Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 9 through 37 of this Form 10-K is incorporated by reference in response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
The information set forth in response to Item 101 of Regulation S-K relative to financial information by industry segment for the three years ended December 31, 1996 under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 17 through 28 of this Form 10-K, and Item 8, Financial Statements and Supplementary Data, at Note 13. Industry Segments on pages 72 through 75 of this Form 10-K, is incorporated by reference in response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 9 through 37 of this Form 10-K is incorporated by reference in partial response to this Item 1.
Employees. As of December 31, 1996, Kansas City Southern Industries, Inc. ("Company" or "KCSI") and its majority owned subsidiaries employed approximately 3,800 persons, with approximately 2,780 employed in The Kansas City Southern Railway Company, 900 in Financial Asset Management, and 120 in Corporate & Other. In addition, unconsolidated affiliates of the Company and its subsidiaries employed approximately 6,000 persons, including approximately 5,600 at DST Systems, Inc. ("DST"), the largest employer of such ventures.
[Page 2] Item 2.
Item 2. Properties
In the opinion of management, the various facilities, office space and other properties owned and/or leased by the Company (and its subsidiaries and affiliates) are adequate for existing operating needs.
The Kansas City Southern Railway Company
The Kansas City Southern Railway Company ("KCSR") owns and operates approximately 2,739 miles of main and branch lines, and approximately 1,106 miles of other tracks, in a nine state region, including Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas. In addition, approximately 215 miles of main and branch lines and 87 miles of other tracks are operated by KCSR under trackage rights and leases.
Kansas City Terminal Railway Company (of which KCSR is a partial 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 and the Union Pacific Railroad ("UP") have a haulage and trackage rights agreement, which gives KCSR access to Nebraska and Iowa, and additional routes in Kansas, Missouri and Texas. The haulage rights require the UP to move KCSR traffic in UP trains; the trackage rights allow KCSR to operate its trains over UP tracks.
KCSR owns and operates repair shops, depots and office buildings along its right-of-way in support of its transportation operations. A major facility, Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling approximately 226,750 square feet. KCSR owns a 108,000 square foot major diesel locomotive repair facility in Pittsburg, Kansas. KCSR owns freight and truck maintenance buildings in Dallas, Texas totaling approximately 125,000 square feet. KCSR and KCSI executive offices are located in an eight story office building in Kansas City, Missouri and are leased from a subsidiary of the Company.
KCSR owns and operates six intermodal facilities. These facilities are located in Dallas, Texas; Kansas City, Missouri; Sallisaw, Oklahoma; Shreveport and New Orleans, Louisiana; and Jackson, Mississippi. The facility in Jackson was completed in December 1996. The various locations include strip tracks, cranes and other equipment used in facilitating the transfer and movement of trailers and containers.
At December 31, 1996, KCSR's fleet of rolling stock consisted of:
* 435 diesel locomotives: 160 owned by KCSR and 275 leased from affiliates; * 15,285 freight cars: 3,675 owned by KCSR, 8,612 leased from non-affiliates, and 2,998 leased from affiliates; * 3,143 tractors, trucks and trailers: 7 owned or leased from an affiliate and 3,136 leased from non-affiliates.
Some of this equipment is subject to liens created under conditional sales agreements, equipment trust certificates and leases in connection with the original purchase or lease of such equipment. KCSR indebtedness with respect to equipment trust certificates, conditional sales agreements and capital leases totaled approximately $96 million at December 31, 1996.
[Page 3] Maintenance expenses for Way and Structure and Equipment (pursuant to regulatory accounting rules, which include depreciation) for the three years ended December 31, 1996 and as a percent of KCSR revenues are as follows (dollars in millions):
Southern Group, Inc. leases approximately 4,150 square feet of office space in downtown Kansas City, Missouri from an affiliate of DST.
Financial Asset Management
Janus Capital Corporation ("Janus"). Janus leases from non-affiliates 227,000 square feet of office space in three facilities for administrative, investment, and shareowner processing operations, and approximately 34,000 square feet for mail processing and storage requirements. These corporate offices and mail processing facilities are located in Denver, Colorado. Janus also leases 5,500 square feet for a customer service and telephone center in Kansas City, Missouri and 1,400 square feet of office space in London, England for securities research and trading.
Berger Associates, Inc. ("Berger"). Berger leases from a non-affiliate approximately 29,800 square feet of office space in Denver, Colorado for its administrative and corporate functions.
Corporate & Other
The Company is an 80% owner of Wyandotte Garage Corporation, which owns a parking facility in downtown Kansas City, Missouri. The facility is located adjacent to the Company's and KCSR's executive offices, and consists of 1,147 parking spaces which are utilized by the employees of the Company and its affiliates, as well as the public.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian, Louisiana under an industrial revenue bond lease arrangement with an option to purchase. This facility includes buildings totaling approximately 12,000 square feet.
Pabtex, Inc. owns a 70 acre coal and petroleum coke bulk handling facility in Port Arthur, Texas.
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 and Port Arthur, Texas and New Orleans, Louisiana. This system is leased to KCSR.
Other subsidiaries of the Company own approximately 8,000 acres of land at various points adjacent to the KCSR right-of-way. Other properties also include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk handling facility at Port Arthur, Texas, and several former railway buildings now being rented to non-affiliated companies, primarily as warehouse space.
The Company owns 1,025 acres of property located on the waterfront in the Port Arthur, Texas area, which includes 22,000 linear feet of deep water frontage and three docks. Port Arthur is an uncongested port with direct access to the Gulf of Mexico. Approximately 75% of this property is available for development.
[Page 4] Unconsolidated Affiliates
DST, an approximate 41% owned unconsolidated affiliate, owns a 161,000 square foot Data Center located in Kansas City, Missouri, commonly known as its Winchester Data Center.
DST master-leases three downtown Kansas City office buildings consisting of approximately 353,000 square feet, in which DST or its affiliates occupy approximately 145,000 square feet and the balance is leased to non-affiliated tenants. This space is utilized by DST for its shareholder operations, systems development and other support functions.
DST's subsidiaries own additional facilities in Kansas City, Missouri, comprising approximately 1,746,000 square feet, and lease 1,030,000 square feet in various locations throughout the United States. DST also leases international properties with an aggregate 190,000 square feet of office space.
In addition to the above properties, DST and its various subsidiaries own or lease a number of surface parking lots in downtown Kansas City, Missouri, nine properties outside the Kansas City, Missouri metropolitan area used for office or production space, and office space in the Netherlands, Switzerland, Belgium and South Africa.
DST owns or leases mainframe computers and significant amounts of auxiliary computer support equipment (such as disk and tape drives, CRT terminals, etc.), all of which are necessary for its computer and communications operations.
Mexrail, Inc., a 49% owned KCSI affiliate, owns 100% of The Texas Mexican Railway Company ("Tex-Mex") and certain other assets, including the northern U.S. half of a rail traffic bridge at Laredo, Texas spanning the Rio Grande river. This bridge is a significant entry point for rail traffic between Mexico and the U.S. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas, and also has trackage rights (from UP) totaling approximately 360 miles between Corpus Christi and Beaumont, Texas.
Transportacion Ferroviaria Mexicana S. de R.L. de C.V. ("TFM") was awarded by the Mexican Government the right to purchase 80% of the common stock of Ferrocarril del Noreste, S.A. de C.V. ("FNE"). FNE holds the concession to operate Mexico's approximate 2,500 mile "Northeast Railway" for the next 50 years, with the option of a 50 year extension (subject to certain conditions). This railway, a strategically important rail link to Mexico and the North American Free Trade Agreement corridor, is estimated to be responsible for transporting approximately 40% of Mexico's rail cargo and is located next to primary north/south truck routes. FNE will have the exclusive right to operate the rail, but will not own the land, roadway or associated structures. However, certain rail equipment, including approximately 370 locomotives and 8,800 freight cars, is included in the purchase price and will be owned by FNE upon gaining operational control of the railway. In addition to the railway, TFM (through FNE) also will have rights to office space at which various operational, accounting, managerial and other activities will be performed. The primary facilities are located in Mexico City and Monterrey, Mexico. TFM was a 49% owned KCSI affiliate at December 31, 1996, but this interest may be reduced to approximately 37% in 1997 if a letter of intent to sell a portion of TFM to the Mexican Government is finalized. See additional information in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 10 and 11.
The outstanding stock of Gateway Western Railway Company ("Gateway Western") is beneficially owned by KCS Transportation Company (a wholly-owned subsidiary of the Company). At December 31, 1996, the Company reported Gateway Western as an unconsolidated subsidiary. If the Company receives approval for the acquisition of Gateway Western from the Surface Transportation Board, Gateway Western will become a consolidated subsidiary of the Company. Gateway Western operates a 402 mile rail line extending from Kansas City, Missouri to East St. Louis and Springfield, Illinois. Additionally, Gateway Western has restricted haulage rights extending to Chicago, Illinois from the Southern Pacific Rail Corporation. Gateway Western connects with various eastern rail carriers at East St. Louis.
[Page 5] Item 3.
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 34 through 36 of this Form 10-K is incorporated by reference in response to this Item 3. In addition, see discussion in Part II Item 8, Financial Statements and Supplementary Data, at Note 11. Commitments and Contingencies on pages 69 and 70 of this Form 10-K.
Item 4.
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, 1996.
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph (b) of Item 401 of Regulation S-K, the following list is included as an unnumbered Item in Part I of this Form 10-K in lieu of being included in KCSI's Definitive Proxy Statement which will be filed no later than 120 days after December 31, 1996. All executive officers are elected annually and serve at the discretion of the Board of Directors. Certain of the executive officers have employment agreements with the Company.
Name Age Position(s) L.H. Rowland 59 President and Chief Executive Officer, Director M.R. Haverty 52 Executive Vice President, Director P.S. Brown 60 Vice President and Associate General Counsel and Assistant Secretary R.P. Bruening 58 Vice President, General Counsel and Corporate Secretary D.R. Carpenter 50 Vice President - Finance A.P. McCarthy 50 Vice President and Treasurer J.D. Monello 52 Vice President and Chief Financial Officer L.G. Van Horn 38 Vice President and Comptroller
Mr. Rowland has continuously served as President since July 1983 and Chief Executive Officer since January 1987. He has been employed by the Company since 1980, serving in numerous management positions, and has served as a Director of the Company continuously since 1983. He also serves as Chairman of the Board of KCSR and as a Director of Janus and Berger.
Mr. Haverty has continuously served as Executive Vice President and Director of the Company since May 1995. From 1993 to 1995, he served as Chairman and Chief Executive Officer of Haverty Corporation. From 1991 to 1993, he was an independent executive transportation adviser. From 1989 to 1991, he served as the President and Chief Operating Officer of The Atchison, Topeka & Santa Fe Railway Company, and for several years prior, held numerous positions within that organization. He also served as a director of Wisconsin Central Ltd. and Gateway Western within the last five years. He serves as President and Chief Executive Officer of KCSR.
Mr. Brown has continuously served as Vice President and Associate General Counsel and Assistant Secretary since July 1992. From 1981 to July 1992, he served as Vice President - Governmental Affairs.
[Page 6] Mr. Bruening has continuously served as Vice President, General Counsel and Corporate Secretary since July 1995. From May 1982 to July 1995, he served as Vice President and General Counsel. He also serves as Senior Vice President and General Counsel of KCSR.
Mr. Carpenter has continuously served as Vice President - Finance since November 1996. He was Vice President - Finance and Tax from May 1995 to November 1996. He was Vice President - Tax from June 1993 to May 1995. From 1978 to June 1993, he was a member in the law firm of Watson & Marshall L.C., Kansas City, Missouri. He also serves as Vice President - Finance of KCSR.
Mr. McCarthy has continuously served as Vice President and Treasurer since May 1996. He was Treasurer from December 1989 to May 1996. He also serves as Vice President and Treasurer of KCSR.
Mr. Monello has continuously served as Vice President and Chief Financial Officer since March 1994. From October 1992 to March 1994, he served as Vice President - Finance. From January 1992 to October 1992, he served as Vice President - Finance and Comptroller. From May 1989 to January 1992, he served as Vice President and Assistant Comptroller. He also serves as Senior Vice President and Chief Financial Officer of KCSR.
Mr. Van Horn has continuously served as Vice President and Comptroller since May 1996. He was Comptroller from October 1992 to May 1996. From January 1992 to October 1992, he served as Assistant Comptroller. From January 1989 to January 1992, he served as Manager - Financial Reporting. He also serves as Vice President and Comptroller of KCSR.
There are no arrangements or understandings between the executive officers and any other person pursuant to which the executive officer was or is to be selected as an officer, except with respect to the executive officers who have entered into employment agreements, which agreements designate the position(s) to be held by the executive officer.
None of the above officers are related to one another by family.
[Page 7] Part II
Item 5.
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The information set forth in response to Item 201 of Regulation S-K on the cover (page i) under the heading "Company Stock," and in Part II Item 8, Financial Statements and Supplementary Data, at Note 14. Quarterly Financial Data (Unaudited) on pages 76 and 77 of this Form 10-K is incorporated by reference in partial response to this Item 5.
The Company's Board of Directors authorized a 33% increase in its common stock dividend in January 1996. The dividend will be reviewed annually and adjustments considered that are consistent with growth in real earnings and prevailing business conditions. Unrestricted retained earnings of the Company at December 31, 1996 were $285.6 million.
At March 3, 1997, there were 6,183 holders of the Company's common stock based upon an accumulation of the registered stockholder listing.
Item 6.
Item 6. Selected Financial Data (in millions, except per share and ratio data)
The selected financial data below should be read in conjunction with the consolidated financial statements and the related notes thereto, and the Report of Independent Accountants thereon, included under Item 8 of this Form 10-K, and such data is qualified by reference thereto.
(i) Includes a one time after-tax gain of $47.7 million (or $1.24 per share), representing the Company's proportionate share of the one time gain recognized by DST in connection with the merger of The Continuum Company, Inc., formerly a DST unconsolidated equity affiliate, with Computer Sciences Corporation in a tax-free share exchange (see Note 2 to the consolidated financial statements in this Form 10-K).
[Page 8] (ii) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to the DST public offering and associated transactions completed in November 1995, which reduced the Company's ownership of DST to approximately 41% and resulted in deconsolidation of DST from the Company's consolidated financial statements. The public offering and associated transactions resulted in a $144.6 million after-tax gain, or $3.31 per share to the Company (see Note 2 to the consolidated financial statements included in this Form 10-K).
(iii) Financial information from which the ratio of earnings to fixed charges was computed for the year ended December 31, 1995 reflects DST as a majority owned unconsolidated subsidiary through October 31, 1995, and an unconsolidated 41% owned affiliate thereafter, in accordance with applicable U.S. Securities and Exchange Commission rules and regula- tions. If the ratio was computed to exclude the one time pretax gain of $296.3 million associated with the November 1995 public offering and associated transactions, the 1995 ratio of earnings to fixed charges would have been 3.04.
All years reflect the reclassification of certain income/expense items from "Revenues" and "Costs and Expenses" to a separate "Other, net" line item in the Consolidated Statements of Income.
Above amounts reflect the 2-for-1 common stock split to shareholders of record on February 19, 1993, paid March 17, 1993 and the 2-for-1 common stock split to shareholders of record on February 14, 1992, paid March 17, 1992.
The information set forth in response to Item 301 of Regulation S-K under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, on pages 9 through 37 of this Form 10-K is incorporated by reference in partial response to this Item 6.
[Page 9] Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-K, contains comments not based upon historical fact. Such forward-looking comments are based upon information currently available to management and management's perception thereof as of the date of this Form 10-K. The actual results of operations of Kansas City Southern Industries, Inc. ("KCSI" or "Company") could materially differ from those indicated in forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company's Current Report on Form 8-K dated November 12, 1996, which has been filed with the U.S. Securities and Exchange Commission (File No. 1-4717) and is hereby incorporated by reference herein. Readers are strongly encouraged to consider these factors when evaluating any such forward-looking comments.
The discussion herein is intended to clarify and focus on the Company's results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 8
Item 8. Financial Statements and Supplementary Data
Page
Management Report on Responsibility for Financial Reporting. . . . 39
Financial Statements:
Report of Independent Accountants. . . . . . . . . . . . . . . 39 Consolidated Statements of Income for the three years ended December 31, 1996 . . . . . . . . . . . . . . . 40 Consolidated Balance Sheets at December 31, 1996, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . 41 Consolidated Statements of Cash Flows for the three years ended December 31, 1996 . . . . . . . . . . . . . . . 42 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1996. . . . . . 43 Notes to Consolidated Financial Statements . . . . . . . . . 44
Financial Statement Schedules:
All schedules are omitted because they are not applicable, insignificant or the required information is shown in the consolidated financial statements or notes thereto.
The consolidated financial statements and related notes, together with the Report of Independent Accountants, of DST Systems, Inc. (an approximate 41% owned affiliate of the Company accounted for under the equity method) for the year ended December 31, 1996, which are included in the DST Systems, Inc. Form 10-K for the year ended December 31, 1996 (Commission File No. 1-14036) and have been incorporated by reference in this Form 10-K as Exhibit 99.1, are hereby incorporated herein by reference.
[Page 39]
Management Report on Responsibility for Financial Reporting
The accompanying consolidated financial statements and related notes of Kansas City Southern Industries, Inc. and its subsidiaries were prepared by management in conformity with generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management has made judgments and estimates based on currently available information. Management is responsible for not only the financial information, but also all other information in this Annual Report on Form 10-K. Representations contained elsewhere in this Annual Report on Form 10-K are consistent with the consolidated financial statements and related notes thereto.
The Company has a formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that its financial records are reliable. Management monitors the system for compliance, and the Company's internal auditors measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, the Company's independent accountants, who are selected by the stockholders, review and test the internal accounting controls on a selective basis to establish the extent of their reliance thereon in determining the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This committee, composed solely of non-management directors, meets regularly with the independent accountants, management and internal auditors to monitor the proper discharge of responsibilities relative to internal accounting controls and to evaluate the quality of external financial reporting.
Report of Independent Accountants
To the Board of Directors and Stockholders of Kansas City Southern Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Kansas City Southern Industries, Inc. and its subsidiaries at December 31, 1996, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP Kansas City, Missouri February 20, 1997
[Page 40] KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31 Dollars in Millions, Except per Share Amounts
See accompanying notes to consolidated financial statements.
[Page 41] KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS at December 31 Dollars in Million
See accompanying notes to consolidated financial statements.
[Page 42] KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 Dollars in Millions
See accompanying notes to consolidated financial statements.
[Page 43] KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Dollars in Millions
See accompanying notes to consolidated financial statements.
[Page 44] KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified holding company, comprising businesses engaged in railroad transportation, through The Kansas City Southern Railway Company ("KCSR"), and Financial Asset Management, through its subsidiaries Janus Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"), as well as significant equity investments. Note 13 further describes the operations of the Company.
The accounting and financial reporting policies of the Company conform with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Use of the term "Company" as described in these Notes to Consolidated Financial Statements means Kansas City Southern Industries, Inc. as a holding company and all of its consolidated subsidiary companies. Significant accounting and reporting policies are described below.
As a result of the public offering of DST Systems, Inc. ("DST"), formerly a wholly-owned and consolidated subsidiary of the Company, and associated transactions completed in November 1995, the Company reduced its ownership in DST to approximately 41% (see Note 2). Accordingly, the Company accounted for its investment in DST under the equity method for the year ended December 31, 1995 retroactive to January 1, 1995. Additionally, the Company realigned its business segments to reflect its ongoing focus on the KCSR and Financial Asset Management operations. In connection with this realignment, several of the Company's less significant consolidated subsidiaries are included in the Corporate & Other segment, together with the Company's equity investment in DST and other unconsolidated affiliates. DST is included as a consolidated subsidiary for the year ended December 31, 1994.
Principles of Consolidation. The consolidated financial statements generally include all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the prior years' consolidated financial statements have been reclassified to conform to the current year presentation.
The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant influence, but not more than 50% voting control interest; the cost method of accounting is generally used for investments of less than 20% voting control interest. In 1996, Gateway Western Railway Company ("Gateway Western"), whose stock is beneficially owned by KCS Transportation Company ("KCSTC," a wholly-owned subsidiary of the Company), has been accounted for under the equity method as a majority-owned unconsolidated subsidiary. If approval of the Company's purchase of Gateway Western is received from the Surface Transportation Board ("STB"), Gateway Western will become a consolidated subsidiary of the Company. See Note 2 for additional information on the Gateway Western acquisition.
Cash Equivalents. Short-term liquid investments with a maturity of generally three months or less are considered cash equivalents. Carrying value approximates market value due to the short-term nature of these investments.
Inventories. Materials and supplies inventories for transportation operations are valued at average cost.
[Page 45] Properties and Depreciation. Properties are stated at cost. Additions and renewals constituting a unit of property are capitalized and all properties are depreciated over the estimated remaining life of such assets. Ordinary maintenance and repairs are charged to expense as incurred.
The cost of transportation equipment and road property normally retired, less salvage value, is charged to accumulated depreciation. Conversely, the cost of industrial and other property retired, and the cost of transportation property abnormally retired, together with accumulated depreciation thereon, are eliminated from the property accounts and the related gains or losses are reflected in earnings.
Depreciation for transportation operations is computed using composite straight-line rates for financial statement purposes. The STB approves the depreciation rates used by KCSR. KCSR evaluates depreciation rates for properties and equipment and implements approved rates. Periodic revisions of rates have not had a material effect on operating results. Unit depreciation methods, employing both accelerated and straight-line rates, are employed in other business segments. Accelerated depreciation is used for income tax purposes. The ranges of annual depreciation rates for financial statement purposes are:
The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") effective January 1, 1996. The new statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill, as well as for long-lived assets and certain identifiable intangibles which are to be disposed. If events or changes in circumstances of a long-lived asset indicate that the carrying amount of an asset may not be recoverable, the Company must estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest) is lower than the carrying amount of the asset, an impairment loss must be recognized to the extent that the carrying amount of the asset exceeds its fair value. In accordance with SFAS 121, the Company will periodically evaluate the recoverability of its operating properties. The adoption of SFAS 121 did not have a material effect on the Company's financial position or results of operations.
Revenue Recognition. Revenue is recognized by KCSR based upon the percentage of completion of a commodity movement. Revenue is recognized by Janus and Berger primarily as a percentage of the assets under management. Other subsidiaries, in general, recognize revenue when the product is shipped or as services are performed.
Software Development. Purchased software is recorded at cost and amortized over the estimated economic life. DST expenses, as incurred, development and maintenance expenditures for its proprietary software. Capitalizable costs of internally developed software that will be exclusively sold or licensed to third parties have not been material and have been expensed as incurred.
Advertising. The Company expenses all advertising as incurred. Direct response advertising for which future economic benefits are probable and specifically attributable to the advertising is not material.
[Page 46] Intangibles. Intangibles principally represent the excess of cost over the fair value of net underlying assets of acquired companies using purchase accounting and are amortized using the straight-line method over periods ranging from 5 to 40 years. On an annual basis, the Company reviews the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of the goodwill for each investment from expected future operating cash flows of each of the investments on a discounted basis.
Income Taxes. Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment. The income statement effect is generally derived from changes in deferred income taxes on the balance sheet.
Treasury Stock. The excess of par over cost of the Preferred shares held in Treasury is credited to capital surplus. Common shares held in Treasury are accounted for as if they were retired and the excess of cost over par value of such shares is charged to capital surplus, if available, and then to retained earnings.
Stock Plans. Proceeds received from the exercise of stock options or subscriptions are credited to the appropriate capital accounts in the year they are exercised.
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. The new statement allows companies to continue under the approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the new accounting method based on the estimated fair value of employee stock options. If a company elects to retain the current method under APB 25, pro forma disclosures of net income and earnings per share as if they had adopted the fair value accounting method under SFAS 123 are required. The Company has elected to retain its current accounting approach under APB 25, and has presented the applicable pro forma disclosures in Note 8 to the consolidated financial statements for the years ended December 31, 1996 and 1995 pursuant to the requirements of SFAS 123.
Indebtedness with respect to the leveraged Employee Stock Ownership Plan ("ESOP") was retired in full during 1995. Prior to its retirement, ESOP loan principal payments were accounted for as employee benefit expense, interest payments recorded as interest expense, and quarterly dividends paid from retained earnings on the ESOP stock used to partially service the ESOP loan. Because the ESOP loan was guaranteed by KCSI, the borrowings were reported as long-term debt and corresponding amounts, representing "ESOP deferred compensation," were reduced as the related compensation expense was recognized by the Company. All shares held in the ESOP are treated as outstanding for purposes of computing the Company's earnings per share.
Earnings Per Share. The Company uses the Primary method for computing earnings per share. The difference between the Primary and Fully-Diluted methods is not material.
[Page 47] Stockholders' Equity. Information regarding the Company's capital stock at December 31, 1996 follows:
The Company's Series B Preferred stock, issued in 1993, has a $200 per share liquidation preference and is convertible to common stock at a ratio of 4 to 1 (see Note 8).
Shares outstanding are as follows at December 31, (in thousands):
Retained earnings include equity in unremitted earnings of unconsolidated affiliates of $99.2, $34.7 and $78.3 million at December 31, 1996, 1995 and 1994, respectively.
Note 2. Acquisitions and Dispositions
Transportacion Ferroviaria Mexicana. In June 1996, the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") formed Transportacion Ferroviaria Mexicana S. de R.L. de C.V. ("TFM"). TFM was formed to participate in the privatization of the Mexican rail industry. At December 31, 1996, the Company owned 49% of TFM. As discussed below, in January 1997, TMM and the Company entered into a letter of intent to sell approximately 24.5% of TFM to the Mexican Government ("Government"), which, upon completion of the sale, would reduce the Company's interest in TFM to approximately 37%. The Company accounts for TFM under the equity method.
On December 6, 1996, TFM, TMM and the Company announced that the Government had awarded to TFM the right to purchase 80% of the common stock of Ferrocarril del Noreste, S.A. de C.V. ("FNE") for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S.). FNE holds the concession to operate Mexico's approximate 2,500 mile "Northeast Railway" for the next 50 years, with the option of a 50 year extension (subject to certain conditions).
The Northeast Railway is a strategically important rail link to Mexico and the North American Free Trade Agreement ("NAFTA") corridor. The line is estimated to transport approximately 40% of Mexico's rail cargo and is located next to primary north/south truck routes. The Northeast Railway directly links Mexico City and Monterrey, as well as Guadalajara (through trackage rights), with the ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of Matamoros and Nuevo Laredo. Nuevo Laredo is a primary transportation gateway between Mexico and the United States. The Northeast Railway will connect in Laredo, Texas to the Union Pacific Railroad and the Texas-Mexican Railroad Company ("Tex-Mex"). The Tex-Mex is a wholly-owned subsidiary of Mexrail, Inc. ("Mexrail"), a 49% owned equity investment of the Company. The Tex-Mex links to KCSR at Beaumont, Texas through trackage rights. With the KCSR and Tex-Mex interchange at Beaumont, and through KCSR's connections with major rail carriers at various other points, KCSR has developed a NAFTA rail system which is expected to facilitate the economic integration of the North American marketplace.
[Page 48] TFM deposited approximately $560 million U.S. with the Government on January 31, 1997 (representing approximately 40% of the purchase price) as the initial installment under the agreement to purchase FNE. The Company funded its proportionate amount (approximately $277 million U.S.) of the initial installment as a capital contribution to TFM using borrowings under existing lines of credit. The Government has transferred to TFM 32% of the stock of FNE and deposited an additional 48% of the stock in trust pending receipt of the final installment of the purchase price from TFM. The remaining 20% of FNE will be retained by the Government. The Government has the option of selling its 20% interest through a public offering, or selling it to TFM subsequent to October 31, 2003 at the share price paid by TFM indexed for inflation at the Mexican Base Rate (i.e., the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that TFM does not purchase the Government's 20% interest, TMM and KCSI are obligated to purchase the interest in proportion to their ownership interest in TFM.
The remaining 60% of the purchase price will be paid when TFM gains operational control of the Northeast Railway, but in no case later than July 16, 1997. TFM (through FNE) has entered into a letter of intent with an investment banking institution to finance the majority of this remaining amount through a combination of a senior bank facility, a high yield note offering, and (if necessary) a high yield bridge loan facility. Together with a line of credit, the arrangements are expected to make available to TFM approximately $875 million. The terms of the letter of intent include a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, to be agreed upon, are not met. The Company would be responsible for approximately $74 million of the capital call.
Concurrent with the arrangement of financing for TFM, TMM and the Company entered into a letter of intent to sell approximately 24.5% of TFM to the Government for approximately $200 million U.S. The letter of intent contemplates that the Government's interest would have limited voting rights, and that TMM and the Company would have a call option, which could be exercised at the share price paid by the Government plus a (U.S. dollar-denominated) interest factor based on one-year U.S. Treasury securities. The proceeds from the Government will be used to finance a portion of the FNE purchase price. As noted above, upon completion of the transaction, the Company's interest in TFM would be reduced from 49% to approximately 37%.
In the event that the proceeds from the proposed debt financing and sale of 24.5% of TFM to the Government do not provide funds sufficient for TFM to make the final installment of the purchase price, the Company may be required to make additional capital contributions. In order to hedge against a portion of the Company's exposure to a strengthening Mexican peso, in February 1997, the Company entered into a $98 million forward contract to purchase Mexican pesos. The contract matures in July 1997. Any gain or loss associated with this contract will be deferred until maturity and accounted for as a component of the Company's investment in TFM. This contract is intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. See Note 11 for additional information.
Upon completion of TFM's purchase of 80% of FNE, the Company expects that its investment in TFM will total approximately $300 million.
Management expects to record losses associated with its investment in TFM during the initial years of TFM's operation (through FNE) of the Northeast Railway.
Gateway Western Acquisition. In December 1996, KCSTC (a wholly-owned subsidiary of the Company) acquired beneficial ownership of the outstanding stock of the Gateway Western, a regional rail carrier with operations from Kansas City, Missouri to East St. Louis and Springfield, Illinois. Gateway Western also has restricted haulage rights between Springfield and Chicago from the Southern Pacific Rail Corporation. The acquisition will be accounted for under the purchase method. The consideration paid for Gateway Western (including various acquisition costs and liabilities) was approximately $12.2 million, which, based on initial purchase price allocations, exceeded the fair value of the underlying net assets by approximately $12.1 million. The resulting intangible will be amortized over a period of 40 years.
[Page 49] The stock acquired by KCSTC will be held in an independent voting trust until the Company receives approval from the STB on the proposed transaction. The approval process is expected to take approximately five months. If approved, the voting trust will be dissolved and the shares transferred to KCSTC; however, if the acquisition is not approved, the shares would have to be disposed to a non-affiliated third party. While the Gateway Western stock is held in trust, the Company will account for Gateway Western under the equity method as a majority-owned unconsolidated subsidiary. If the shares are transferred to KCSTC, final purchase price allocations will be completed and Gateway Western will become a consolidated subsidiary reported within the KCSR segment.
Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company, Burlington Northern Santa Fe Corporation has the option of purchasing the assets of Gateway Western (based on a fixed formula in the agreement) through the year 2004.
Assuming the transaction had been completed January 1, 1996, inclusion of Gateway Western results on a pro forma basis, as of and for the year ended December 31, 1996, would not have been material to the Company's consolidated results of operations.
Southern Capital Corporation, LLC Joint Venture. On October 21, 1996, the Company and GATX Capital Corporation ("GATX") completed the transactions for the formation and financing of a joint venture to perform certain leasing and financing activities. The venture, Southern Capital Corporation, LLC ("Southern Capital"), was formed through a GATX contribution of $25 million in cash, and a Company contribution (through its subsidiaries KCSR and Carland, Inc.) of $25 million in net assets, comprising a negotiated fair value of locomotives and rolling stock and long-term indebtedness owed to KCSI and its subsidiaries. In an associated transaction, Southern Leasing Corporation (an indirect wholly-owned subsidiary of the Company prior to dissolution in October 1996), sold to Southern Capital approximately $75 million of loan portfolio assets and rail equipment at fair value which approximated historical cost.
As a result of these transactions and subsequent repayment by Southern Capital of indebtedness owed to KCSI and its subsidiaries, the Company received cash which exceeded the net book value of its assets by approximately $47.2 million. Concurrent with the formation of the joint venture, KCSR entered into operating leases with Southern Capital for the majority of the rail equipment acquired by or contributed to Southern Accordingly, this excess fair value over book value is being recognized over the terms of the leases.
The cash received by the Company was used to reduce outstanding indebtedness by approximately $217 million, after consideration of applicable income taxes, through repayments on various lines of credit and subsidiary indebtedness. The Company reports its 50% ownership interest in Southern Capital under the equity method of accounting. See Note 3 for additional information.
DST Public Offering. On October 31, 1995, DST and the Company effected an initial public offering for a total of 22 million shares of DST common stock. The initial offering price was $21 per share. Of the 22 million shares, 19,450,000 and 2,550,000 were offered by DST and the Company, respectively. On November 6, 1995, an over-allotment option, granted by the Company to the underwriters, for an additional 3,300,000 DST shares owned by the Company was exercised, effectively completing the DST offering. The approximate $384.0 million net proceeds received by DST were used to reduce outstanding indebtedness to the Company, borrowings on bank credit lines, and for working capital. The approximate $276 million in proceeds received by the Company from sale of DST stock and repayment of indebtedness by DST have been used for repayment of debt, repurchase of Company common stock and general corporate purposes. In conjunction with the offering, the Company completed an exchange of 4,253,508 shares of DST common stock for 1,820,000 shares of Company common stock held by the DST portion of the ESOP. The 1,820,000 shares received in the exchange have been accounted for as treasury shares by the Company. With the completion of all associated transactions, the Company's ownership in DST was reduced to approximately 41%, and a pretax gain of approximately $296.3 million was recognized during fourth quarter 1995. The Company recorded approximately $78.6 million in income taxes currently payable and $73.1 million in deferred income taxes in connection with the public offering and associated transactions, resulting in an after-tax gain of approximately $144.6 million.
[Page 50] Upon completion of the public offering, DST was no longer included in the Company's consolidation, and was accounted for as an equity investment (in accordance with the Company's accounting policy described more fully in Note 1) in the Consolidated Statement of Income for the year ended December 31, 1995 as if it was an unconsolidated subsidiary as of January 1, 1995. The Consolidated Statement of Income for the year ended December 31, 1994 reflects DST as a consolidated subsidiary of the Company.
In order to provide a more relevant comparison of the current operations of the Company to 1994, selected financial information for the year ended December 31, 1994 has been reclassified below to reflect DST as a 100% owned unconsolidated subsidiary accounted for under the equity method. The information reflected below was derived by: i) eliminating all DST assets, liabilities and the various income statement line items from historical consolidated KCSI results; ii) considering the effects of elimination entries required for consolidation; and iii) including only the Company's investment in DST (as an equity investment) and the equity in earnings of DST for the year ended December 31, 1994. This information does not include any pro forma adjustments which would be required to fully reflect the effects of the DST stock offering as if it had occurred on January 1, 1994.
[Page 51] Mexrail Investment. In November 1995, the Company purchased 49% of the common stock of Mexrail from TMM. Mexrail owns 100% of the Tex-Mex, as well as certain other assets. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas, with trackage rights to Beaumont, Texas. The purchase price of $23 million was financed through the Company's existing lines of credit. The investment is accounted for under the equity method. The transaction resulted in the recording of intangibles (approximately $9.8 million) as the purchase price exceeded the fair value of underlying net assets. The intangible amounts are being amortized over a period of 40 years. Assuming the transaction had been completed January 1, 1995, inclusion of Mexrail results on a pro forma basis, as of and for the year ended December 31, 1995, would not have been material to the Company's consolidated results of operations.
Berger. In October 1994, the Company completed the acquisition of a controlling interest in Berger. The Company made payments of $47.5 million in cash, pursuant to a Stock Purchase Agreement (the "Agreement"). The Agreement also provides for additional purchase price payments, totaling approximately $62.4 million, contingent upon attaining certain levels (up to $10 billion) of assets under management, as defined in the Agreement, over a five year period. Any contingent payments will be reflected as an adjustment to the purchase price.
The acquisition, which was accounted for as a purchase, increased the Company's ownership in Berger from approximately 18% to over 80%. Adjustments to appropriate asset and liability balances were 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. In 1996 and 1995, contingent payments were made totaling $23.9 and $3.1 million, respectively, resulting in adjustment to the purchase price recorded, and therefore, an increase in intangibles. The intangible amounts are being amortized over their estimated economic life of 15 years.
The financial statements of Berger were consolidated into the Company effective with the closing of the transaction. Assuming the transaction had been completed on January 1, 1994, the addition of Berger's revenues and net income, including adjustments to reflect the effects of the acquisition on a pro forma basis, as of and for the year ended December 31, 1994, would not have been material to the Company's consolidated results of operations.
In January 1997, KCSI's ownership in Berger increased to approximately 87% due to Berger's repurchase of its common stock (for treasury) from a minority shareholder. The Company recorded $8.7 million in intangibles in connection with this transaction, which will be amortized over 15 years.
DST Transactions. On August 1, 1996, The Continuum Company, Inc. ("Continuum"), formerly an approximate 23% owned DST equity affiliate, merged with Computer Sciences Corporation ("CSC," a publicly traded company) in a tax-free share exchange. In exchange for its ownership interest in Continuum, DST received approximately 4.3 million shares (representing an approximate 6% interest) of CSC common stock.
As a result of the transaction, the Company's earnings for the year ended December 31, 1996 include approximately $47.7 million (after-tax), or $1.24 per share, representing the Company's proportionate share of the one time gain recognized by DST in connection with the merger. Continuum ceased to be an equity affiliate of DST, thereby eliminating any future Continuum equity affiliate earnings or losses. DST recognized equity losses in Continuum of $4.9 million for the first six months of 1996 and $1.1 million for the year ended December 31, 1995. DST recognized $5.0 million in equity earnings from Continuum in 1994. DST did not receive any dividends from CSC in 1996, consistent with historical CSC practice.
[Page 52] On January 31, 1995, DST completed the sale of its 50% interest in Investors Fiduciary Trust Company Holdings, Inc. ("IFTC"), which wholly-owns Investors Fiduciary Trust Company, to State Street Boston Corporation ("State Street"). At closing, DST received 2,986,111 shares of State Street common stock in a tax-free exchange (representing an approximate 4% ownership interest in State Street). As a result of this transaction, equity earnings from DST include a net gain of $4.7 million, after consideration of appropriate tax effects. With the closing of the transaction, IFTC ceased to be an unconsolidated affiliate of DST and no further equity in earnings of IFTC have been recorded by DST. The Company recognized equity in earnings from IFTC of $6.5 million in 1994. DST received approximately $2.2 and $1.5 million in dividends from State Street during 1996 and 1995, respectively.
Note 3. Supplemental Cash Flow Disclosures
Supplemental Disclosures of Cash Flow Information.
Supplemental Schedule of Noncash Investing and Financing Activities. In connection with the Southern Capital joint venture formation, the Company (through its subsidiaries KCSR, Carland, Inc. and Southern Leasing Corporation) contributed/sold to Southern Capital rail equipment, current and non-current loan portfolio assets, and long-term indebtedness owed to KCSI and its subsidiaries (see Note 2). Southern Capital repaid the indebtedness owed KCSI and its subsidiaries with borrowings under Southern Capital's credit facility. Cash received by KCSI from Southern Capital of approximately $224 million is reflected in the Consolidated Statement of Cash Flows for the year ended December 31, 1996 as proceeds from disposal of property ($184 million) and proceeds from disposal of other investments ($40 million). The Company accrued for expected income taxes on the transaction and, as described in Note 2, deferred the excess cash received over the book value of the assets contributed and sold.
The Company accrued a liability for the donation of 300,000 shares of DST common stock to a charitable trust in December 1995. These shares were delivered to the charitable trust in January 1996, resulting in a reduction in the Company's investment in DST and associated liabilities.
Company subsidiaries and affiliates hold various investments which are accounted for as "available for sale" securities as defined in Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company records its proportionate share of any unrealized gains or losses related to these investments, net of taxes, in stockholders' equity. Stockholders' equity increased $18.5 and $8.2 million in 1996 and 1995, respectively, and decreased $3.9 million in 1994, as a result of unrealized gains or losses related to these investments.
The Company's Board of Directors declared a quarterly dividend on November 14, 1996 totaling approximately $3.6 million, payable on January 2, 1997. Accordingly, the dividend declaration reduced retained earnings and established a liability as of December 31, 1996, requiring no cash outlay until 1997.
On November 15, 1995, the Company's Board of Directors declared a quarterly dividend totaling approximately $3.1 million, payable on January 2, 1996. The dividend declaration reduced retained earnings and established a liability as of December 31, 1995.
[Page 53] In first quarter 1996, the Company issued approximately 101,800 shares of KCSI common stock under the Eighth Offering of the Employee Stock Purchase Plan ("ESPP"). These shares, totaling a purchase price of approximately $3.8 million, were subscribed and paid for through employee payroll deductions in 1994 and 1995.
In fourth quarter 1995, KCSI issued approximately 53,950 shares of common stock under the Eighth Offering of the ESPP. These shares, totaling a purchase price of approximately $2.1 million, were subscribed and paid for through employee payroll deductions in 1994 and 1995.
In first quarter of 1994, KCSI issued approximately 234,000 shares of common stock under the Seventh Offering of the ESPP. These shares, totaling a purchase price of approximately $4.6 million, were subscribed and paid for through employee payroll deductions in 1993.
In connection with the DST public offering in fourth quarter 1995, the Company exchanged DST shares for 1,820,000 shares of KCSI common stock owned by the ESOP with a value of approximately $84.8 million. No cash was exchanged in connection with this transaction.
At December 31, 1995, the Company had repurchased $11.9 million of its common stock for which cash had not been exchanged prior to year end. The Company recorded a liability for these repurchases, with an offsetting reduction of stockholders' equity.
As described in greater detail in Note 6, the Company issued $100 million in Debentures in 1995. As part of this transaction, the Company incurred $2.2 million in discount and underwriting fees which were transferred directly to the underwriter. The discount and underwriting fees represent non-cash amounts, which are being amortized over the term of the Debentures.
Property acquired under capital leases was $3.4 million for 1994. Such acquisitions require no direct outlay of cash.
Note 4. Investments
Investments held for operating purposes include investments in unconsolidated affiliates as follows (in millions):
[Page 54] (a) As a result of the DST public offering and associated transactions completed in November 1995 (discussed in Note 2), the Company's investment in DST was reduced to approximately 41%. Fair market value at December 31, 1996 (based on the New York Stock Exchange closing market price) was approximately $633.7 million
(b) During 1996, purchase price allocations were completed, and resulted in reclassification of $9.1 million from investments to intangibles, representing excess purchase price over fair value of underlying net assets
(c) In January 1997, the Company, together with TMM, entered into a letter of intent to sell approximately 24.5% of TFM to the Mexican Government. Upon completion of the sale, the Company's ownership in TFM would be reduced to approximately 37% (see Note 2)
(d) Gateway Western will be reported as an unconsolidated subsidiary until the Company receives approval for the purchase from the STB, which is still pending (see Note 2)
(e) Midland, comprising Midland Data Systems, Inc. and Midland Loan Services, L.P., both formerly 45% owned KCSI affiliates, was sold in April 1996
(f) Owned by DST or a subsidiary of DST. DST was consolidated in 1994
(g) Fair market value is not readily determinable for investments other than noted above, and in the opinion of management, market value approximates carrying value
Additionally, DST holds investments in the common stock of State Street and CSC, which are accounted for as "available for sale" securities as defined by SFAS 115. The Company records its proportionate share of any unrealized DST gains or losses related to State Street and CSC, net of taxes, in stockholders' equity.
Transactions With and Between Unconsolidated Affiliates. In connection with the October 1996 formation of the Southern Capital joint venture, KCSR entered into operating leases with Southern Capital for locomotives and rolling stock at rental rates management believes reflect market. KCSR paid Southern Capital $4.5 million under these operating leases in 1996. Additionally, Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, entered into a contract with Southern Capital to manage the loan portfolio assets held by Southern Capital, as well as to perform general administrative and accounting functions for the venture. Payments under this contract were not material to the Company in 1996.
Throughout 1996, the Company repurchased KCSI common stock owned by DST's portion of the ESOP and DST's Profit Sharing Plan. In total, 535,000 shares were repurchased for approximately $24.2 million.
Together, Janus and Berger recognized approximately $5.4 and $4.5 million in 1996 and 1995, respectively, in expenses associated with various services provided by DST and its subsidiaries and affiliates.
DST had loans outstanding to the Company throughout the first ten months of 1995, which were repaid in connection with the public offering. The Company recognized approximately $8.8 million in interest income related to this indebtedness during 1995. Additionally, DST paid a special dividend of $150 million to the Company in May 1995.
During 1995, DST sold its interest in Midland to the Company. In April 1996, the Company sold its Midland investments, resulting in an after-tax gain of $1.7 million.
DST revenues associated with its unconsolidated affiliates were $76 million for 1994. Accounts receivable in 1994 include amounts due from unconsolidated affiliates of $14 million related to services provided by DST in the ordinary course of business and payable at usual trade terms.
[Page 55] Financial Information. Combined financial information of all unconsolidated affiliates, principally DST in 1996 and 1995 and DST-related affiliates in 1994, which the Company and its subsidiaries account for under the equity method, is as follows (in millions):
(i) Significant increase over 1995 and 1994 is attributable to the one time gain recorded by DST as a result of the merger of its Continuum investment in third quarter 1996 (see Note 2)
Generally, the difference between the carrying amount of the Company's investment in unconsolidated affiliates and the underlying equity in net assets is attributable to certain equity investments whose carrying amounts have been reduced to zero, and report a net deficit. However, in 1995, the larger difference between the carrying amount and the underlying equity in net assets of unconsolidated affiliates was a result of initial purchase price allocations related to the Mexrail acquisition. Upon completion of the purchase price allocation in 1996, $9.1 million was reclassified from investments to intangibles, representing excess purchase price over fair value of underlying net assets (see Note 2).
[Page 56] Financial information with respect to DST in 1996 and 1995 and for IFTC in 1994, which are included in the amounts shown above, is as follows (in millions):
(i) Significant increase over 1995 is attributable to the one time gain recorded by DST as a result of the merger of its Continuum investment in third quarter 1996 (see Note 2)
Other. Interest income on cash and equivalents and short-term investments was $4.9, $2.8 and $2.5 million in 1996, 1995 and 1994, respectively.
Note 5. Other Balance Sheet Captions
Accounts Receivable. Accounts receivable include the following allowances (in millions):
Other Current Assets. Other current assets include the following items (in millions):
[Page 57] Properties. Properties and related accumulated depreciation and amortization are summarized below (in millions):
Intangibles and Other Assets. Intangibles and other assets include the following items (in millions):
[Page 58] Accrued Liabilities. Accrued liabilities include the following items (in millions):
Note 6. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in millions):
[Page 59] KCSI Credit Agreements. The Company's lines of credit at December 31, 1996 follow (in millions):
On May 5, 1995, the Company established a new credit agreement in the amount of $400 million. The credit agreement replaced approximately $420 million of then existing Company credit agreements which had been in place for varying periods since 1992 (see below). Proceeds of the facility have been and are anticipated to be used for general corporate purposes. The agreement contains a facility fee ranging from .07 - .25% per annum, interest rates below prime and terms ranging from one to five years. The Company also has various other lines of credit lines totaling $120 million. These additional lines, which are available for general corporate purposes, have interest rates below prime and terms of less than one year. At December 31, 1996, the Company had $40 million outstanding under its various lines of credit. Among other provisions, the agreements limit subsidiary indebtedness and sale of assets, and require certain coverage ratios to be maintained.
As discussed in Note 2, in January 1997, the Company made an approximate $277 million capital contribution to TFM, representing the Company's proportionate amount of the initial payment required of TFM by the Mexican Government for the purchase of FNE. This payment was funded using borrowings under the Company's lines of credit.
During 1994 and 1993, the Company established or increased credit agreements with several lending institutions, which increased the Company's borrowing ability to approximately $450 million. The agreements bore interest rates below prime. Proceeds from these agreements were used to finance the Berger and MidSouth Corporation ("MidSouth") acquisitions, refinance certain MidSouth indebtedness, and for general corporate purposes. All of these agreements were replaced by the new credit agreement established on May 5, 1995 as discussed above.
Public Debt Transactions. On December 18, 1995, the Company issued $100 million of 7% Debentures due 2025. The Debentures are redeemable at the option of the Company at any time, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of such Debentures or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis at the Treasury Rate (as defined in the Debentures agreement) plus 20 basis points, and in each case accrued interest thereon to the date of redemption. The net proceeds of this transaction were used to repay indebtedness on the Company's existing lines of credit and for the repurchase of KCSI common stock.
Other Company public indebtedness includes $100 million of 5.75% Notes due in 1998; $100 million of 6.625% Notes due in 2005; $100 million of 7.875% Notes due 2002; and $100 million of 8.8% Debentures due 2022. The various Notes are not redeemable prior to their respective maturities. The 8.8% Debentures are redeemable on or after July 1, 2002 at a premium of 104.04%, which declines to par on or after July 1, 2012.
These various debt transactions were issued at a total discount of $4.1 million. This discount is being amortized over the respective debt maturities on a straight-line basis, which is not materially different from the interest method. Deferred debt issue costs incurred in connection with these various transactions (totaling approximately $4.8 million) are also being amortized on a straight-line basis over the respective debt maturities.
[Page 60] KCSI ESOP. In 1988, the Company established a $39 million leveraged ESOP (see Note 8). Related indebtedness was guaranteed by the Company.
In 1995, the Company retired the remaining ESOP indebtedness through contributions totaling $13.2 million, which included $9.0 million in accelerated payments.
KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales agreements, equipment trust certificates and capitalized lease obligations, which equipment has been pledged as collateral for the related indebtedness.
Other Agreements, Guarantees, Provisions and Restrictions. As of December 31, 1996, the Company is a guarantor of approximately $40 million principal indebtedness of Gateway Western. As discussed in Note 2, if the Company receives approval for the acquisition of Gateway Western from the STB, the assets and liabilities, including this indebtedness, of Gateway Western will be included in the Company's consolidated financial statements.
As previously noted, the Company has debt agreements containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. At December 31, 1996, the Company was in compliance with the provisions and restrictions of these agreements. Because of certain financial covenants contained in the credit agreements, however, maximum utilization of the Company's available lines of credit may be restricted. Unrestricted retained earnings at December 31, 1996 were $285.6 million.
Leases and Debt Maturities. The Company and its subsidiaries lease transportation equipment, and office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $42, $30 and $53 million for the years 1996, 1995 and 1994, respectively. As more fully described in Note 2, in connection with the Southern Capital joint venture transactions completed in October 1996, KCSR entered into operating leases with Southern Capital for locomotives and railroad rolling stock. Accordingly, 1997 and future years' rental expenses under operating leases are expected to increase.
Minimum annual payments and present value thereof under existing capital leases, other debt maturities, and minimum annual rental commitments under noncancellable operating leases, are as follows (in millions):
Fair Value of Long-Term Debt. Based upon the borrowing rates currently available to the Company and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of long-term debt was approximately $663, $679 and $959 million at December 31, 1996, 1995 and 1994, respectively.
[Page 61] Note 7. Income Taxes
Under the liability method of accounting for income taxes specified by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," 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. Generally, deferred tax expense is the result of changes in the liability for deferred taxes.
Tax Expense. Income tax expense attributable to continuing operations consists of the following components (in millions):
Deferred Taxes. Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities, and available tax credit carryovers. Temporary differences which give rise to a significant portion of federal deferred tax expense (benefit) applicable to continuing operations are as follows (in millions):
[Page 62] The federal and state deferred tax liabilities (assets) recorded on the Consolidated Balance Sheets at December 31, 1996, 1995 and 1994, respectively, follow (in millions):
Based upon the Company's history of operating earnings and its expectations for the future, management has determined that operating income of the Company will, more likely than not, be sufficient to recognize fully the above gross deferred tax assets.
Tax Rates. Differences between the Company's effective income tax rates applicable to continuing operations and the U.S. federal income tax statutory rates of 35% in 1996, 1995 and 1994, are as follows (in millions):
[Page 63] Tax Carryovers. At December 31, 1996, the Company had $3.4 million of alternative minimum tax credit carryover generated by the MidSouth prior to its acquisition by the Company. This credit can be carried forward indefinitely and is available on a "tax return basis" to reduce future federal income taxes payable.
The amount of federal NOL carryover generated by the MidSouth prior to its acquisition was $54.0 million. The Company utilized approximately $31.9 million of these NOL's in 1996, leaving approximately $22.1 million of carryover available, with expiration dates beginning in the year 2004. The use of preacquisition net operating losses and tax credit carryovers is subject to limitations imposed by the Internal Revenue Code. The Company does not anticipate that these limitations will affect utilization of the carryovers prior to their expiration.
Tax Examinations. Examinations of the consolidated federal income tax returns by the Internal Revenue Service ("IRS") have been completed for the years 1984-1989 and the IRS has proposed certain tax assessments for these years. In addition, other taxing authorities have also completed examinations principally through 1992, and have proposed additional tax assessments for which the Company believes it has recorded adequate reserves.
Since most of these asserted tax deficiencies represent temporary differences, subsequent payments of taxes will not require additional charges to income tax expense. In addition, accruals have been made for interest (net of tax benefit) for estimated settlement of the proposed tax assessments. Thus, management believes that final settlement of these matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition.
Note 8. Stockholders' Equity
Pro Forma Fair Value Information for Stock-Based Compensation Plans. At December 31, 1996, the Company had several stock-based compensation plans, which are described separately below. The Company applies APB 25, and related interpretations, in accounting for its plans. No compensation cost has been recognized for its fixed stock option plans and its ESPP. Had compensation cost for the Company's stock-based compensation plans been determined in accordance with the fair value accounting method prescribed by SFAS 123 for options issued after December 31, 1994, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Stock Option Plans. Employee Stock Option Plans established in 1978, 1983, 1987 and 1991, as amended, provide for the granting of options to purchase up to 19.6 million shares (after stock splits) of the Company's common stock by officers and other designated employees. In addition, the Company established a 1993 Directors' Stock Option Plan with a maximum of 120,000 shares for grant. Such options have been granted at 100% of the average market price of the Company's stock on the date of grant and generally may not be exercised sooner than one year, nor longer than ten years following the date of the grant, except that options outstanding for six months or more, with limited rights, become immediately exercisable upon certain defined circumstances constituting a change in control of the Company. The Plans include provisions for stock appreciation rights and limited rights ("LRs"). All outstanding options include LRs, except for options granted to non-employee Directors.
[Page 64] For purposes of computing the pro forma effects of option grants under the fair value accounting method prescribed by SFAS 123, the fair value of each option grant is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following assumptions were used for the various grants depending on the date of grant, nature of vesting and term of option:
A summary of the status of the Company's stock option plans as of December 31, 1996, 1995 and 1994, and changes during the years then ended, is presented below:
The following table summarizes the information about stock options outstanding at December 31, 1996:
Shares available for future grants at December 31, 1996 aggregated 3,955,646.
[Page 65] Stock Purchase Plan. The ESPP, established in 1977, provides to substantially all full-time employees of the Company, certain subsidiaries and certain other affiliated entities, the right to subscribe to an aggregate of 7.6 million shares of common stock. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower, but in no event less than the par value of the shares. At December 31, 1996, there were approximately 3.9 million shares available for future offerings.
The following table summarizes activity related to the various ESPP offerings:
For purposes of computing the pro forma effects of employees' purchase rights under the fair value accounting method prescribed by SFAS 123, the fair value of the Tenth and Ninth Offerings under the ESPP are estimated on the date of grant using a version of the Black-Scholes option pricing model. The following weighted-average assumptions were used:
The weighted-average fair value of purchase rights granted under the Tenth and Ninth Offerings of the ESPP were $10.67 and $10.48, respectively.
Restricted Stock. The Company issued 7,300 shares of restricted stock in 1993 to senior management executives of KCSI and certain subsidiaries at then current market prices ranging between $39.25 and $41.56 per share. These shares vest ratably over a five year period.
Forward Stock Purchase Contract. During 1995, the Company entered into a forward stock purchase contract ("the contract") as a means of securing a potentially favorable price for the repurchase of its common stock in connection with the stock repurchase program authorized by the Company's Board of Directors on April 24, 1995. During 1996, the Company purchased 1.2 million shares under this arrangement at an aggregate price of $56 million (including transaction premium). In January 1997, the Company purchased 400,000 shares for approximately $19 million. The contract, which is not held for trading purposes, allows the Company to purchase from a financial institution an additional 400,000 shares of the Company's common stock at an aggregate price of approximately $19 million (including an escalating transaction premium which approximates $1.5 million). The contract also contains provisions which allow the Company to elect a net cash or net share settlement in lieu of physical settlement of the shares. The transaction will be recorded in the Company's financial statements upon settlement of the contract in accordance with the Company's accounting policies described in Note 1. If either the net cash or net share settlement provisions are elected by the Company, any appreciation or depreciation associated with the forward contract will be reflected as an equity component upon settlement of the contract. At February 20, 1997, the fair value of 400,000 shares of the Company's common stock was $21 million, based on quoted market prices.
The contract involves, to varying degrees, elements of credit and market risk; however, the Company does not anticipate any material adverse effect on its financial position resulting from its involvement in this contract, nor does it anticipate nonperformance by the counter party. The contract is unsecured.
[Page 66] Employee Stock Ownership Plan. In 1987 and 1988, KCSI and DST established leveraged ESOPs for employees not covered by collective bargaining agreements by collectively purchasing $69 million of KCSI common stock from Treasury at a then current market price of $49 per share ($12.25 per share effected for stock splits). During 1990, the two plans were merged into one plan known as the KCSI ESOP. The indebtedness was retired in full during 1995. In October 1995, the ESOP became a multiple employer plan covering both KCSI employees and DST employees, and was renamed The Employee Stock Ownership Plan. KCSI contributions to its portion of the ESOP are based on a percentage (determined by the Compensation Committee of the Board of Directors) of wages earned by eligible employees.
The Company's employee benefit expense for the ESOP aggregated $2.4, $5.7 and $15.5 million in 1996, 1995 and 1994, respectively. Interest incurred on the indebtedness was $0.8 and $1.2 million in 1995 and 1994, respectively. Dividends used to service the ESOP indebtedness were $1.6 and $1.3 million in 1995 and 1994, respectively.
Certain of the Company's ESOP shares are grandfathered under the provisions of Statement of Position No. 93-6 "Employers Accounting for Employee Stock Ownership Plans" ("SOP 93-6"). In 1994, the Company contributed $11.5 million to the ESOP which was used by the trustee to purchase 352,000 shares of KCSI common stock in the open market for allocation to plan participants. These ESOP shares were not grandfathered under the provisions of SOP 93-6. Disclosures regarding the Company's ESOP plan follow, (in millions at December 31, 1996):
Employee Plan Funding Trust. On October 1, 1993, KCSI transferred one million shares of KCSI Series B Convertible Preferred Stock (the "Series B Preferred Stock") to the Kansas City Southern Industries, Inc. Employee Plan Funding Trust ("the Trust"), a grantor trust established by KCSI. The purchase price of the stock (based upon an independent valuation) was $200 million, which the Trust financed through KCSI. The indebtedness of the Trust to KCSI is repayable over 27 years with interest at 6% per year, with no principal payments in the first three years. The Trust, which is administered by an independent bank trustee and consolidated into the Company's financial statements, will repay the indebtedness to KCSI utilizing dividends and other investment income, as well as other cash obtained from KCSI. As the debt is reduced, shares of the Series B Preferred Stock, or shares of common stock acquired on conversion, may be released and available for distribution to various KCSI employee benefit plans, including its ESOP, Stock Option Plan and Stock Purchase Plans. Principal payments totaling $14.1 million have been made since inception; however, no shares have been released or are available for distribution to these plans. Only shares that have been released and allocated to employees are considered for purposes of computing fully-diluted earnings per share.
The Series B Preferred Stock, which has a $10 per share (5%) annual dividend and a $200 per share liquidation preference, is convertible into common stock at an initial ratio of four shares of common stock for each share of Series B Preferred Stock. The Series B Preferred Stock is redeemable after April 1, 1995 at a specified premium and under certain other circumstances.
The Series B Preferred Stock can be held only by the Trust or its beneficiaries - the employee benefit plans of KCSI. The full terms of the Series B Convertible Preferred Stock are set forth in a Certificate of Designations approved by the Board of Directors and filed in Delaware.
Treasury Stock. The Company issued shares of common stock from Treasury - 519,268 in 1996, 523,320 in 1995 and 721,431 in 1994 - to fund the exercise of options and subscriptions under various employee stock option and purchase plans. Treasury stock previously acquired had been accounted for as if retired. The Company purchased shares as follows: 3,276,533 in 1996, 4,978,457 in 1995 and 1,376 in 1994.
[Page 67] Establishment of Par Value for Common Stock. In May 1994, the Company amended its certificate of incorporation to set a par value for the common stock and increase its authorized shares. The amendment established a par value of $.01 per common share, which had previously been no par, and had the effect of reallocating amounts between categories within stockholders' equity, but had no overall effect upon the total amount of stockholders' equity. In addition, the number of authorized common shares was increased from 100 million to 400 million.
Note 9. Minority Interest
Purchase Agreements. Agreements between KCSI and Janus minority owners contain, among other provisions, mandatory stock purchase provisions whereby under certain circumstances, KCSI would be required to purchase the minority interest of Janus.
In late 1994, the Company was notified that certain Janus minority owners made effective the mandatory purchase provisions for a certain percentage of their ownership. In the aggregate, the value of the shares made effective for mandatory purchase totaled $59 million. Concurrent with the notification of these mandatory purchase provisions, the Company negotiated the early termination of certain Janus compensation arrangements, which began in 1991. These compensation arrangements, which were scheduled to be fully vested at the end of 1996, permitted individuals to earn units (which vested over time) based upon Janus earnings, and would have continued to accrue benefits in subsequent years. The negotiated termination resulted in payments of $48 million in cash by Janus, of which approximately $21 million had been accrued.
In early 1995, the individuals whose compensation arrangements were terminated used their after-tax net proceeds to purchase certain portions of the shares made available due to the mandatory purchase notification discussed above. In addition, the Janus minority group was restructured to allow for minority ownership by other key Janus employees. These employees also purchased portions of the minority shares (available as a result of the mandatory purchase notification) through payment of $10.5 million in cash and recourse loans financed by KCSI. The remaining minority shares made effective for mandatory purchase were purchased by Janus ($6.1 million, as treasury stock) and KCSI ($12.7 million).
As a result of KCSI's acquisition of additional Janus shares and the reduction of total outstanding Janus shares (from Janus' treasury purchase), KCSI increased its ownership in Janus from approximately 81% to 83% in January 1995. Additional purchases were made by minority holders during 1995, financed through recourse loans by KCSI in the amount of $8.8 million. The Company also purchased shares, thereby maintaining its respective ownership percentage. The KCSI share purchases resulted in the recording of intangibles as the purchase price exceeded the value of underlying tangible assets. The intangibles are being amortized over their estimated economic lives.
The purchase prices of these mandatory stock purchase provisions are based upon a multiple of earnings and/or fair market value determinations depending upon specific agreement terms. If all of the provisions of the Janus minority owner agreements became effective, KCSI would be required to purchase the respective minority interests at a cost currently estimated at approximately $220 million.
Agreements between KCSI and Berger minority owners contain mandatory stock purchase provisions, which under certain circumstances require Berger or KCSI to purchase the minority interest at a purchase price based upon a multiple of Berger's net investment company advisory fees. If all of the provisions relative to mandatory stock repurchase became effective, KCSI would be required to purchase the respective minority interests at a cost currently estimated at approximately $11 million (exclusive of the minority shareholder whose shares were repurchased by Berger in January 1997 as discussed in Note 2).
[Page 68] Note 10. Profit Sharing and Other Postretirement Benefits
Profit Sharing. Qualified profit sharing plans are maintained for most employees not included in collective bargaining agreements. Contributions for the Company and its subsidiaries are made at the discretion of the Boards of Directors in amounts not to exceed the maximum allowable for federal income tax purposes. Profit sharing expense was $1.8 million in 1996. There was no profit sharing expense for the year ended December 31, 1995. Profit sharing expense was $0.8 million in 1994.
Employee Savings Plan. Effective January 1, 1996, the Company transferred its participating employees from the DST 401(k) Employee Savings Plan into the Kansas City Southern Industries, Inc. 401(k) Plan and Trust Agreement ("employee savings plan"). The Company's employee savings plan permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions up to a maximum of 3% of compensation. In connection with the required match, the Company's contribution to the plan was $1.2 million in 1996.
Other Postretirement Benefits. The Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The Company and several of its subsidiaries provide certain medical, life and other postretirement benefits other than pensions to its retirees. The medical and life plans are available to employees not covered under collective bargaining arrangements, who have attained age 60 and rendered ten years of service. Individuals employed as of December 31, 1992 were excluded from a specific service requirement. The medical plan is contributory and provides benefits for retirees, their covered dependents and beneficiaries. Benefit expense begins to accrue at age 40. The medical plan was amended effective January 1, 1993 to provide for annual adjustment of retiree contributions, and also contains, depending on the plan coverage selected, certain deductibles, copayments, coinsurance and coordination with Medicare. The life insurance plan is non-contributory and covers retirees only. The Company's policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (e.g., money market funds) do exist with respect to life insurance benefits.
The following table displays a reconciliation of the plans' obligations and assets at December 31 (in millions):
Net periodic postretirement benefit cost included the following components (in millions):
[Page 69] The Company's health care costs are limited to the increase in the Consumer Price Index ("CPI") with a maximum annual increase of 5%. Accordingly, health care costs in excess of the CPI limit will be borne by the plan participants, and therefore assumptions regarding health care cost trend rates are not applicable.
The following assumptions were used to determine the postretirement obligations and costs for the years ended December 31:
Note 11. Commitments and Contingencies
Litigation Reserves. In the opinion of management, claims or lawsuits incidental to the business of the Company and its subsidiaries have been adequately provided for in the consolidated financial statements.
Purchase Commitments. As of December 31, 1995, the Company had commitments to purchase approximately $14 million of diesel fuel over the subsequent twelve month period, representing approximately 50% of projected fuel requirements for 1996. The Company entered into minimal commitments for 1997.
Foreign Exchange Matters. In connection with the Company's investment in TFM, a Mexican company, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements from Mexican pesos into U.S. dollars. The Company expects to follow the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance.
The purchase price to be paid by TFM for 80% of the common stock of FNE is fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuates as the U.S. dollar/Mexican peso exchange rate changes. The Company's capital contribution (approximately $277 million U.S.) to TFM in connection with the initial installment of the FNE purchase price was made based on the U.S. dollar/Mexican peso exchange rate on January 31, 1997.
TFM must pay the remaining 60% of the purchase price in Mexican pesos no later than July 16, 1997. As discussed above, the final installment is expected to be funded using proceeds from the proposed debt financing and sale of 24.5% of TFM to the Mexican Government. In the event that the proceeds from these arrangements do not provide funds sufficient for TFM to make the final installment of the purchase price, the Company may be required to make additional capital contributions.
In order to hedge a portion of the Company's exposure to a strengthening of the Mexican peso versus the U.S. dollar, in February 1997, the Company entered into a $98 million forward contract to purchase Mexican pesos. The contract matures in July 1997. The Company intends to defer any gain or loss from changes in the market value of this contract and to record the net gain or loss as a component of its investment in TFM. This contract is intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. The Company or TFM may enter into additional contracts as market conditions change or exchange rates fluctuate.
[Page 70] Mexico's economy is currently classified as "highly inflationary" as defined in SFAS 52. Accordingly, any gains or losses from translating TFM's financial statements into U.S. dollars will be included in the determination of TFM's net income. Any equity earnings or losses from TFM included in the Company's results of operations will reflect the Company's share of such translation gains and losses.
Upon completion of the TFM purchase of 80% of FNE, the Company expects that its investment in TFM will be approximately $300 million. The Company will evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in TFM as market conditions change or exchange rates fluctuate.
Environmental Liabilities. The Company's transportation operations are subject to extensive regulation under environmental protection laws and its land holdings have been used for transportation purposes or leased to third-parties for commercial and industrial purposes. The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred.
The Company's recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. At December 31, 1996, these recorded liabilities were not material. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition.
Note 12. Control
Subsidiaries and Affiliates. In connection with its acquisition of an interest in Janus, the Company entered into an agreement which provides for preservation of a measure of management autonomy at the subsidiary level and for rights of first refusal on the part of minority stockholders, Janus and the Company with respect to certain sales of Janus stock by the minority stockholders. The agreement also requires the Company to purchase the shares of minority stockholders in certain circumstances. In addition, in the event of a "change of ownership" of the Company, as defined in the agreement, the Company may be required to sell its stock of Janus to the minority stockholders or to purchase such holders' Janus stock. Purchase and sales transactions under the agreements are to be made based upon a multiple of the net earnings of Janus and/or fair market value determinations, as defined therein. See Note 9 for further details.
Under the Investment Company Act of 1940, certain changes in ownership of Janus or Berger may result in termination of its investment advisory agreements with the mutual funds and other accounts it manages, requiring approval of fund shareholders and other account holders to obtain new agreements.
DST, an approximate 41% owned unconsolidated affiliate of the Company, has a Stockholders' Rights Agreement. Under certain circumstances following a "change in control" of KCSI, as defined in DST's Stockholders' Rights Agreement, substantial dilution of the Company's interest in DST could result.
The Company is party to certain agreements with TMM covering the TFM and Mexrail ventures, which contain "change of control" provisions, provisions intended to preserve the proportionate ownership of the Company and TMM, and super majority provisions with respect to voting on certain significant transactions. Such agreements also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in TFM or Mexrail. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates.
[Page 71] Employees. The Company and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termination of employment.
Assets. The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments and entitlements of officers, directors, employees and others in the event of a specified change in control of the Company or subsidiary. Assets held in such trusts at December 31, 1996 were not material. Depending upon the circumstances at the time of any such change in control, the most significant factor of which would be the highest price paid for KCSI common stock by a party seeking to control the Company, funding of the Company's trusts could be very substantial.
Debt. Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for default in the event of a specified change in control of the Company or particular subsidiaries of the Company.
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of the Company's common stock, $.01 par value per share (the "Common Stock"), to the stockholders of record on October 12, 1995. Each Right entitles the registered holder to purchase from the Company 1/1,000th of a share of Series A Preferred Stock (the "Preferred Stock") or in some circumstances, Common Stock, other securities, cash or other assets as the case may be, at a price of $210 per share, subject to adjustment.
The Rights, which are automatically attached to the Common Stock, are not exercisable or transferable apart from the Common Stock until the tenth calendar day following the earlier to occur of (unless extended by the Board of Directors and subject to the earlier redemption or expiration of the Rights): (i) the date of a public announcement that an acquiring person acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the outstanding shares of the Common Stock of the Company (or 15 percent in the case that such person is considered an "adverse person"), or (ii) the commencement or announcement of an intention to make a tender offer or exchange offer that would result in an acquiring person beneficially owning 20 percent or more of such outstanding shares of Common Stock of the Company (or 15 percent in the case that such person is considered an "adverse person"). Until exercised, the Right will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. In connection with certain business combinations resulting in the acquisition of the Company or dispositions of more than 50% of Company assets or earnings power, each Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of the highest priority voting securities of the acquiring company (or certain of its affiliates) that at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on October 12, 2005, unless earlier redeemed by the Company as described below.
At any time prior to the tenth calendar day after the first date after the public announcement that an acquiring person has acquired beneficial ownership of 20 percent (or 15 percent in some instances) or more of the outstanding shares of the Common Stock of the Company, the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right . In addition, the Company's right of redemption may be reinstated following an inadvertent trigger of the Rights (as determined by the Board) if an acquiring person reduces its beneficial ownership to 10 percent or less of the outstanding shares of Common Stock of the Company in a transaction or series of transactions not involving the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will have a cumulative quarterly dividend rate set by the Board of Directors or equal to 1,000 times the dividend declared on the Common Stock for such quarter. Each share will have the voting rights of one vote on all matters voted at a meeting of the stockholders for each 1/1,000th share of preferred stock held by such stockholder. In the
[Page 72] event of any merger, consolidation or other transaction in which the common shares are exchanged, each Series A Preferred share will be entitled to receive an amount equal to 1,000 times the amount to be received per common share. In the event of a liquidation, the holders of Series A Preferred shares will be entitled to receive $1,000 per share or an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock. The shares will not be redeemable. The vote of holders of a majority of the Series A Preferred shares, voting together as a class, will be required for any amendment to the Company's Certificate of Incorporation which would materially and adversely alter or change the powers, preferences or special rights of such shares.
Note 13. Industry Segments
The Company's three segments, aligned to reflect the Company's current operations, are as follows:
The Kansas City Southern Railway Company. The Company operates a Class I Common Carrier railroad system through its wholly-owned subsidiary, KCSR. As a common carrier, KCSR's customer base includes utilities and a wide range of companies in the petroleum/chemical, agricultural and paper processing industries, among others. The railroad system operates primarily in the United States, from the Midwest to the Gulf of Mexico and on an East-West axis from Dallas, Texas to Meridian, Mississippi. Also included in this industry segment is Southern Group, Inc., a wholly-owned subsidiary of KCSR, and equity investments in Southern Capital and Gateway Western.
KCSR's revenues and earnings are dependent on providing reliable service to its customers at competitive rates, the general economic conditions in the geographic region it serves, and its ability to effectively compete against alternative forms of surface transportation, such as over-the-road truck transportation. KCSR's ability to construct and maintain its roadway in order to provide safe and efficient transportation service is important to its ongoing viability as a rail carrier. As has been evident during 1996, consolidation in the rail industry places increased competitive pressure on KCSR to effectively maintain its presence as an alternative route for the movement of commodities. Additionally, the containment of costs and expenses is important in maintaining a competitive market position, particularly with respect to employee costs as approximately 86% of the KCSR's employees are covered under various collective bargaining agreements.
Financial Asset Management. Janus (an 83% owned subsidiary) and Berger (an 80% owned subsidiary as of December 31, 1996, subsequently increased to 87% as discussed in Note 2) manage investments for mutual funds and private accounts. Both companies operate throughout the United States, as well as in parts of Europe, with headquarters in Denver, Colorado. Janus assets under management at December 31, 1996, 1995 and 1994 were $46.7, $31.1 and $22.9 billion, respectively. Berger assets under management at December 31, 1996, 1995 and 1994 were $3.6, $3.4 and $3.0 billion, respectively.
Financial Asset Management revenues and operating income are driven primarily by growth in assets under management, and a decline in the stock and bond markets and/or an increase in the rate of return of alternative investments could negatively impact results. In addition, the mutual fund market, in general, faces increasing competition as the number of mutual funds continues to increase, marketing and distribution channels become more creative and complex, and investors place greater emphasis on published fund recommendations and investment category rankings.
Corporate & Other. Earnings of various immaterial consolidated subsidiaries (e.g., Pabtex, Inc., Trans-Serve, Inc., etc.), the Company's equity in earnings from investments in certain unconsolidated affiliates (including DST, TFM and Mexrail), unallocated holding company expenses, intercompany eliminations, and miscellaneous investment activities are reported in the Corporate & Other industry segment. In 1996 and 1995, DST is included as an equity investment (see Note 1 for further discussion). In 1994, DST was reported as a separate segment, Information & Transaction Processing, as discussed below.
[Page 73] The earnings of DST, the Company's largest unconsolidated affiliate, are dependent in part upon the further growth of the mutual fund industry in the United States, DST's ability to continue to adapt its technology to meet increasingly complex and rapidly changing requirements and various other factors including, but not limited to: reliance on a centralized processing facility; further development of international businesses; continued equity in earnings from joint ventures; and competition from other third party providers of similar services and products as well as from in-house providers.
Information & Transaction Processing (1994). DST, and its subsidiaries and affiliates, provide sophisticated information processing and computer software services and products, primarily to mutual funds, insurance providers, banks and other financial services organizations. DST operates throughout the United States with its base of operations in the Midwest and, through certain of its subsidiaries and affiliates, internationally in Canada, Europe, Africa and the Pacific Rim. As discussed in Note 2, DST and the Company completed a public offering of DST common stock and associated transactions in November 1995, resulting in the reduction of the Company's ownership in DST to approximately 41%. Accordingly, Information & Transaction Processing is reported as a separate segment in 1994 only.
Segment Financial Information. Sales between segments were not material in 1996, 1995 or 1994. The year ended December 31, 1995 reflects DST as an unconsolidated affiliate as of January 1, 1995 as a result of the DST public offering and associated transactions completed in November 1995, as discussed in Note 2. The year ended December 31, 1994 presents DST as a consolidated subsidiary. Certain amounts in prior years' segment information have been reclassified to conform to the current year presentation.
[Page 74] Segment Financial Information, dollars in millions, years ended December 31,
(a) Exclusive of property additions from acquisitions
[Page 75] Segment Financial Information, dollars in millions, at December 31,
[Page 76] Note 14. Quarterly Financial Data (Unaudited)
Quarterly financial data follows. Certain amounts in the quarterly financial data have been reclassified to conform to the current year presentation.
Third Quarter 1996 includes a one time after-tax gain of $47.7 million (or $1.23 per share), representing the Company's proportionate share of the one time gain recognized by DST in connection with the merger of Continuum, formerly a DST unconsolidated equity affiliate, with Computer Sciences Corporation in a tax-free share exchange (see Note 2).
(in millions, except per share amounts):
(i) The accumulation of 1996's four quarters for primary earnings per share is greater than the primary earnings per share for the year ended December 31, 1996 due to significant repurchases of Company common stock throughout the year.
[Page 77] The four quarters for 1995 were restated to reflect DST as an unconsolidated affiliate as of January 1, 1995 due to the DST public offering and associated transactions completed in November 1995, which reduced the Company's ownership in DST to approximately 41% and resulted in an after-tax gain of $144.6 million, or $3.45 per share (see Note 2).
(in millions, except per share amounts):
(i) The accumulation of 1995's four quarters for primary earnings per share is greater than the primary earnings per share for the year ended December 31, 1995 due to significant repurchases of Company common stock in fourth quarter 1995.
[Page 78] Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
[Page 79] Part III
The Company has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction G(3) to Form 10-K. The Company's definitive proxy statement for the annual meeting of stockholders scheduled for May 1, 1997 ("Proxy Statement") will be filed no later than 120 days after December 31, 1996.
Item 10.
Item 10. Directors and Executive Officers of the Company
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under the heading "Proposal 1 - Election of Three Directors" and "The Board of Directors" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under "Executive Officers of the Company," an unnumbered Item in Part I (immediately following Item 4, Submission of Matters to a Vote of Security Holders), on pages 5 and 6 of this Form 10-K is incorporated herein by reference in partial response to this Item 10.
The information set forth in response to Item 405 of Regulation S-K under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10.
Item 11.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation S-K under "Management Compensation" in the Company's Proxy Statement, (other than The Compensation and Organization Committee Report on Executive Compensation and the Stock Performance Graph), is incorporated by reference in response to this Item 11.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in response to Item 403 of Regulation S-K under the heading "Principal Stockholders" and "Stock Owned Beneficially by Directors and Certain Executive Officers" in the Company's Proxy Statement is hereby incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at a subsequent date result in a change of control of the Company.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under the heading "Transactions with Management" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 13.
[Page 80] Part IV
Item 14.
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 20, 1997, appear in Part II Item 8, Financial Statements and Supplementary Data, on pages 38 through 77 of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission appear in Part II Item 8, Financial Statements and Supplementary Data, under the Index to Financial Statements on page 38 of this Form 10-K.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession (Inapplicable)
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1 Exhibit 4 to Company's Registration Statement on Form S-8 originally filed September 19, 1986 (Commission File No. 33-8880), Certificate of Incorporation as amended through May 14, 1985, is hereby incorporated by reference as Exhibit 3.1
3.2 Exhibit 4.1 to Company's Current Report on Form 8-K dated October 1, 1993 (Commission File No. 1-4717), Certificate of Designation dated September 29, 1993 Establishing Series B Convertible Preferred Stock, par value $1.00, is hereby incorporated by reference as Exhibit 3.2
3.3 Exhibit 3.1 to Company's Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 1-4717),Amendment to Company's Certificate of Incorporation to set par value for common stock and increase the number of authorized common shares dated May 6, 1994, is hereby incorporated by reference as Exhibit 3.3
3.4 The Amended Certificate of Designation Establishing the New Series A Preferred Stock, par value $1.00, dated November 7, 1995, is attached to this Form 10-K as Exhibit 3.4
3.5 The Certificate of Amendment dated May 12, 1987 of the Company's Certificate of Incorporation adding the Sixteenth paragraph, is attached to this Form 10-K as Exhibit 3.5
[Page 81] Bylaws
3.6 The Company's By-Laws, as amended and restated May 1, 1996, are attached to this Form 10-K as Exhibit 3.6
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 The Fourth, Seventh, Eighth, Twelfth, Thirteenth, Fifteenth and Sixteenth paragraphs of Exhibit 3.1 hereto are incorporated by reference as Exhibit 4.1
4.2 Article I, Sections 1,3 and 11 of Article II, Article V and Article VIII of Exhibit 3.6 hereto are incorporated by reference as Exhibit 4.2
4.3 The Certificate of Designation dated September 29, 1993 establishing Series B Convertible Preferred Stock, par value $1.00, which is attached hereto as Exhibit 3.2, is incorporated by reference as Exhibit 4.3
4.4 The Amended Certificate of Designation dated November 7, 1995 establishing the New Series A Preferred Stock, par value $1.00, which is attached hereto as Exhibit 3.4, is incorporated by reference as Exhibit 4.4
4.5 Exhibit 4 to Company's Form S-3 filed June 19, 1992 (Commission File No. 33-47198), the Indenture to a $300 million Shelf Registration of Debt Securities dated July 1, 1992, is hereby incorporated by reference as Exhibit 4.5
4.6 Exhibit 4(a) to Company's Form S-3 filed March 29, 1993 (Commission File No. 33-60192), the Indenture to a $200 million Medium Term Notes Registration of Debt Securities dated July 1, 1992, is hereby incorporated by reference as Exhibit 4.6
4.7 Exhibit 99 to Company's Form 8-A dated October 24, 1995 (Commission File No. 1-4717), which is the Stockholder Rights Agreement by and between the Company and Harris Trust and Savings Bank dated as of September 19, 1995, is hereby incorporated by reference as Exhibit 4.7
(9) Voting Trust Agreement (Inapplicable)
(10) Material Contracts
10.1 Exhibit I to Company's Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 1-4717), The Director Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.1
10.2 Exhibit B to Company's Definitive Proxy Statement for 1987 Annual Stockholder Meeting dated April 6, 1987, The Director Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.2
10.3 The Indenture dated July 1, 1992 to a $300 million Shelf Registration of Debt Securities, which is incorporated by reference as Exhibit 4.5 hereto, is hereby incorporated by reference as Exhibit 10.3
10.4 Exhibit H to Company's Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 1-4717), The Officer Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.4
[Page 82] 10.5 Exhibit O to Company'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 as adopted August 20, 1982 and the amendment thereto effective January 1, 1987 to such plan, is hereby incorporated by reference as Exhibit 10.5
10.6 Exhibit 10.4 to Company's Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4717), Description of the Company's 1991 incentive compensation plan, is hereby incorporated by reference as Exhibit 10.6
10.7 The Indenture dated July 1, 1992 to a $200 million Medium Term Notes Registration of Debt Securities, which is incorporated as Exhibit 4.6 hereto, is hereby incorporated by reference as Exhibit 10.7
10.8 Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended June 30, 1995 (Commission File No. 1-4717), Five-Year Competitive Advance and Revolving Credit Facility Agreement dated May 5, 1995, by and between the Company and the lenders named therein, is hereby incorporated by reference as Exhibit 10.8
10.9 Exhibit 10.4 in the DST Systems, Inc. Registration Statement on Form S-1 dated October 30, 1995, as amended (Registration No. 33-96526), Tax Disaffiliation Agreement, dated October 23, 1995, by and between the Company and DST Systems, Inc., is hereby incorporated by reference as Exhibit 10.9
10.10 Exhibit 10.6 to the DST Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 1-14036), the 1995 Restatement of The Employee Stock Ownership Plan and Trust Agreement, is hereby incorporated by reference as Exhibit 10.10
10.11 Exhibit 4.1 to the DST Systems, Inc. Registration Statement on Form S-1 dated October 30, 1995, as amended (Registration No. 33-96526), The Registration Rights Agreement dated October 24, 1995 by and between DST Systems, Inc. and the Company, is hereby incorporated by reference as Exhibit 10.11
10.12 Exhibit 10.1 to Company's Form 10-K for the year ended December 31, 1995 (Commission File No. 1-4717), Employment Agreement, as amended and restated January 1, 1996, by and between the Company, The Kansas City Southern Railway Company and Michael R. Haverty, is hereby incorporated by reference as Exhibit 10.12
10.13 Exhibit 10.2 to Company's Form 10-K for the year ended December 31, 1995 (Commission File No. 1-4717), Employment Agreement, dated January 1, 1996, by and between the Company and Joseph D. Monello, Jr., is hereby incorporated by reference as Exhibit 10.13
10.14 The Company's 1983 Employee Stock Option Plan, as amended and restated September 26, 1996, is attached to this Form 10-K as Exhibit 10.14
10.15 The Company's 1987 Employee Stock Option Plan, as amended and restated September 26, 1996, is attached to this Form 10-K as Exhibit 10.15
10.16 The Company's 1991 Stock Option and Performance Award Plan, as amended and restated September 26, 1996, is attached to this Form 10-K as Exhibit 10.16
10.17 Employment Agreement, dated January 1, 1997, by and between the Company and Landon H. Rowland, is attached to this Form 10-K as Exhibit 10.17
[Page 83] 10.18 The Company's Directors Deferred Fee Plan, adopted August 20, 1982, amended and restated February 1, 1997, is attached to this Form 10-K as Exhibit 10.18
10.19 The Kansas City Southern Industries, Inc. Executive Plan (restated), as restated Janaury 1, 1992, is attached to this Form 10-K as Exhibit 10.19
10.20 Amendment No. 1 as of May 15, 1995, to the Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992, is attached to this Form 10-K as Exhibit 10.20
10.21 Amendment No. 2 dated January 23, 1997, to the Kansas City Southern Industries, Inc. Executive plan (restated), as restated January 1, 1992, is attached to this Form 10-K as Exhibit 10.21
(11) Statement Re Computation of Per Share Earnings (Inapplicable)
(12) Statements Re Computation of Ratios
12.1 The Computation of Ratio of Earnings to Fixed Charges prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 12.1
(13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders (Inapplicable)
(16) Letter Re Change in Certifying Accountant (Inapplicable)
(18) Letter Re Change in Accounting Principles (Inapplicable)
(21) Subsidiaries of the Company
21.1 The list of the Subsidiaries of the Company prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 21.1
(22) Published Report Regarding Matters Submitted to Vote of Security Holders (Inapplicable)
(23) Consents of Experts and Counsel
23.1 The Consent of Independent Accountants prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 23.1
(24) Power of Attorney (Inapplicable)
(27) Financial Data Schedule
27.1 The Financial Data Schedule prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 27.1
(28) Information from Reports Furnished to State Insurance Regulatory Authorities (Inapplicable)
[Page 84] (99) Additional Exhibits
99.1 The consolidated financial statements of DST Systems, Inc. (including the notes thereto and the Report of Independent Accountants thereon) set forth under Item 8 of the DST Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1996 (Commission File No. 1-14036), as listed under Item 14(a)(2) herein, are hereby incorporated by reference as Exhibit 99.1
(b) Reports on Form 8-K
The Company filed the following Current Reports on Form 8-K during the three months ended December 31, 1996:
- - Dated November 12, 1996 under items 5 and 7, reporting cautionary statements identifying significant factors that could cause the Company's actual operating results to materially differ from the projections in forward-looking statements made by, or on behalf of, the Company.
- - Dated November 13, 1996 under items 5 and 7, reporting selected unaudited pro forma consolidated condensed balance sheet information of the Company as if the completion of the Southern Capital Corporation, LLC joint venture formation and associated transactions had occurred on September 30, 1996.
- - Dated December 23, 1996 under item 5, announcing that the Mexican Government had awarded to Transportacion Ferroviaria Mexicana S. de R.L. de C.V. (a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V.) the right to purchase 80% of Ferrocarril del Noreste, S.A. de C.V. (who holds the concession to operate Mexico's "Northeast Railway") based upon the highest economic bid.
In addition, the Company filed a Current Report on Form 8-K dated February 21, 1997, reporting the payment of 40% of the purchase price for Ferrocarril del Noreste, S.A. de C.V. (who holds the concession to operate Mexico's "Northeast Railway") by Transportacion Ferroviaria Mexicana S. de R.L. de C.V. (a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V.), and the Company's funding of its proportionate amount of the initial installment. Also, anticipated financing arrangements for the remaining 60% of the FNE purchase price were disclosed.
[Page 85] SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Kansas City Southern Industries, Inc.
March 19, 1997 By: /s/ L. H. Rowland L.H. Rowland, President, Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 19, 1997.
Signature Capacity
/s/ P.H. Henson Chairman and Director P.H. Henson
/s/ L.H. Rowland President, Chief Executive Officer L.H. Rowland and Director
/s/ M.R. Haverty Executive Vice President and Director M.R. Haverty
/s/ J.D. Monello Vice President and Chief Financial Officer J.D. Monello (Principal Financial Officer)
/s/ L.G. Van Horn Vice President and 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/ M.G. Fitt Director M.G. Fitt
/s/ J.F. Serrano Director J.F. Serrano
/s/ M.I. Sosland Director M.I. Sosland
[Unnumbered Page] KANSAS CITY SOUTHERN INDUSTRIES, INC. 1996 FORM 10-K ANNUAL REPORT INDEX TO EXHIBITS Regulation S-K Exhibit Item 14(a)(3) No. Document Exhibit No.
3.4 The Amended Certificate of Designation Establishing the New Series A Preferred Stock, par value $1.00, dated November 7, 1995 3
3.5 The Certificate of Amendment dated May 12, 1987 of the Company's Certificate of Incorporation adding the Sixteenth paragraph 3
3.6 The Company's By-Laws, as amended and restated May 1, 1996 3
10.14 The Company's 1983 Employee Stock Option Plan, as amended and restated September 26, 1996 10
10.15 The Company's 1987 Employee Stock Option Plan, as amended and restated September 26, 1996 10
10.16 The Company's 1991 Stock Option and Performance Award Plan, as amended and restated September 26, 1996 10
10.17 Employment Agreement, dated January 1, 1997, by and between the Company and Landon H. Rowland 10
10.18 The Company's Directors Deferred Fee Plan, adopted August 20, 1982,amended and restated February 1, 1997 10
10.19 The Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992 10
10.20 Amendment No. 1 as of May 15, 1995, to the Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992 10
10.21 Amendment No. 2 dated January 23, 1997, to the Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992 10
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consent of Independent Accountants 23
27.1 Financial Data Schedule 27