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 September 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 October 31, 1997
Common Stock, $.01 per share par value 107,627,371 Shares
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 1
Consolidated Condensed Balance Sheets -
September 30, 1997 and December 31, 1996 2
Consolidated Condensed Statements of Income -
Three and Nine Months Ended September 30, 1997 and 1996 3
Computation of Primary Earnings per Common Share 3
Consolidated Condensed Statements of Cash Flows -
Nine Months Ended September 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 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
SEPTEMBER 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.
<PAGE> 2
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents $ 43.4 $ 22.9
Accounts receivable, net 173.7 138.1
Inventories 36.9 39.3
Other current assets 89.6 91.8
Total current assets 343.6 292.1
Investments held for operating purposes 679.7 335.2
Properties (net of $524.6 and $491.3 accumulated
depreciation and amortization, respectively) 1,269.3 1,219.3
Intangibles and Other Assets, net 238.3 237.5
Total assets $2,530.9 $2,084.1
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 107.2 $ 7.6
Accounts and wages payable 99.7 102.6
Accrued liabilities 170.1 134.4
Total current liabilities 377.0 244.6
Other Liabilities:
Long-term debt 834.3 637.5
Deferred income taxes 359.9 337.7
Other deferred credits 137.0 129.8
Total other liabilities 1,331.2 1,105.0
Minority Interest in consolidated subsidiaries 22.1 18.8
Stockholders' Equity:
Preferred stock 7.1 7.1
Common stock 1.1 0.4
Capital surplus - -
Retained earnings 944.6 883.3
Net unrealized gain on investments 47.8 24.9
Shares held in trust (200.0) (200.0)
Total stockholders' equity 800.6 715.7
Total liabilities and stockholders' equity $2,530.9 $2,084.1
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 3
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues $273.6 $218.2 $764.0 $626.4
Costs and expenses 169.8 138.3 500.3 422.1
Depreciation and amortization 19.3 19.7 56.2 57.9
Operating Income 84.5 60.2 207.5 146.4
Equity in net earnings (losses) of
unconsolidated affiliates:
DST Systems, Inc. 5.6 56.3 17.4 63.2
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. (2.3) - (5.3) -
Other 1.0 0.2 2.8 1.7
Interest expense (19.3) (16.1) (46.6) (43.2)
Other, net 4.4 2.4 14.7 12.3
Pretax Income 73.9 103.0 190.5 180.4
Income tax provision 25.4 22.5 71.1 50.7
Minority interest in
consolidated earnings 6.7 4.4 17.3 11.3
Net Income 41.8 76.1 102.1 118.4
Less: dividends on preferred stock 0.1 0.1 0.2 0.2
Net Income Applicable to
Common Stockholders $ 41.7 $ 76.0 $ 101.9 $ 118.2
Computation of Primary Earnings per Common Share
Weighted Average Primary Common
Shares Outstanding (in thousands) 110,802 114,012 110,253 116,406
Primary Earnings per Common Share $ 0.38 $ 0.67 $ 0.92 $ 1.02
Cash Dividends Paid:
Per Preferred share $ .25 $ .25 $ .75 $ .75
Per Common share .04 .03 .11 .10
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 4
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
<S> <C> <C>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net income $102.1 $118.4
Adjustments to net income:
Depreciation and amortization 56.2 57.9
Deferred income taxes 14.0 8.1
Equity in undistributed earnings (14.9) (61.1)
Changes in working capital items:
Accounts receivable (25.7) (0.1)
Inventories 4.0 3.9
Other current assets (2.0) 2.2
Accounts and wages payable (10.0) 2.3
Accrued liabilities 24.1 (64.8)
Other, net 2.4 0.6
Net 150.2 67.4
INVESTING ACTIVITIES:
Property acquisitions (57.1) (110.3)
Proceeds from disposal of property 5.8 3.6
Investment in and loans with affiliates (298.8) (24.8)
Net sales (purchases) of short-term investments 2.2 (31.5)
Proceeds from disposal of investments - 8.8
Other, net 8.8 4.1
Net (339.1) (150.1)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 336.4 201.0
Repayment of long-term debt (82.0) (6.6)
Proceeds from stock plans 17.7 10.8
Stock repurchased (47.1) (120.3)
Cash dividends paid (15.4) (14.8)
Other, net (0.2) 3.3
Net 209.4 73.4
CASH AND EQUIVALENTS:
Net increase (decrease) 20.5 (9.3)
At beginning of year 22.9 31.8
At end of period $ 43.4 $ 22.5
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE> 5
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
September 30, 1997 and December 31, 1996, the results of operations for the
three and nine months ended September 30, 1997 and 1996, and cash flows for
the nine months ended September 30, 1997 and 1996.
2. The results of operations for the three and nine months ended September 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, which was effected in the form of a stock
dividend paid on September 16, 1997 to stockholders of record as of August 25,
1997. All share and per share data has been restated to reflect the stock
split.
The accumulation of the 1997 and 1996 first, second and third quarter Primary
Earnings per Common Share does not total the Primary Earnings per Common Share
for the nine months ended September 30, 1997 and 1996, respectively, as a
result of repurchases of Company common stock.
4. 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.
During third quarter 1997, the Company formed Kansas City Southern Lines, Inc.
("KCSL") as a holding company for KCSR and all other transportation-related
subsidiaries and affiliates. KCSL was organized to provide separate control,
management and accountability for all transportation operations and
businesses.
On September 19, 1997, the Company announced its intention to separate its
Transportation segment from its Financial Asset Management segment. On
October 21, 1997, the Company announced that the separation would take the
form of an initial public offering of approximately 60% of KCSL's equity. The
offering is expected to occur early in 1998, subject to market conditions and
completion of regulatory review and other processes.
<PAGE> 6
As a result of the Company's decision to commence an initial public offering
of KCSL, among other factors, management is in the process of performing a
detailed review of the various assets of all Company subsidiaries. This
review is being performed using the relevant accounting guidance (e.g.,
Statement of Financial Accounting Standards No. 121, Accounting Principles
Board Opinion No. 17), and under the established 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.
This review is expected to be completed during fourth quarter 1997.
5. The Company's inventories ($36.9 million at September 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.
6. 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 September
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 nine months ended September
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.
<PAGE> 7
Combined condensed financial information of unconsolidated affiliates is shown
below (dollars in millions):
<TABLE>
<CAPTION>
Financial Condition:
September 30, 1997 December 31, 1996
DST Grupo TFM Other DST Grupo TFM Other
<S> <C> <C> <C> <C> <C> <C>
Current Assets $ 215.0 $ 102.3 $ 25.7 $ 201.3 $ 1.2 $ 34.4
Non-current assets 1,048.2 1,885.7 257.1 920.3 4.2 331.7
Assets $1,263.2 $1,988.0 $282.8 $1,121.6 $ 5.4 $ 366.1
Current liabilities$ 109.8 $ 93.2 $ 11.0 $ 125.7 $ 1.2 $ 27.2
Non-current
liabilities 348.0 1,106.7 196.2 300.7 - 267.7
Equity of stockholders
and partners 805.4 788.1 75.6 695.2 4.2 71.2
Liabilities and
equity $1,263.2 $1,988.0 $282.8 $1,121.6 $ 5.4 $ 366.1
Investment in
unconsolidated
affiliates $ 331.7 $ 296.0 $ 42.1 $ 283.5 $ 2.7 $ 39.7
</TABLE>
Operating Results:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
DST $159.8 $ 139.6 $473.9 $427.0
Grupo TFM (a) 100.0 - 107.0 -
All others 17.8 8.1 50.6 23.3
Total revenues $277.6 $ 147.7 $631.5 $450.3
Operating costs and expenses:
DST $138.3 $ 137.8 $407.7 $388.7
Grupo TFM (a) 89.9 - 96.9 -
All others 18.4 8.3 45.6 22.0
Total operating costs
and expenses $246.6 $ 146.1 $550.2 $410.7
Net income:
DST $ 14.1 $ 138.6 $ 43.0 $155.4
Grupo TFM (a) (11.0) - (18.9) -
All others 0.8 (0.8) 3.9 (0.7)
Total net income $ 3.9 $ 137.8 $ 28.0 $154.7
</TABLE>
(a) The operating results provided for Grupo TFM reflect its operation of TFM,
S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.)
beginning on June 23, 1997. See discussion in Note 9 below.
<PAGE> 8
7. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with a maturity of generally three months or
less to be cash equivalents.
a.Supplemental Cash Flow Information (in millions):
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
<S> <C> <C>
Interest paid (excluding capitalized interest) $ 50.8 $ 52.7
Income taxes paid 44.5 106.9
</TABLE>
The Company's income taxes paid for the nine months ended September 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 246,000 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 305,400 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 September 30, 1997,
net of deferred taxes, related to these investments increased $22.9 million
from December 31, 1996. The unrealized gain as of September 30, 1996, net of
deferred taxes, increased $12.4 million from December 31, 1995.
8. 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 statements.
Accordingly, if the Company's earnings per share had been computed in
accordance with SFAS 128 for the three and nine months ended September 30,
1997 and 1996, pro forma earnings per share would have been as follows:
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Pro Forma Earnings per Share:
Basic $ 0.39 $ 0.68 $0.95 $1.03
Diluted 0.38 0.67 0.92 1.02
</TABLE>
9. 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 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
holds the concession to operate over 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 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, 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 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 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, which includes a possible capital call of $150 million from TMM and the
Company if certain performance benchmarks, outlined in the
<PAGE> 10
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 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 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
September 30, 1997, Grupo TFM was in compliance with all provisions of the
Contribution Agreement; accordingly, no additional contributions from the
Company have been requested or made.
As of September 30, 1997, the Company's investment in Grupo TFM was
approximately $296 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 translation 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.
10.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
capitalized interest incurred on the borrowings under its lines of credit
associated with the approximate $297 million capital contribution to Grupo TFM
(see Note 9 above). Pursuant to SFAS 58, once Grupo TFM assumed operational
control of TFM (June 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 nine months ended September 30, 1997
totaled $7.4 million.
11.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.
<PAGE> 11
12. In July 1996, the Company was named as one of twenty-seven defendants in
various lawsuits in Louisiana and Mississippi arising from the explosion
of a rail car loaded with chemicals in Bogalusa, Louisiana on
October 23, 1995. As a result of the explosion, nitrogen dioxide and
oxides of nitrogen were released into the atmosphere over parts of that
town and the surrounding area causing evacuations and injuries.
Approximately 25,000 residents of Louisiana and Mississippi have asserted
claims to recover damages allegedly caused by exposure to the chemicals.
The Company neither owned nor leased the rail car or the rails on which it was
located at the time of the explosion in Bogalusa. The Company did, however,
move the rail car from Jackson to Vicksburg, Mississippi, where it was loaded
with chemicals, and back to Jackson where the car was tendered to the Illinois
Central Railroad Company ("IC"). The explosion occurred more than 15 days
after the Company last transported the rail car. The car was loaded in excess
of its standard weight when it was transported by the Company to interchange
with the IC.
The lawsuits in Louisiana and Mississippi are in different stages of progress.
The Company filed motions seeking its dismissal in both the Louisiana and
Mississippi actions. The motion was denied in Mississippi and is being
appealed to the Mississippi Supreme Court. The motion awaits a hearing in
Louisiana. Management believes that the Company's exposure with regard to
liability in these cases is remote.
The Company has had no significant changes in other outstanding litigation or
contingencies from that previously reported in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996.
13.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.
<PAGE> 12
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. Readers can
identify these forward-looking comments by their use of such verbs as expects,
anticipates, believes or similar verbs or conjugations of such verbs. 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
services. 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.
During third quarter 1997, the Company formed Kansas City Southern Lines, Inc.
("KCSL") as a holding company for The Kansas City Southern Railway Company
("KCSR") and all other transportation-related subsidiaries and affiliates. KCSL
was organized to provide separate control, management and accountability for
all transportation operations and businesses.
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:
*KCSR, a wholly-owned subsidiary 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.
<PAGE> 13
RECENT DEVELOPMENTS
Planned Public Offering of Transportation Business - On September 19, 1997, the
Company announced the planned separation of its Transportation and Financial
Asset Management segments. The form of the transaction will be an initial
public offering of approximately 60% of KCSL's equity. The public offering is
expected to occur early in 1998, subject to market conditions and completion of
regulatory review and other processes.
Operating Difficulties of the Union Pacific Railroad - As has been reported in
the press, the Union Pacific Railroad ("UP") has experienced recent
difficulties with its railroad operations, reportedly linked to its recent
acquisition of the Southern Pacific Railroad. The Company has the largest
interchange of rail traffic with the UP. The UP's difficulties have resulted
in overall traffic congestion of the U.S. railroad system and have impacted
the Company's ability to interchange traffic with UP, both for domestic and
international traffic (i.e., to and from Mexico). This system congestion has
resulted in certain equipment shortages due to the Company's rolling stock
being retained within the UP system for unusually extended periods of time,
for which UP remits car hire amounts. The Company has agreed to accept
certain UP trains as diversion of traffic to assist in the easing of the UP's
system congestion. For the nine months ended September 30, 1997, the Company
had received only one such diverted UP train. The amount of trains to be
diverted to the Company by UP, and the overall impact of the UP congestion
problems, is not expected to have a material effect on the Company's 1997
result of operations.
The Surface Transportation Board ("STB") issued an emergency service order on
October 31, 1997, addressing the deteriorating quality of rail service in the
Western United States. Key measures in the STB order, which is expected to
facilitate resolution of problems in the West, include the granting to the
Texas Mexican Railway ("Tex-Mex") access to Houston, Texas shippers, access to
trackage rights over the more direct Algoa Route south of Houston, and a
connection with the Burlington Northern Santa Fe Railroad at Flatonia, Texas.
The order takes effect on November 5, 1997 and extends for 30 days initially.
The STB plans another hearing for December 3, 1997 for a progress report from
UP officials. Tex-Mex is a wholly-owned subsidiary of Mexrail.
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," 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
holds the concession to operate over 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 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, 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 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.
<PAGE> 14
On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM 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, which includes 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 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 Govern-
ment 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 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
September 30, 1997, Grupo TFM was in compliance with all provisions of the
Contribution Agreement; accordingly, no additional contributions from the
Company have been requested or made.
As of September 30, 1997, the Company's investment in Grupo TFM was
approximately $296 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 $0.04 per share. Both
dividends were paid 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.
Common Stock Repurchases - The Company's Board has authorized management to
repurchase a total of 33 million shares of KCSI common stock under two programs
- - the 1995 program for 24 million shares and the 1996 program for nine million
shares. During first quarter 1997, the Company purchased the final 2.4
<PAGE> 15
million shares 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 27.3 million shares of its common shares,
completing the 1995 program and part of the 1996 program.
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 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 nine months ended September 30, 1997 reflect this restatement.
RESULTS OF OPERATIONS
Segment revenues, operating income and net income comparisons follow (dollars in
millions):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Transportation (KCSL) $ 142.7 $ 132.2 $ 416.9 $ 392.8
Financial Asset Management 130.9 86.0 347.1 233.6
Total $ 273.6 $ 218.2 $ 764.0 $ 626.4
Operating Income:
Transportation (KCSL) $ 24.5 $ 22.7 $ 52.6 $ 49.6
Financial Asset Management 60.0 37.5 154.9 96.8
Total $ 84.5 $ 60.2 $ 207.5 $ 146.4
Net Income:
Transportation (KCSL) $ 3.0 $ 5.2 $ 6.3 $ 7.4
Financial Asset Management 38.8 70.9 95.8 111.0
Total $ 41.8 $ 76.1 $ 102.1 $ 118.4
</TABLE>
The Company reported third quarter 1997 earnings of $41.8 million, or $0.38 per
share, compared to $76.1 million, or $0.67 per share in third quarter 1996.
Third quarter 1996 earnings include a one-time gain of approximately $47.7
million, or $0.42 per share (after-tax), from equity earnings in DST,
representing the Company's proportionate share of the gain recognized by DST in
connection with the merger of The Continuum Company, Inc. ("Continuum,"
formerly a DST equity investment) with Computer Sciences Corporation.
Exclusive of this one-time gain, the Company's earnings per share increased
52% over third quarter 1996. Consolidated third quarter 1997 revenues rose
25% compared to the same period in 1996 from improvements in both of the
Company's segments. Operating income for the three months ended September 30,
1997 increased 40% (to $84.5 million) versus comparable 1996, largely due to
higher revenues, together with lower proportionate growth in Financial
Asset Management operating expenses as compared to revenues. Equity earnings
in unconsolidated affiliates totaled $4.3 million in third quarter 1997,
which was significantly lower than the prior period due to the one-time gain
in 1996. Third quarter 1997 includes an estimated $2.3 million equity loss
from Grupo TFM, which more than offset increased equity earnings from
<PAGE> 16
DST (exclusive of the Continuum gain) and other investments. Interest expense
for the three months ended September 30, 1997 was 20% higher than comparable
1996 from higher average debt balances in 1997 resulting from the investment in
Grupo TFM.
For the nine months ended September 30, 1997, consolidated earnings were $102.1
million, or $0.92 per share, versus $70.7 million, or $0.61 per share in
comparable 1996, exclusive of the one-time Continuum gain. Year to date 1997
consolidated revenues increased 22% to $764.0 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 nine months ended 1997 increased at a lower
proportionate rate than revenues compared to 1996, leading to a 42% improvement
in operating income. Year to date 1997 equity earnings of unconsolidated
affiliates increased over comparable 1996 (exclusive of the Continuum gain) due
to higher DST earnings, offset by estimated losses at Grupo TFM.
TRANSPORTATION (KCSL)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
(in millions)
Holding Holding
Company and Company and
Transpor- Consol- Transpor- Consol-
tation- idated tation- idated
Related Trans- Related Trans-
KCSR Affiliates portation KCSR Affiliates portation
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 128.5 $ 14.2 $ 142.7 $ 125.5 $ 6.7 $ 132.2
Costs and expenses 92.5 10.1 102.6 86.6 6.6 93.2
Depreciation and
amortization 13.6 2.0 15.6 15.1 1.2 16.3
Operating income
(loss) 22.4 2.1 24.5 23.8 (1.1) 22.7
Equity in net
earnings (losses)
of unconsolidated
affiliates:
Grupo TFM - (2.3) (2.3) - - -
Other 0.5 0.4 0.9 - 0.1 0.1
Interest expense (9.4) (7.6) (17.0) (12.2) (1.9) (14.1)
Other, net 0.8 (0.1) 0.7 1.1 (0.3) 0.8
Pretax income
(loss) 14.3 (7.5) 6.8 12.7 (3.2) 9.5
Income tax provision
(benefit) 6.3 (2.5) 3.8 5.5 (1.2) 4.3
Net income
(loss) $ 8.0 $ (5.0) $ 3.0 $ 7.2 $ (2.0) $ 5.2
</TABLE>
The Transportation segment contributed $3.0 million to the Company's third
quarter 1997 earnings versus $5.2 million in third quarter 1996. Exclusive of
the Company's equity in the estimated net losses of, and interest expense
associated with, its investment in Grupo TFM, Transportation third quarter 1997
earnings were $7.7 million, 48% higher than 1996. This increase is
attributable to 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 third quarter 1997 revenues increased 2% over comparable 1996, primarily
from a $2.4 million increase in domestic grain business on volume gains.
Revenue improvements were also evident in chemical/petroleum, paper/forest
products and unit coal. While total KCSR revenues increased over third
quarter 1996, revenue carloadings decreased 1% quarter to quarter. This
improvement in average revenue per carload is generally attributable to
traffic mix and length of haul. Third quarter 1997 Holding Company and
Transportation-Related Affiliates revenues increased over 1996 due to the
inclusion of Gateway Western (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.
<PAGE> 17
Third quarter 1997 Transportation operating expenses increased 8% compared to
third quarter 1996. KCSR experienced a 4% increase in operating expenses,
primarily from higher operating lease expenses (payments to Southern Capital),
partially offset by reduced depreciation as a result of the contribution and
sale of rail property to the Southern Capital joint venture. While total third
quarter 1997 KCSR operating expenses were higher than 1996, variable expenses
as a percentage of revenues declined by 2%. 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 over third 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 third quarter 1996 related to the UP/SP merger as
discussed above, together with reduced costs and expenses due to the
dissolution of SLC.
During third quarter 1997, the Company recorded $2.3 million in estimated
equity losses associated with its investment in Grupo TFM. KCSR recorded
$0.5 million of equity income, reflecting KCSR's 50% share of Southern Capital
third quarter earnings.
Interest expense increased $2.9 million from third quarter 1996 because of
interest associated with the indebtedness incurred to fund the Grupo TFM
investment, partially offset by reduced interest due to the repayment of KCSR,
Carland and SGI debt using proceeds from the Southern Capital transaction.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(in millions)
Holding Holding
Company and Company and
Transpor- Consol- Transpor- Consol-
tation- idated tation- idated
Related Trans Related Trans-
KCSR Affiliates portation KCSR Affiliates portation
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 375.7 $ 41.2 $ 416.9 $ 370.4 $ 22.4 $ 392.8
Costs and expenses 285.5 32.7 318.2 272.0 23.0 295.0
Depreciation and
amortization 40.9 5.2 46.1 44.6 3.6 48.2
Operating income
(loss) 49.3 3.3 52.6 53.8 (4.2) 49.6
Equity in net
earnings (losses)
of unconsolidated
affiliates:
Grupo TFM - (5.3) (5.3) - - -
Other 1.6 0.8 2.4 - 1.0 1.0
Interest expense (28.6) (11.0) (39.6) (36.5) (2.5) (39.0)
Other, net 3.8 0.3 4.1 2.7 (0.8) 1.9
Pretax income
(loss) 26.1 (11.9) 14.2 20.0 (6.5) 13.5
Income tax provision
(benefit) 11.5 (3.6) 7.9 8.5 (2.4) 6.1
Net income
(loss) $ 14.6 $ (8.3) $ 6.3 $ 11.5 $ (4.1) $ 7.4
</TABLE>
The Transportation segment contributed $14.0 million to the Company's earnings
for the nine months ended September 30, 1997, exclusive of estimated equity
losses in, and interest expense associated with, Grupo TFM, compared to $7.4
million for the same period in 1996. This increase in earnings was
attributable to higher earnings from KCSR as a result of reduced interest
expense, the inclusion of Gateway Western in 1997 and the UP/SP merger costs
incurred in 1996.
Transportation revenues increased 6% compared to 1996. This increase was
primarily attributable to the inclusion of Gateway Western revenues in 1997,
together with a $5.3 million increase in KCSR revenues. The KCSR revenue gain
was largely due to increased domestic grain revenues, particularly corn, as
well as improved export grain, chemicals and petroleum products, and paper/
forest products. Similar to third quarter 1997, carloadings for year to date
1997 were down, yet revenue has increased due to the mix of traffic and length
of haul improvements, as well as a greater focus on higher margin traffic.
Holding Company and Transportation-Related Affiliates revenues reflect the
Gateway Western revenues, offset partially by the lack of SLC revenues in 1997.
<PAGE> 18
Year to date 1997 Transportation operating expenses increased 6% 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 8% for the
reasons discussed above. These reductions were offset by higher
fuel costs due to usage 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 nine months ended September 30, 1997, reflecting the
Company's estimated proportionate share of Grupo TFM's 1997 net loss.
Year to date 1997 Transportation interest expense increased from 1996 as
discussed above. 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 purchase price was made (June 23, 1997). Other,
net increased for the nine months ended September 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
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
(in millions)
Holding Holding
Company and Company and
Janus FAM- Consol- Janus FAM- Consol-
and Related idated and Related idated
Berger Affiliates FAM Berger Affiliates FAM
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 131.5 $ (0.6) $ 130.9 $ 85.9 $ 0.1 $ 86.0
Costs and expenses 66.7 0.5 67.2 43.5 1.6 45.1
Depreciation and
amortization 3.3 0.4 3.7 3.2 0.2 3.4
Operating income
(loss) 61.5 (1.5) 60.0 39.2 (1.7) 37.5
Equity in net
earnings of
unconsolidated
affiliates:
DST Systems, Inc. - 5.6 5.6 - 56.3 56.3
Other 0.1 - 0.1 - 0.1 0.1
Interest expense (1.5) (0.8) (2.3) (1.5) (0.5) (2.0)
Other, net 2.7 1.0 3.7 1.1 0.5 1.6
Pretax income 62.8 4.3 67.1 38.8 54.7 93.5
Income tax provision
(benefit) 24.9 (3.3) 21.6 15.6 2.6 18.2
Minority interest 6.7 - 6.7 4.4 - 4.4
Net income $ 31.2 $ 7.6 $ 38.8 $ 18.8 $ 52.1 $ 70.9
</TABLE>
Financial Asset Management contributed $38.8 million to KCSI's 1997 third
quarter consolidated earnings, an increase of 67% over comparable 1996,
exclusive of the one-time gain from the Continuum merger. Average assets under
management by Janus and Berger were 58% higher during third quarter 1997 than
third quarter 1996, leading to a $44.9 and $22.5 million increase in revenues
and operating income, respectively, over third quarter 1996.
Assets under management increased $8.4 billion during third quarter 1997 as a
result of net fund sales of $2.9 billion and market appreciation of $5.5
billion. Assets under management totaled $72.0 billion at September 30, 1997
($67.9 billion at Janus; $4.1 billion at Berger) versus $47.0 billion at
September 30, 1996.
While revenues for the third quarter 1997 increased 52% over comparable 1996,
costs and expenses increased at a lower proportionate rate, resulting in an
improved operating margin. This improved margin (2% higher than third quarter
1996) was primarily attributable to increased average shareholder balances.
<PAGE> 19
Third quarter 1997 equity earnings from DST totaled $5.6 million, significantly
lower than 1996 as a result of the gain from the Continuum merger. Exclusive
of this gain, equity earnings from DST increased 24%, primarily due to
higher mutual fund, portfolio accounting, output processing and other
revenues, together with improved operating margins compared to third
quarter 1996.
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, 1997 September 30, 1996
(in millions)
Holding Holding
Company and Company and
Janus FAM- Consol- Janus FAM- Consol-
and Related idated and Related idated
Berger Affiliates FAM Berger Affiliates FAM
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 348.2 $ (1.1) $ 347.1 $ 233.8 $ (0.2) $ 233.6
Costs and expenses 178.9 3.2 182.1 122.3 4.8 127.1
Depreciation and
amortization 9.5 0.6 10.1 9.3 0.4 9.7
Operating income
(loss) 159.8 (4.9) 154.9 102.2 (5.4) 96.8
Equity in net
earnings of
unconsolidated
affiliates:
DST Systems, Inc. - 17.4 17.4 - 63.2 63.2
Other 0.4 - 0.4 - 0.7 0.7
Interest expense (4.7) (2.3) (7.0) (4.2) - (4.2)
Other, net 4.3 6.3 10.6 2.8 7.6 10.4
Pretax income 159.8 16.5 176.3 100.8 66.1 166.9
Income tax provision
(benefit) 63.3 (0.1) 63.2 40.7 3.9 44.6
Minority interest 17.3 - 17.3 11.3 - 11.3
Net income $ 79.2 $ 16.6 $ 95.8 $ 48.8 $ 62.2 $ 111.0
</TABLE>
For the nine months ended September 30, 1997, Financial Asset Management
contributed $95.8 million to the Company's consolidated earnings, a 51%
increase over the same period in 1996, exclusive of the Continuum gain.
Higher earnings were attributable to a 49% increase in revenues (driven by
growth in assets under management), a 60% increase in operating income and
higher equity earnings.
Assets under management increased $21.7 billion during the nine months ended
September 30, 1997 from net fund sales and market appreciation. Shareowner
accounts numbered more than 2.8 million as of September 30, 1997 (a 5% increase
from December 31, 1996).
Equity earnings from DST increased 53% over year to date 1996 (exclusive of the
Continuum gain), largely due to the Company's proportionate share of a first
quarter 1996 non-recurring charge recorded by DST related to Continuum.
Exclusive of this first quarter charge, DST's 1997 earnings reflect the same
trends noted in third quarter 1997.
Year to date 1997 interest expense increased due to higher average KCSI Holding
Company allocated debt balances during third quarter 1997, reflecting
repurchases of KCSI common stock in first quarter 1997.
A brief discussion of Janus and Berger activity during the nine months ended
September 30, 1997 follows:
Janus
Janus continued to report growth in assets under management - a 45% 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 approximately 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 September 30, 1997 (using data from Lipper Analytical Services, Inc.);
(ii) growth through new investment money - approximately 46% of the growth in
assets under management was due to net sales; and (iii) individual fund
performance, particularly the Janus Overseas Fund and Janus Worldwide Fund,
combining for $14.3 billion in assets under management as of September 30,
1997 compared to $4.8 billion at September 30, 1996.
<PAGE> 20
Berger
In September 1997, Berger launched the Berger Balanced Fund, which closed with
$7.5 million in assets under management as of September 30, 1997. In February
1997, Berger assumed the advisory contract for the Omni Fund, renaming it The
Berger Small Cap Value Fund ("Small Cap"). At September 30, 1997, assets
under management for the Small Cap fund totaled approximately $114 million.
Also, the Berger/BIAM International Fund (introduced in fourth quarter 1996)
increased its assets under management to $124 million as of September 30,
1997. Exclusive of these new funds, assets under management of Berger's core
funds increased approximately $130 million from December 31, 1996, reflecting
market appreciation in excess of net redemptions during the nine months ended
September 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 52% improvement in third quarter 1997 earnings per share
compared to third quarter 1996. Year to date 1997 earnings per share were 51%
higher than the same period in 1996. Third 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 improved operating margins.
The Transportation segment continued its earnings improvement (exclusive of the
estimated equity losses and interest expense associated with Grupo TFM),
reporting higher net income in third quarter 1997 than in either previous
quarter in 1997 and comparable 1996.
A current outlook for the Company's businesses for the fourth quarter 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 (as evidenced by the increase in domestic
grain revenues during 1997 due to a strong corn crop). (I) Based on
anticipated traffic levels, including consideration of recent rail mergers,
fourth quarter 1997 revenues are expected exceed third quarter 1997. (I)
Variable costs and expenses are expected to continue at levels proportionate
with revenue expectations. (I) Unlike the first nine months of 1997, in
which equipment lease costs exceeded comparable 1996 periods, lease costs in
fourth quarter 1997 should be relatively comparable with the prior period
because the Southern Capital joint venture was formed in fourth quarter
1996. Interest expense is expected to be higher in fourth quarter 1997 than
comparable 1996 due to expense associated with the indebtedness incurred to
finance the $297 million investment in Grupo TFM. (I)
ii) As a result of the Company's decision to commence an initial public
offering of KCSL, among other factors, management is in the process of
performing a detailed review of the various assets of all Company
subsidiaries. This review is being performed using the relevant accounting
guidance (e.g., Statement of Financial Accounting Standards No. 121,
Accounting Principles Board Opinion No. 17), and under the established
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. This review is expected to be
completed during fourth quarter 1997.
(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
<PAGE> 21
iii) 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) Fourth quarter 1997 revenues and
earnings for the Financial Asset Management segment will be impacted by
overall market declines experienced in late October 1997. Costs and
expenses should continue at operating levels consistent with the rate of
growth, if any, in revenues. (I)
iv)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)
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1997 1996
<S> <C> <C>
Cash flows provided by (used for):
Operating activities $150.2 $ 67.4
Investing activities (339.1) (150.1)
Financing activities 209.4 73.4
Cash and equivalents:
Net increase (decrease) 20.5 (9.3)
At beginning of year 22.9 31.8
At end of period $ 43.4 $ 22.5
</TABLE>
During the nine months ended September 30, 1997, the Company's cash position
increased $20.5 million from December 31, 1996. This increase was caused
primarily by positive operating cash flows, offset by cash used for property
acquisitions and Company common stock repurchases.
Year to date 1997 operating cash flows increased $82.8 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 nine months ended September 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 and proceeds from
the disposal of property.
Financing cash flows were generated through borrowings under credit lines in
excess of repayments, essentially to fund the Grupo TFM capital contribution
and the repurchase of approximately $47.1 million of Company common stock
during 1997.
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.
(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
<PAGE> 22
As discussed in the Recent Developments section above, TMM and the
Company could be required to purchase the Mexican Government's interest in
TFM in proportion to each partner's respective ownership interest in
Grupo TFM (without regard to the Mexican Government's interest in
Grupo TFM). Also, the Mexican Government's interest in Grupo TFM
may be called by TMM and the Company, exercisable at the original
amount (in U.S. dollars) paid by the Government plus interest based on
one-year U.S. Treasury securities.
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 $225 million was available at September 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.
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
September 30, 1997 was 54.0% compared to 47.4% at December 31, 1996. Company
consolidated debt increased $296.4 million from December 31, 1996 (to $941.5
million at September 30, 1997), primarily as a result of borrowings to fund the
Grupo TFM capital contribution and for the repurchase of common stock, together
with the consolidation of Gateway Western indebtedness. Consolidated equity
increased $84.9 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.
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.
Subsequent to the Company's announcement to separate its Transportation and
Financial Asset Management segments, both S&P and Moody's placed the Company on
"watch" until the details of the form of the separation and the capital
structure of each remaining entity are determined.
(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
<PAGE> 23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Financial Statements, Note 12 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 3.1 - The Company's By-Laws, as amended and restated as
of May 1, 1997, are attached to this Form 10-Q as Exhibit 3.1
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
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.
The Company filed a Current Report on Form 8-K dated September 19, 1997
reporting the announcement that the Company intended on separating its
Transportation and Financial Asset Management businesses.
<PAGE> 24
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
November 4, 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)
BY-LAWS
OF
KANSAS CITY SOUTHERN INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
As amended and restated to May 1, 1997
ARTICLE I
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. Meetings of stockholders for any purpose
may be held at such time and place, within or without the State of Delaware, as
shall be designated by the Board of Directors and stated in the notice of the
meeting.
Section 2. Annual Meetings. The annual meeting of the stockholders, at
which they shall elect directors and transact such other business as may
properly be brought before the meeting, shall be held on the first Tuesday of
May in each year unless the Board of Directors shall designate some other date
therefor in April, May or June.
To be properly brought before the meeting, business must be either (i)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the Board of Directors, (ii) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (iii)
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements, for business to be properly brought before
the meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, such a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than 45 days nor more
than 90 days prior to the meeting; provided, however, that in the event that
the meeting is designated by the Board of Directors to be held at a date other
than the first Tuesday in May and less than 60 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, to be
timely, the notice by the stockholder must be so received not later than the
close of business on the 15th day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made, whichever
first occurs. A stockholder's notice to the Secretary shall set forth as to
each matter the stockholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting such business at the meeting, (ii) the name and address
of the stockholder proposing such business, (iii) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
stockholder and the name and address of record under which such stock is held
and (iv) any material interest of the stockholder in such business.
<PAGE> 2
Notwithstanding anything in these By-Laws to the contrary, no business
shall be conducted at the annual meeting except in accordance with the
procedures set forth in this Section 2 of Article I; provided, however, that
nothing in this Section 2 of Article I shall be deemed to preclude discussion
by any stockholder of any business properly brought before the annual meeting.
The Chairman of the annual meeting shall have the power to determine
whether or not business was properly brought before the meeting in accordance
with the provisions of this Section 2 of Article I, and, if the Chairman should
determine that any such business was not properly brought before the meeting,
the Chairman shall so declare to the meeting and any such business shall not be
transacted.
Section 3. Notice of Annual Meetings. Written notice of each annual
meeting of the stockholders stating the place, day and hour of the meeting,
shall be given to each stockholder entitled to vote thereat, at least ten (10)
days before the date of the meeting.
Section 4. Quorum. Except as otherwise required by statute, by the
Certificate of Incorporation or by these By-Laws, the presence, in person or by
proxy, of stockholders holding a majority in number of shares of the stock
issued and outstanding and entitled to vote, shall constitute a quorum at all
meetings of the stockholders. If, at any such meeting, such quorum shall not be
present or represented, the stockholders present in person or by proxy shall
have power to adjourn the meeting from time to time without notice other than
announcement at the meeting until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present in person or by
proxy, any business may be transacted which might have been transacted at the
meeting as originally noticed.
Section 5. Voting. Each holder of shares of common stock and preferred
stock shall be entitled to vote on the basis of one vote for each voting share
held by him, except as provided in the Certificate of Incorporation and except
that in elections for directors when the holders of the preferred stock do not
have the right, voting as a class, to elect two directors, each holder of
voting shares shall be entitled to as many votes as shall equal the number of
shares which he is entitled to vote, multiplied by the number of directors to
be elected and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or any two or more of them,
as he may see fit.
Section 6. List of Stockholders Entitled to Vote. The Board of Directors
shall cause the officer who has charge of the stock ledger of the corporation
to prepare and make, at least ten (10) days before every election of directors,
a complete list of the stockholders entitled to vote at said election, arranged
in alphabetical order, showing the address of and the number of shares of
common stock and preferred stock registered in the name of each stockholder.
Such list shall be open to the examination
<PAGE> 3
of any stockholder, for any purpose germane to the meeting, during ordinary
business hours, for a period of at least ten (10) days prior to the election,
either at a place within the city where the election is to be held, and which
place be specified, at the place where said meeting, or, if not specified, at
the place where said meeting is to be held, and the list shall be produced and
kept at the time and place of election during the whole time thereof, and
subject to the inspection of any stockholder who may be present.
Section 7. Inspectors. For each meeting of stockholders there may be
appointed by the Board of Directors or by the Chairman of the meeting three (3)
inspectors of election. If any inspector shall fail or be unable to serve as
inspector or for any reason be unable to complete his duties, an alternate
inspector shall be appointed by the Board of Directors or the Chairman of the
meeting. The inspectors of election shall examine and canvass the proxies and
ballots, and make and submit a signed report of the votes cast at the meeting,
which shall be entered at large upon the records.
Section 8. Inspectors' Oath. An inspector, before he enters on the duties
of his office, shall take and subscribe an oath substantially in the following
form before any officer authorized by law to administer oaths:
"I do solemnly swear that I will execute the duties of an
inspector of the election now to be held with strict
impartiality and according to the best of my ability."
Section 9. Special Meeting. Special meetings of the stockholders for any
purpose or purposes may be called at any time by the Chairman of the Board of
Directors, the Chief Executive Officer or the President, or at the request in
writing of a majority of the Board of Directors, by giving ten(10) days written
notice thereof to the stockholders. Business transacted at any special meeting
of the stockholders shall be limited to the purpose stated in the notice.
Section 10. Organization. The Chairman of the Board of Directors, and in
his absence the Chief Executive Officer, the President or one of the Vice
Presidents, shall call meetings of the stockholders to order and act as
Chairman of such meeting. In the absence of all these officers, the Board of
Directors may appoint a Chairman of the meeting. The Secretary of the
Corporation shall act as secretary at all meetings of the shareholders; but
the Board of Directors may designate an Assistant Secretary for that purpose
before the meeting and, if no such designation shall have been made, then
such designation may be made by the Chairman of the meeting. The conduct
of any meeting of the stockholders shall be governed by such rules,
regulations and procedures as the Chairman of the meeting, in his sole
and exclusive discretion shall determine.
Section 11. Stockholder Nomination of Directors. Not less than 45 days
nor more than 90 days prior to the date of any meeting of the stockholders at
which
<PAGE> 4
directors are to be elected ("the Election Meeting") any stockholder who
intends to make a nomination at the Election Meeting shall deliver a notice
in writing (the "Stockholder's Notice") to the Secretary of the Corporation
setting forth (a) as to each nominee whom the stockholder proposes to nominate
for election or re-election as a director, (i) the name, age, business address
and residence address of the nominee, (ii) the principal occupation or
employment of the nominee, (iii) the class and number of shares of capital
stock of the Corporation which are beneficially owned by the nominee and (iv)
any other information concerning the nominee that would be required, under the
rules of the Securities and Exchange Commission, in a proxy statement
soliciting proxies for the election of such nominee; and (b) as to the
stockholder giving the notice, (i) the name and address of the stockholder and
(ii) the class and number of shares of capital stock of the Corporation which
are beneficially owned by the stockholder and the name and address of record
under which such stock is held; provided, however, that in the event that the
Election Meeting is designated by the Board of Directors to be held at a date
other than the first Tuesday in May and less than 60 days' notice or prior
public disclosure of the date of the Election Meeting is given or made to
stockholders, to be timely, the Stockholder's Notice must be so
delivered not later than the close of business on the 15th day
following the day on which such notice of the date of the meeting
was mailed or such public disclosure was made, whichever first occurs.
The Stockholder's Notice shall include a signed consent of each such nominee to
serve as a director of the Corporation, if elected. The Corporation may
require any proposed nominee or stockholder proposing a nominee to furnish
such other information as may reasonably be required by the Corporation to
determine the eligibility of such proposed nominee to serve as a director of
the Corporation or to properly complete any proxy or information statement
used for the solicitation of proxies in connection with such Election Meeting.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers. The general management of the business and
affairs and all the corporate powers of the Corporation shall be vested in and
exercised by its Board of Directors which shall exercise all of the powers of
the Corporation except such as are by statute, or by the Certificate of
Incorporation or by these By-Laws, conferred upon or reserved to the
stockholders. The directors shall act only as a Board and the individual
directors shall have no power as such.
Section 2. Number, Term and Qualifications. The number of directors
shall not be less than three nor more than eighteen, the exact number of
directors to be determined from time to time by resolution adopted by a
majority of the whole Board, and such exact number shall be eighteen until
otherwise determined by resolution adopted by a majority of the whole Board.
Directors need not be stockholders.
<PAGE> 5
The Board of Directors shall be divided into three classes as nearly equal
in number as possible. At each annual meeting of stockholders, successors to
directors of the class whose terms then expire shall be elected to hold office
for a term expiring at the third succeeding annual meeting of stockholders.
When the number of directors is changed, any newly created directorships or any
decrease in directorships shall be so apportioned among the classes as to make
all classes as nearly equal in number as possible. Notwithstanding the
foregoing, whenever the holders of the preferred stock shall have the right,
voting as a class, to elect two directors at the next annual meeting of
stockholders, the terms of all directors shall expire at the next annual
meeting of stockholders, and then and thereafter all directors shall be
elected for a term of one year expiring at the succeeding annual meeting.
From and after January 19, 1990, no person who has attained the age of 72
shall be eligible to be nominated or to serve as a member of the Board of
Directors, but any person who shall attain the age of 72 during the term of
directorship to which he was elected shall be eligible to serve the remainder
of such term; provided, however, that any person, regardless of age, who, on
January 19, 1990, is an incumbent director, shall be eligible to be nominated
for election and to serve one (1) additional term.
Section 3. Election of Directors. Directors shall be elected at the
annual meetings of stockholders by ballot in the manner provided in these
By-Laws and the Certificate of Incorporation.
Section 4. Newly Created Directorships and Vacancies. Newly created
directorships and vacancies which shall occur in the Board of Directors because
of death, resignation, disqualification or any other cause, may be filled by a
majority of the directors then in office, though less than a quorum, pursuant
to Section 223 of the General Corporation Law of Delaware. Such directors may,
by resolution, eliminate any vacant directorship thereby reducing the size of
the whole Board of Directors but in no event shall the size of the Board of
Directors be reduced to less than three directors. No decrease in the Board of
Directors shall shorten the term of any incumbent directors.
Section 5. Resignations. Any director of the Corporation may resign at
any time by giving written notice to the President or to the Secretary of the
Corporation. Such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein. Unless otherwise provided
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 6. Organization. The Board of Directors shall hold its
organizational meeting as soon as practicable after the Annual Meeting of
Stockholders. The Chairman of the Board of Directors, or in his absence the
President, shall preside at all meetings of the Board of Directors.
<PAGE> 6
Section 7. Place of Meetings. The Board of Directors may hold its
meetings, both regular and special, at such place or places, within or without
the State of Delaware as determined by the Board of Directors.
Section 8. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such times and at such places as shall from time
to time be determined by the Board of Directors.
Section 9. Special Meetings. Special meetings of the Board of Directors
may be called at the request of the Chairman of the Board of Directors, the
Executive Committee, or of the President, or of any three members of the Board
of Directors. Notice of the time and place of such meeting shall be given
either by mail to each director at least three (3) days before such meeting or
personally, by telephone, or by telegram to each director at least twelve (12)
hours before such meeting.
Section 10. Quorum. A majority of the Board of Directors at a meeting
duly assembled shall be necessary to constitute a quorum for the transaction of
business except as otherwise provided by statute, by the Certificate of
Incorporation or by these By-Laws. The act of a majority of the directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors. In the absence of a quorum, a majority of the directors present
may adjourn the meeting from time to time until a quorum be present, without
notice other than by announcement at the meeting.
Section 11. Report to Stockholders. The President and Board of Directors
shall make a report or statement of the affairs of the Corporation at each
regular annual meeting of the stockholders subsequent to the first annual
meeting.
Section 12. Compensation. The directors may receive reasonable fees to
be determined from time to time by the Board of Directors for services actually
performed in attending meetings and for other services actually performed and
the expenses of attendance, if any, may be allowed for attendance at each
regular or special meeting of the Board of Directors. A director who is, at the
same time, an officer or employee of the Corporation or of any subsidiary or
affiliate, shall not be entitled to receive any compensation or fee for service
as a director or as a member of any committee of the Board of Directors.
Section 13. Consent of Directors in Lieu of Meeting. Unless otherwise
restricted by the Certificate of Incorporation or By-Laws, any action required
or permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board
or Directors or Committee, as the case may be, consent thereto in writing and
the writing or writings are filed with the minutes of proceedings of the Board
of Directors or Committee.
<PAGE> 7
ARTICLE III
COMMITTEES
Section 1. Executive Committee: Organization and Powers. There shall
be an Executive Committee to consist of the Chairman of the Board of Directors,
the Chief Executive Officer and two (2) or more non-officer directors, the
number of which being fixed from time to time by resolution adopted by a
majority vote of the whole Board of Directors. The Board of Directors shall
elect the members of the Executive Committee by vote of a majority of the whole
Board of Directors and one member of the Executive Committee shall be elected
as Chairman by the vote of a majority of the whole Board of Directors. The
members of the Executive Committee shall be elected annually at the Board's
organizational meeting or as soon as thereafter as possible.
When the Board of Directors is not in session, the Executive Committee
shall have and may exercise all the powers of the Board of Directors in the
management of the business and affairs of the Corporation in all cases in which
specific directions shall not have been given by the Board of Directors
including, but not limited to, the power to declare dividends on the common and
preferred stock of the Corporation, and to authorize the seal of the
Corporation to be affixed to all papers which may require it. The members of
the Executive Committee shall act only as a committee and individual members
shall have no power as such.
The Executive Committee shall have full power to act as the Nominating
Committee, which, when acting as such, shall have the power and duty to make
recommendations to the Board of Directors as to suitable nominees for election
to the Board of Directors by the stockholders or by the remaining members of
the Board of Directors, to fill newly created directorships and to fill any
vacancies which shall occur.
When acting as the Nominating Committee, it shall have the power to meet
with and consider suggestions from such other members of the Board of
Directors, stockholders, members of management, consultants and other persons,
firms or corporations as they deem necessary or advisable in the premises to
assist them in making such recommendations.
The Chief Executive Officer shall not be eligible to vote upon any matter
coming before the Committee when acting as the Nominating Committee.
Section 2. Compensation and Organization Committee: Organization and
Powers. There shall be a Compensation and Organization Committee to consist of
three (3) or more non-officer directors, the number of which being fixed from
time to time by resolution adopted by a majority vote of the whole Board of
Directors, each of whom shall be a "disinterested person" within the meaning
ascribed thereto under Rule 16b-3 promulgated under the Securities Exchange Act
of 1934 as amended from time
<PAGE> 8
to time and interpreted by the Securities and Exchange Commission. The Board of
Directors shall elect the members of the Compensation and Organization
Committee by vote of a majority of the whole Board of Directors, and one
member of the Compensation and Organization Committee shall be elected its
Chairman by the vote of a majority of the whole Board of Directors. The
members of the Compensation and Organization committee shall be elected
annually at the Board's organizational meeting or as soon thereafter as
possible.
The Compensation and Organization Committee shall have the power: to
authorize and determine all salaries for the officers and supervisory employees
of the Corporation and subsidiary companies as may be prescribed from time to
time by resolution adopted by the Board of Directors; to administer the
incentive compensation plans of the Corporation, The Kansas City Southern
Railway Company and the other subsidiaries of the Corporation in accordance
with the powers and authority granted in such plans; and to determine any
incentive allowances to be made to officers and staff of the Corporation and
its subsidiaries. The Compensation and Organization Committee shall have the
power to administer the Employee Stock Purchase Plan of the Corporation under
which eligible employees of the Corporation and its subsidiaries and affiliates
are permitted to subscribe to and to purchase shares of the Corporation
common stock through payroll deductions.
The Compensation and Organization Committee shall have full power: to act
as the Stock Option Plan Committee to construe and interpret any stock option
plan or similar plan of the Corporation and all options, stock appreciation
rights and limited rights granted under this plan or any other plan; to
determine the terms and provisions of the respective option agreements,
including such terms and provisions as, in the judgement of the Committee, are
necessary or desirable to qualify any of the options as "incentive stock
options"; to establish and amend rules for its administration;to grant options,
stock appreciation rights and limited rights under any stock option plan of the
Corporation; to determine and designate the recipients of options, stock
appreciation rights and limited rights; to determine and designate the dates
that options, stock appreciation rights and limited rights are granted; to
determine and designate the number of shares subject to options, stock
appreciation rights and limited rights; to determine and designate the option
prices and option periods; and to correct any defect or supply any omission or
reconcile any inconsistency in any stock option plan of the Corporation or in
any option, stock appreciation right or limited right to the extent the
Committee deems desirable to carry any stock option plan or any option, stock
appreciation right or limited right into effect.
The Compensation and Organization Committee shall also have the power: to
review the consolidated earnings of the Corporation and to make recommendations
to the Board of Directors with respect to the allocation of funds to the
Corporation's Profit Sharing Plan; and to review the results of the investment
program of the Profit Sharing Plan and make reports thereof to the Board of
Directors.
<PAGE> 9
The Compensation and Organization Committee shall also have the power and
duty to initiate, review and approve succession plans and major organizational
plans and changes within the Corporation and its subsidiaries.
Section 3. Audit Committee: Organization and Powers. There shall be an
Audit Committee to consist of three (3) or more non-officer directors, the
number of which being fixed from time to time by resolution adopted by a
majority vote of the whole Board of Directors. The Board of Directors shall
elect the members of the Audit Committee by vote of a majority of the whole
Board of Directors and one member of the Audit Committee shall be elected as
Chairman by a vote of a majority of the whole Board of Directors. The members
of the Audit Committee shall be appointed by the Board of Directors to serve
staggered three-year terms.
The Audit Committee shall have the power and the duty to meet with and
consider suggestions from members of management and of the Corporation's
internal audit staff, as well as with the Corporation's independent
accountants, concerning the financial operations of the Corporation. The Audit
Committee shall additionally have the power to review audited financial
statements of the Corporation and consider and recommend the employment of,
and approve the fee arrangement with, independent accountants for both audit
functions and for advisory and other consulting services.
Section 4. Rules, Records and Reports. The Committees may make and adopt
such rules and regulations governing their proceedings as they may deem proper
and which are consistent with the statutes of the State of Delaware, the
Certificate of Incorporation and By-Laws. The committees shall keep a full and
accurate record of all their acts and proceedings and report the same from time
to time to the Board of Directors.
Section 5. Meetings. Regular meetings of the committees shall be held at
such times and at such places as from time to time may be fixed by the
committees. Special meetings of the committees may be held at such other times
as may in the judgement of the Chairman or, he being absent, in the judgement
of a member, be necessary. Notice of regular meetings need not be given.
Notice of special meetings shall be given to each member by mail not less than
three (3) days before the meeting or personally, by telephone or telegram to
each member not less than twelve (12) hours before the meeting, unless the
Chairman of the committee, or a member acting in that capacity in his absence,
shall deem a shorter notice expedient.
Section 6. Quorum. A majority of members of a committee shall constitute
a quorum for the transaction of business and the act of a majority of those
present shall be the act of the committee (except with respect to the
Compensation and Organization Committee, in which any act of the Compensation
and Organization Committee when acting as the Stock Option Plan Committee under
any stock option plan, must be authorized and approved by at least (3) members).
<PAGE> 10
Section 7. Subcommittees. A committee may appoint such subcommittees as
it shall deem necessary.
Section 8. Vacancies. Any vacancy in a committee shall be filled by a
majority of the whole Board of Directors.
Section 9. Substitute Members. Whenever at any time a member of any
committee shall be absent from a meeting of that committee and it shall be
necessary in order to constitute a quorum or, for other reason, it may be
deemed expedient or desirable, the member or members thereof present at any
meeting and not disqualified from voting, whether or not he or they constitute
a quorum, may unanimously designate a director (subject to the eligibility
requirements set forth in Sections 2, 3, and 4 above) to serve and act in his
stead; and in the event that the absence of a committee member shall be
prolonged, such substitute member may, subject to the approval of the
committee, continue to act for the term of its duration. A director so
designated shall rank as a duly qualified member of the
committee during incumbency, and shall be entitled to participate
in its deliberations with the same force and effect as if elected in the manner
herein elsewhere provided.
Section 10. Compensation. Subject to the provisions of Section 12 of
Article II of these By-Laws, each member of any committee may receive a
reasonable fee to be fixed by the Board of Directors for services actually
performed in attending meetings, and for other services actually performed, and
shall receive expenses of attendance, if any actually incurred by him for
attendance at any meeting of the committee.
ARTICLE IV
OFFICERS, AGENTS AND EMPLOYEES
Section 1. Election of Officers. The Board of Directors at its annual
organizational meeting, shall elect a Chairman of the Board of Directors and
President of the Corporation, who shall be a member of the Board of Directors.
The Board of Directors may elect a Chief Executive Officer and a Chief
Operating Officer who shall be members of the Board of Directors.
Section 2. Vice Presidents. The Board of Directors may, in its
discretion, appoint an Executive Vice President and one or more additional Vice
Presidents.
Section 3. Other Officers. The Board of Directors shall appoint a
Secretary, a Treasurer, a General Counsel and Comptroller. The Board of
Directors may also appoint one or more Assistant Secretaries, and one or more
Assistant Treasurers.
Section 4. Powers, Duties and Responsibilities. The powers, duties and
responsibilities of the officers and employees of the Corporation, which are
not prescribed by statute, by the Certificate of Incorporation or by these
By-Laws, shall be
<PAGE> 11
defined in rules or regulations which may be adopted and from time to time
modified or changed by the Board of Directors.
Section 5. Vacancies. The Board of Directors shall, as soon as
practicable, fill any vacancy in the office of Chairman of the Board of
Directors or President. Any vacancy in any other office may be filled
temporarily by the Chairman of the Board of Directors or the President. In case
of temporary incapacity or absence of any of the officers, the Chairman of the
Board of Directors, or the President, may make an appointment pro tem and
confer on such appointee full power and authority to act in place of any of
said officers or appointees so temporarily incapacitated or absent; but such
appointment shall be subject to change by the Board of Directors or by the
Executive Committee at any regular or special meeting.
Section 6. Absence from Duty. No officer or employee of the Corporation
shall be absent from duty without the consent of the President or the head of
the department in which he is employed.
Section 7. Resignations. Any officer may resign at any time giving
written notice to the President or to the Secretary of the Corporation. Such
resignation shall take effect at the date of the receipt of such notice, or at
any later time specified therein and, unless otherwise provided therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 8. Removals. All officers and agents of the Corporation shall be
subject to removal at any time by the affirmative vote of a majority of the
members of the Board of Directors present at any meeting. All officers and
employees not appointed by the Board of Directors shall hold their offices at
the discretion of the Executive Committee or of the officer appointing them.
Section 9. Term of Office. The officers of the Corporation shall hold
office for one year and until their successors shall have been duly elected or
appointed and qualified, or until they shall die, resign or be removed.
Section 10. Salaries. The salaries of officers elected or appointed by
the Board of Directors or by the Executive Committee, shall be fixed by the
Compensation and Organization Committee. The salaries of all other officers and
employees shall be fixed by the President, or by the heads of departments
subject to the approval of the President; and the compensation of all officers
and employees shall be subject to the control of the Board of Directors or of
the Compensation and Organization Committee.
No special compensation shall be paid to any officer or employee unless
authorized by the Board of Directors, the Executive Committee or the
Compensation and Organization Committee.
<PAGE>
<PAGE> 12
CHAIRMAN OF THE BOARD OF DIRECTORS
Section 11. Duties. The Chairman of the Board of Directors shall preside
at all meetings of the Stockholders and the Board of Directors at which he is
present and perform such other duties as the Board of Directors may prescribe.
In his absence, the President shall discharge the duties of the Chairman of the
Board of Directors.
CHAIRMAN OF THE EXECUTIVE COMMITTEE
Section 12. Duties. The Chairman of the Executive Committee shall preside
at all meetings of the Executive Committee. In the absence of the Chairman of
the Executive Committee, his duties shall be discharged by the President.
PRESIDENT
Section 13. General Powers and Duties. The President shall have the
general care, supervision and control of the Corporation's business and
operation in all departments under control of the Board of Directors. The
President shall have such other powers and perform such other duties as the
Board of Directors may from time to time prescribe and shall perform such other
duties as are incidental to the office of President. In the absence or
incapacity of the Chairman of the Board of Directors, he shall preside at all
meetings of the Board of Directors and stockholders.
Section 14. Appointments. Except as otherwise provided by statute, the
Certificate of Incorporation, or these By-Laws, the President may appoint such
additional officers and may employ such persons as he shall deem necessary for
the proper management of the business and property of the Corporation.
VICE PRESIDENTS
Section 15. Powers and Duties. The Vice Presidents shall have such powers
and perform such duties as shall from time to time be conferred and prescribed
by the Board of Directors or by the Executive Committee. The Executive Vice
President shall, however, be the ranking officer in the affairs of the
Corporation next below the President.
SECRETARY
Section 16. Duties. The Secretary, or, in his absence, an Assistant
Secretary, shall attend all meetings of the stockholders, of the Board of
Directors and of the Executive Committee, and shall record their proceedings.
He shall report to the Board of Directors and the Executive Committee and
through the respective Chairman.
Section 17. Notice of Meetings. The Secretary shall give due notice of
all meetings of the stockholders and of the Board of Directors and of the
Executive
<PAGE> 13
Committee, where such notice is required by law, by the Certificate of
Incorporation, by these By-Laws, by the Board of Directors or by the Executive
Committee.
Section 18. Custody of Seal, Etc. The Secretary shall be custodian of the
seal of the Corporation and of its records, and of such papers and documents as
may be committed to his care by the Board of Directors or of the Executive
Committee. He shall have power to affix the seal of the Corporation to
instruments to which the same is authorized to be affixed by the Board of
Directors or by the Executive Committee, and shall have power to attest the
same. He shall perform such other duties as may be assigned to him by the
Chairman of the Board of Directors, the President, the Board of Directors or
the Executive Committee, or as may be prescribed in the rules or regulations
to be adopted by the Board of Directors.
Section 19. Duties of Assistant Secretaries. The Assistant Secretary or
Secretaries shall perform such duties as may be assigned to him or them by the
Board of Directors or by the Executive Committee or the President, or as may be
prescribed in the rules or regulations, if any, to be adopted by the Board of
Directors or the Executive Committee; and, when authorized by the Board of
Directors or by the Executive Committee, he or they shall have the power to
affix the corporate seal to instruments and to attest the same, and to sign the
certificates of stock of the Corporation.
TREASURER
Section 20. Duties. The Treasurer, either in person or through competent
and faithful assistants, shall receive, keep and disburse all moneys, belonging
or coming to the Corporation; he shall keep regular, true and full accounts of
all receipts and disbursements, and make detailed reports of the same to the
President, to the Board of Directors or to the Executive Committee, through the
Chairman of said Board of Directors or Committee, as and when required.
Section 21. Other Duties. The Treasurer shall perform such other duties
in connection with the administration of the financial affairs of the
Corporation as the Board of Directors or the Executive Committee shall assign
to him or as may be prescribed in the rules or regulations to be adopted by the
Board of Directors or the Executive Committee. The Treasurer shall give bond
in such amount as shall be required by the Board of Directors or by the
Executive Committee. Any Assistant Treasurer appointed pursuant to the
provisions of these By-Laws shall also give bond in such amount as shall be
required by the Board of Directors or by the Executive Committee.
GENERAL COUNSEL
Section 22. Duties. The General Counsel shall render such legal services
and perform such duties as the Board of Directors, Executive Committee,
Chairman of the
<PAGE> 14
Board of Directors, President or other elected or appointed officer may request
from time to time.
COMPTROLLER
Section 23. Duties. The Comptroller shall have charge of the Accounting
Department. He shall have the supervision and management of all accounts of the
Corporation, and shall prescribe, enforce and maintain the system of
bookkeeping, and the books, blanks, etc., for keeping the accounts of the
Corporation. He shall have the cooperation of all departments. He shall keep
regular sets of books, showing a complete record of the general business
transactions of the Corporation, and for that purpose shall receive from the
Treasurer, Assistant Treasurers and agents of the Corporation such daily or
other reports of receipts and disbursements as he may require.
Section 24. Custody of Contracts. The Comptroller shall have the custody
of all written contracts and other similar written instruments to which the
Corporation is a party.
Section 25. Statements by Comptroller. The Comptroller shall render such
statements of the affairs of the Corporation, shown by his books and records,
as may be required for the information of the Board of Directors or of the
Executive Committee, and shall by proper distribution and classification of the
accounts under his charge, be prepared to furnish such reports as may be
required by the Chairman of the Board of Directors, the President, the Board of
Directors, and the Executive Committee, or any state or federal official.
ARTICLE V
CERTIFICATE OF STOCK
Section 1. Provision for Issue, Transfer and Registration. The Board of
Directors shall provide for the issue, transfer and registration of the capital
stock of the Corporation in the City of New York or elsewhere, and for that
purpose may appoint the necessary officers, transfer agents and registrars of
transfers.
Section 2. Certificates of Stock. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the name
of the Corporation by, the President or a Vice President and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned.
Section 3. Facsimile Signatures of Certificates. Where a certificate is
countersigned (1) by a Transfer Agent or an Assistant Transfer Agent or by a
Transfer Clerk acting on behalf of the Corporation and (2) by a Registrar, the
signature of the President, Vice President, Treasurer, Assistant Treasurer,
Secretary or Assistant
<PAGE> 15
Secretary may be facsimile. In case any officer or officers who have signed, or
whose facsimile signature or signatures have been used on, any such certificate
or certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to be such officer or officers of the Corporation. Record shall
be kept by the Transfer Agent of the number of each certificate, the date
thereof, the name of the person owning the shares represented thereby, and the
number of shares. Every certificate surrendered to the Corporation for
transfer or otherwise in exchange for a new certificate shall be cancelled
by perforation or otherwise with the date of cancellation indicated thereon.
Section 4. Transfer of Stock. Transfer of stock of the capital stock of
the Corporation shall be made only on the books of the Corporation by the
holder thereof, or by his attorney thereunto authorized by a power of attorney
duly executed and filed with the Transfer Agent of the Corporation, and on
surrender for cancellation of the certificate or certificates for such shares.
A person in whose name shares of stock stand on the books of the Corporation
and no one else shall be deemed the owner thereof as regards the Corporation.
Section 5. Registrar and Transfer Agent. The Corporation shall at all
times maintain a registrar, which shall in every case be a bank or trust
company, and a transfer agent, to be appointed by the Board of Directors, in
accordance with the requirements of the New York Stock Exchange, and
registration and transfer of the Corporation's stock certificates shall be in
accordance with the rules and regulations of said stock exchange. The Board of
Directors may also make such additional rules and regulations as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of the capital stock of the Corporation.
Section 6. Closing of Transfer Books; Record Date. The Board of Directors
may close the stock transfer books of the Corporation for a period not more
than sixty (60) days nor less than ten (10) days preceding the date of any
meeting of stockholders or the date for payment of any dividend or the date
for the allotment of rights or the date when any change or conversion or
exchange of capital stock shall go into effect. In lieu of closing the stock
transfer books as aforesaid, the Board of Directors may fix in advance a date,
not more than sixty (60) days nor less than ten (10) days preceding the date
of any meeting of stockholders, or the date for the payment of any dividend,
or the date for the allotment of rights, or the date when any change or
conversion or exchange of capital stock shall go into effect, as a record date
for the determination of the stockholders entitled to notice of, and to
vote at, any such meeting, and any adjournment thereof, or entitled
to receive payment of any such dividend, or to any such allotment
of rights, or to exercise the rights in respect of any
such change, conversion or exchange of capital stock and, in such case, such
stockholders and only
<PAGE> 16
such stockholders as shall be stockholders of record on the date so fixed shall
be entitled to such notice of, and to vote at, such meeting and any adjournment
thereof, or to receive payment of such dividend, or to receive such allotment
of rights, or to exercise such rights, as the case may be notwithstanding any
transfer of any stock on the books of the Corporation after any such record
date fixed as aforesaid.
ARTICLE VI
SEAL
Section 1. The authorized seal shall have inscribed thereon the name of
the Corporation, the year of incorporation and the name of the state of
incorporation. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise applied.
ARTICLE VII
FISCAL YEAR
Section 1. The fiscal year of the Corporation shall commence on the first
day of January of each year.
ARTICLE VIII
NOTICES
Section 1. Form of Notice. Where notice, other than by publication, is
required to be given by Delaware law, the Certificate of Incorporation or
By-Laws, notice to directors and stockholders shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed to
such directors or stockholders at such address as appears on the books of the
Corporation. Notice by mail shall be deemed to be given at the time when the
same shall be mailed. Notice to directors may also be given personally, by
telephone, by telegram or in such other manner as may be provided in these
By-Laws.
Section 2. Waiver of Notice. Whenever any notice is required to be given
under the provisions of the statutes or of the Certificate of Incorporation or
of these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated herein, shall
be deemed equivalent thereto.
<PAGE>
<PAGE> 17
ARTICLE IX
INDEMNIFICATION, AMENDMENTS AND MISCELLANEOUS
Section 1. Indemnification. Each person who, at any time is, or shall
have been, a director, officer, employee or agent of the Corporation, and is
threatened to be or is made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is, or was, a director, officer,
employee or agent of the Corporation, or served at the request of the
Corporation as a director, officer, employee, trustee or agent of another
corporation, partnership, joint venture, trust or other enterprise, shall be
indemnified against expense (including attorneys' fees), judgment, fines and
amounts paid in settlement actually and reasonably incurred by him in con-
nection with any such action, suit or proceeding to the full extent provided
under Section 145 of the General Corporation Law of the State of Delaware. The
foregoing right of indemnification shall in no way be exclusive of any other
rights of indemnification to which any such director, officer, employee or
agent may be entitled, under any By-Law, agreement, vote of stockholders or
disinterested directors or otherwise.
Section 2. Amendments. These By-Laws may be altered, amended or repealed
by a vote of a majority of the whole Board of Directors at any meeting of the
Board of Directors. The Board of Directors in its discretion may, but need not,
submit any proposed alteration, amendment or repeal of the By-Laws to the
stockholders at any regular or special meeting of the stockholders for their
adoption or rejection; provided notice of the proposed alteration, amendment or
repeal be contained in the notice of such stockholders' meeting.
Section 3. Proxies. Unless otherwise provided by resolution of the Board
of Directors, the President or, in his absence or disability, a Vice President,
from time to time in the name and on behalf of the Corporation: may appoint an
attorney or attorneys, agent or agents of the Corporation (who may be or
include himself), in the name and on behalf of the Corporation to cast the
votes which the Corporation may be entitled to cast as a stockholder or
otherwise in any other corporation any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporations or to consent in writing to any action
by such other corporation; may instruct the person or persons so appointed as
to the manner of casting such votes or giving such consent; and may execute or
cause to be executed in the name and on behalf of the Corporation and under
its corporate seal all such written proxies or other instruments as may be
necessary or proper to evidence the appointment of such attorneys and agents.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-Q, CONTAINS
SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE
SHEET AND STATEMENT OF INCOME OF KANSAS CITY SOUTHERN INDUSTRIES, INC.,
COMMISSION FILE NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 43,400,000
<SECURITIES> 0
<RECEIVABLES> 173,700,000
<ALLOWANCES> 0
<INVENTORY> 36,900,000
<CURRENT-ASSETS> 343,600,000
<PP&E> 1,793,900,000
<DEPRECIATION> 524,600,000
<TOTAL-ASSETS> 2,530,900,000
<CURRENT-LIABILITIES> 377,000,000
<BONDS> 834,300,000
0
7,100,000
<COMMON> 1,100,000
<OTHER-SE> 792,400,000
<TOTAL-LIABILITY-AND-EQUITY> 2,530,900,000
<SALES> 0
<TOTAL-REVENUES> 764,000,000
<CGS> 0
<TOTAL-COSTS> 556,500,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,600,000
<INCOME-PRETAX> 190,500,000
<INCOME-TAX> 71,100,000
<INCOME-CONTINUING> 102,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 102,100,000
<EPS-PRIMARY> .92
<EPS-DILUTED> 0
</TABLE>
