-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LFiUWjyeKqjQiX60Nna2lQ56vrolzmrQXpYvOoetWORC/NArzUfl7V+Tab9EYWwb KwLuhVPuGhmVFy6SlslTTw== 0000054480-97-000019.txt : 19970814 0000054480-97-000019.hdr.sgml : 19970814 ACCESSION NUMBER: 0000054480-97-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANSAS CITY SOUTHERN INDUSTRIES INC CENTRAL INDEX KEY: 0000054480 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 440663509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-04717 FILM NUMBER: 97657916 BUSINESS ADDRESS: STREET 1: 114 W 11TH ST CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8165560303 MAIL ADDRESS: STREET 1: 114 WEST 11TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______ Commission File Number 1-4717 KANSAS CITY SOUTHERN INDUSTRIES, INC. (Exact name of Company as specified in its charter) Delaware 44-0663509 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 114 West 11th Street, Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) (816) 983-1303 (Company's telephone number, including area code) No Changes (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at July 31, 1997 Common Stock, $.01 per share par value 35,721,898 Shares (pro forma 107,165,694 shares post-split) KANSAS CITY SOUTHERN INDUSTRIES, INC. FORM 10-Q JUNE 30, 1997 INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Introductory Comments 1 Consolidated Condensed Balance Sheets - June 30, 1997 and December 31, 1996 2 Consolidated Condensed Statements of Income - Three and Six Months Ended June 30, 1997 and 1996 3 Computation of Primary Earnings per Common Share 3 Consolidated Condensed Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 PART II - OTHER INFORMATION Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 23 KANSAS CITY SOUTHERN INDUSTRIES, INC. FORM 10-Q JUNE 30, 1997 PART I - FINANCIAL INFORMATION Item 1. Financial Statements INTRODUCTORY COMMENTS The Consolidated Condensed Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Millions) (Unaudited)
June 30, December 31, 1997 1996 ASSETS Current Assets: Cash and equivalents $ 18.1 $ 22.9 Accounts receivable, net 163.0 138.1 Inventories 39.9 39.3 Other current assets 66.9 91.8 Total current assets 287.9 292.1 Investments held for operating purposes 655.5 335.2 Properties (net of $509.8 and $491.3 accumulated depreciation and amortization, respectively) 1,262.1 1,219.3 Intangibles and Other Assets, net 241.4 237.5 Total assets $ 2,446.9 $ 2,084.1 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Debt due within one year $ 7.5 $ 7.6 Accounts and wages payable 91.5 102.6 Accrued liabilities 169.7 134.4 Total current liabilities 268.7 244.6 Other Liabilities: Long-term debt 927.3 637.5 Deferred income taxes 352.0 337.7 Other deferred credits 138.2 129.8 Total other liabilities 1,417.5 1,105.0 Minority Interest in consolidated subsidiaries 15.5 18.8 Stockholders' Equity: Preferred stock 7.1 7.1 Common stock 0.4 0.4 Capital surplus - - Retained earnings 903.7 883.3 Net unrealized gain on investments 34.0 24.9 Shares held in trust (200.0) (200.0) Total stockholders' equity 745.2 715.7 Total liabilities and stockholders' equity $ 2,446.9 $ 2,084.1
See accompanying notes to consolidated condensed financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in Millions, Except per Share Data) (Unaudited)
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Revenues $ 252.6 $ 206.9 $ 490.4 $ 408.2 Costs and expenses 166.8 142.0 330.5 283.8 Depreciation and amortization 18.4 19.2 36.9 38.2 Operating Income 67.4 45.7 123.0 86.2 Equity in net earnings (losses) of unconsolidated affiliates: DST Systems, Inc. 5.7 5.0 11.8 6.9 Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (3.0) - (3.0) - Other 1.2 0.2 1.8 1.5 Interest expense (13.6) (14.2) (27.3) (27.1) Other, net 4.3 5.3 10.3 9.9 Pretax Income 62.0 42.0 116.6 77.4 Income tax provision 24.3 15.7 45.7 28.2 Minority interest in consolidated earnings 5.9 3.9 10.6 6.9 Net Income 31.8 22.4 60.3 42.3 Less: dividends on preferred stock 0.1 0.1 0.1 0.1 Net Income Applicable to Common Stockholders $ 31.7 $ 22.3 $ 60.2 $ 42.2 Computation of Primary Earnings per Common Share Weighted Average Primary Common Shares Outstanding (in thousands) 36,506 39,279 36,648 39,650 Primary Earnings per Common Share $ 0.87 $ 0.57 $ 1.64 $ 1.06 Pro Forma Weighted Average Primary Common Shares Outstanding (in thousands) (Note 3) 109,518 117,837 109,944 118,950 Pro Forma Primary Earnings per Common Share (Note 3) $ 0.29 $ 0.19 $ 0.55 $ 0.35 Cash Dividends Paid: Per Preferred share $ .25 $ .25 $ .50 $ .50 Per Common share .10 .10 .20 .20 Pro Forma Per Common share (Note 3) .03 .03 .07 .07
See accompanying notes to consolidated condensed financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited)
Six Months Ended June 30, 1997 1996 CASH FLOWS PROVIDED BY (USED FOR): OPERATING ACTIVITIES: Net income $ 60.3 $ 42.3 Adjustments to net income: Depreciation and amortization 36.9 38.2 Deferred income taxes 10.7 3.9 Equity in undistributed earnings (10.6) (4.6) Changes in working capital items: Accounts receivable (14.9) (1.9) Inventories 0.9 1.0 Other current assets (4.6) (1.7) Accounts and wages payable (17.6) (5.2) Accrued liabilities 24.7 (59.8) Other, net (5.7) (8.6) Net 80.1 3.6 INVESTING ACTIVITIES: Property acquisitions (33.1) (73.3) Proceeds from disposal of property 4.3 2.6 Investment in and loans with affiliates (298.9) (27.8) Net sales (purchases) of short-term investments 27.1 (19.3) Proceeds from disposal of investments - 8.8 Other, net 8.0 4.6 Net (292.6) (104.4) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 298.0 172.8 Repayment of long-term debt (50.3) (5.3) Proceeds from stock plans 7.8 6.5 Stock repurchased (42.4) (84.8) Cash dividends paid (11.0) (10.9) Other, net 5.6 1.4 Net 207.7 79.7 CASH AND EQUIVALENTS: Net decrease (4.8) (21.1) At beginning of year 22.9 31.8 At end of period $ 18.1 $ 10.7
See accompanying notes to consolidated condensed financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of Kansas City Southern Industries, Inc. ("Company"; "KCSI"), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiaries as of June 30, 1997 and December 31, 1996, the results of operations for the three and six months ended June 30, 1997 and 1996, and cash flows for the six months ended June 30, 1997 and 1996. 2. The results of operations for the three and six months ended June 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year 1997. 3. The accompanying consolidated condensed financial statements have been prepared consistently with accounting policies described more fully in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. On July 29, 1997, the Company's Board of Directors authorized a 3-for-1 split of the Company's common stock to be effected in the form of a stock dividend payable September 16, 1997 to stockholders of record as of August 25, 1997. Appropriate pro forma share and per share data has been provided to reflect the stock split. Effective January 1, 1997, the Company realigned its business segments to better define the core industries in which it operates. The various components comprising the segment formerly known as Corporate & Other have been assigned to either the Transportation or Financial Asset Management segment. Transportation consists of: The Kansas City Southern Railway Company ("KCSR"); Southern Group, Inc.; Gateway Western Railway Company ("Gateway Western"); transportation-related KCSI Holding Company amounts; and transportation-related subsidiaries and equity investments, including Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana S. de R.L. de C.V.), Southern Capital Corporation, LLC ("Southern Capital"), and Mexrail, Inc. ("Mexrail"). Financial Asset Management includes Janus Capital Corporation ("Janus"), Berger Associates, Inc. ("Berger"), the Company's equity interest in DST Systems, Inc. ("DST"), as well as Financial Asset Management-related KCSI Holding Company amounts. Prior year's information has been realigned to reflect the new segment approach. The accumulation of the 1996 first quarter and second quarter Primary Earnings per Common Share does not total the Primary Earnings per Common Share for the six months ended June 30, 1996, as a result of repurchases of Company common stock. 4. The Company's inventories ($39.9 million at June 30, 1997 and $39.3 million at December 31, 1996) primarily consist of material and supplies related to rail transportation. Other components of inventories are not material. 5. Investments in unconsolidated affiliates and certain other investments accounted for under the equity method generally include all entities in which the Company or its subsidiaries have significant influence but not more than 50% voting interest. Investments in unconsolidated affiliates at June 30, 1997 include equity interests in DST (approximately 41%), Grupo TFM (37%), Southern Capital (50%) and Mexrail (49%), as well as the Company's interests in other companies. As more fully discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, during first quarter 1997, Gateway Western was accounted for under the equity method as a majority-owned subsidiary while the Company awaited approval from the Surface Transportation Board ("STB") for the acquisition of Gateway Western. The STB approved the Company's acquisition of Gateway Western, effective May 5, 1997. Accordingly, the assets, liabilities, revenues and expenses of Gateway Western are included in the Company's consolidated financial statements. Additionally, the Company restated first quarter 1997 to include Gateway Western as a consolidated subsidiary as of January 1, 1997, and results of operations for the six months ended June 30, 1997 reflect this restatement. DST has a Stockholders' Rights Agreement, which includes provisions providing that under certain circumstances following a "change in control" of KCSI, as defined in DST's Stockholders' Rights Agreement, substantial dilution of the Company's interest in DST could result. Additionally, the Company is party to certain agreements with Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") covering the Grupo TFM and Mexrail ventures. TMM (including its affiliates) owns approximately 38.4% of Grupo TFM and 51% of Mexrail. These agreements contain "change in control" provisions, provisions intended to preserve the Company's and TMM's proportionate ownership of the ventures, 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 Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates. Combined condensed financial information of unconsolidated affiliates is shown below (dollars in millions): Financial Condition:
June 30, 1997 December 31, 1996 DST Grupo TFM Other DST Grupo TFM Other Current Assets $ 208.9 $ 45.4 $ 19.4 $ 201.3 $ 1.2 $ 34.4 Non-current assets 970.0 1,879.8 272.1 920.3 4.2 331.7 Assets $1,178.9 $1,925.2 $ 291.5 $1,121.6 $ 5.4 $ 366.1 Current liabilities $ 100.9 $ 16.6 $ 16.1 $ 125.7 $ 1.2 $ 27.2 Non-current liabilities 331.6 1,109.5 201.3 300.7 - 267.7 Equity of stockholders and partners 746.4 799.1 74.1 695.2 4.2 71.2 Liabilities and equity $1,178.9 $1,925.2 $ 291.5 $1,121.6 $ 5.4 $ 366.1 Investment in unconsolidated affiliates $ 306.3 $ 298.4 $ 41.0 $ 283.5 $ 2.7 $ 39.7
Operating Results:
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Revenues: DST $ 155.4 $ 143.2 $ 314.1 $ 287.5 Grupo TFM (a) 7.0 - 7.0 - All others 17.0 6.9 32.8 15.1 Total revenues $ 179.4 $ 150.1 $ 353.9 $ 302.6 Operating costs and expenses: DST $ 134.4 $ 125.7 $ 269.4 $ 250.8 Grupo TFM (a) 7.0 - 7.0 - All others 13.6 6.0 27.2 13.7 Total operating costs and expenses $ 155.0 $ 131.7 $ 303.6 $ 264.5 Net income: DST $ 13.8 $ 12.3 $ 28.9 $ 16.7 Grupo TFM (a) (7.9) - (7.9) - All others 2.3 0.7 3.1 0.1 Total net income $ 8.2 $ 13.0 $ 24.1 $ 16.8
(a) The operating results provided for Grupo TFM reflect its operation of TFM, S.A. de C.V. ("TFM Rail," formerly Ferrocarril del Noreste, S.A. de C.V.) beginning on June 23, 1997. See discussion in Note 8 below. 6. For purposes of the Statement of Cash Flows, the Company considers all short-term liquid investments with a maturity of generally three months or less to be cash equivalents. a. Supplemental Cash Flow Information (in millions):
Six Months Ended June 30, 1997 1996 Interest paid (excluding capitalized interest) $ 25.1 $ 29.5 Income taxes paid 18.9 88.3
The Company's income taxes paid for the six months ended June 30, 1996 included the payment of federal and state income taxes resulting from the DST initial public offering transactions, which occurred in fourth quarter 1995. b. Noncash Investing and Financing Activities: In first quarter 1997, the Company issued approximately 82,000 shares of KCSI common stock under the Ninth Offering of the Employee Stock Purchase Plan ("ESPP"). These shares, totaling a purchase price of approximately $3.1 million, were subscribed and paid for through employee payroll deductions in 1996. In first quarter 1996, the Company issued approximately 101,800 shares of KCSI common stock under the Eighth Offering of the 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. Certain Company subsidiaries and affiliates hold investments which are accounted for as "available for sale" securities as defined by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company records its proportionate share of any unrealized gains or losses related to these investments, net of deferred taxes, in stockholders' equity. The unrealized gain as of June 30, 1997, net of deferred taxes, related to these investments increased $9.1 million from December 31, 1996. The unrealized gain as of June 30, 1996, net of deferred taxes, increased $3.3 million from December 31, 1995. 7. Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") was issued in February 1997, effective for financial statements for interim and annual periods ending after December 15, 1997. The statement specifies the computation, presentation and disclosure requirements for earnings per share. The statement requires the computation of earnings per share under two methods: "basic" and "diluted." Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued). SFAS 128 requires the Company to present basic and diluted per share amounts for income from continuing operations and for net income on the face of the income statement. Although early adoption of SFAS 128 is not permitted, pro forma earnings per share amounts may be disclosed in the notes to the financial state- ments. Accordingly, if the Company's earnings per share had been computed in accordance with SFAS 128 for the three and six months ended June 30, 1997 and 1996, pro forma earnings per share (on a pre and post-split basis) would have been as follows:
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Pro Forma Earnings per Share (pre-split): Basic $ 0.89 $ 0.58 $ 1.68 $ 1.10 Diluted 0.87 0.57 1.64 1.06 Pro Forma Earnings per Share (post-split): Basic $ 0.30 $ 0.19 $ 0.56 $ 0.37 Diluted 0.29 0.19 0.55 0.35
8. As discussed more fully in Notes 2 and 11 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Mexican Government ("Government") awarded to Grupo TFM the right to purchase 80% of the common stock of TFM Rail for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM Rail holds the concession to operate Mexico's Northeast rail lines for the next 50 years, with the option of a 50 year extension (subject to certain conditions). The remaining 20% of TFM Rail was retained by the Government. The Government has the option of selling its interest through a public offering, or selling it to Grupo TFM after October 31, 2003 at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that Grupo TFM does not purchase the Government's 20% interest in TFM Rail, the Government may require TMM and KCSI to purchase the Government's holdings in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Government's interest in Grupo TFM - see below). On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM Rail purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $297 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. The Company financed this contribution using borrowings under existing lines of credit. On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM Rail through the payment of the remaining $835 million U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and discount debentures ($400 million U.S.); (iii) proceeds from the sale of 24.6% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/ Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were 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. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM Rail, which could include a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM Rail and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Government has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a 1:3 proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. Based on the completed financing arrangements for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary (except for the possible capital call discussed above). As of June 30, 1997, the Company's investment in Grupo TFM was approximately $298 million. With the sale of 24.6% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.4%). The Company accounts for its investment in Grupo TFM under the equity method. In connection with the Company's investment in Grupo 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 follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. Mexico's economy is currently classified as "highly inflationary" as defined in SFAS 52; accordingly, the U.S. dollar is Grupo TFM's functional currency, and any gains or losses from translating its financial statements into U.S. dollars will be included in the determination of its net income. Any equity earnings or losses from Grupo TFM included in the Company's results of operations will reflect the Company's share of such transla- tion gains and losses. The Company will evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. 9. In accordance with Statement of Financial Accounting Standards No. 58 "Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method" ("SFAS 58"), the Company has capitalize interest incurred on the borrowings under its lines of credit associated with the approximate $297 million capital contribution to Grupo TFM (see Note 8 above). Pursuant to SFAS 58, once Grupo TFM assumed operational control of TFM Rail (Jun 23, 1997) and the planned principal operations of Grupo TFM commenced, capitalization of interest by the Company ceased. Interest capitalized by the Company for the three and six months ended June 30, 1997 totaled $4.3 and $7.4 million, respectively. 10. In June 1997, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") were issued. SFAS 130 establishes standards for reporting and disclosure of comprehensive income and its components in the financial statements. SFAS 131 establishes standards for reporting information about operating segments in the financial statements. The reporting and disclosure required by these statements must be included in the Company's financial statements beginning in 1998. The Company is reviewing SFAS 130 and SFAS 131 and expects to adopt them by the required dates. 11. The Company has had no significant changes in its outstanding litigation or other contingencies from that previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 12. See the Recent Developments section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for significant transactions and events that will have an impact on the Company's future results of operations and financial position. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The discussion set forth below, as well as other portions of this Form 10-Q, contains 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-Q. The actual results of operations of Kansas City Southern Industries, Inc. ("Company"; "KCSI") 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 and its amendment, Form 8-K/A dated June 3, 1997, which have been filed with the U.S. Securities and Exchange Commission (File No. 1-4717) and are hereby incorporated by reference herein. Readers are strongly encouraged to consider these factors when evaluating any such forward-looking comments. KCSI, a Delaware Corporation organized in 1962, is a diversified holding company with principal operations in rail transportation and Financial Asset Management. The Company supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other "non-operating" and more passive investments. Effective January 1, 1997, the Company realigned its industry segments to more clearly reflect the Company's focus on its core businesses. The various components which formerly comprised the Corporate & Other segment were assigned to either the Transportation or Financial Asset Management segment. Accordingly, the Company's business activities by newly aligned industry segment and principal subsidiary companies are: Transportation - The Transportation segment consists of all transportation- related subsidiaries and investments, including: * The Kansas City Southern Railway Company ("KCSR"), a wholly-owned sub- sidiary of the Company, operating a Class I Common Carrier railroad system; * Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning 100% of Carland, Inc. ("Carland") and managing the loan portfolio for Southern Capital Corporation, LLC ("Southern Capital," a 50% owned joint venture); * Gateway Western Railway Company ("Gateway Western"), an indirect wholly- owned subsidiary of the Company, operating a regional railroad system; * Equity investments in Southern Capital, Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana S. de R.L. de C.V., a 37% owned affiliate), and Mexrail, Inc. ("Mexrail," a 49% owned affiliate); * Various other consolidated subsidiaries; * KCSI Holding Company amounts. Financial Asset Management - This segment consists of all subsidiaries engaged in the management of investments for mutual funds, private and other accounts, as well as any Financial Asset Management-related investments. Included are: * Janus Capital Corporation ("Janus"), an 83% owned subsidiary; * Berger Associates, Inc. ("Berger"), an 87% owned subsidiary; * DST Systems, Inc. ("DST"), an approximate 41% owned equity investment; * KCSI Holding Company amounts. RECENT DEVELOPMENTS Mexico's Northeast Rail Lines - As disclosed previously, Grupo TFM, a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") was awarded the right to purchase 80% of the common stock of TFM, S.A. de C.V. ("TFM Rail," formerly Ferrocarril del Noreste, S.A. de C.V.) for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM Rail holds the concession to operate Mexico's Northeast rail lines for the next 50 years, with the option of a 50 year extension (subject to certain conditions). As previously disclosed, the remaining 20% of TFM Rail was retained by the Mexican Government ("Government"). The Government has the option of selling its 20% interest through a public offering, or selling it to Grupo TFM after October 31, 2003 at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that Grupo TFM does not purchase the Government's 20% interest in TFM Rail, the Government may require TMM and KCSI to purchase the Government's holdings in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Government's interest in Grupo TFM - see below). On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM Rail purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $297 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. The Company financed this contribution using borrowings under existing lines of credit. On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM Rail through the payment of the remaining $835 million U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and discount debentures ($400 million U.S.); (iii) proceeds from the sale of 24.6% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were 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. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM Rail, which could include a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM Rail and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Government has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a 1:3 proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. Based on the completed financing arrangements for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary (except for the possible capital call discussed above). As of June 30, 1997, the Company's investment in Grupo TFM was approximately $298 million. With the sale of 24.6% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.4%). The Company accounts for its investment in Grupo TFM under the equity method. Stock Split and 20% Increase in Quarterly Common Stock Dividend - On July 29, 1997, the Company's Board of Directors ("Board") authorized a 3-for-1 split in the Company's common stock effected in the form of a stock dividend. The Board also voted to increase the quarterly dividend 20% to $0.12 per share (on a pre-split basis). Both dividends are payable on September 16, 1997 to stockholders of record as of August 25, 1997. Amounts reported in this Form 10-Q have been restated to reflect the stock split on a pro forma basis. Common Stock Repurchases - The Company's Board has authorized management to repurchase a total of eleven million shares (pro forma 33 million shares post- split) of KCSI common stock under two programs - the 1995 program for eight million shares (pro forma 24 million shares post-split) and the 1996 program for three million shares (pro forma nine million shares post-split). During first quarter 1997, the Company purchased the final 800,000 shares (pro forma 2.4 million shares post-split) under the forward purchase contract disclosed in Note 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. With these transactions, the Company has repurchased approximately 9.1 million (pro forma 27.3 million shares post-split) of its common shares, completing the 1995 program and part of the 1996 program. Additional share repurchases may be made during 1997 based on management's assessment of current market conditions and perceived risks, as well as the Company's available capital and liquidity. Gateway Western - KCS Transportation Company ("KCSTC," a wholly-owned subsidiary of the Company) acquired beneficial ownership of the outstanding stock of Gateway Western in December 1996. The stock acquired by KCSTC was held in an independent voting trust until the Company received approval from the Surface Transportation Board ("STB") on the Company's proposed acquisition of Gateway Western. The STB issued its approval of the transaction effective May 5, 1997. Because the Gateway Western stock was held in trust during first quarter 1997, the Company accounted for Gateway Western under the equity method as a majority-owned unconsolidated subsidiary. Upon STB approval of the acquisition, the Company consolidated Gateway Western in the Transportation segment. Additionally, the Company restated first quarter 1997 to include Gateway Western as a consolidated subsidiary as of January 1, 1997, and results of operations for the six months ended June 30, 1997 reflect this restatement. RESULTS OF OPERATIONS Segment revenues, operating income and net income comparisons follow (dollars in millions):
Three Months Six Months Ended June 30, Ended June 30, 1997 1996 1997 1996 Revenues: Transportation $139.9 $129.7 $274.2 $260.6 Financial Asset Management 112.7 77.2 216.2 147.6 Total $252.6 $206.9 $490.4 $408.2 Operating Income: Transportation $ 14.1 $ 11.7 $ 28.1 $ 26.9 Financial Asset Management 53.3 34.0 94.9 59.3 Total $ 67.4 $ 45.7 $123.0 $ 86.2 Net Income (Loss): Transportation $ 0.3 $ (0.2) $ 3.3 $ 2.2 Financial Asset Management 31.5 22.6 57.0 40.1 Total $ 31.8 $ 22.4 $ 60.3 $ 42.3
The Company reported second quarter 1997 earnings of $31.8 million, or $0.87 per share (pro forma $0.29 per share post-split), compared to $22.4 million, or $0.57 per share (pro forma $0.19 per share post-split) in second quarter 1996. Consolidated second quarter 1997 revenues rose 22% compared to the same period in 1996 from improvements in both of the Company's segments. Operating income for the three months ended June 30, 1997 increased 47% (to $67.4 million) versus comparable 1996, largely due to higher revenues, together with lower proportionate growth in Financial Asset Management operating expenses as compared to revenues. Total equity earnings in unconsolidated affiliates decreased $1.3 million. This decrease reflects a $3.0 million equity loss from Grupo TFM, which more than offset increased equity earnings from DST and other investments. Interest expense for the three months ended June 30, 1997 was approximately 4% lower than comparable 1996 as a result of slightly lower average debt balances in 1997 (exclusive of indebtedness on which interest was capitalized during 1997). For the six months ended June 30, 1997, consolidated earnings were $60.3 million, or $1.64 per share (pro forma $0.55 per share post-split), versus $42.3 million, or $1.06 per share (pro forma $0.35 per share post-split) in comparable 1996. Year to date 1997 consolidated revenues increased 20% to $490.4 million compared to the same period in 1996, primarily due to the growth in assets under management in the Financial Asset Management segment and the addition of Gateway Western revenues. Operating expenses for the six months ended 1997 increased at a lower proportionate rate than revenues compared to 1996, leading to a 43% improvement in operating income. Year to date 1997 equity earnings of unconsolidated affiliates increased by $2.2 million, mainly because of earnings improvements at DST, partially offset by the equity losses in Grupo TFM. TRANSPORTATION
Three Months Ended Three Months Ended June 30, 1997 June 30, 1996 (in millions) Holding Holding Company and Company and Trans- Trans- portation- Consol- portation- Consol- Related idated Related idated Affil- Trans- Affil- Trans- KCSR iates portation KCSR iates portation Revenues $ 126.2 $ 13.7 $ 139.9 $ 121.6 $ 8.1 $ 129.7 Costs and expenses 99.5 11.3 110.8 91.3 10.8 102.1 Depreciation and amortization 13.7 1.3 15.0 14.9 1.0 15.9 Operating income (loss) 13.0 1.1 14.1 15.4 (3.7) 11.7 Equity in net earnings (losses) of unconsol- idated affiliates: Grupo TFM - (3.0) (3.0) - - - Other 0.6 0.4 1.0 - 0.3 0.3 Interest expense (9.5) (1.7) (11.2) (12.2) (0.5) (12.7) Other, net 0.6 0.3 0.9 0.7 (0.2) 0.5 Pretax income (loss) 4.7 (2.9) 1.8 3.9 (4.1) (0.2) Income tax provision (benefit) 2.1 (0.6) 1.5 1.6 (1.6) - Net income (loss) $ 2.6 $ (2.3) $ 0.3 $ 2.3 $(2.5) $ (0.2)
The Transportation segment contributed $0.3 million to the Company's second quarter 1997 earnings versus a loss of $0.2 million in second quarter 1996. Exclusive of the Company's equity in the net loss of Grupo TFM, Transportation second quarter 1997 earnings were $3.5 million higher than 1996, reflecting higher KCSR net income, the inclusion of Gateway Western results in 1997, and 1996 non-recurring allocated Holding Company costs related to the Company's efforts with respect to the Union Pacific/Southern Pacific merger ("UP/SP merger"). KCSR second quarter 1997 revenues increased 4% over comparable 1996, primarily due to a 5% increase in unit coal revenues (mix of traffic and length of haul) and a 34% increase in domestic/export grain revenues (volume and mix of traffic). Additionally, second quarter intermodal revenues increased 6% on less than a 3% increase in carloadings, indicative of KCSR's focus on higher rate business. Second quarter 1997 Holding Company and Transportation-Related Affiliates revenues increased over 1996 due to the inclusion of $10.5 million of Gateway Western revenues (consolidated effective January 1, 1997), offset partially by reduced revenues as a result of the dissolution of Southern Leasing Corporation ("SLC") in connection with the formation of the Southern Capital joint venture in October 1996. Second quarter 1997 Transportation operating expenses increased 7% compared to second quarter 1996, primarily due to higher KCSR operating expenses. KCSR experienced increases in salaries and wages (increased crew levels), fuel costs (higher prices in 1997 than 1996) and operating lease expenses (payments to Southern Capital). Additionally, second quarter 1997 KCSR operating expenses include costs and expenses from SGI - which became a consolidated KCSR subsidiary in October 1996. These increases were partially offset by lower depreciation as a result of the contribution and sale of rail property to the Southern Capital joint venture. However, while total second quarter 1997 KCSR operating expenses were higher than 1996, variable expenses as a percentage of revenues were virtually unchanged. This result highlights KCSR's efforts to maintain (or reduce) controllable cost components given anticipated revenue levels. Holding Company and Transportation-Related Affiliates costs and expenses increased 5% over second quarter 1996 due to the inclusion of Gateway Western activity in 1997. The increase would have been higher if not for the non-recurring costs incurred in second quarter 1996 related to the UP/SP merger as discussed above, together with reduced costs and expenses due to the dissolution of SLC. The Company recorded $3.0 million in equity losses during second quarter 1997 associated with its investment in Grupo TFM. Of this total, $2.6 million represented the Company's proportionate share of a one-time charge recorded by Grupo TFM with respect to financing-related fees in connection with the final installment payment of the TFM Rail purchase price. KCSR recorded $0.6 million of equity income, reflecting KCSR's 50% share of Southern Capital second quarter earnings. Interest expense decreased 12% from second quarter 1996 because of the re- payment of KCSR, Carland and SGI debt using proceeds from the Southern Capital transaction. Interest expense related to the indebtedness incurred in connection with the Company's investment in Grupo TFM was capitalized until the final installment of the TFM Rail purchase price was made (June 23, 1997). Interest capitalized during the quarter ended June 30, 1997 totaled $4.3 million.
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 (in millions) Holding Holding Company and Company and Trans- Trans- portation- Consol- portation- Consol- Related idated Related idated Affil- Trans- Affil- Trans- KCSR iates portation KCSR iates portation Revenues $ 247.2 $ 27.0 $ 274.2 $ 244.9 $ 15.7 $ 260.6 Costs and expenses 193.0 22.6 215.6 185.4 16.4 201.8 Depreciation and amortization 27.3 3.2 30.5 29.5 2.4 31.9 Operating income (loss) 26.9 1.2 28.1 30.0 (3.1) 26.9 Equity in net earnings (losses) of unconsol- idated affiliates: Grupo TFM - (3.0) (3.0) - - - Other 1.1 0.4 1.5 - 0.9 0.9 Interest expense (19.2) (3.4) (22.6) (24.3) (0.6) (24.9) Other, net 3.0 0.4 3.4 1.6 (0.5) 1.1 Pretax income (loss) 11.8 (4.4) 7.4 7.3 (3.3) 4.0 Income tax provision (benefit) 5.2 (1.1) 4.1 3.0 (1.2) 1.8 Net income (loss) $ 6.6 $ (3.3) $ 3.3 $ 4.3 $(2.1) $ 2.2
The Transportation segment contributed $3.3 million to the Company's earnings for the six months ended June 30, 1997, compared to $2.2 million for the same period in 1996. The increase in earnings was primarily attributable to higher earnings from KCSR as a result of reduced interest expense, offset by equity in net losses from Grupo TFM. Transportation revenues increased 5% compared to 1996. This increase was primarily attributable to the inclusion of Gateway Western revenues in 1997, together with a $2.3 million increase in KCSR revenues. KCSR revenue gains were evident in grain, metal products and various petroleum products (largely due to increased average rates per carload), offset substantially by lower unit coal revenues as a result of volume declines. Holding Company and Transportation-Related Affiliates revenues reflect the Gateway Western revenues, offset partially by the lack of SLC revenues in 1997. Year to date 1997 Transportation operating expenses increased 5% versus the same period in 1996. While total year to date 1997 KCSR costs and expenses increased over 1996, variable operating expenses decreased, including reductions in salaries and wages, fringe benefits, and supplies. Additionally, depreciation and amortization decreased by 7% (as discussed above). These reductions were offset by higher fuel costs due to increased prices and fixed equipment lease charges to Southern Capital. Higher operating expenses from Holding Company and Transportation-Related Affiliates were attributable to the inclusion of Gateway Western, offset by the lack of SLC costs in 1997 and the 1996 non-recurring UP/SP merger costs. The Transportation segment reported equity losses from unconsolidated affiliates for the six months ended June 30, 1997, reflecting the Company's proportionate share of Grupo TFM's 1997 net loss. Year to date 1997 Transportation interest expense decreased from 1996 as discussed above. Other, net increased for the six months ended June 30, 1997 due to a one time pretax gain of $1.6 million recorded in first quarter 1997 resulting from the sale of track by KCSR. FINANCIAL ASSET MANAGEMENT
Three Months Ended Three Months Ended June 30, 1997 June 30, 1996 (in millions) Holding Holding Company Company Janus and FAM- Consol- Janus and FAM- Consol- and Related idated and Related idated Berger Affiliates FAM Berger Affiliates FAM Revenues $ 113.1 $ (0.4) $ 112.7 $ 77.8 $ (0.6) $ 77.2 Costs and expenses 54.6 1.4 56.0 38.3 1.6 39.9 Depreciation and amortization 3.3 0.1 3.4 3.1 0.2 3.3 Operating income (loss) 55.2 (1.9) 53.3 36.4 (2.4) 34.0 Equity in net earnings (losses) of unconsol- idated affiliates: DST Systems, Inc. - 5.7 5.7 - 5.0 5.0 Other 0.2 - 0.2 - (0.1) (0.1) Interest income (expense) (1.7) (0.7) (2.4) (1.6) 0.1 (1.5) Other, net 1.3 2.1 3.4 0.9 3.9 4.8 Pretax income 55.0 5.2 60.2 35.7 6.5 42.2 Income tax provision 22.0 0.8 22.8 14.5 1.2 15.7 Minority interest 5.9 - 5.9 3.9 - 3.9 Net income $ 27.1 $ 4.4 $ 31.5 $ 17.3 $ 5.3 $ 22.6
Financial Asset Management contributed $31.5 million to KCSI's 1997 second quarter consolidated earnings, an increase of 39% over comparable 1996. Average assets under management by Janus and Berger were 43% higher during second quarter 1997 than second quarter 1996, leading to a $35.5 and $19.3 million increase in revenues and operating income, respectively, over second quarter 1996. Assets under management increased $10.4 billion during second quarter 1997 as a result of net fund sales of $3.2 billion and market appreciation. Assets under management totaled $63.6 billion at June 30, 1997 ($60.0 billion at Janus; $3.6 billion at Berger) versus $42.8 billion at June 30, 1996. While revenues for the second quarter 1997 increased 46% over comparable 1996, costs and expenses increased at a lower proportionate rate, resulting in an improved operating margin. This improved margin (3% higher than second quarter 1996) was primarily attributable to increased average shareholder balances and efficiencies through the use of enhanced technology. Second quarter 1997 equity earnings from DST increased to $5.7 million from $5.0 million in comparable 1996, primarily due to improved operating margins compared to second quarter 1996. Financial Asset Management interest expense increased over second quarter 1996 as a result of higher average KCSI Holding Company allocated debt balances during second quarter 1997, reflecting the Company's common stock repurchases in first quarter 1997. Other, net decreased from prior year second quarter due to a one time gain recognized on the sale of a KCSI equity investment in 1996.
Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 (in millions) Holding Holding Company Company Janus and FAM- Consol- Janus and FAM- Consol- and Related idated and Related idated Berger Affiliates FAM Berger Affiliates FAM Revenues $ 216.7 $ (0.5) $ 216.2 $ 147.9 $ (0.3) $ 147.6 Costs and expenses 112.2 2.7 114.9 78.8 3.2 82.0 Depreciation and amortization 6.2 0.2 6.4 6.1 0.2 6.3 Operating income (loss) 98.3 (3.4) 94.9 63.0 (3.7) 59.3 Equity in net earnings of unconsolidated affiliates: DST Systems, Inc. - 11.8 11.8 - 6.9 6.9 Other 0.3 - 0.3 - 0.6 0.6 Interest income (expense) (3.2) (1.5) (4.7) (2.7) 0.5 (2.2) Other, net 1.6 5.3 6.9 1.7 7.1 8.8 Pretax income 97.0 12.2 109.2 62.0 11.4 73.4 Income tax provision 38.4 3.2 41.6 25.1 1.3 26.4 Minority interest 10.6 - 10.6 6.9 - 6.9 Net income $ 48.0 $ 9.0 $ 57.0 $ 30.0 $ 10.1 $ 40.1
For the six months ended June 30, 1997, Financial Asset Management contributed $57.0 million, a 42% increase over the same period in 1996. This increase was attributable to higher revenues (driven by growth in assets under management), operating income and equity earnings. Year to date 1997 revenues increased 46% to $216.2 million and operating income 60% to $94.9 million compared to the six months ended June 30, 1996. Assets under management increased $13.3 billion during the first six months of 1997 from net fund sales and market appreciation. Shareowner accounts numbered more than 2.8 million as of June 30, 1997 (a 4% increase from December 31, 1996). Equity earnings from DST increased 71% over year to date 1996, largely due to the Company's proportionate share of a first quarter 1996 non-recurring charge recorded by DST related to a former DST equity affiliate, The Continuum Company, Inc. Exclusive of this item, DST's 1997 earnings reflect an increase in mutual fund, output processing and subscriber management revenues and higher operating margins compared to 1996. Year to date 1997 interest expense increased and other, net decreased from comparable 1996 as discussed in the quarterly review above. A brief discussion of Janus and Berger activity during the six months ended June 30, 1997 follows: Janus Janus continues to report growth in assets under management - a 28% increase from December 31, 1996. This increase is attributable to several factors, including, among others: (i) the investment performance of the Janus group of mutual funds, as evidenced by more than 50% of (separately tracked) Janus fund products ranking in the first quartile when compared to their respective peer categories based on product performance over a rolling one- year period through June 30, 1997 (using data from Lipper Analytical Services, Inc.); (ii) growth through new monies - less than half of the growth in assets under management was due to market appreciation; and (iii) individual fund performance, particularly the Janus Overseas Fund and Janus Worldwide Fund, combining for $11.9 billion in assets under management as of June 30, 1997 compared to $4.0 billion at June 30, 1996. Berger In February 1997, Berger assumed the advisory contract for the Omni Fund, renaming it The Berger Small Cap Value Fund ("Small Cap"). At June 30, 1997, assets under management for the Small Cap fund totaled approximately $67 million. Also, the Berger/BIAM International Fund (introduced in fourth quarter 1996) increased its assets under management to $92 million as of June 30, 1997. Exclusive of these new funds, assets under management of Berger's core funds decreased approximately $198 million from December 31, 1996, reflecting net redemptions in excess of market appreciation during the six months ended June 30, 1997. In January 1997, KCSI's ownership in Berger increased to approximately 87% (from 80%) 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. TRENDS AND OUTLOOK The Company reported a 53% improvement in second quarter 1997 earnings per share compared to second quarter 1996. Year to date 1997 earnings per share were 55% higher than the same period in 1996. Second quarter and year to date 1997 earnings from the Financial Asset Management segment reflect continued growth in assets under management and revenues, as well as efficient operations as evidenced by improved operating margins. Despite a $3.0 million equity loss from Grupo TFM (the majority of which was attributable to a non- recurring charge), the Transportation segment continued its earnings improvement, raising net income by $0.5 and $1.1 million compared to the three and six months ended June 30, 1996, respectively. A current outlook for the Company's businesses for the remainder of 1997 is as follows (refer to the first paragraph of "Overview" section of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments): i) KCSR - General commodities and intermodal traffic will continue to be largely dependent on economic trends within certain industries in the geographic region served by KCSR. (I) Based on anticipated traffic levels, including consideration of recent rail mergers, revenues are expected to be relatively flat during the remainder of 1997. (I) Variable costs and expenses are expected to continue at levels proportionate with revenue activity. (I) Consistent with the first half of 1997, equipment lease costs will be higher than 1996 as a result of operating leases with Southern Capital. Interest expense is expected to increase in the second half of 1997 due to expense associated with the indebtedness incurred to finance the $297 million capital contribution to Grupo TFM (i.e., the interest capitalization period ceased on June 23, 1997). (I) ii) Financial Asset Management - Future growth will be largely dependent on prevailing financial market conditions, relative performance of Janus' and Berger's products, introduction and market reception of new products, as well as other factors. (I) Costs and expenses should continue at operating levels consistent with the rate of growth, if any, in revenues. (I) iii) Equity Investments - The Company will continue to participate in the earnings from its equity investments in DST, Southern Capital and Mexrail. (I) However, the Company expects to report equity losses from Grupo TFM during the initial period of its operation of Mexico's Northeast rail lines. (I) (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments LIQUIDITY AND CAPITAL RESOURCES Summary cash flow data is as follows (in millions):
Six Months Ended June 30, 1997 1996 Cash flows provided by (used for): Operating activities $ 80.1 $ 3.6 Investing activities (292.6) (104.4) Financing activities 207.7 79.7 Cash and equivalents: Net decrease (4.8) (21.1) At beginning of year 22.9 31.8 At end of period $ 18.1 $ 10.7
During the six months ended June 30, 1997, the Company's cash position decreased $4.8 million from December 31, 1996. This decrease was caused primarily by cash used for property acquisitions and Company common stock repurchases, offset partially by positive operating cash flows and the sale of short-term investments by Janus. Year to date 1997 operating cash flows increased $76.5 million compared to the same period in 1996. This increase was chiefly attributable to the 1996 payment of approximately $74 million in federal and state income taxes resulting from the taxable gains associated with the DST public stock offering completed in November 1995, offset partially by changes in other working capital components. Investing expenditures for the six months ended June 30, 1997 included the Company's approximate $297 million capital contribution to Grupo TFM and KCSR road property additions. Cash from investing activities was generated primarily from the sale of short-term investments by Janus. Financing cash flows were generated through borrowings under credit lines in excess of repayments, essentially to fund the Grupo TFM capital contribution. The Company repurchased approximately $42.4 million of its common stock during 1997, funded primarily through operating cash flows. Cash flows from operations are expected to increase during the remainder of 1997 from positive operating income, which has historically resulted in favorable cash flows. (I) Investing activities will continue to use significant amounts of cash. Future roadway improvement projects are expected to be funded by KCSR operating cash flow. (I) Based on the completion of financing for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary. (I) However, as discussed earlier, there exists a possible capital call ($74 million) if certain Grupo TFM benchmarks are not met. In addition to operating cash flows, the Company has financing available through its various lines of credit (with a maximum borrowing amount of $560 million, of which $233 million was available at June 30, 1997). Because of certain financial covenants contained in the credit agreements, however, maximum utilization of the Company's available lines of credit may be restricted. The Company also has the ability to issue $500 million of securities under a Universal Shelf Registration Statement ("Registration Statement") filed in September 1993, as amended in April 1996. The Securities and Exchange Commission declared the Registration Statement effective on April 22, 1996; however, no securities have been issued. (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments The Company believes its operating cash flows and available financing resources are sufficient to fund working capital and other requirements for the remainder of 1997, as well as other potential business opportunities that the Company is currently pursuing. (I) The Company's debt ratio (total debt as a percent of total debt plus equity) at June 30, 1997 was 55.6% compared to 47.4% at December 31, 1996. Company consolidated debt increased $289.7 million from December 31, 1996 (to $934.8 million at June 30, 1997) primarily as a result of borrowings to fund the approximate $297 million capital contribution to Grupo TFM. Consolidated equity increased $29.5 million from December 31, 1996. This increase was primarily due to net income and a positive non-cash equity adjustment related to unrealized gains on "available for sale" securities held by affiliates, offset partially by common stock repurchases. The higher increase in debt, however, resulted in an increase in the debt ratio from December 31, 1996. Management anticipates that the debt ratio throughout the remainder of 1997 will remain relatively consistent with the ratio as of June 30, 1997. (I) During May 1997, Standard & Poor's Corporation ("S&P") and Moody's Investing Service ("Moody's") issued opinions of the Company's credit and senior secured debt ratings. S&P lowered its rating on the Company to BBB- from BBB+, but commented that the Company's outlook is stable. According to S&P, the reduced rating was a result of the Company's increased debt levels to fund share repurchases and its investment in the Mexican Northeast rail lines, combined with increased competitive pressures on the Company's core U.S. railroad operations. Moody's confirmed as unchanged its previous rating of the Company at Baa2. According to Moody's, this decision was based on the Company's diversified nature of businesses and the considerable strength of a number of assets whose market value exceeds book value. (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments PART II - OTHER INFORMATION Item 1. Legal Proceedings Part I, Item 1. Financial Statements, Note 11 to the Consolidated Condensed Financial Statements of this Form 10-Q is hereby incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 10.1 - The Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility dated May 2, 1997, by and between the Company and the lenders named therein, is attached to this Form 10-Q as Exhibit 10.1 Exhibit 27.1 - Financial Data Schedule b) Reports on Form 8-K The Company filed a Current Report on Form 8-K/A dated June 3, 1997, an amendment to a Current Report on Form 8-K dated November 12, 1996, 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. The Company filed a Current Report on Form 8-K dated July 9, 1997 reporting the payment of the remaining 60% of the purchase price for TFM, S.A. de C.V. (formerly Ferrocarril del Noreste, S.A. de C.V.), who holds the concession to operate Mexico's Northeast rail lines, by Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (formerly 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 Company filed a Current Report on Form 8-K dated July 29, 1997 reporting the announcement of a 3-for-1 split in the Company's common stock to be effected in the form of a stock dividend and a 20% increase in the quarterly dividend. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on August 12, 1997. Kansas City Southern Industries, Inc. /s/ Joseph D. Monello Joseph D. Monello Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Louis G. Van Horn Louis G. Van Horn Vice President and Comptroller (Principal Accounting Officer) EX-10.1 2 AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT is made as of the 2nd day of May 1997 (the "Amendment and Restatement"), among KANSAS CITY SOUTHERN INDUSTRIES, INC., a Delaware corporation (the "Borrower"), each lender listed on the signature pages hereof (each individually a "Lender" and collectively the "Lenders") and [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] as administrative agent for the Lenders (in its capacity as administrative agent, the "Agent"). WHEREAS, on May 5, 1995, the Borrower, [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT], as agent, and certain of the Lenders entered into a Five-Year Credit Agreement (as previously amended, the "Credit Agreement") pursuant to which the Lenders made available to the Borrower Loans in an aggregate principal amount not to exceed $300,000,000 at any time outstanding; WHEREAS, on May 3, 1996, the Borrower, [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT], as agent, and the Lenders entered into the First Amendment to the Credit Agreement pursuant to which the Maturity Date was extended and certain other amendments to the Credit Agreement were effectuated; WHEREAS, the parties hereto desire to amend and restate the Credit Agreement as set forth herein and to restate the Credit Agreement in its entirety to read as set forth in the Credit Agreement after giving effect to the amendments set forth herein; and WHEREAS, the Borrower and the Lenders have agreed to amend and restate, on the terms and subject to the conditions set forth herein, the Credit Agreement, to provide for the foregoing. NOW, THEREFORE, for and in consideration of the premises and the mutual covenants herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, the Agent and the Lenders hereby agree as follows: SECTION 1. All capitalized terms which are defined in the Credit Agreement and not otherwise defined herein or in the recitals hereof shall have the same meaning herein as in the Credit Agreement. SECTION 2. All references to Section numbers in this Amendment shall, except as the context requires, be references to the corresponding Sections of the Credit Agreement. SECTION 3. On and after the Restatement Effective Date (as defined below), each reference in the Credit Agreement to "this Agreement", "hereunder", "herein", or words of like import shall mean and be a reference to the Credit Agreement, as amended and restated hereby. SECTION 4. Article 1 of the Credit Agreement is hereby amended by: (a) Adding in the appropriate alphabetical order the definitions of "Amendment and Restatement" and "Restatement Effective Date" which shall read in their entirety as follows: "'Amendment and Restatement' shall mean the Amended and Restated Five-Year Credit Agreement dated as of May 2, 1997 among the Borrower, the Lenders and the Agent." "'Restatement Effective Date' shall mean May 2, 1997; provided, that each of the conditions precedent to the Amendment and Restatement shall have been satisfied in full." (b) Deleting the definition of Maturity Date in its entirety and substituting in lieu thereof the following: "'Maturity Date' shall mean May 2, 2002." SECTION 5. Schedule 2.01 to the Credit Agreement shall be deleted in its entirety, and Exhibit A, attached hereto, shall be substituted in lieu thereof as Schedule 2.01 to the Credit Agreement, to the effect that the aggregate Commitments of the Lenders under the Credit Agreement, as amended hereby, shall remain equal to $300,000,000, and the Commitment of each Lender after the effectiveness of this Amendment and Restatement shall be the amount set forth beside such Lender's name on such Schedule 2.01 to the Credit Agreement, as amended hereby, as such amount may be reduced from time to time pursuant to the terms of the Credit Agreement. SECTION 6. Each of Sections 3.05(a)(ii), 3.06 and 3.09 of the Credit Agreement is hereby amended by deleting each reference therein to (a) "1995" and substituting in lieu thereof a reference to "1996" and (b) "1996" and substituting in lieu thereof a reference to "1997". SECTION 7. Schedule 3.08 to the Credit Agreement (Subsidiaries) is hereby amended by deleting said Schedule 3.08 in its entirety, and a new Schedule 3.08, in the form of Exhibit B, attached hereto, is hereby substituted in lieu thereof. SECTION 8. Schedule 6.01 to the Credit Agreement (Indebtedness) is hereby amended by deleting said Schedule 6.01 in its entirety, and a new Schedule 6.01 in the form of Exhibit C, attached hereto, is hereby substituted in lieu thereof. SECTION 9. Section 6.02 of the Credit Agreement is hereby amended by deleting the words "and those specified in clause (g) below" from the parenthetical contained in the second sentence thereof. SECTION 10. Schedule 6.02 to the Credit Agreement (Liens) is hereby amended by deleting said Schedule 6.02 in its entirety, and a new Schedule 6.02 in the form of Exhibit D, attached hereto, is hereby substituted in lieu thereof. SECTION 11. Section 6.07(a) of the Credit Agreement is hereby amended to read in its entirety as follows: "(a) permit the ratio of Consolidated Total Indebtedness to the sum of Consolidated Total Indebtedness and Consolidated Net Worth to exceed (i) [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] at any time from the date hereof through December 31, 1998 and (ii) [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] at any time thereafter; or" SECTION 12. By its execution and delivery hereof, the Borrower represents and warrants: (a) Before and after giving effect to the amendments provided for herein, (i) the representations and warranties contained in Article III of the Credit Agreement, as amended by this Amendment and Restatement, are true and correct on and as of the date hereof and the Restatement Effective Date as though made by the Borrower on and as of each such date, and (ii) no Default or Event of Default has occurred and is continuing or would result from the execution and delivery of this Amendment and Restatement; and (b) the Borrower has all requisite corporate power and authority to execute, deliver and perform this Amendment and Restatement; this Amendment and Restatement has been authorized by proper corporate proceedings and constitutes the legal, valid and binding obligation of the Borrower enforceable in accordance with its terms. SECTION 13. This Amendment and Restatement shall become effective as of the Restatement Effective Date; provided, that, (a) the Agent shall have received: (i) counterparts of this Amendment and Restatement duly and validly executed by the Borrower and each Lender; (ii) an Officer's Certificate in form and substance satisfactory to the Agent and counsel to the Agent (with resolutions of the Board of Directors of the Borrower approving and authorizing the transactions contemplated under this Amendment and Restatement and the execution, delivery and performance by the Borrower of this Amendment and Restatement); (iii) an opinion of Richard P. Bruening, Vice President and General Counsel of the Borrower in form and substance reasonably satisfactory to the Agent and counsel to the Agent; (iv) such other documents and agreements as the Agent may reasonably request; and (v) all Facility Fees accrued prior to the Restatement Effective Date; and (b) all Standby Loans outstanding under the Credit Agreement prior to the effectiveness of this Amendment and Restatement shall have been repaid, together accrued interest and any amounts due pursuant to Section 2.15 of the Credit Agreement. SECTION 14. On the Restatement Effective Date, the Credit Agreement, as amended hereby, shall be deemed incorporated herein by reference and restated in its entirety. SECTION 15. The Borrower agrees to pay on demand all costs and expenses of the Agent or any Lender in connection with the preparation, execution and delivery of this Amendment and Restatement (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Agent with respect thereto). SECTION 16. THIS AMENDMENT AND RESTATEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AND SHALL BE BINDING UPON THE BORROWER, THE AGENT AND THE LENDERS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. SECTION 17. This Amendment and Restatement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly authorized, have executed this Amendment and Restatement as of the day and year first above written. KANSAS CITY SOUTHERN INDUSTRIES, INC., by /s/ Anthony P. McCarthy Name: Anthony P. McCarthy Title: Vice President and Treasurer SIGNATURES AND PARTICIPATING BANK GROUP [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] SIGNATURES AND PARTICIPATING BANK GROUP [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] SIGNATURES AND PARTICIPATING BANK GROUP [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] SIGNATURES AND PARTICIPATING BANK GROUP [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] SIGNATURES AND PARTICIPATING BANK GROUP [INFORMATION SUBJECT TO REQUEST FOR CONFIDENTIAL TREATMENT] EX-27.1 3
5 THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-Q, CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME OF KANSAS CITY SOUTHERN INDUSTRIES, INC., COMMISSION FILE NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-31-1997 JUN-30-1997 18,100,000 0 163,000,000 0 39,900,000 287,900,000 1,771,900,000 509,800,000 2,446,900,000 268,700,000 927,300,000 0 7,100,000 400,000 737,700,000 2,446,900,000 0 490,400,000 0 367,400,000 0 0 27,300,000 116,600,000 45,700,000 60,300,000 0 0 0 60,300,000 1.64 0
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