargaining arrangements, who have attained age 60 and rendered ten years of
service. Individuals employed as of December 31, 1992 were excluded from a
specific service requirement. The medical plan is contributory and provides
benefits for retirees, their covered dependents and beneficiaries. Benefit
expense begins to accrue at age 40. The medical plan was amended effective
8
January 1, 1993 to provide for annual adjustment of retiree contributions and
also contains, depending on the plan coverage selected, certain deductibles,
copayments, coinsurance and coordination with Medicare. The life insurance
plan is non-contributory and covers retirees only. The Registrants' policy,
in most cases, is to fund benefits payable under these plans as the
obligations become due. However, certain plan assets do exist with respect to
life insurance benefits. Prior to January 1, 1993, the Registrant recognized
the cost of these benefits on a "pay as you go" basis.
The entire accumulated postretirement benefit obligation was charged to
earnings in firstRights. In third quarter 1993 in the amount of $5.5 million, net of
applicable income taxes. The adoption of SFAS 106 is not expected to have a
material effect on future annual expenses of the Registrant.
Income Taxes - The Registrant also adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," ("SFAS 109"), effective
January 1, 1993. SFAS 109 was issued as an amendment to Statement of
Financial Accounting Standards No. 96, "Accounting for Income Taxes," ("SFAS
96"). The adoption of SFAS 109 resulted in a charge to earnings in first
quarter 1993 of $970,000. Under the liability method specified by SFAS 109,
the deferred tax liability is determined based on the difference between the
financial statement and tax basis of assets and liabilities as measured by the
enacted tax rates which will be in effect when these differences reverse.
Deferred tax expense is the result of changes in the liability for deferred
taxes. The principal difference between the Registrant's assets and
liabilities recorded for financial statement and tax return purposes is
accumulated depreciation.
As a result of the Registrant's previous adoption of SFAS 96, the adoption of
SFAS 109 did not have a material impact on the components of income tax
expense or the effective income tax rates applicable to continuing operations
versus the U.S. federal income tax statutory rate.
Stock Splits
On January 28, 1993,1994, the Registrant's
Board of Directors authorized redemption of the Common stock "Rights" issued
pursuant to its Rights Plan in 1986. The Board action terminates the
exercisability of such Rights and resulted in a 2-for-1
stock split which was effectedpayment on September 20, 1994
of one and one-quarter cents ($.0125) per share to Common stockholders of
record on August 26, 1994, amounting to approximately $540,000 in the
formaggregate.
Establishment of a stock dividend in the
Registrant'sPar Value for Common stock and paid March 17, 1993.Stock. On January 30, 1992, the Registrant's Board of Directors authorized a 2-for-1
stock split which was effected in the form of a stock dividend in the
Registrant's Common stock and paid March 17, 1992.
All appropriate information in this report reflect the effects of both of
these 2-for-1 stock splits.
Employees Stock Purchase Plan
In the fourth quarter 1993,May 6, 1994, the Registrant
filedamended its certificate of incorporation to set a Form S-8 withpar value for the SecuritiesCommon
stock. The amendment established a par value of $.01 per Common share, which
had previously been no par, and Exchange Commission ashad the eighth offering undereffect of reallocating amounts between
categories within stockholders' equity but had no overall effect upon the
Employees
Stock Purchase Plan. Approximately 221,000total amount of stockholders' equity.
Increase in Authorized Common Shares. On May 6, 1994, the Registrant amended
its certificate of incorporation to increase the number of authorized Common
shares of Registrant Common stock
were subscribedfrom 100,000,000 to under this offering, which will be funded through employee
payroll deductions, over a two year period, at a price of $38.20 per share.400,000,000.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
Financial information by industry segment for the three years ended December
31, 1993,1994, which appears on pages 6568 through 6771 of Registrant's 19931994 Annual
Report to Stockholders, is hereby incorporated herein by reference (see
Exhibit 13.1).
9[Page 8]
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The Registrant is a Delaware corporation, organized in 1962, with executive
offices located at 114 West 11th Street, Kansas City, Missouri. The
Registrant is a holding company which supervises the operations of its
subsidiaries, supplying them with managerial, legal, tax, financial and
accounting services, and manages its portfolio of other "non-operating" and
more passive investments.
Employees - As of December 31, 1993,1994, the Registrant and its majority owned
subsidiaries employed approximately 7,4708,217 persons, with approximately 2,7602,889
employed in the Transportation Services; 3,960 at DST, 700 at JanusServices, 4,490 in Information & Transaction
Processing, 800 in Financial Asset Management, and 5040 in Corporate and Other.
In addition, unconsolidated affiliates of the Registrant and its subsidiaries
employed approximately 5,6306,225 persons, including 2,4002,700 and 1,6001,860 at The
Continuum Company Inc. ("Continuum") and Boston Financial Data Services, Inc.,
("BFDS"), respectively, the largest employers of such ventures.
The Registrant's business activities, by industry segment, with principal
subsidiary companies are:
Transportation Services - The Kansas City Southern Railway Company, their
affiliatedits
trucking subsidiariesaffiliates (collectively "KCSR"), MidSouth Corporation
("MidSouth") prior to its merger into KCSR effective January 1, 1994, Pabtex, Inc. ("Pabtex") and
Southern Leasing Corporation ("Southern Leasing"); along with other
subsidiaries supporting the transportation segment.
Information & Transaction Processing - DST Systems, Inc. ("DST") and its
subsidiaries.
Financial Asset Management - Janus Capital Corporation ("Janus") its
subsidiaries, and its
subsidiaries.Berger Associates, Inc.
Eliminations, Corporate & Other - Registrant's Corporate general and
administrative operations, and passive investments.
Unconsolidated Affiliates, (primarily DST related) - DST Joint Ventures, The
Continuum Company, Inc., Investors Fiduciary Trust Company, Boston Financial
Data Services, Inc., Argus Health Systems, Inc., First of Michigan Capital
Corporation, Clarke & Tilley Data Systems, Ltd., Midland Data Systems, Inc.
and Midland Loan Services, L.P.
Transportation Services
General Description of the Business-CommoditiesBusiness-Commodities. The Kansas City Southern
Railway Company ("KCSR"), a wholly-owned subsidiary of the Registrant,
comprises the largest percentage of the Registrant's revenue and assets
employed. KCSR operates a rail system of 1,7122,880 main and branch line route
miles and 2,5524,104 total track miles in a sixnine state region. KCSR serves the
states of Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama,
Tennessee, Louisiana, and Texas, and in conjunction with the Union Pacific haulage
rights, the two additional states of Nebraska and Iowa. KCSR has the shortest
rail route between Kansas City and the Gulf of Mexico, serving the ports of
Beaumont and Port Arthur, Texas; and New Orleans, Baton Rouge, Reserve and
West Lake Charles, Louisiana. Through haulage rights, KCSR also serves the
ports of Houston and Galveston, Texas. Kansas City, Missouri, as the second
largest rail center in the United States, represents an important gateway for
KCSR where it interchanges freight with eight major rail carriers. KCSR also
has important interchange gateways in the cities of New Orleans and
Shreveport, Louisiana; and Dallas and Beaumont, Texas. The Registrant
completed the acquisition of MidSouth Corporation ("MidSouth") in June 1993 at
which time it became a wholly-owned subsidiary of the 10
Registrant. MidSouth
iswas a regional railroad holding company, which operatesoperated over 1,100 track
miles. MidSouth, through four operating subsidiaries, servesserved the states of
Mississippi, Louisiana, Alabama and Tennessee. The MidSouth acquisition
provides an important East/West rail line, as a complement to KCSR's
predominantly North/South route, and adds interchange gateways in Jackson and
Meridian, Mississippi and Birmingham, Alabama. This East/West rail line
running from Dallas, Texas to Meridian, Mississippi will allow the Registrant
[Page 9]to be more competitive in the transcontinental intermodal transportation
market. In
addition,market, among others. The acquisition of the acquisitionMidSouth adds a base of MidSouth
customers in the South Central U.S. to KCSR's already strong traffic base and presents
opportunities for the rerouting of certain commodity movements over less
circuitous routes. Through haulage rights, MidSouth also serves the city of
Gulfport, Mississippi. Effective January 1, 1994, MidSouth was operationally
and administratively merged into KCSR. Future MidSouth results will be included with KCSR. The
combined KCSR/MidSouth operations will operate approximately 2,800 main and
branch line route miles and approximately 3,700 total track miles over a nine
state region.
Major commodities handled by KCSR include coal, grain and farm products,
petroleum, chemicals, paper and forest products as well as other general
commodities and intermodal traffic. Coal continues to be the largest single
commodity handled by KCSR since the advent of unit coal train shipments in the
mid-1970's from the Powder River Basin in Wyoming, via the Burlington Northern
and Union Pacific interchange at Kansas City, for movement south by KCSR.
KCSR delivers coal to six electric generating plants located at Amsterdam,
Missouri; Flint Creek, Arkansas; Welsh, Texas; Mossville (near Lake Charles),
Louisiana, Kansas City, Missouri and Pittsburg, Kansas. KCSR also delivers
lignite, originating on its line at Thermo, Texas, to an electric generating
plant at Monticello, Texas ("Tumco"), a distance of approximately 30 miles.
During 1993, the Tumco plant was shut down when one of its smoke stacks
collapsed. The plant is not scheduled to be back in service until late 1995.
The MidSouth merger is strategically important in reducing KCSR's dependence
on coal traffic. MidSouth derivesderived only minimal revenues from coal. On a
stand alone basis, KCSR coal revenues represented 30% of total revenues in
1993. However, when combined with MidSouth revenues since the June 1993
acquisition, the percentage of coal revenues to total combined freight
revenues would
have reduced to 25% and even furtherhas been reduced to 23% assuming the MidSouth
transaction had occurred at the beginning of 1993.for 1994. Conversely, MidSouth's primary
commodity traffic iswas in the pulp/paper and forest products area, which allows
KCSR to complement its revenues in that industry.
Gross revenue from unit coal trainstraffic aggregated $106,$102, $106 and $107$106 million,
in 1993-1991,1994, 1993, and 1992, respectively. Certain coal transportation contracts
contain "take or pay" and volume discount clauses. Revenue from Southwestern
Electric Power Company ("SWEPCO"), operator of two electric generating
facilities served under long-term contracts by KCSR, continues to represent
the greatest portion of coal revenues.
In 1993, SWEPCO revenues approximated $60 million or 13% of
Transportation Services revenues. (See Item 3. Legal Proceedings).
KCSR serves the petroleum and chemicals industry, via refineries located in
the Gulf states of Texas and Louisiana, through tank and hopper car service
primarily to markets in the Southeast and Northeast through interchange with
other rail carriers. Petroleum and chemical products as a combined group
represent the second largest commodity to KCSR in terms of revenues, trailing only coal. MidSouthrevenues. KCSR provides
rail transportation of chemical products, primarily vinyl chloride used in the
production of polyvinyl chloride ("PVC") materials, as well as other chemical
products, some used in paper production to customers primarily in the
Mississippi and Alabama areas. These products are shipped via rail
interchange to many destinations throughout the United States. As part of
serving the petroleum and chemicals industry, KCSR/MidSouth transport
11KCSR transports hazardous
materials and havehas a Shreveport, Louisiana based hazardous materials emergency
team available to handle environmental problems which might occur in the
transport of such materials.
KCSR/MidSouth serveKCSR serves eleven paper mills directly and seven others indirectly through
short-line connections. International Paper Co. at South Texarkana, Texas and
Georgia Pacific at Ashdown, Arkansas, both served by KCSR, have completed
plant expansions in recent years which increases their operating capacity.
Paper/pulp and primary forest products represent the largest component of MidSouthKCSR
Eastern Division revenue carloadings. MidSouthKCSR provides transportation of
pulpwood, woodchips, poles and raw fiber used in the production of paper, pulp
and paperboard. MidSouthKCSR also serves as the first leg of rail transportation
throughout the United States for finished paper products from major
manufacturers such as, International Paper, Riverwood International
Corporation, Stone Container and Packaging Corporation of America. MidSouth'sBy
combining KCSR and MidSouth, KCSR is now the third largest railroad in terms
of pulp and paper carload originations in the U.S. KCSR's geographic location
provides a stable market due to the abundance and fast growth of timber in the
area.
The cost effective nature of the plants served
by MidSouth provide a competitive advantage over trucks for these bulk
commodities.[Page 10]
KCSR farm products carloadings increased 15% during 1993. Increased
carloadings were experienceddecreased 12% in 1994, due principally to a
reduction in the shipmentexport grain market. This trend, which was experienced
throughout the rail industry, came as a result of corn, wheat, soybeans and
other farm products. Grainreduced crop sizes as an
aftermath of damage sustained in the flood of 1993. Domestic grain shipments
are transported from the grain producing states of Iowa and Nebraska southward
to poultry feed mills served by KCSR in the states of Missouri, Arkansas,
Oklahoma, Louisiana and Texas. Consumer demand for poultry consumption
remains constant thereby generating demand for feed grains delivered by KCSR.
MidSouth also transports farm products,
principally corn and processed soybean to customersDuring 1994 KCSR experienced a 46% increase in intermodal ("TOFC/COFC")
traffic. Most of the increase occurred on itsKCSR's predominantly North/South
rail line, which
include poultry feed processing mills.especially between Dallas and Kansas City. A small amount of the
increase is due to the availability of reliable and effective East/West
service from Dallas, Texas, to Atlanta, Georgia. KCSR is better able to
provide this new service as a result of the capital improvement program
largely completed on the Eastern Division and the acquisition of the Zacha
Junction intermodal facility in Dallas, both previously discussed. In
November of 1994, KCSR began through train intermodal service between Dallas,
Texas, and Atlanta, Georgia, in conjunction with the Norfolk Southern Railway
Company. In addition, KCSR has entered into agreements with several over the
road trucking companies to move intermodal trailers on both its East/West and
North/South routes.
KCSR continued to implement its roadway capital improvement program to provide
safer commodity movements. This long-term capital improvements project is
designed to improve the integrity and quality of service to KCSR customers.
Management expects this program to be completed in 1995. The MidSouth acquisition will requirerequired the Registrant to complete a capital
improvement program for MidSouth roadbed, locomotives and facilities. This
program will upgradeupgraded and expandexpanded MidSouth's track to handle greater traffic
levels at higher train speeds and will be completed over the next five years
with a large majority of these upgrades completed during the next two years.speeds.
The Registrant currently anticipates the cost of this five year capital
program will be approximately $150 million, 50% of which was planned by
MidSouth management prior to the acquisition.
KCSR/MidSouthKCSR marketing departments havedepartment has primary responsibility for developing
transportation servicesbusiness and areis supported by field marketingsales offices at various
locations throughout the United States. Heavy emphasis is placed on providing
the highest quality of transportation service and on servicing the current
needs of customers and also on the promotion of additional growth through
efforts to locate industrial and manufacturing companies in the KCSR/MidSouthKCSR service
area. Addition of new traffic resulting from
combination of the two rail systems may affect this service.
Other wholly-owned subsidiaries comprising the Transportation Services
industry segment include Trans-Serve, Inc.; Carland, Inc.; Southern Leasing
Corporation; Pabtex, Inc.; Rice-Carden Corporation; Tolmak, Inc.; Southern
Development Company and Mid-South Microwave, Inc.
Trans-Serve, Inc. owns and operates a railroad wood tie treating facility in
Vivian, Louisiana and a vehicle fleet maintenance operation for the KCSR
Engineering, Mechanical and Transportation department vehicles, with locations
in Shreveport, Louisiana, Pittsburg, Kansas and Heavener, Oklahoma.
Carland, Inc., a subsidiary of Southern Credit Corporation, headquartered in
12
Kansas City, leases various types of equipment including railroad rolling
stock, roadway maintenance equipment and vehicles. KCSR is the principal
customer of Trans-Serve and Carland.
Southern Leasing Corporation, a subsidiary of Southern Credit Corporation, was
formed in late 1983 and is
involved in finance leasing and other forms of secured financing, generally
for equipment acquisition by small to medium sized businesses.
Pabtex, Inc. ("Pabtex") owns and operates a bulk materials handling facility
which stores and transfers coal and petroleum coke from trucks and rail cars
to ships and barges primarily for export. This facility, located in Port
Arthur, Texas, with deep water access to the Gulf of Mexico, is served on an
inbound basis by KCSR and independent truckers. In 1990, under the provision of a
twenty year capital lease commitment, which expired in that year, the
Registrant exercised its right to purchase the facility improvements of
Pabtex. This purchase was completed in the fourth quarter of 1991 at a
purchase price of $9.2 million and will allow KCSR opportunities for future
expansion of the petroleum coke and coal export business. In 1992, the Registrant
purchased 530 acres of land adjacent to the Registrant's Pabtex coal and
petroleum coke storage, barge and ship loading facility in Port Arthur, Texas.
The 530 acres includes 4,000 linear feet of deep water frontage on the Sabine-
Neches Waterway, which has direct access to the Gulf of Mexico via the
Intercoastal Waterway. This acquisition increases the Transportation Services
[Page 11]
deep water access in the Port Arthur, Texas area and will permit capacity
expansion of the Pabtex coal and coke facility and development of additional
port operations in KCSR's service area. The Registrant currently owns 1,025
acres of property located on the waterfront in the Port Arthur, Texas area,
which includes approximately 22,000 linear feet of deep water frontage and
three docks. Port Arthur is an uncongested port with direct access to the
Gulf of Mexico. Approximately 75% of this property is available for
development.
Mid-South Microwave, Inc. owns and leases a 1,600 mile industrial frequency
microwave transmission system, which is athe primary communications facility
used by KCSR.
Rice-Carden Corporation and Tolmak, Inc. both wholly-owned subsidiaries of the
Registrant and both headquartered in Kansas City, own and operate various
industrial real estate and spur rail trackage contiguous to the KCSR right of
way. These properties are leased to various industrial businesses, many of
whom are serviced by KCSR.
Southern Development Company, a wholly-owned subsidiary of the Registrant,
owns and operates the headquarters building of the Registrant and KCSR located
in Downtown Kansas City. Southern Development leases a substantial portion of
the building to KCSR for its executive, financial, marketing, operating and
engineering departments.
Regulatory InfluenceInfluence. Transportation operations are subject to the regulatory
jurisdiction of the Interstate Commerce Commission ("ICC"), various state regulatoryreg-
ulatory agencies, the Department of Transportation ("DOT") and the
Occupational Safety and Health Administration ("OSHA"). The ICC has
jurisdiction over interstate rates charged, routes, service, issuance or
guarantee of securities, extension or abandonment of rail lines, and
consolidation, merger or acquisition of control of rail common carriers.
State agencies regulate some aspects of rail operations with respect to health
and safety and in some instances intrastate freight rates. The DOT and OSHA
have jurisdiction over certain health and safety features of railroad
operations. In addition, railway operations are
13 subject to extensive
regulation under environmental protection laws concerning, among other things,
discharges to waters and the generation, handling, storage, transportation and
disposal of waste and other materials, where environmental risks are inherent.
KCSR and some of the Registrant's other subsidiaries land holdings have been
used for industrial purposes or leased to commercial and industrial companies
whose activities may have resulted in discharges onto the property.
Accordingly, the Registrant and its subsidiaries may become subject from time
to time to environmental clean-up and enforcement actions. In particular, the
Registrant is subject to regulatory legislation such as; the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "superfund law"; the Toxic Substances Control
Act ("TSCA"); the Federal Water Pollution Control Act, commonly known as the
"Clean Water Act" and the Hazardous Materials Transportation Act ("HAZMAT").
This legislation generally imposes joint and several liability for clean up
and enforcement costs, without regard to fault or legality of the original
conduct, on current and predecessor owners and operators of a site. The
discharge of hazardous materials or contamination of property by hazardous
materials may arise from the transportation, production, storage, use and
disposal of such materials by rail operations. Normal rail transportation
operations may result in hazards and expose the Registrant to claims and
potential liability for injuries to employees, other persons, property and the
environment. Registrant management does not foresee that compliance with the
requirements imposed by these agencies' standards under present statutes will
impair its competitive capability or result in any material additional
operating or maintenance costs. KCSR continued to implement extensive safety
programs during 19931994 designed to reduce employee injuries through promotion of
a safe work environment. The Registrant expects these programs will exceed
safety requirements of the various regulatory agencies governing
transportation operations.
[Page 12]Railroad Industry Trends and CompetitionCompetition. In 1994, and continuing into 1995,
the railroad industry displayed signs of ongoing consolidation. Specifically,
Burlington Northern Industries ("BNI") the parent company of the Burlington
Northern Railroad and Santa Fe Pacific Corporation ("SFP") the parent company
of the Atchison, Topeka, and Santa Fe Railway have announced plans whereby BNI
would acquire SFP. KCSR competes with both of these railroads in its
marketplace. In March 1995, Union Pacific Railroad ("UP") and Chicago and
North Western Transportation Company ("CNW") announced that they have agreed
that UP would acquire 100% of CNW's common stock. KCSR is in direct
competition with the Union Pacific Railroad ("UP")UP for certain freight traffic moving between Kansas City
and Gulf Ports served by KCSR. Since these transactions are not complete, the
Registrant cannot predict their outcome or effect on KCSR.
KCSR, in conjunction with the Santa Fe Railroad,SFP, also competes with the Southern Pacific
Transportation Company ("SP") for certain transcontinental freight traffic in
the Dallas-New Orleans corridor. In 1992, KCSR signed an
agreement with the Santa Fe Railway to purchase portions of its rail line in
the Dallas, Texas area. The sale consists of approximately 90 miles of track
and an 80 acre piggyback intermodal facility. The agreement is being
implemented in phases over two years (Phase I of which was completed in 1993)
and will gain KCSR direct access to the Dallas/Ft. Worth markets for the first
time in the Registrant's history. Phase II is anticipated to be completed in
second quarter 1994 to acquire the Zacka Junction facility.
In 1988, the UP and KCSR signed a haulage and trackage rights agreement which
facilitated and supported the acquisition of control of the Missouri-Kansas-
Texas Railroad Company ("MKT") by the UP. This agreement gave KCSR haulage
rights between Omaha and Lincoln, Nebraska; Council Bluffs, Iowa; Topeka and
Atchison, Kansas and Kansas City, Missouri. KCSR also received haulage rights
over UP tracks between Beaumont, Houston and Galveston, Texas. Under this
haulage rights agreement, UP is required to move KCSR traffic in UP trains.
Under the trackage rights, KCSR is allowed to operate its own trains over UP
tracks. The "rights" between Beaumont, Houston and Galveston, Texas are
restricted to transporting grain and grain products. However, the "North end
rights" between Kansas City, Missouri and Omaha and Lincoln, Nebraska; Council
Bluffs, Iowa and Atchison and Topeka, Kansas are unrestricted. These "rights"
enable KCSR to be more competitive, particularly in feed grains, with the UP
and Burlington Northern railroads in both the Gulf port and domestic
transportation corridors. Beginning in 1990, KCSR has made more extensive use of these haulage rights
with the UP in accessing the corn belt states of Nebraska and Iowa.
14
During 1993, the ICC ruled that it had jurisdiction regarding the UP
acquisition of certain voting stock of CNW Holding Corp., ("CNW") a holding
company for the Chicago North Western Railroad. UP was required by the ICC to
submit evidence regarding marketing and operating coordination and related
public benefits which UP allegesalleged will stem from the CNW transaction. The
Registrant filed a responsive application with the ICC supporting protective
conditions designed to upgrade current haulage rights to Omaha/Council Bluffs
and provide direct access, by way of additional haulage and local gathering
rights to CNW grain origins in Iowa, Nebraska and South Dakota. Hearings onIn 1994, the
matter are scheduled in second quarter 1994 with a final decision
anticipated in late third quarter 1994.Registrant received upgrades to its haulage rights. The ICC also granted the
UP voting rights for its CNW stock.
In addition to competition within the railroad industry, highway carriers
compete with KCSR and MidSouth throughout its territory. An example of this is the
East/West intermodal business between Dallas, Texas, and Atlanta, Georgia,
which competes directly with truckers along the Interstate 20 corridor. 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/MidSouthKCSR have, in recent years, placed a greater effort towards
competing in the intermodal marketplace. Rail carriers are working together
to provide end-to-end transportation of products and forming working
partnerships with truck carriers in an effort to recapture market share. In
some cases, additions to box car fleets and upgrade of existing box car
equipment are underway to attract new business. KCSR/MidSouth are in the process of
upgrading current "on-off ramps" intermodal facilities in anticipation of
greater TOFC/COFC traffic.
Mississippi and Missouri
River barge traffic also compete with KCSR in the transportation of bulk
commodities such as grains, steel, aluminum and petroleum products.
Labor Relations
CollectiveRelations. Approximately 85% of the KCSR's employees are covered under
collective bargaining agreements. The current agreements, with KCSR union employees, representing
approximately 83% of KCSR's workforce were completedexecuted in 1992. Through a
process of national negotiation and arbitration, KCSR and contract employees
reached agreement on issues which will allow1992,
included implementation of productivity improvements and partially reduce the costscost sharing of escalating
health care premiums through a cost sharing arrangement with contract employees. In addition, the
terms and conditions of the agreements allow KCSR to improve its operating
income through savings to be realized by modification in the operation of its
trains with reduced crew sizes. KCSR is initially permitted to operate any
through freight train without limitation to the number of cars and train
length with two man crews. Additionally, via a "phased in" approach through
December 31, 1997, KCSR has the opportunity to operate one hundred percent of
its trains with two man crews as it both achieves and demonstrates the ability
to safely operate with reduced crews in a productive manner. These
productivity improvements are necessary to enable the railroad industry to
remain competitive with other modes of transportation. However railroads
remain restricted by antiquated operating rules and uncompetitive employee
benefit programs and they are prevented from achieving optimum productivity.
These national agreements, with the
exception of that with the International Association of Machinist and
Aerospace Workers ("IAM"), discussed below, will be open were reopened for negotiation in November 1994. The
[Page 13]
IAM contract is eligible for renegotiation on December 31, 1994.
As a result of the arbitration process and a Registrant initiated voluntary
buy out program offered in January 1992, approximately 150 trainmen were
declared excess by the Registrant, of which 105 excess employees accepted the
$60,000 buy out. The remaining excess employees were placed on a Reserve
Board where they received 70% of their 1991 W-2 earnings (net of certain
adjustments). During 1992, through attrition and increased business levels,
all excess employees were removed from the Reserve Board.1995. KCSR, had fully
reserved the cost of the buy outs in 1991, accordingly no charges to earnings
were required in 1992 and none are anticipated in the future.
15
In 1992, KCSR operations experienced a two day operational shutdown as part of
an orderly shutdown of freight transportation operations by allalong with most
other Class I U.S.
Railroads. This two day shutdown was precipitated when members of the IAM
initiated a strike against the CSX Railway. The national rail shutdown ended
through Congressional intervention, which ordered all IAM workers back to
work. In ending the rail strike, Congress established a process intended to
result in settlement of disputes between the parties or recommendation by an
arbitrator on settlement terms. KCSR participated in the national bargaining
of issues with the IAM throughRailroads, has designated the National Railway Labor Conference
("NRLC").
In early August 1992,as its agent for collective bargaining purposes. Bargaining is governed by
the NRLCRailway Labor Act of 1926. The railroads are negotiating for "national
handling" i.e. with the railroads as a collective entity and each national
union as a bargaining entity. National handling has prevailed in the IAM were able to resolve virtually all
issues andindustry
in every round since the arbitrator's settlement recommendations on the remaining issues
were accepted by President Bush. The resulting labor agreements will be open
for renegotiation in 1995. The two day shutdown resulted in reduced KCSR
revenues but, in total, the effect of the shutdown was immaterial to the
Registrant.
Approximately 87% of MidSouth'smid-1930's. Management believes relations with
collective bargaining employees are also covered under collective
bargaining agreements. MidSouth has numerous labor agreements with a variety
of unions. These labor agreements, which were in place at the date of
acquisition, will be open for renegotiation in varying periods beginning in
1994.
As a result of completion of these labor agreements, management believes the
Registrant has made progress in becoming able to compete with all railroads
contiguous to the KCSR/MidSouth lines as well as other forms of
transportation.
16good.
[Page 14]
Information & Transaction Processing
DST Systems, Inc.
General Description of the BusinessBusiness. DST Systems, Inc., formed in 1968,
together with its subsidiaries and joint ventures (principally The Continuum
Company, Inc., Boston Financial Data Services, Inc., Investors Fiduciary Trust
Company (prior to its sale, discussed earlier), Argus Health Systems, Inc.,
Midland Data Services, Inc. and Midland Loan Services L.P.), designs,
maintains and operates proprietary on-line shareowner accounting and record
keeping data processing systems, primarily for mutual funds and financial
services institutions and insurance companies. Historically, the majority of
DST's revenue has been derived from full-service and remote-service record
keeping for the mutual fund industry. The growth of the mutual fund industry
is a major contributor to the substantial increase in revenues of DST.
Currently, DST's growth results from an increase in both existing and new
mutual fund customers as well as acquisitions and expansion of existing
business lines and products.
Output Technologies, Inc. ("OTI"), a wholly-owned subsidiary of DST, was
formed in early 1991 as a holding company for DST's businessbusiness' involved in the
financial printing, mailing, output processing and related business lines.
During 1993, OTI completed the internal reorganization of its subsidiaries,
which included renaming of subsidiaries and merging of certain operations.
The overall objective of the internal reorganization was a consolidation of
output related activities, identification of businesses with the OTI name and
alignment into geographic operating regions. Included under OTI are its
wholly-owned subsidiaries; Output Technologies Central Region, Inc.; formerly
United Micrographics Systems, Inc. and Network Graphics, Inc., which process
computer output microfilm and microfiche, and printing and mailing of
specialized laser printing output and perform graphics design services; Output
Technologies SRI Group, Inc., formerly Support Resources, Inc. and Output
Technologies Eastern Region, Inc., formerly Mail Processing Systems, Inc.
provide laser printing and mailing of value-added customer information; Output
Technologies of Illinois, Inc., was formed in 1992 and performs telemarketing
and fulfillment services; Output Technologies Phoenix Litho Group, Inc.,
formerly Phoenix Litho, Inc., performs commercial printing services, and
Output Technologies Vital Records Storage Group, Inc., formerly Data Retrieval
Services, which performs vital records storage.
Effective September 30, 1993, DST completed the merger of Vantage Computer
Systems, Inc. ("Vantage") into a subsidiary of The Continuum Company, Inc.
("Continuum"). Vantage, a 90.5% owned subsidiary, along with its wholly-owned
subsidiary Vantage P&C Systems, Inc., provideprovides record keeping services and
custom designed software packages to the life and property/casualty insurance
industries. Vantage, using DST's computer systems on a remote basis, focus on
the administration of universal life coverage and other non-traditional
insurance products. DST and the minority shareholder of Vantage received a
total of 4 million shares of Continuum stock -- 2,939,000 shares at closing
and the remainder after Continuum shareholder approval was obtained in late
1993. As a result of this transaction and additional Continuum stock
purchases made by DST DST owned approximately 24% of the outstanding common
stock of Continuum at December 31, 1993. Inin January 1994, DST acquired
additional Continuum shares through privately negotiated transactions.
Accordingly, DST currently ownsowned approximately 29% of
Continuum's outstanding common stock. DST accounted for the initial exchange transaction as a non-
cash, non-taxable exchange in investment basis of Vantage for an investment in
Continuum. Accordingly, no gain or loss recognition was associated with the
transaction. Vantage revenues for the nine months ended September 30, 1993,
were $32.6 million and $38.7 million for the year endedstock at December 31, 1992.
Continuum is a publicly traded international consulting and computer services
17
firm based in Austin, Texas, which primarily serves the needs of life and
property and casualty insurance companies for computer software and services.1994.
The Vantage/Continuum transaction will allowallows DST to expand its presence in the
information processing market for the insurance industry and combinecombines the
strengths of both Vantage and Continuum. Prior to the merger, Vantage's
business was primarily centered in the U.S. domestic market while Continuum
has a significant international and domestic presence. Subsequent to this
transaction, DST assumed all of the North American operations data processing
functions for Continuum. DST and Continuum signed an agreement whereby DST
will makehas made available the capabilities of the Winchester Data Center for
Continuum processing requirements. Concurrent with the Continuum/Vantage
merger, DST and Continuum reached a license agreement, whereby Continuum
will
marketmarkets AWD for use in insurance industry applications.
Other services offered by DST include securities transfer services for debt
securities and corporate stocks, portfolio accounting for investment fund
managers and health care pharmaceutical insurance claim processing.
DST also engages, directly and through its affiliates, in trust accounting,
security clearing services, portfolio accounting for investment fund managers,
asset management administration, commercial loan servicing, broker-dealer
services, pharmaceutical claim processing and processing for the insurance
industry through Investors Fiduciary Trust Company, Boston Financial Data
Services, Inc., Midland Data Systems, Inc., Midland Loan Services, L.P., First
[Page 15]of Michigan Capital Corporation, Argus Health Systems, Inc., Clarke & Tilley
Data Services, Ltd., and The Continuum Company, Inc. in which DST is either a
joint venture partner or investor. These affiliates are further described
below:
The Continuum Company, Inc. ("Continuum"), a publicly held company,
approximately 29% owned by DST, is an international consulting and computer
services firm based in Austin, Texas, serving the needs of life insurance,
property and casualty insurance and other financial services companies for
computer software and services.
Investors Fiduciary Trust Company ("IFTC"), a 50% joint venture previously
owned with Kemper Financial Services, Inc., is incorporated under the
banking laws of Missouri and provides fiduciary and other custodial
services to its clients. IFTC serves as trustee for unit trusts, tax
deferred retirement and compensation plans, including IRAs, Keogh Plans and
other deferred compensation plans offered by DST's clients. IFTC also
serves as transfer agent and custodian for several mutual funds and
sponsors a federally insured money market deposit account. As described
earlier, DST exchanged its ownership in IFTC for shares in State Street
Boston Corporation in January 1995.
Boston Financial Data Services, Inc. ("BFDS"), a Boston based 50% joint
venture between DST and State Street Boston Corporation, performs full
service transfer agency functions for open and closed end mutual funds and
corporations using DST's proprietary software on a remote basis through
telecommunication transmissions with DST's computer facility located in
Kansas City.
Midland Data Systems, Inc. and Midland Loan Services, L.P. (collectively
"Midland") 45-50%45% owned joint ventures respectively, provide comprehensive commercial loan
servicing for assets, both performing and non-performing loans and related
asset management services for governmental and institutional clients. Midland has been awarded contracts with the
Resolution Trust Corporation ("RTC") for the operation of an Asset
Management System and a Control Totals Module System for use by the RTC and
for servicing RTC loans. Midland intends to expand its market by
continuing to create innovative and responsive systems through technology
and expanding its loan processing and asset management capabilities to the
private sector.
First of Michigan Capital Corporation, ("FOM"), a publicly held company,
21% owned by DST, provides full service retail securities brokerage
services and maintains several offices throughout the State of Michigan.
Argus Health Systems, Inc., ("Argus"), a 50% joint venture owned with
Financial Holding Corporation provides pharmaceutical claim insurance
processing services for several health care providers through a data base
network.
18
The Continuum Company, Inc. ("Continuum")Clarke & Tilley Data Services, Ltd., a publicly held company,
approximately 29%United Kingdom entity 50% owned by
DST, is an international consultingdeveloping a unit trust accounting system for the U.K. and
computer
services firm based in Austin, Texas, serving the needs of life insurance,
property and casualty insurance and other financial services companies for
computer software and services.Luxembourg markets.
Product Base and Competitive InfluenceInfluence. DST's reputation is based largely on
service, ability to handle volume increases, commitment to software
development and, to a lesser degree, price. The advantages of DST include its
experience in providing service to the markets it serves, the number and size
of its clients, its use of centralized data processing facilities which
enables it to achieve economies of scale, the breadth of services it and its
joint ventures offer, and the reputations of its joint venture partners. In
addition, DST's systems are complex, having been enhanced over a number of
years to provide a high quality service and to meet changing regulatory and
user requirements. The complex nature of the business, the software systems
and the significant resource base needed to operate and/or duplicate such
systems make it difficult for new firms to enter these markets. Although
market entry by new firms may be difficult, several strong competitors in
DST's marketplace do exist. In recent years, the competitive environment for
shareowners processing has changed as several major bank competitors exited
from direct participation in the shareowner processing business. The balance
of these accounts were absorbed by DST or its competitors. A further review
of competitive factors for DST's principal product lines follows:
Mutual Fund Shareowners Accounting System: Certain competitors provide
remote processing services or engage in software sales. DST also considers
[Page 16]in-house systems as a competitive alternative. DST does not ordinarily
offer its software for sale; therefore, when customers purchase software,
they do so as an alternative to DST's remote processing or full-service
product offerings. The Shareholder Services Group ("TSSG"), a unit of
First Data Resources, Sungard Data Systems Inc., Oppenheimer Industries,
Provident National Bank and U.S. Trust are the primary competitors for
full-service and remote processing. Oppenheimer Industries is the primary
competitor for systems sales. DST currently processes approximately one-
third of all United States mutual fund shareowner accounts.
DST and its affiliates also provide a full-service product by acting in the
capacity of a transfer agent either through direct appointment or
subcontract. DST's mainprimary full service competitor is TSSG.
Securities Transfer and Portfolio Accounting Systems: DST's Securities
Transfer System competes with in-house systems and independent vendors,
some of whom supply clerical support in connection with their software sys-
tems. The Portfolio Accounting System competes primarily with in-house
systems and systems offered by certain banks in conjunction with their
custodial services. Banks and thrift institutions in competition with DST
may have an advantage by considering the value of their client's funds on
deposit when pricing their services. Moreover, such banks or thrift
institutions generally have much greater financial resources available to
them than DST. DST's 1993 acquisitions of Belvedere Financial Systems,
Inc. ("Belvedere") and Clarke & Tilley, both of which develop and market
portfolio accounting and investment management systems, expands DST's
portfolio accounting opportunities. Belvedere's system will provide a
common platform for DST future portfolio growth in both domestic and
international markets.
Building on its strength as a technology company, DST has developed and
marketed an advanced work management system, called Automated Work
Distributor TM ("AWD "), since 1990. AWD converts paper based and
electronic transactions to work items that are automatically routed
throughout an enterprise. The complete complement of AWD products offers
a comprehensive solution to customer service problems in organizations with
large clerical operations. It is installed in mutual fund, insurance,
banking, and health care organizations and has proven its scallability and
adaptability. In 1993, DST entered into an agreement with Continuum
allowing Continuum to market AWD to its clients in the insurance industry.
International Market Expansion: In 1991, DST began evaluating the
feasibility of marketing its products outside the United States and also
products that would serve foreign markets in DST's product lines. DST
acquired a 50% interest in Talisman Services during 1991. Talisman is a
19
European software company whose primary product is a multi-currency
financial accounting package. In 1992, DST formed DST Systems
International B.V. as a holding company for certain of its non-U.S.
operations and a marketing unit for DST's software. Also in 1992,
DST, together with State Street Bank and Clarke and Tilley, Ltd. (a United
Kingdom software firm), formed Clarke and Tilley Data Services ("CTDS").
CTDS is developing a unit trust accounting system for the U.K. and
Luxembourg markets, combiningincorporating DST workflow management, image technology
and unit trust software. During 1993, DST completed the acquisition of
Clarke & Tilley Ltd., (96%(100% owned), which markets investment management
software primarily for use in Europe and the Pacific Rim and Corfax Benefit
Systems, Ltd., (100% owned), a Canadian company, which processes shareowner
transactions for mutual funds and pension accounts in Canada.
This international expansion provides DST with a base of products which are
multi-currency, as well as multi-platform, and creates avenues for greater
market penetration of DST's U.S. products into international channels.
Through these subsidiaries, sales and development offices currently reside
in the United Kingdom, Switzerland, Netherlands, Belgium, Luxembourg,
Canada, Australia and South Africa. DST foresees opportunities for further
growth and expansion in international markets.
The financial institutions served by DST, both mutual fund and insurance,
will continue to evaluate whether to internalize or outsource their
technology needs. This process will have both positive and negative
effects on DST's results; however, on an overall basis, DST's customer base
is expected to grow.
During 1993, the financial markets as a whole experienced an increase in spite
of certain uncertainties in domestic and global economies.[Page 17]
DST's mutual fund shareowner accounts serviced also rose in 19931994 to end the year at
an all time high of 2832.1 million accounts. In 1993, Kemper Financial Services
("Kemper"), a DST customer, mutual fund shareowner began conversion of its mutual fund shareowner
processing which will result in the removal of its accounts from the DST system. The total number of Kemper accounts, approximately 2.5
million, will be converted from the DST system in stages over the next few
years. In early July 1993, the first stage, which encompassed 500,000 Kemper accounts
were converted from the DST system. The remaining accounts will be
removed in 1994. The loss of 500,000 Kemper accounts in
1993 was offset by account growth from other mutual fund customers and,
accordingly, did not have a material financial impact. As a result of the
Kemper transactions, discussed earlier, DST expects to continue to process the
Kemper accounts. Mutual fund shareowner accounts had also risen in 1992 even
through weighted average monthly billable accounts lagged 1991 averages.
In 1991, DST experienced an overall decline in the number of mutual
fund shareowner accounts serviced. This decline is in large part the result
of the Vanguard group of mutual funds, which exited the DST system in
September 1991 and the removal of 800,000 broker based accounts of Prudential
Bache in late 1991. Vanguard comprised approximately 2.7 million shareowner
accounts. Excluding the Vanguard and Prudential Bache accounts, DST
experienced growth in certain other fund groups serviced during 1991.
Financial Asset Management
General Description of the Business, Product Base, and
Competitive Influences
Janus Capital CorporationCorporation. Janus Capital Corporation, headquartered in
Denver, Colorado and 81%83% owned by the Registrant, provides investment advisory
and management services to the Janus and IDEX equity mutual fund groups,
investment management services for individuals and institutions including
large pension and profit sharing plans. Janus experienced substantialmoderate growth
during 19931994 in terms of both shareholder
accounts and assets under management. FundsAssets under management
increased from
$15.5 billion at December 31, 1992 to $22.2 billion at December 31, 1993 to $22.9 billion at December
31, 1994 while total shareholder accounts increased 35%remained stable at 2 million in
1993.1994. This growth is largely attributable to successful marketing programs,
an overall favorable
20 performance of theselected Janus no-load and IDEX load funds compared
to the market as a whole, and general growth in the mutual fund marketplace.
While Janus experienced significant growthmarketplace,
especially during 1993, much of that growth
occurred in the first half of 1993. During the third and fourth quarters of
1993 growth in assets under management slowed. Total fund sales were $3.3
billion during the second half of 1993 versus $5.5 billion during the first
six months of 1993, while fund redemption increased to $2.2 billion versus
$1.6 billion, respectively.1994.
Janus experiences competition in the form of alternative investment vehicles,
which may offer competitive investment returns and similar or different
investment objectives when compared to Janus. These alternatives have
typically been other mutual funds, certificates of deposit, money market
accounts and individual stocks and bonds. Janus management continues to strive in offeringoffer
a variety of investment products. While Janus has historically been a
primarily equity based fund group, management has sought to build a base of
fixed income products. In 1994, Janus introduced two new products, Janus
Overseas, a new international equity mutual fund, and Janus International, an
expansion of the Aspen series. During 1993, Janus introduced three new fund
products; Janus Mercury Fund, an equity fund; Janus Federal Tax Exempt Fund, a
federal tax exempt income fund; and the Janus Aspen Series, which are variable
annuity products. During 1992, Janus introduced three new mutual funds, Janus
Enterprise Fund, an equity fund; Janus Balanced Fund, a combination
equity
/fixedequity/fixed income fund and Janus Short-Term Bond Fund, a fixed income fund.
JanusBerger Associates, Inc. Berger Associates, Inc., headquartered in Denver,
Colorado, and 80% owned by the Registrant, provides investment advisory and
management services to the Berger Funds and to private and other accounts. As
disclosed earlier, the Registrant increased its ownership percentage from
approximately 18% to over 80% on October 14, 1994. During 1994, Berger
introduced a new equity fund, the Berger Small Company Growth Fund. Berger
had substantial growth in 1994 in both assets under management and shareholder
accounts. Assets under management increased 56% ($1.1 billion) to $3 billion
at December 31, 1994, from $1.9 billion at December 31, 1993. Shareholders
increased from 202,000 at December 31, 1993 to 380,000 at December 31, 1994.
Assets under management increased from $.9 billion at December 31, 1992 to
$1.9 billion at December 31, 1993. Shareholders increased from 90,000 at
December 31, 1992 to 202,000 at December 31, 1993. This growth is largely
attributable to successful marketing programs, a favorable performance of
Berger funds compared to the overall market, the introduction of the Small
Company Growth fund, and general growth in the mutual fund marketplace.
Berger has competition primarily in the form of alternative investment
vehicles, including other mutual funds, individual stocks and bonds,
certificates of deposit, and money market accounts.
[Page 18]
Financial Asset Management revenues and operating income increases are a
direct result of increases in assets under management. Assets under
management have grown in recent years from a combination of new money
investments or fund sales and market appreciation. Fund sales have risen in
response to marketing efforts, favorable fund performance and the current
popularity of no-load mutual funds. Market appreciation has resulted from
increases in stock investment values. However, a decline in stock and bond
markets and/or an increase in the rate of return of alternative investments
could negatively impact JanusFinancial Asset Management revenues and operating
income. In addition, the mutual fund market,funds, in general, facesface 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 JanusFinancial Asset Management and negativenegatively
impact revenues and operating income. Operating expenses are expected to
increase as assets and service requirements grow.
Janus, its subsidiaries and the funds it managesRegulatory Influence. 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. Janus
managementManagement does not foresee that compliance with these various
requirements will have a material impact upon operations.
Eliminations, Corporate & Other
This industry segment is comprised of passive investments, and the general
administrative and corporate operations of the Registrant.
21[Page 19]
Item 2. Properties
Transportation Services
KCSR owns and operates approximately 1,6332,706 miles of main and branch lines and
approximately 7521,137 miles of other tracks. In addition, approximately 79174
miles of main and branch lines and 8887 miles of other tracks are operated by
KCSR under trackage rights and leases. Through the acquisition of MidSouth, an
additional 1,100 track miles were added, primarily in the states of Louisiana,
Mississippi and Alabama. MidSouth has no material classification yards or
other building facilities.
Kansas City Terminal Railway Company, of which KCSR is a one-twelfth owner,
with other railroads, owns and operates approximately 80 miles of track, and
operates an additional 8 miles of track under trackage rights in greater
Kansas City, Missouri. KCSR also leases for operating purposes certain short
sections of trackage owned by various other railroad companies and jointly
owns certain other facilities with such railroads.
KCSR also owns and operates repair shops, depots and office buildings along
its right-of-way in support of its transportation operations. A major
facility, Deramus Yard, is located in Shreveport, Louisiana and includes a
general office building, locomotive repair shop, car repair shops, customer
service center, material warehouses and fueling facilities totalling
approximately 210,000227,000 square feet. KCSR owns a major diesel locomotive
repair facility in Pittsburg, Kansas, of approximately 108,000 square feet.
KCSR and Registrant executive offices are located in an eight story office
building in Kansas City, Missouri and are leased from a subsidiary of the
Registrant.
At December 31, 1993,1994, KCSR's fleet of rolling stock consisted of 255382 diesel
locomotives, of which six16 were leased from non-affiliates; 7,17915,698 freight cars,
of which 1,8289,496 were leased from non-affiliates; and 1,9823,901 tractors, trucks and
trailers, of which 1,961 were leased from non-affiliates. At December 31,
1993, MidSouth's fleet of rolling stock consisted of 110 diesel locomotives,
none of which were leased from non-affiliates; 7,734 freight cars, of which
6,7763,890 were leased from non-affiliates. Some of this
equipment is subject to liens created under conditional sales agreements,
equipment trust certificates and capitalized leases in connection with the
original purchase or lease of such equipment.
Maintenance expenses for Way and Structure and Equipment (pursuant to ICC
accounting rules, which include depreciation) for the three years ended
December 31, 19931994 and as a percent of KCSR revenues are as follows (dollars in
millions):
KCSR Maintenance
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue
1993 $64.41994 $75.8 16.0% $88.1 18.6%
$54.5 15.8%
19921993* 64.4 18.6 54.5 15.8
1992* 62.6 18.7 59.8 17.8
1991 62.2 19.3 52.7 16.4*Excludes MidSouth information
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option to
purchase. This facility contains buildings totaling approximately 12,000
square feet. Carland, Inc. leases approximately 1,400 square feet of office
facilities in downtown Kansas City, Missouri from DST Realty, Inc. a wholly-
owned subsidiary of DST. Pabtex, Inc. owns a 70 acre coal and petroleum coke
22
bulk handling facility at Port Arthur, Texas. Southern Leasing leases 2,800
square feet of office space in downtown Kansas City, Missouri, from DST
Realty, Inc., a wholly-owned subsidiary of DST.
Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City, Missouri to
Dallas, Beaumont-Port Arthur, Texas and New Orleans, Louisiana. This system
is leased to KCSR.
[Page 20]Other subsidiaries of the Registrant own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also
include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk
handling facility at Port Arthur, Texas, and several former railway buildings
now being rented to non-affiliated companies, primarily as warehouse space.
At December 31, 1993,1994, the Registrant owns 1,025 acres of property located on
the waterfront in the Port Arthur, Texas area, which includes 22,000 linear
feet of deep water frontage and three docks. Port Arthur is an uncongested
port with direct access to the Gulf of Mexico. Approximately 75% of this
property is available for development.
Information & Transaction Processing
DST Systems, Inc. DST owns an 82,000 square foot Data Center, located in
Kansas City, commonly known as its Winchester Data Center, which commenced
operations in 1985. This facility is located on 13 acres of land within an
overall 25 acre tract of land owned by DST. In 1994, DST has undertaken an
expansion of the Winchester Data Center which, when completed in 1995, will
provide an additional 83,000 square feet.
DST master-leases three downtown Kansas City office buildings consisting of
approximately 353,000 square feet in which DST or its affiliates occupy
approximately 330,000312,000 square feet and the balance is leased to non-affiliated
tenants. This space is utilized by DST for its shareholder operations,
systems development and other support functions.
DST and itsDST's wholly-owned subsidiary, DST Realty, Inc., own sixowns five buildings in Kansas
City, Missouri, with approximately 413,000284,000 square feet. DST utilizes 117,000203,000
square feet in these buildings for its mutual fund full service processing,
portfolio, laser printing and mailing operations, and leases 47,000 square feet to Argus Health Systems for
its systems development, administrative and other support operations, 81,000 square feet are
leased to Midland Data Systems and Midland Loan Services. In first quarter 1994 Argus purchased theDST began
an expansion to one of these buildings to provide an additional 51,000 square
feet. In early 1995, DST Realty acquired a sixth office building it hadin downtown
Kansas City, Missouri, comprising 210,000 square feet. It is anticipated that
substantially all of this building will be used by DST for its operations.
Output Technologies, Inc. ("OTI" a 100% owned DST subsidiary) and its wholly-
owned subsidiaries operate in various owned or leased from DST. The
balance of 168,000 square feet is available for business expansion needs.facilities:
Output Technologies Central Region Inc. (formerly United Micrographics
Systems, Inc.), a 100% owned DST subsidiary, leases 97,00093,000 square feet in several office
buildings representing its primary operating facilities in Kansas City, and St.
Louis Missouri, along with remote locations throughout the Midwestern
United States.and Joplin, Missouri; Austin, Texas; Lincoln, Nebraska; Wichita, Kansas;
and Fayetteville, Arkansas.
Output Technologies Eastern Region Inc. (formerly Mail Processing Systems,
Inc.), a 100% owned DST subsidiary, leases 156,000 square feet of production,
warehouse and office space facilities in East Hartford, Connecticut and
Braintree, Massachusetts. Additionally, a 20,00024,000 square foot facility in New
York, New York was leasedis leased.
Output Technologies of Illinois leases approximately 129,000 square feet of
office and warehouse space in 1993.Chicago, Illinois.
Output Technologies Western Region leases 31,000 square feet of office and
production facilities in Denver, Colorado.
Other Output Technologies entities lease an aggregate of 78,000 square feet of
office and production facilities in the Kansas City, Missouri area.
In addition to the previously discussed office space, DST Realty, Inc. also
owns six parking facilities in downtown Kansas City, Missouri having 1,670
parking spaces which are rented by the Registrant's and affiliates' employees,
and the public. A 100% owned subsidiary of DST, Winchester Business Center,
Inc., owns and operates an underground storage and office facility
encompassing a total of 550,000 square feet. 191,000299,000 square feet of this
23
facility is leased to another DST subsidiary with the remaining space occupied
by unaffiliated tenants or comprising as yet unfinished space.
[Page 21]At December 31, 1993,1994, DST owned or leased mainframe computers which are
capable of processing approximately 1.31.6 billion instructions per second. DST
presently uses a substantial portion of the capacity of these mainframes. In
addition, DST owns significant amounts of auxiliary computer support equipment
such as disk and tape drives, CRT terminals, etc., all of which are necessary
for its computer and communications operations.
Financial Asset Management
Janus Capital CorporationCorporation. Janus leases 140,000227,000 square feet of office space
in twothree facilities from non-
affiliatednon-affiliated companies for its administrative,
investment, and shareowner processing departments. In addition, in October, 1993, Janus leasedleases
approximately 34,000 square feet from a non-affiliated entity for its mail
processing and storage requirements. Its corporate offices and mail
processing facilities are located in Denver, Colorado.Colorado with a retail customer
service and telephone center in Kansas City, Missouri. In August of 1994,
Janus leased 2,500 square feet of office space in London, England for use as a
securities research and trading center, primarily for international
investments.
Berger Associates, Inc. Berger leases 20,000 square feet of office space in
Denver, Colorado, from a non-affiliated entity for its administrative and
corporate functions.
Corporate & OtherOther.
The Registrant and DST are a combined 80% owner of Wyandotte Garage
Corporation, a parking facility in downtown Kansas City, Missouri. The
facility is located adjacent to the Registrant's and KCSR's headquarters
building, and consists of 1,147 parking spaces which are utilized by the
Registrant's and affiliates' employees and the public.
Unconsolidated Affiliates, primarily DST relatedrelated.
DST's 50% joint venture, Boston Financial Data Services, Inc., leases and
occupies a 186,000 square foot office building in Quincy, Massachusetts.
Additionally, DST's 50% joint venture, Investors Fiduciary Trust Co. leases
and occupies a total of 86,000 square feet in a downtown Kansas City office
building.
In 1994, Argus Health Systems, an affiliated entity 50% owned by DST,
purchased a 51,000 square foot building from DST which it uses for systems
development, administrative, and other support operations. In fourth quarter
1994, Argus began an expansion of 15,000 square feet to this building.
DST formed Winchester Ventures II, for the purpose of acquiring land and
subsurface areas near DST's Data Center. To date, twelve acres adjacent to
the Data Center have been purchased for resale or development. Additionally,
DST is a 50% joint venture partner of a 260,000 square foot downtown Kansas
City, Missouri office building which is both leased by DST, affiliates and
non-affiliates, and houses DST's corporate headquarters.
The Continuum Company, approximately 29% owned by DST, occupies and owns a
building of 186,000 square feet located in Austin, Texas, which is used for
product development and administration. Continuum leases an additional 35,000
square feet of office in Austin, approximately 100,000 at several locations in
Australia, and another approximately 100,000 square feet for various
administrative premises in Europe. The Continuum Company through Vantage
(formerly 90.5% owned by DST) also leases 35,000
and 53,000 square feet of office space in Weatherfield, Connecticut and Kansas
City, Missouri, respectively.
24[Page 22]
Item 3. Legal Proceedings
SWEPCO Litigation. TheAs was previously disclosed in the Registrant's wholly-owned subsidiary, The Kansas City
Southern Railway Company ("KCSR") isAnnual
Report on Form 10-K for the year ended December 31, 1993, KCSR was a defendant
in a lawsuit filed in the District Court of Bowie County, Texas by
Southwestern Electric Power Company ("SWEPCO"). In that case, SWEPCO has alleged
that KCSR iswas required to reduce SWEPCO's coal transportation rate due to
changed circumstances that allegedly createcreating a "gross inequity" under the
provisions of the existing coal transportation contract existing among SWEPCO, KCSR and
the Burlington-NorthernBurlington Northern Railroad. SWEPCO is theKCSR's largest single customer of KCSR. Although the suit is pending,customer.
KCSR and SWEPCO are negotiating an agreement to settlehave settled this litigation and the major issues which are the
subject of this litigation. Management is confident that thecase against KCSR has
been dismissed. This matter will bewas concluded without material adverse effect on
the financial condition or future
results of operationoperations of KCSR.the Registrant.
Environmental Matters. KCSR is a participant in certain federal and state
environmental matters as follows:
In the Ilada Superfund Site East Cape Girardeau, Ill., KCSR was cited for
furnishing one carload of used oil to this petroleum recycling facility.
Counsel advises that KCSR's liability, if any, should fall within the "de
minimus" provisions of the Superfund law, representing minimal exposure.
In Petroleum Products Corp. Hollywood, Fla., also a Superfund case, KCSR was
cited, as a transporter only, in hauling two carloads of material in
interchange from Princeton, Louisiana to New Orleans. KCSR was removed from
the list of Potentially Responsible Parties during 1993 and is no longer
involved in this proceeding.
Louisiana Department of Environmental Quality, Docket No. IE-0-91-0001, is a
proceeding involving the alleged contamination of Capitol Lake, Baton Rouge,
Louisiana. This proceeding also names KCSR as a party due to its ownership of
part of the lake bottom. During 1994, the list of Potentially Responsible
Parties remain(PRP's) was significantly expanded to be named
in this proceeding.include the State of Louisiana,
the City and Parish of Baton Rouge and the U.S. Army Reserve Center, 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 Registrant.
Louisiana Department of Environmental Quality, Docket No. IAS 88-0001-A, The
Louisiana Department of Environmental Quality named KCSR in a state
environmental proceeding involving contaminated land near Bossier City,
Louisiana, which was the site of a wood preservative treatment plant (Lincoln
Creosoting). KCSR is a former owner of part of the land in question. This
matter was the subject of a trial in the United States District Court in
Shreveport, Louisiana which was concluded in July of 1993. The Court found
that Joslyn Manufacturing Company, an operator of the plant, 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 has beenwas appealed to the United States
Court of Appeals for the Fifth Circuit.
On January 18,Circuit, which court affirmed the District
Court's ruling in favor of KCSR.
In early 1994, the Environmental Protection Agency ("EPA") published a
list of potential sites that may be placed onadded the CERCLALincoln
Creosoting site to its Federal Comprehensive Environmental Response,
Compensation & Liability Act ("CERCLA", also known as the superfund law)
national priority list. The Lincoln Creosoting site was included. Since major remedial work has been performed at this
site by Joslyn and KCSR has been held by the Federal CourtDistrict and Appeals
Courts to be entitled to indemnity for such costs, it would appear that KCSR
should not incur significant remedial liability. In any event,At this time, it is not
possible to meaningfully evaluate the potential consequences of remediation at the site, since the EPA has made no announcement other than listing of the
Lincoln Creosoting site for "potential" inclusion on the national list.site.
Litigation Reserves. In the opinion of the Registrant, claims or lawsuits
incidental to the business of the Registrant and its subsidiaries have been
adequately provided for in the consolidated financial statements.
25[Page 23]
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three month
period ended December 31, 1993.1994.
Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered Item in Part I of this Report in lieu of being
included in KCSI's Definitive Proxy Statement which will be filed no later
than 120 days after December 31, 1993.
Directors/Officers1994.
Name Age Position(s)
L.H. Rowland 57 President and Chief Executive Officer,
Director
T.A. McDonnell 49 Executive Vice President, Director
G.W. Edwards, Jr. 55 Executive Vice President, Director
R.H. Bornemann 39 Vice President-Governmental Affairs
P.S. Brown 58 Vice President and Associate General
Counsel and Assistant Secretary
R.L. Brown II 50 Vice President and Assistant
Comptroller
R.P. Bruening 56 Vice President and General Counsel
D.R. Carpenter 48 Vice President and Tax Counsel
R.W. Comstock 64 Vice President - Administration
J.B. Dehner 49 Vice President
A.P. McCarthy 48 Treasurer
A.P. Mauro 65 Vice President and Corporate Secretary
J.D. Monello 50 Vice President and Chief Financial
Officer
H.H. Salisbury 69 Vice President - Public Affairs
L.G. Van Horn 36 Comptroller
Mr. Rowland, age 56, has continuously served as President and Chief Executive Officer
since January 1987. He has been employed by the Registrant since 1983,1980,
serving in numerous management positions and has served as a director of the
Registrant continuously since 1983.
T.A.Mr. McDonnell, age 48, has continuously served as Executive Vice President since
February 1987. He has served as a director of the Registrant continuously
since 1983 and has been Chief Executive Officer of DST since 1984.
G.W.Mr. Edwards, Jr. age 54, has continuously served as Executive Vice President since April
1991. He has served as a director of the Registrant continuously since May
1991. He has also served as President and Chief Executive Officer of KCSR
since April 1991. Prior to this, he served as Chairman of the Board and Chief
Executive Officer of the United Illuminating Company, New Haven, Connecticut
from 1985 to 1991.
Vice Presidents and Other Corporate Officers (In alphabetical order)
R.H.Mr. Bornemann, age 38, has continuously served as Vice President - Governmental
Affairs since July 1992. From 1987 to July 1992 he was employed by United
Illuminating Company, New Haven, Connecticut, serving most recently as Vice
President - Corporate Affairs.
P.S.Mr. Brown, age 57, has continuously served as Vice President and AssistantAssociate General
Counsel and Assistant Secretary since July 1992. From 1981 to July 1992, he
served as Vice President - Governmental Affairs.
R.L.Mr. Brown II, age 49, has continuously served as Vice President and Assistant
Comptroller since January 1992. From October 1986 to January 1992, he served
as Vice President and Comptroller. He also serves as Senior Vice President -
Finance of KCSR.
R.P.Mr. Bruening, age 55, has continuously served as Vice President and General Counsel
since May 1982. He also serves as Senior Vice President and General Counsel
of KCSR.
D.R.[Page 24]
Mr. Carpenter, age 47, has continuously served as Vice President - Tax Counsel since
June 1993. From 1978 to June 1993, he was a partnermember in the law firm of Watson
Ess,& Marshall, & Enggas, Kansas City, Missouri.
R.W.Mr. Comstock, age 63, has continuously served as Vice President - Administration since
April 1992. From 1986 to April 1992, he served as Senior Vice President -
Corporate Affairs with United Illuminating Company, New Haven, Connecticut.
He also serves as Senior Vice President - Administration of KCSR.
J.B.Mr. Dehner, age 48, has continuously served as Vice President since December 1989.
From November 1987 to December 1989, he served as Assistant to the
26 President.
Prior to November 1987, he was Executive Vice President of Southern Group,
Inc. and a principal officer of several other KCSI subsidiaries. He also
serves as Executive Vice President and Chief Operating Officer of KCSR.
A.P.Mr. McCarthy, age 47, has continuously served as Treasurer since December 1989. From
1984 to December 1989, he served as Assistant Treasurer.
A.P.Mr. Mauro, age 64, has continuously served as Vice President and Corporate Secretary
since August 1985.
J.D.Mr. Monello, age 49, has continuously served as Vice President-FinancePresident and Chief Financial
Officer since March 1994. From October 1992.1992 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. From October 1986 to May 1989,
he served as Assistant Comptroller.
H.H.Mr. Salisbury, age 68, has continuously served as Vice President - Public Affairs
since May, 1986.
L.G.Mr. Van Horn, age 35, has continuously served as Comptroller since October 1992. From
January 1992 to October 1992 he served as Assistant Comptroller. From January
1989 to January 1992 he served as Manager - Financial Reporting. From April
1988 to January 1989 he served as Supervisor - Internal Audit.
None of the above officers are related to one another by family.
27[Page 25]
Part II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters
See information on pages i and ii of this Form 10-K. Also, pages 6872 and 6973 of
KCSI's 19931994 Annual Report to Stockholders (Exhibit 13.1 hereto) are hereby
incorporated herein by reference.*
The Registrant's Board of Directors authorized an 11% increase in its Common
stock dividend in January 1992. The dividend will be reviewed annually and
adjustments considered that are consistent with growth in real earnings and
prevailing business conditions. Unrestricted retained earnings of the
Registrant at December 31, 19931994 were $97.2$96.9 million.
At December 31, 1993,1994, there were 3,3865,611 holders of the Registrant's Common
stock based upon an accumulation of the registered stockholder listing.
Item 6. Selected Financial Data
(In millions, except per share and ratio data)
1994 1993 1992 1991 1990 1989
Operating Revenue $1,097.9 $961.1 $741.4 $610.2 $528.0
$498.3
Income from continuing
operations $104.9 $97.0 $63.8 $45.7 $41.4 $37.1
Income from continuing
operations per
Common share $2.32 $2.16 $1.43 $1.08 $.99
$.89
Total assets $2,230.8 $1,917.0 $1,248.4 $1,091.9 $1,034.0
$964.9
Long-term obligations $928.8 $776.2 $387.0 $317.1 $344.9 $282.8
Cash dividends per
Common share $.30 $.30 $.27$.30 $.27 $.27
Ratio of earnings to fixed charges (Exhibit 12.1 hereto)
Excluding interest on
deposits of IFTC 3.28 3.68 3.40 2.88 2.58 2.55
Including interest on
deposits of IFTC 3.14 3.43 2.98 2.44 2.23 2.32
Above amounts reflect the 2-for-1 Common stock split to shareholders of record
on February 19, 1993, payablepaid March 17, 1993 and the 2-for-1 Common stock split
to shareholders of record on February 14, 1992, payablepaid March 17, 1992.
See information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 3028 through 4546 of
KCSI's 19931994 Annual Report to Stockholders (Exhibit 13.1 hereto) which are
hereby incorporated herein by reference.*
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(2) to Form 10-K
28[Page 26]
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
See information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 3028 through 4546 of
KCSI's 19931994 Annual Report to Stockholders (Exhibit 13.1 hereto) which is
hereby incorporated herein by reference.*
A listing of explanations of graphics used in the Managements' Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1993,1994, (Exhibit 99.299.1 hereto), which is hereby incorporated herein
by reference.*
Item 8. Financial Statements and Supplementary Data
The report of the independent accountants, the audited consolidated financial
statements and the unaudited quarterly financial data appear on pages 4647
through 7073 of KCSI's 19931994 Annual Report to Stockholders (Exhibit 13.1 hereto)
and are hereby incorporated herein by reference.*
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General
Instruction G(2) to Form 10-K
29[Page 27]
Part III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors of the Registrant
See "Election of Directors" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
(b) Executive Officers of the Registrant
Included under Part I pages 2624 and 27.25.
Item 11. Executive Compensation
See "Management Compensation" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) See "Principal Stockholders" in the Registrant's Definitive Proxy
Statement, incorporated herein by reference.**
(b) See "Election of Directors" in the Registrant's Definitive Proxy
Statement, incorporated herein by reference.**
Item 13. Certain Relationships and Related Transactions
See "Certain Transactions" in the Registrant's Definitive Proxy Statement,
incorporated herein by reference.**
_________ _______________________________________________
**Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(3) to Form 10-K. KCSI's Definitive 19931994 Proxy Statement will be filed no
later than 120 days after December 31, 1993
301994
[Page 28]
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 24, 1994,23, 1995, which appear on pages 4647 through 7073 of
the accompanying 19931994 Annual Report to Stockholders (Exhibit 13.1), are hereby
incorporated herein by reference*. With the exception of the information
explicitly incorporated by reference in this Form 10-K, the 19931994 Annual Report
to Stockholders is not to be deemed filed as a part of this Form 10-K.
The following additional financial statement schedules should be read in
conjunction with the financial statements in such 1993 Annual Report to
Stockholders.(2) Financial Statement Schedules
Schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission not included
with these additional financial statement schedulesherein have been omitted because they are not applicable, insignificant or the
required information is shown in the financial statements or notes thereto.
(2) Financial Statement Schedules
Supplementary Financial Information
Page
ReportConsent of independent accountants on financial statement F-1 thru
schedules and consents of independent accountants F-2
Schedule V
Property, plant and equipment - Years ended
December 31, 1993, 1992 and 1991 F-3
Schedule VI
Accumulated depreciation and amortization of
property, plant and equipment - Years ended
December 31, 1993, 1992 and 1991 F-4
Schedule X
Supplementary income statement information -
Years ended December 31, 1993, 1992 and 1991 F-5
The financial statements and related notes, together with the report of Ernst
& Young dated January 12, 1994, of Investors Fiduciary Trust Company (a 50%
owned affiliate of DST Systems, Inc., a 100% owned subsidiary of the
Registrant and accounted for using the equity method) for the year ended
December 31, 1993 (Exhibit 99.1) are hereby incorporated herein by reference*.
____________________________
* Incorporated by reference pursuant to Rule 12b-23 and General Instruction
G(2) to Form 10-K
31[Page 29]
(3) List of Exhibits
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
- Exhibit 3.1 to this Form 10-K
- Exhibit 4*** to Registrant's Registration Statement on Form S-8,
Commission File No. 33-8880
- Certificate of Designation Establishing the New Series Preferred
Stock, Series A, of Registrant, dated May 16, 1986 which is detailed
as Exhibit A*** to Registrant's Report on Form 10-Q for the quarter
ended June 30, 1986, Commission File No. 1-4717
- Exhibit 4.1*** to Registrant's Current Report on Form 8-K dated
October 1, 1993 (Commission File No. 1-4717), Certificate of
Designation of Series B Convertible Preferred Stock
Bylaws
- Exhibit 3.1***, Registrant's By-Laws, as amended and restated
November 7, 1991, to Registrant's Form 10-K for the fiscal year ended
December 31, 1991, Commission File No. 1-4717
(4) Instruments Defining the Right of Security Holders, Including Indentures
- Exhibits incorporated by reference under Part IV Item 14 (a)(3)(3) of
this Form 10-K
- Item 5*** to Registrant's Current Report on Form 8-K dated December
8, 1992 (Commission File No. 1-4717), which is a brief description of
the $250 million Revolving Credit Agreement, dated December 8, 1992.
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
- The Director Indemnification Agreement attached as Exhibit I*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717 and Exhibit B*** to Registrant's Proxy
Statement for 1987 Annual Stockholder Meeting, dated April 6, 1987
- The Deferred Directors Fee Plan attached as Exhibit 10*** to DST's
Form 10-K, for the fiscal year ended December 31, 1986, Commission
File No. 2-81678
- The Kansas City Southern Railway 1987 Restricted Stock Plan, attached
as Exhibit C*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The Indenture, dated July 1, 1992, to (i) a $300 million Shelf
Registration of Debt Securities attached as Exhibit 4*** to
Registrant's Form S-3 Commission File No. 33-47198, filed June 19,
____________________________
*** Incorporated by reference pursuant to Rule 12b-32
321992 (ii) a $200 million Medium Term Notes Registration of Debt
Securities, attached as Exhibit 4(a)*** to Registrant's Form S-3
Commission File No. 33-60192, filed March 29, 1993
- The Rights Agreement, dated May 16, 1986 attached as Exhibit 1*** to
Registrant's Registration Statement on Form 8-A , dated May 17, 1986,
Commission File No. 1-4717
- The 1978 Employee Stock Option Plan as amended attached as Exhibit
D*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
____________________________
***Incorporated by reference pursuant to Rule 12b-32
[Page 30]
- The 1983 Employee Stock Option Plan as amended attached as Exhibit
E*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
- The 1987 Employee Stock Option Plan as amended attached as Exhibit
F*** to Registrant's Form 10-K, for the fiscal year ended December
31, 1987, Commission File No. 1-4717
- The Employment Continuation Agreements - KCSI and subsidiaries
attached as Exhibit G*** to Registrant's Form 10-K, for the fiscal
year ended December 31, 1987, Commission File No. 1-4717 extended to
February 19, 1993
- The Officer Indemnification Agreement attached as Exhibit H*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717
- The DST ESOP Loan Agreement, dated December 18, 1987, and Amendment
No. 1, dated February 3, 1988, attached as Exhibit J*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717
- The DST Guarantee Agreement, dated December 18, 1987, and
Ratification and Amendment of Guarantee, dated February 3, 1988,
attached as Exhibit K*** to
Registrant's Form 10-K, for the fiscal year ended December 31, 1987,
Commission File No. 1-4717
- The KCSI ESOP Loan Agreement, dated February 3, 1988, attached as
Exhibit L*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The KCSI Guarantee Agreement, dated February 3, 1988, attached as
Exhibit M*** to Registrant's Form 10-K, for the fiscal year ended
December 31, 1987, Commission File No. 1-4717
- The KCSI Directors' Deferred Fee Plan and Amendment to KCSI
Directors' Fee Plan attached as Exhibit N*** to Registrant's Form 10-
K, for the fiscal year ended December 31, 1987, Commission File No.
1-4717
- The Kansas City Southern Railway Company Directors' Deferred Fee Plan
and Amendment to Kansas City Southern Railway Company Directors'
Deferred Fee Plan attached as Exhibit O*** to Registrant's Form 10-K,
for the fiscal year ended December 31, 1987, Commission File No. 1-
4717
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32
33- Exhibit 10.1*** Employee Stock Ownership Plan and Trust Note
Agreement dated December 1, 1989 to Registrant's Form 10-K, for the
fiscal year ended December 31, 1989, Commission File No. 1-4717
- Exhibit 10.3*** Employment Continuation Agreement, dated, May 5,
1987, between T.A. McDonnell and DST Systems, Inc. to Registrant's
Form 10-K, for the fiscal year ended December 31, 1990, Commission File No. 1-4717
- Exhibit 10.4*** Description of the Registrant's 1991 incentive
compensation plan to Registrant's Form 10-K, for the fiscal year
ended December 31, 1990, Commission File No. 1-4717
- Exhibit 10.1*** The Registrant's 1991 Stock Option and Performance
Award Plan to Registrant's Form 10-K, for fiscal year ended December
31, 1991, Commission File No. 1-4717
- Exhibit 10.2*** The Registrant's Directors Deferred Fee Plan, adopted
August 20, 1982, amended and restated September 13, 1991, to
Registrant's Form 10-K, for fiscal year ended December 31, 1991,
Commission File No. 1-4717
- The Agreement and Plan of Merger dated September 19, 1992, among the
Registrant, K&M Newco, Inc. (a wholly-owned subsidiary of the
Registrant) and MidSouth Corporation as Exhibit 2*** to Registrant's
Form 8-K dated September 19, 1992, Commission File No. 1-4717; and
letter agreement dated August 4, 1992, between Registrant and
MidSouth Corporation setting forth confidentiality and standstill
agreements; letter dated September 24, 1992 modifying the Agreement
and Plan of Merger dated September 19, 1992 and letter agreement
dated August 4, 1992 as Exhibits 28.1*** and 28.2 *** respectively to
Registrant's Form 8, dated September 28, 1992, Commission File No. 1-
4717. Third Amendment dated March 30, 1993 to the confidentiality
letter dated August 4, 1992 as Exhibit 28.1*** to Registrant's Form
8-K, dated March 30, 1993, Commission File No. 1-4717.
- Exhibit 10.1*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, Inc., and Landon H. Rowland to the Registrant's
Form 10-K, for fiscal year ended December 31, 1992, Commission File
No. 1-4717.
- Exhibit 10.2*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, Inc., The Kansas City Southern Railway Company
and George W. Edwards, Jr. to the Registrant's Form 10-K, for fiscal
year ended December 31, 1992, Commission File No. 1-4717.
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32
[Page 31]- Exhibit 10.3*** Employment Agreement, dated January 1, 1992, as
amended and restated March 18, 1993, by and between Kansas City
Southern Industries, DST Systems, Inc. and Thomas A. McDonnell to the
Registrant's Form 10-K, for fiscal year ended December 31, 1992,
Commission File No. 1-4717.
- Exhibit 10.4*** Employment Agreement, dated April 1, 1992, by and
between Kansas City Southern Industries, Inc. and Roland W. Comstock
to the Registrant's Form 10-K, for fiscal year ended December 31,
1992, Commission File No. 1-4717.
- Exhibit 10.1 attached to this Form 10-K
_____________________________
*** Incorporated by reference pursuant to Rule 12b-32#
3410-K.
(11)Statement Re Computation of Per Share Earnings
(Inapplicable)
(12)Statements Re Computation of Ratios
Exhibit- -Exhibit 12.1 attached to this Form 10-K
(13)Annual Report to Security Holders, Form 10-Q or Quarterly Report to
Security Holders
- Exhibit-Exhibit 13.1 attached to this Form 10-K
(16)Letter Re Change in Certifying Accountant
(Inapplicable)
(18)Letter Re Change in Accounting Principles
(Inapplicable)
(21)Subsidiaries of the Registrant
- Exhibit-Exhibit 21.1 attached to this Form 10-K
(22)Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23)Consents of Experts and Counsel
Page F-1 and F-2 to this Form 10-K
(24)Power of Attorney
(Inapplicable)
(27)Financial Data Schedules
(Inapplicable)Schedule
- -Exhibit 27.1 attached to this Form 10-K
(28)Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)
(99)Additional Exhibits
- The financial statements and related notes, together with the report
of Ernst & Young dated January 12, 1994, of Investors Fiduciary Trust
Company as listed under Item 14(a)2, for the year ended December 31,
1993 attached hereto as Exhibit 99.1
- A-A listing of explanations of graphics used in the Management's Discussion and
Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1993,1994, attached hereto as Exhibit 99.299.1
(b) Reports on Form 8-K
The Registrant filed a Form 8-K dated October 1, 199314, 1994 under Itemsitems 5 and 7,
reporting (a) the establishmentclosing of the KCSI Employee Plan Funding Trust and
transferacquisition of KCSI Series B Convertible Preferred Stocka controlling interest in
Berger Associates, Inc., increasing KCSI's ownership from approximately 18% to
over 80%, and (b) completionthe joint announcement by the Registrant and the Illinois
Central Corporation of the Vantage Computertermination of their Letter of Intent for the
merger of the Registrant, after a spin-off of the Registrant's non-
transportation operations, with the ICC.
The Registrant filed a Form 8-K dated January 31, 1995 under items 2 and 7,
reporting the Registrant's wholly-owned subsidiary, DST Systems, Inc. merger into a wholly-owned subsidiary, along
with Kemper Financial Services, completed of The Continuum Company,the sale of IFTC Holdings, Inc.
35to State Street Boston Corporation.
____________________________
*** Incorporated by reference pursuant to Rule 12b-32
[Page 32]
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Kansas City Southern Industries, Inc.
March 18, 199421, 1995 By: /s/L.H. Rowland
L.H. Rowland, President,
Chief Executive Officer
and Director
36[Page 33]
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 18, 1994.21, 1995.
Signature Capacity
/s/P.H. Henson Chairman and Director
P.H. Henson
/s/L.H. Rowland President, Chief Executive
L.H. Rowland Officer and Director
/s/G.W. Edwards Jr. Executive Vice President
G.W. Edwards Jr. and Director
/s/T.A. McDonnell Executive Vice President
T.A. McDonnell and Director
/s/J.D. Monello Vice President-FinancePresident & 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.M. Levin Director
M.M. Levin
/s/M.I. Sosland Director
M.I. Sosland
37[Page 34]
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Kansas City Southern Industries, Inc.
Our audits of the consolidated financial statements referred to in our report
dated February 24, 1994, appearing on page 70 of the 1993 Annual Report to
Stockholders of Kansas City Southern Industries, Inc. (which report and
consolidated financial statements are incorporated by reference in this Annual
Report on Form 10-K) also included an audit of the Financial Statement
Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these
Financial Statement Schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ Price Waterhouse
PRICE WATERHOUSE
Kansas City, Missouri
February 24, 1994
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-69060, 33-50517, 33-50519), and in the
Prospectuses constituting part of the Registration Statements on Form S-3 (No.
33-60192, 33-69648) of Kansas City Southern Industries, Inc. of our report
dated February 24, 1994,23, 1995, appearing on page 7047 of the 1994 Annual Report to
Stockholders which is incorporated in this Annual Report on Form 10-K.
We
also consent to the incorporation by reference of our report on the Financial
Statement Schedules, which appears above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Kansas City, Missouri
March 18, 199421, 1995
F-1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 and Form S-3 of Kansas City Southern Industries, Inc. and the related
Prospectuses of our report dated January 12, 1994, with respect to the
financial statements of Investors Fiduciary Trust Company included at page 1
of Exhibit 99.1 in this Annual Report on Form 10-K for the year ended
December 31, 1993.
/s/ Ernst & Young
ERNST & YOUNG
Kansas City, Missouri
March 18, 1994
F-2
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(Dollars in Millions)
Balance at Balance at
beginning Additions end of
of period at cost Retirements period
Year ended
December 31, 1993
DST $ 208.1 $ 69.0 $ 14.3 $ 262.8
Janus 12.8 9.2 .3 21.7
Corporate & Other 9.7 .4 .7 9.4
Transportation -
Road 684.0 411.6 20.3 1,075.3
Equipment 338.4 26.9 9.7 355.6
Land and Facilities 59.0 9.3 1.1 67.2
$1,312.0 $ 526.4 $ 46.4 $1,792.0
Year ended
December 31, 1992
DST $ 155.6 $ 56.5 $ 4.0 $ 208.1
Janus 2.8 10.0 -- 12.8
Corporate & Other 9.6 .1 -- 9.7
Transportation -
Road 650.1 52.7 18.8 684.0
Equipment 340.0 47.3 48.9 338.4
Land and Facilities 51.8 7.5 .3 59.0
$1,209.9 $ 174.1 $ 72.0 $1,312.0
Year ended
December 31, 1991
DST $ 127.7 $ 31.1 $ 3.2 $ 155.6
Janus 1.3 1.6 .1 2.8
Corporate & Other 9.5 .1 -- 9.6
Transportation -
Road 646.3 39.7 35.9 650.1
Equipment 309.4 41.2 10.6 340.0
Land and Facilities 51.6 10.6 10.4 51.8
$1,145.8 $ 124.3 $ 60.2 $1,209.9
F-3
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(Dollars in Millions)
Additions
Balance at charged to Balance
beginning costs and at end
of period expenses Retirements of period
Year ended
December 31, 1993
DST $ 98.9 $35.4 $ 5.8 $128.5
Janus 3.0 4.3 .1 7.2
Corporate & Other 3.9 .6 -- 4.5
Transportation -
Road 251.6 26.7 14.1 264.2
Equipment 168.0 14.5 7.7 174.8
Land and Facilities 18.4 2.4 .6 20.2
$543.8 $83.9 $ 28.3 $599.4
Year ended
December 31, 1992
DST $ 78.4 $23.9 $ 3.4 $ 98.9
Janus .9 2.1 -- 3.0
Corporate & Other 3.4 .5 -- 3.9
Transportation -
Road 244.0 21.7 14.1 251.6
Equipment 200.6 12.0 44.6 168.0
Land and Facilities 16.4 2.2 .2 18.4
$543.7 $62.4 $ 62.3 $543.8
Year ended
December 31, 1991
DST $ 60.4 $20.3 $ 2.3 $ 78.4
Janus .6 .4 .1 .9
Corporate & Other 2.8 .7 .1 3.4
Transportation -
Road 252.3 23.6 31.9 244.0
Equipment 195.4 10.8 5.6 200.6
Land and Facilities 24.9 1.7 10.2 16.4
$536.4 $57.5 $ 50.2 $543.7
F-4
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
SCHEDULE X - SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Dollars in Millions)
Charged to Costs and Expenses
Years Ended December 31,
1993 1992 1991
Property maintenance and
repair expenses:
DST and Corporate & Other $ 16.9 $ 8.4 $ 9.5
Transportation Services -
Road properties 42.7 41.9 38.6
Equipment 27.1 28.9 25.1
$ 86.7 $79.2 $73.2
Depreciation and amortization of
intangible assets, preoperating
costs and similar deferrals:
DST and Corporate & Other $ 8.8 $ 5.9 $ 4.3
Transportation Services 2.8 - -
$ 11.6 $ 5.9 $ 4.3
F-5
KANSAS CITY SOUTHERN INDUSTRIES, INC.
19931994 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation SK
Exhibit Item 14(a)(3)
No. Document Exhibit No.
3.1 Amendment to Registrant's Certificate of 3
Incorporation to set a par value for Common
stock and increase the number of authorized
Common shares, dated May 6, 1994
10.1 Employment Agreement, dated July 15, 1993,April 1, 1992, by 10
by
and between Kansas City Southern Industries,
Inc.Kansas City Southern Railway Company, and
Mark M. LevinJames B. Dehner
12.1 Ratio of Earnings to Fixed Charges 12
13.1 19931994 Annual Report to Stockholders 13
21.1 Subsidiaries of the Registrant 21
27.1 Financial Data Schedule 27
99.1 The financial statements and related notes, together99
with the report of Ernst & Young dated January 12,
1994 of Investors Fiduciary Trust Company for the year
ended December 31, 1993
99.2 Listing of explanations of graphics used in 99
Management's Discussion and Analysis of Financial
Condition and Results of Operations