SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998
[ ] 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 44-0663590
(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)
Company's telephone number, including area code (816) 983-1303
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Each class which registered
Preferred Stock, Par Value $25 Per New York Stock Exchange
Share, 4%, Noncumulative
Common Stock, $.01 Per Share Par Value New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Company's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of March 9, 1998, 108,828,011 shares of
common stock and 242,170 shares of voting Preferred stock were outstanding.
On such date, the aggregate market value of the voting common and Preferred
stock held by non-affiliates was $4,160,168,188 (amount computed based on
closing prices of Preferred and common stock on New York Stock Exchange).
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents are incorporated herein by reference into
Part of the Report as indicated:
Part of Report
Document into which incorporated
Company's Definitive Proxy Statement for the Part III
1998 Annual Meeting of Shareholders, which will be
held no later than December 31, 1998
Explanatory Note
In the first amendment to the Registrant's Form 10-K for the year ended
December 31, 1998, the Registrant hereby amends Items 7 and 8 to provide
expanded disclosure regarding (i) a stock purchase agreement, as amended,
with Thomas H. Bailey which gives Mr. Bailey certain rights with respect to
the election of a majority of the directors of Janus Capital Corporation
("Janus") and the establishment and implementation of investment policies at
Janus, and (ii) the basis for the Company's consolidation of Janus
notwithstanding those rights. Item 7 has been amended by adding three
paragraphs directly under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Financial Services -
Janus Capital Corporation" and deleting the last two sentences of, and adding
language to, the end of the sixth paragraph under "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Other -
New Accounting Pronuncements." Item 8 has been amended by adding two sentences
to the end of the sixth paragraph of "Note 1. Significant Accounting Policies
- - New Accounting Pronouncements" and by deleting the first paragraph of "Note
12. Control - Subsidiaries and Affiliates" and replacing that paragraph with
three new paragraphs. Finally, this amendment adds to Item 14 the stock
purchase agreement with Mr. Bailey, and the amendments thereto, as Exhibits
10.19, 10.19.1, 10.19.2, 10.19.3, 10.19.4 and 10.19.5 and replaces Exhibit
23.1 with the attached Exhibit 23.1. Except as specifically identified,
the disclosures set forth herein do not differ from those in the prior filing.
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 5
Item 3. Legal Proceedings........................................... 9
Item 4. Submission of Matters to a Vote of Security Holders......... 9
Executive Officers of the Company........................... 9
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters............................... 11
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 13
Item 7(A) Quantitative and Qualitative Disclosures About Market Risk.. 56
Item 8. Financial Statements and Supplementary Data................. 60
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 104
PART III
Item 10. Directors and Executive Officers of the Company............. 105
Item 11. Executive Compensation...................................... 105
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 105
Item 13. Certain Relationships and Related Transactions.............. 105
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................... 106
Signatures.................................................. 111
ii
<PAGE>1
Part I
Item 1. Business
(a) GENERAL DEVELOPMENT OF COMPANY BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1.
(b) INDUSTRY SEGMENT FINANCIAL INFORMATION
Kansas City Southern Industries, Inc. ("Company" or "KCSI") reports its
financial information in two business segments: Transportation and Financial
Services.
Kansas City Southern Lines, Inc. ("KCSL") is the holding company for
Transportation segment subsidiaries and affiliates. This segment includes, among
others, The Kansas City Southern Railway Company ("KCSR"), Gateway Western
Railway Company ("Gateway Western"), and strategic joint venture interests in
Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.("Grupo TFM"), which owns
80% of the common stock of TFM, S.A. de C.V. ("TFM"), Mexrail, Inc. ("Mexrail"),
which wholly owns the Texas Mexican Railway Company ("Tex Mex"), and Southern
Capital Corporation, LLC ("Southern Capital"), a 50% owned joint venture.
FAM Holdings, Inc. ("FAM HC") has been formed for the purpose of becoming the
holding company for the subsidiaries and affiliates comprising the Financial
Services segment. The primary entities included in this segment are Janus
Capital Corporation ("Janus" - 82% owned, diluted), Berger Associates, Inc.
("Berger" - 100% owned) and Nelson Money Managers plc ("Nelson" - 80% owned).
Additionally, the Company owns an approximate 32% equity interest in DST
Systems, Inc. ("DST," formerly a 41% owned investment prior to the merger
transaction in December 1998 as discussed below).
The information set forth in response to Item 101 of Regulation S-K relative to
financial information by industry segment for the three years ended December 31,
1998 under Part II Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations, of this Form 10-K, and Item 8, Financial
Statements and Supplementary Data, at Note 13 - Industry Segments of this Form
10-K, is incorporated by reference in partial response to this Item 1.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
The information set forth in response to Item 101 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 1.
Transportation
KCSL, along with its principal subsidiaries and joint ventures, owns and
operates a rail network of approximately 6,000 miles of main and branch lines
that links key commercial and industrial markets in the United States and
Mexico. Together with its strategic alliance with the Canadian National Railway
Company/Illinois Central Corporation ("CN/IC") and other marketing agreements,
KCSL's reach has been expanded to comprise a contiguous rail network of
approximately 25,000 miles of main and branch lines connecting Canada, the
United States and Mexico. The Company believes that the economic growth within
the United States, Mexico and Canada is developing along a north/south axis and
becoming more interconnected and interdependent as a result of the
implementation of the North American Free Trade
<PAGE>2
Agreement ("NAFTA"). In order to capitalize on the growing trade resulting from
NAFTA, KCSL has transformed itself from a regional rail carrier into an
extensive North American transportation network. During the mid-1990's, while
other railroad competitors concentrated on enlarging their share of the
east/west transcontinental traffic in the United States, KCSL aggressively
pursued acquisitions, joint ventures, strategic alliances and marketing
partnerships with other railroads to achieve its goal of creating the "NAFTA
Railway."
KCSL's rail network connects midwestern, eastern and Canadian shippers,
including shippers utilizing Chicago and Kansas City -- the two largest rail
centers in the United States -- with the largest industrial centers of Canada
and Mexico, including Toronto, Edmonton, Mexico City and Monterrey. KCSL's
principal subsidiary, KCSR, which traces its origins to 1887, offers the
shortest route between Kansas City and major port cities along the Gulf of
Mexico in Louisiana, Mississippi and Texas. KCSR, in conjunction with the
Norfolk Southern Railway Co. ("Norfolk Southern"), operates the most direct rail
route, referred to as the "Meridian Speedway," linking the Atlanta and Dallas
gateways for traffic moving between the rapidly-growing southeast and southwest
regions of the United States. The "Meridian Speedway" also provides eastern
shippers and other U.S. and Canadian railroads with an efficient connection to
Mexican markets.
In addition to KCSR, KCSL's railroad system includes Gateway Western, which
links Kansas City with East St. Louis and Springfield, Illinois and provides key
interchanges with the majority of other Class I railroads, as well as its
strategic joint venture interests in Grupo TFM and Mexrail, which provide direct
access to Mexico.
Through its joint ventures in Grupo TFM and Mexrail, operated in partnership
with Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), KCSL has
established a prominent position in the growing Mexican market. TFM's route
network provides the shortest connection to the major industrial and population
areas of Mexico from midwestern and eastern points in the United States. TFM,
which was privatized by the Mexican government in June 1997, passes through
Mexican states comprising approximately 69% of Mexico's population and
accounting for approximately 70% of Mexico's estimated gross domestic product.
Tex Mex connects with TFM at Laredo, Texas, (the single largest rail freight
transfer point between the United States and Mexico), other U.S. Class I
railroads, as well as with KCSR at Beaumont, Texas.
As a result of the KCSR/CN/IC strategic alliance to promote NAFTA traffic, the
Company has gained access to customers in Detroit, Michigan and Canada as well
as more direct access to Chicago. Separate marketing agreements with the Norfolk
Southern and I&M Rail Link, LLC provide KCSL with access to additional rail
traffic to and from the eastern and upper midwestern markets of the United
States. KCSL's system, through its core network, strategic alliances and
marketing partnerships, interconnects with all Class I railroads in North
America.
Financial Services
The Financial Services segment includes Janus, Berger, Nelson and a 32% interest
in DST. Janus and Berger, each headquartered in Denver, Colorado, are United
States investment advisors registered with the Securities and Exchange
Commission ("SEC"). Janus serves as an investment advisor to the Janus
Investment Funds ("Janus Funds") and Janus Aspen Series ("Janus Aspen"), as well
as to institutional and individual private accounts (including pension,
profit-sharing and other employee benefit plans, trusts, estates, charitable
organizations, endowments and foundations) and other investment companies.
Berger is also engaged in the business of providing financial asset management
services and products, principally through sponsorship of a family of mutual
funds (the "Berger Complex"). Nelson, a United Kingdom company, provides
investment planning and investment management services to individuals that are
retired or contemplating retirement. DST, together with its subsidiaries and
joint ventures, provides sophisticated information processing and computer
software services and products to the financial services industry (primarily to
mutual funds and investment managers), communications industries and
<PAGE>3
other service industries. DST is organized into three operating segments:
financial services, customer management and output solutions.
Janus derives its revenues and net income primarily from diversified advisory
services provided to the Janus Funds, Janus Aspen, other financial services
firms and private accounts. In order to perform its investment advisory
functions, Janus conducts fundamental investment research and valuation
analysis. In general, Janus' approach tends to focus on companies that are
experiencing or expected to experience above average growth relative to their
peers or the economy, or that are realizing or expected to realize positive
change due to new product development, new management, changing demographics or
regulatory developments. This approach utilizes research provided by outside
parties, as well as in-house research.
Janus has three wholly-owned subsidiaries: Janus Service Corporation ("Janus
Service"), Janus Capital International, Ltd. ("Janus International") and Janus
Distributors, Inc. ("Janus Distributors").
o Pursuant to transfer agency agreements, which are subject to renewal
annually, Janus Service provides full service accounting, recordkeeping,
administration and shareowner services to the Janus Funds and Janus Aspen
and their shareholders. To provide the consistent and reliable level of
service required to compete effectively in the direct distribution channel,
Janus Service maintains a highly trained group of telephone representatives
and utilizes leading edge technology to provide immediate data to support
call center and shareholder processing operations. This approach includes
the utilization of automated phone lines and an interactive Internet web
site ("Virtual Janus") both of which are integrated into the shareholder
services system. These customer service related enhancements provide Janus
Service with additional capacity to handle the high shareholder volume that
can be experienced during market volatility.
o Janus International is an investment advisor registered with the SEC that
executes securities trades from London, England. Beginning in fourth
quarter 1998, Janus launched a series of funds domiciled in Ireland, the
Janus World Funds PLC ("Janus World").
o Pursuant to a distribution agreement, Janus Distributors serves as the
distributor of the Janus Funds, Janus World and certain classes of Janus
Aspen and is a registered broker-dealer.
Berger is an investment advisor to the Berger Complex, which includes a series
of Berger mutual funds, as well as sub-advised mutual funds and pooled asset
trusts. Berger derives its revenues and net income from these advisory services.
Additionally, Berger is a 50% owner in a joint venture with the Bank of Ireland
Asset Management (U.S.) Limited ("BIAM"). The joint venture, BBOI Worldwide LLC,
serves as the investment advisor to the Berger/BIAM Funds and Berger acts as the
sub-administrator.
Nelson provides two distinct, but interrelated services to individuals that
generally are retired or contemplating retirement: investment advice and
investment management. Clients are assigned a specific investment advisor, who
meets with each client individually and conducts an analysis of the client's
investment objectives and then recommends the construction of a portfolio to
meet those objectives. The design and ongoing maintenance of the portfolio
structure is the responsibility of the investment advisor. The selection and
management of the instruments/securities which constitute the portfolio is the
responsibility of Nelson's investment management team. Revenues are earned based
on a percentage of the initial client investment as well as from a monthly fee
based on the level of assets under management.
DST operates throughout the United States, with operations in Kansas City,
Northern California and various locations on the East Coast, as well as
internationally in Canada, Europe, Africa and the Pacific Rim. DST has a single
class of stock, its common stock, which is publicly traded on the New York Stock
Exchange and the Chicago Stock Exchange. Prior to November 1995, KCSI owned all
of the stock of DST. In November 1995, a public offering reduced KCSI's
ownership interest in DST to approximately 41%. In December 1998, a wholly-owned
subsidiary of DST merged with USCS International, Inc. The merger resulted in a
reduction of KCSI's ownership of DST to approximately 32%. KCSI reports DST as
an equity investment in the consolidated financial statements.
<PAGE>4
Employees. As of December 31, 1998, the approximate number of employees of KCSI
and its majority owned subsidiaries was as follows:
<TABLE>
<CAPTION>
Transportation:
<S> <C>
KCSR 2,665
Gateway Western 235
Other 90
-----
Total 2,990
-----
Financial Services:
Janus 1,300
Berger 80
Nelson 145
Other 20
-----
Total 1,545
-----
Total KCSI 4,535
=====
</TABLE>
<PAGE>5
Item 2. Properties
In the opinion of management, the various facilities, office space and other
properties owned and/or leased by the Company (and its subsidiaries and
affiliates) are adequate for existing operating needs.
TRANSPORTATION (KCSL)
KCSR
KCSR owns and operates approximately 2,756 miles of main and branch lines, and
approximately 1,175 miles of other tracks, in a nine state region, including
Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee,
Louisiana, and Texas. Approximately 215 miles of main and branch lines and 85
miles of other tracks are operated by KCSR under trackage rights and leases.
Kansas City Terminal Railway Company (of which KCSR is a partial owner with
other railroads) owns and operates approximately 80 miles of track, and operates
an additional eight miles of track under trackage rights in greater Kansas City,
Missouri. KCSR also leases for operating purposes certain short sections of
trackage owned by various other railroad companies and jointly owns certain
other facilities with such railroads.
KCSR and the Union Pacific Railroad ("UP") have a haulage and trackage rights
agreement, which gives KCSR access to Nebraska and Iowa, and additional routes
in Kansas, Missouri and Texas for movements of certain limited types of traffic.
The haulage rights require the UP to move KCSR traffic in UP trains; the
trackage rights allow KCSR to operate its trains over UP tracks.
KCSR, in support of its transportation operations, owns and operates repair
shops, depots and office buildings along its right-of-way. A major facility,
Deramus Yard, is located in Shreveport, Louisiana and includes a general office
building, locomotive repair shop, car repair shops, customer service center,
material warehouses and fueling facilities totaling approximately 227,000 square
feet. KCSR owns a 107,800 square foot major diesel locomotive repair facility in
Pittsburg, Kansas and freight and truck maintenance buildings in Dallas, Texas
totaling approximately 125,200 square feet. KCSR and KCSI executive offices are
located in an eight story office building in Kansas City, Missouri and are
leased from a subsidiary of the Company. Other facilities owned by KCSR include
a 21,000 square foot car repair shop in Kansas City, Missouri and approximately
15,000 square feet of office space in Baton Rouge, Louisiana.
KCSR owns and operates seven intermodal facilities. These facilities are located
in Dallas and Port Arthur, Texas; Kansas City, Missouri; Sallisaw, Oklahoma;
Shreveport and New Orleans, Louisiana; and Jackson, Mississippi. The facility in
Port Arthur is owned and operated jointly with the Norfolk Southern. The
facility in Jackson was completed in December 1996. The various locations
include strip tracks, cranes and other equipment used in facilitating the
transfer and movement of trailers and containers.
<PAGE>6
<TABLE>
KCSR's fleet of rolling stock at December 31 consisted of:
<CAPTION>
1998 1997 1996
Leased Owned Leased Owned Leased Owned
------- ------- ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Locomotives:
Road Units 258 108 238 113 213 160
Switch Units 52 - 52 - 52 -
Other 8 - 9 - 10 -
------- ------- ------- ------ ------ ------
Total 318 108 299 113 275 160
======= ======= ======= ====== ====== ======
Rolling Stock:
Box Cars 6,634 2,023 7,168 2,027 6,366 1,558
Gondolas 748 56 819 61 819 65
Hopper Cars 2,660 1,185 2,680 1,198 2,588 1,213
Flat Cars (Intermodal
and Other) 1,617 676 1,249 554 1,249 551
Tank Cars 34 58 35 59 40 60
Other Freight Cars - - 547 123 554 164
------- ------- ------- ------ ------ ------
Total 11,693 3,998 12,498 4,022 11,616 3,611
======= ======= ======= ====== ====== ======
</TABLE>
As of December 31, 1998, KCSR's fleet of locomotives and rolling stock consisted
of 426 diesel locomotives, of which 108 were owned, 298 leased from affiliates
and 20 leased from non-affiliates, as well as 15,691 freight cars, of which
3,998 were owned, 3,113 leased from affiliates and 8,580 leased from
non-affiliates. A significant portion of the locomotives and rolling stock
leased from affiliates include equipment leased through Southern Capital, a
joint venture with GATX Capital Corporation formed in October 1996.
Some of the owned equipment is subject to liens created under conditional sales
agreements, equipment trust certificates and leases in connection with the
original purchase or lease of such equipment. KCSR indebtedness with respect to
equipment trust certificates, conditional sales agreements and capital leases
totaled approximately $78.8 million at December 31, 1998.
<TABLE>
Certain KCSR property statistics follow:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Route miles - main and branch line 2,756 2,845 2,954
Total track miles 3,931 4,036 4,147
Miles of welded rail in service 2,031 2,030 1,981
Main line welded rail (% of total) 65% 63% 58%
Cross ties replaced 255,591 332,440 438,170
Average Age (in years):
Wood ties in service 15.8 15.1 15.5
Rail in main and branch line 25.5 26.0 27.0
Road locomotives 23.3 22.1 21.9
All locomotives 23.9 22.8 22.5
</TABLE>
Maintenance expenses for Way and Structure and Equipment (pursuant to regulatory
accounting rules, which include depreciation) for the three years ended December
31, 1998 and as a percent of KCSR revenues are as follows (dollars in millions):
<PAGE>7
<TABLE>
KCSR Maintenance
<CAPTION>
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue
<S> <C> <C> <C> <C>
1998 $ 82.4 14.9% $ 118.3 21.4%
1997 122.2* 23.6 112.3 21.7
1996 92.6 18.8 99.8 20.3
</TABLE>
* Way and structure expenses include $33.5 million related to asset
impairments. See Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of this Form 10-K for further
discussion.
Gateway Western
Gateway Western operates a 402 mile rail line extending from Kansas City,
Missouri to East St. Louis and Springfield, Illinois. Additionally, Gateway
Western has restricted haulage rights extending to Chicago, Illinois. The
Gateway Western acquisition provides interchanges with various eastern rail
carriers and gave the Company access to the St. Louis rail gateway. The Surface
Transportation Board approved the Company's acquisition of Gateway Western in
May 1997.
<TABLE>
Certain Gateway Western property statistics follow:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 121 109 109
Main line welded rail (% of total) 40% 39% 39%
</TABLE>
Mexrail
Mexrail, a 49% owned KCSI affiliate, owns 100% of the Tex Mex and certain other
assets, including the northern U.S. half of a rail traffic bridge at Laredo,
Texas spanning the Rio Grande river. Grupo TFM operates the southern half of the
bridge. This bridge is a significant entry point for rail traffic between Mexico
and the U.S. The Tex Mex operates a 157 mile rail line extending from Corpus
Christi to Laredo, Texas, and also has trackage rights (from Union Pacific
Railroad) totaling approximately 360 miles between Corpus Christi and Beaumont,
Texas.
The Tex Mex is currently in the process of constructing a new rail yard in
Laredo, Texas. Phase I of the project was completed in December 1998 and
includes four tracks comprising approximately 6.5 miles. Phase II of the
project, which consists of two new intermodal tracks totaling approximately 2.8
miles, is expected to be completed in March 1999. Ground work for an additional
ten tracks has been completed; however, construction on the tracks has not yet
begun. Current capacity of the yard is approximately 800 freight cars. Upon
completion of all tracks, expected capacity will be 2,000 freight cars.
<TABLE>
Certain Tex Mex property statistics follow:
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Route miles - main and branch line 157 157 157
Total track miles 530 521 521
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Locomotives (average years) 25 25 24
</TABLE>
Grupo TFM Grupo TFM owns 80% of the common stock of TFM. TFM holds the
concession to operate Mexico's "Northeast Rail Lines" for 50 years, with the
option of a 50 year extension (subject to certain conditions). TFM operates
approximately 2,661 miles of main line and an additional 838 miles of sidings
and spur tracks, and main line under trackage rights. Approximately 80% of TFM's
main line consists of welded rail. TFM has the right to operate the rail, but
does not own the land, roadway or associated structures. 331 locomotives are
owned by TFM and approximately 4,034 freight cars are either owned by TFM or
<PAGE>8
leased from affiliates. 89 locomotives and 2,846 freight cars are leased
from non-affiliates. Grupo TFM (through TFM) also has office space at which
various operational, accounting, managerial and other activities are performed.
The primary facilities are located in Mexico City and Monterrey, Mexico. TFM
leases 140,354 square feet of office space in Mexico City and owns an 115,157
square foot facility in Monterrey. Grupo TFM was a 37% owned KCSI affiliate at
December 31, 1998.
Other Transportation
Southern Group, Inc. leases approximately 4,150 square feet of office space in
downtown Kansas City, Missouri from an affiliate of DST.
The Company is an 80% owner of Wyandotte Garage Corporation, which owns a
parking facility in downtown Kansas City, Missouri. The facility is located
adjacent to the Company's and KCSR's executive offices, and consists of 1,147
parking spaces utilized by the employees of the Company and its affiliates, as
well as the general public.
Trans-Serve, Inc. operates a railroad wood tie treating plant in Vivian,
Louisiana under an industrial revenue bond lease arrangement with an option to
purchase. This facility includes buildings totaling approximately 12,000 square
feet.
Pabtex, Inc. owns a 70 acre coal and petroleum coke bulk handling facility in
Port Arthur, Texas.
Mid-South Microwave, Inc. owns and operates a microwave system, which extends
essentially along the right-of-way of KCSR from Kansas City, Missouri to Dallas,
Beaumont and Port Arthur, Texas and New Orleans, Louisiana. This system is
leased to KCSR.
Other subsidiaries of the Company own approximately 8,000 acres of land at
various points adjacent to the KCSR right-of-way. Other properties also include
a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk handling
facility at Port Arthur, Texas, and several former railway buildings now being
rented to non-affiliated companies, primarily as warehouse space.
The Company owns 1,025 acres of property located on the waterfront in the Port
Arthur, Texas area, which includes 22,000 linear feet of deep water frontage and
three docks. Port Arthur is an uncongested port with direct access to the Gulf
of Mexico. Approximately 75% of this property is available for development.
FINANCIAL SERVICES (FAM HC)
Janus
Janus leases from non-affiliates 340,000 square feet of office space in three
facilities for investment, administrative, marketing, information technology,
and shareowner processing operations, and approximately 33,500 square feet for
mail processing and storage requirements. These corporate offices and mail
processing facilities are located in Denver, Colorado. In September 1998, Janus
opened a 51,500 square foot investor service and data center in Austin, Texas.
Janus also leases 2,200 square feet of office space in Westport, Connecticut for
development of the Janus World Funds PLC and 2,500 square feet of office space
in London, England for securities research and trading. In December 1998, Janus
closed its investor service center in Kansas City, Missouri to focus efforts on
providing quality service through various electronic communication avenues.
Berger
Berger leases approximately 29,800 square feet of office space in Denver,
Colorado from a non-affiliate for its administrative and corporate functions.
<PAGE>9
Nelson
Nelson leases 8,000 square feet of office space in Chester, England, the
location of its corporate headquarters, investment operations and one of its
marketing offices. During 1998, Nelson acquired additional office space adjacent
to its Chester location to accommodate expansion efforts. Also, Nelson leases
five branch marketing offices totaling approximately 8,500 square feet in the
following locations in England: London, Lichfield, Bath, Durham and Edinburgh.
Item 3. Legal Proceedings
The information set forth in response to Item 103 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, "Other - Litigation and Environmental Matters" of this
Form 10-K is incorporated by reference in response to this Item 3. In addition,
see discussion in Part II Item 8, Financial Statements and Supplementary Data,
at Note 11 - Commitments and Contingencies of this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the three month
period ended December 31, 1998.
Executive Officers of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph
(b) of Item 401 of Regulation S-K, the following list is included as an
unnumbered Item in Part I of this Form 10-K in lieu of being included in KCSI's
Definitive Proxy Statement which will be filed no later than 120 days after
December 31, 1998. All executive officers are elected annually and serve at the
discretion of the Board of Directors (or in the case of Mr. T. H. Bailey, the
Janus Board of Directors). Certain of the executive officers have employment
agreements with the Company.
Name Age Position(s)
L.H. Rowland 61 Chairman, President and
Chief Executive Officer of the Company
M.R. Haverty 54 Executive Vice President, Director
T.H. Bailey 61 Chairman, President and
Chief Executive Officer of
Janus Capital Corporation
P.S. Brown 62 Vice President, Associate General
Counsel and Assistant Secretary
R.P. Bruening 60 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 52 Vice President - Finance
W.K. Erdman 40 Vice President - Corporate Affairs
A.P. McCarthy 52 Vice President and Treasurer
J.D. Monello 54 Vice President and Chief Financial Officer
L.G. Van Horn 40 Vice President and Comptroller
The information set forth in the Company's Definitive Proxy Statement in the
description of the Board of Directors with respect to Mr. Rowland and Mr.
Haverty is incorporated herein by reference.
Mr. Bailey has continuously served as Chairman, President and Chief Executive
Officer of Janus Capital Corporation since 1978.
<PAGE>10
Mr. Brown has continuously served as Vice President, Associate General Counsel
and Assistant Secretary since July 1992.
Mr. Bruening has continuously served as Vice President, General Counsel and
Corporate Secretary since July 1995. From May 1982 to July 1995, he served as
Vice President and General Counsel. He also serves as Senior Vice President and
General Counsel of KCSR.
Mr. Carpenter has continuously served as Vice President - Finance since November
1996. He was Vice President - Finance and Tax from May 1995 to November 1996. He
was Vice President - Tax from June 1993 to May 1995. Prior to June 1993, he was
a member in the law firm of Watson & Marshall L.C., Kansas City, Missouri.
Mr. Erdman has continuously served as Vice President - Corporate Affairs since
April 1997. From January 1997 to April 1997 he served as Director - Corporate
Affairs. From 1987 to January 1997 he served as Chief of Staff for United States
Senator from Missouri, Christopher ("Kit") Bond.
Mr. McCarthy has continuously served as Vice President and Treasurer since May
1996. He was Treasurer from December 1989 to May 1996.
Mr. Monello has continuously served as Vice President and Chief Financial
Officer since March 1994. From October 1992 to March 1994, he served as Vice
President - Finance.
Mr. Van Horn has continuously served as Vice President and Comptroller since May
1996. He was Comptroller from October 1992 to May 1996.
There are no arrangements or understandings between the executive officers and
any other person pursuant to which the executive officer was or is to be
selected as an officer, except with respect to the executive officers who have
entered into employment agreements, which agreements designate the position(s)
to be held by the executive officer.
None of the above officers are related to one another by family.
<PAGE>11
Part II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The information set forth in response to Item 201 of Regulation S-K on the cover
(page i) under the heading "Company Stock," and in Part II Item 8, Financial
Statements and Supplementary Data, at Note 14 - Quarterly Financial Data
(Unaudited) of this Form 10-K is incorporated by reference in partial response
to this Item 5.
The payment and amount of dividends will be reviewed periodically and
adjustments considered that are consistent with growth in real earnings and
prevailing business conditions. In July 1997, the Board authorized a 3-for-1
split in the Company's common stock.
Unrestricted retained earnings of the Company at December 31, 1998 were $480.9
million.
As of March 8, 1999, there were 5,709 holders of the Company's common stock
based upon an accumulation of the registered stockholder listing.
Item 6. Selected Financial Data
(in millions, except per share and ratio data)
The selected financial data below should be read in conjunction with the
consolidated financial statements and the related notes thereto, and the Report
of Independent Accountants thereon, included under Item 8 of this Form 10-K, and
such data is qualified by reference thereto.
<TABLE>
<CAPTION>
1998 (i) 1997 (ii) 1996 (iii) 1995 (iv) 1994 (v)
<S> <C> <C> <C> <C> <C>
Revenues $ 1,284.3 $ 1,058.3 $ 847.3 $ 775.2 $ 1,088.4
Income (loss) from continuing
operations $ 190.2 $ (14.1) $ 150.9 $ 236.7 $ 104.9
Income (loss) from continuing
operations per common share:
Basic $ 1.74 $ (0.13) $ 1.33 $ 1.86 $ 0.80
Diluted 1.66 (0.13) 1.31 1.80 0.77
Total assets $ 2,619.7 $ 2,434.2 $ 2,084.1 $ 2,039.6 $ 2,230.8
Long-term obligations $ 825.6 $ 805.9 $ 637.5 $ 633.8 $ 928.8
Cash dividends per
common share $ .16 $ .15 $ .13 $ .10 $ .10
Ratio of earnings to
fixed charges 4.44 (vi) 1.60 (vii) 3.30 6.14 (viii) 3.28
</TABLE>
(i) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax, or $0.21 per basic and diluted share) resulting from the merger
of a wholly-owned subsidiary of DST with USCS International, Inc. ("USCS").
The merger was accounted for by DST under the pooling of interests method.
The charge reflects the Company's reduced ownership of DST (from 41% to
approximately 32%), together with the Company's proportionate share of DST
and USCS fourth quarter merger-related charges. See note 2 to the
consolidated financial statements in this Form 10-K.
(ii) Includes $196.4 million ($158.1 million after-tax, or $1.47 per basic and
diluted share) of restructuring, asset impairment and other charges
recorded during fourth quarter 1997. The charges reflect: a $91.3 million
impairment of goodwill associated with KCSR's acquisition of MidSouth
Corporation in 1993; $38.5 million of long-lived assets held for disposal;
$9.2 million of
<PAGE>12
impaired long-lived assets; approximately $27.1 million in reserves related
to termination of a union productivity fund and employee separations; a
$12.7 million impairment of goodwill associated with the Company's
investment in Berger; and $17.6 million of other reserves for leases,
contracts and other reorganization costs. See Notes 1 and 3 to the
consolidated financial statements in this Form 10-K.
(iii)Includes a one-time after-tax gain of $47.7 million (or $0.42 per basic
share, $0.41 per diluted share), representing the Company's proportionate
share of the one-time gain recognized by DST in connection with the merger
of The Continuum Company, Inc., formerly a DST unconsolidated equity
affiliate, with Computer Sciences Corporation in a tax-free share exchange
(see Note 2 to the consolidated financial statements in this Form 10-K).
(iv) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to
the DST public offering and associated transactions completed in November
1995, which reduced the Company's ownership of DST to approximately 41% and
resulted in deconsolidation of DST from the Company's consolidated
financial statements. The public offering and associated transactions
resulted in a $144.6 million after-tax gain (or $1.14 per basic share,
$1.10 per diluted share) to the Company.
(v) Reflects DST as a consolidated subsidiary. See (iv) above for discussion of
DST public offering in 1995.
(vi) Financial information from which the ratio of earnings to fixed charges was
computed for the year ended December 31, 1998 includes the one-time
non-cash charge resulting from the DST and USCS merger discussed in (i)
above. If the ratio was computed to exclude this charge, the 1998 ratio of
earnings to fixed charges would have been 4.75.
(vii)Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1997 includes the
restructuring, asset impairment and other charges discussed in (ii) above.
If the ratio was computed to exclude these charges, the 1997 ratio of
earnings to fixed charges would have been 3.60.
(viii) Financial information from which the ratio of earnings to fixed charges
was computed for the year ended December 31, 1995 reflects DST as a
majority owned unconsolidated subsidiary through October 31, 1995, and an
unconsolidated 41% owned affiliate thereafter, in accordance with
applicable U.S. Securities and Exchange Commission rules and regulations.
If the ratio was computed to exclude the one-time pretax gain of $296.3
million associated with the November 1995 public offering and associated
transactions, the 1995 ratio of earnings to fixed charges would have been
3.04.
All years reflect the 3-for-1 common stock split to shareholders of record on
August 25, 1997, paid September 16, 1997.
Certain prior year information has been restated to conform to the current year
presentation. All years reflect the reclassification of certain income/expense
items from "Revenues" and "Costs and Expenses" to a separate "Other, net" line
item in the Consolidated Statements of Operations.
The information set forth in response to Item 301 of Regulation S-K under Part
II Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of this Form 10-K is incorporated by reference in partial
response to this Item 6.
<PAGE>13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-K,
contains comments not based upon historical fact. Such forward-looking comments
are based upon information currently available to management and management's
perception thereof as of the date of this Form 10-K. Readers can identify these
forward-looking comments by the 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. ("KCSI" or the " Company")
could materially differ from those indicated in forward-looking comments. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's Current
Report on Form 8-K dated November 12, 1996 and its Amendment, Form 8-K/A dated
June 3, 1997, which have been filed with the U.S. Securities and Exchange
Commission (Files No. 1-4717) and are hereby incorporated by reference herein.
Readers are strongly encouraged to consider these factors when evaluating any
forward-looking comments. The Company will not update any forward-looking
comments set forth in this Form 10-K.
The discussion herein is intended to clarify and focus on the Company's results
of operations, certain changes in its financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included under Item 8 of this Form 10-K. This discussion
should be read in conjunction with these consolidated financial statements, the
related notes and the Report of Independent Accountants thereon, and is
qualified by reference thereto.
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.
The Company's business activities by industry segment and principal subsidiary
companies are:
Transportation. The Transportation segment consists of all
Transportation-related subsidiaries and investments, including:
* The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary of the Company, operating a Class I Common Carrier railroad
system;
* Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary of KCS Transportation Company ("KCSTC," a wholly-owned
subsidiary of the Company), operating a regional railroad system;
* Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning
100% of Carland, Inc. and managing the loan portfolio for Southern Capital
Corporation, LLC ("Southern Capital," a 50% owned joint venture);
* Equity investments in Southern Capital, Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM" ), a 37% owned affiliate, Mexrail, Inc.
("Mexrail") a 49% owned affiliate along with its wholly owned subsidiary,
The Texas Mexican Railway Company ("Tex Mex"), and Panama Canal Railway
Company ("PCRC"), a 50% owned joint venture;
* Various other consolidated subsidiaries;
* Kansas City Southern Lines, Inc. ("KCSL"), a wholly-owned subsidiary of the
Company, serving as a holding company for Transportation-related entities;
<PAGE>14
Financial Services. The Financial Services segment consists of all subsidiaries
engaged in the management of investments for mutual funds, private and other
accounts, as well as any Financial Services-related investments. Included are:
* Janus Capital Corporation ("Janus"), an 82% owned subsidiary, diluted;
* Berger Associates, Inc. ("Berger"), a wholly-owned subsidiary;
* Nelson Money Managers plc ("Nelson"), an 80% owned subsidiary
* DST Systems, Inc. ("DST"), an approximate 32% owned equity investment (see
ownership interest discussion below);
* FAM Holdings, Inc. ("FAM HC"), a wholly-owned subsidiary of the Company
formed for the purpose of becoming a holding company for Financial
Services-related subsidiaries and affiliates.
Upon the completion of a public offering of DST common stock and associated
transactions in November 1995, the Company's ownership of DST was reduced from
100% to approximately 41%. As discussed below, the fourth quarter 1998 merger
between a wholly-owned subsidiary of DST and USCS International, Inc. ("USCS")
reduced KCSI's ownership of DST to approximately 32% and resulted in a one-time
pretax non-cash charge of approximately $36.0 million.
All per share information included in this Item 7 is presented on a diluted
basis, unless specifically identified otherwise.
RECENT DEVELOPMENTS
DST Merger. On December 21, 1998, DST and USCS announced the completion of the
merger of USCS with a wholly-owned DST subsidiary. The merger, accounted for as
a pooling of interests by DST, expands DST's presence in the output solutions
and customer management software and services industries. USCS is a leading
provider of customer management software to the cable television and convergence
industries. Under the terms of the merger, USCS became a wholly-owned subsidiary
of DST. DST issued approximately 13.8 million shares of its common stock in the
transaction.
The issuance of additional DST common shares reduced KCSI's ownership interest
from 41% to approximately 32%. Additionally, the Company recorded a one-time
pretax non-cash charge of approximately $36.0 million ($23.2 million after-tax,
or $0.21 per share), reflecting the Company's reduced ownership of DST and the
Company's proportionate share of DST and USCS fourth quarter merger-related
costs. KCSI accounts for its investment in DST under the equity method.
Option to Purchase Mexican Government's Ownership Interest in TFM, S.A. de
C.V. ("TFM"). On January 28, 1999, the Company, along with other direct and
indirect owners of TFM, entered into a preliminary agreement with the Mexican
Government ("Government"). As part of that agreement, an option was granted to
the Company, Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") and Grupo
Servia, S.A. de C.V. ("Grupo Servia") to purchase all or a portion of the
Government's 20% ownership interest in TFM at a discount. The option to purchase
all or a portion of the Government's interest expires on November 30, 1999. If
the purchase of at least 35% of the Government's stock is not completed by May
31, 1999, the entire option will expire on that date. If the option is fully
exercised, the Company's additional cash investment is not expected to exceed
$88 million. As part of this agreement and as a condition to exercise this
option, the parties have agreed to settle the outstanding claims against the
Government regarding a refund of Mexican Value Added Tax (VAT) payments. TFM has
also agreed to sell to the Government a small section of redundant trackage for
inclusion in another railroad concession. In addition, under the terms of the
agreement, the Government would be released from its capital call obligations
(as described below in "Results of Operations") at the moment that the option is
exercised in whole or in part. Furthermore, TFM, TMM, Grupo Servia and the
Company have agreed to sell, in a public offering, a direct or indirect
participation in at least the same percentage currently represented by the
shares exercised in this option, by October 31, 2003, at the latest, subject to
market conditions. The
<PAGE>15
option and the other described agreements are conditioned on the parties
entering into a final written agreement and obtaining all necessary consents and
authorizations.
Planned Separation of the Company Business Segments. As previously disclosed,
the Company announced its intention to separate the Transportation and Financial
Services segments through a proposed dividend of the stock of a new holding
company for its Financial Services businesses (the "Separation"). On February
27, 1998, a filing was made with the Internal Revenue Service ("IRS") requesting
a favorable tax ruling on the proposed Separation. On October 20, 1998, the
Company announced that a favorable ruling on the initial structure proposed to
the IRS was not expected and, accordingly, KCSI withdrew its request for a tax
ruling. As a result, the Separation did not occur during 1998 as previously
contemplated. The Company resubmitted a request for a tax ruling in January
1999. Subject to receipt of a favorable ruling from the IRS and consideration of
other relevant factors, the Separation is expected to occur before the end of
1999.
Additionally, in contemplation of the Separation, the Company's stockholders
approved a reverse stock split at a special stockholders' meeting held on July
15, 1998. The Company will not effect the reverse stock split until the
Separation is completed.
Houston Emergency Service Order. On October 31, 1997 the Surface Transportation
Board ("STB") issued an emergency service order which took effect on November 5,
1997 and extended through August 2, 1998. On July 31, 1998, the STB announced
that it would not extend the emergency service order. This decision provided for
a "45-day wind down" period until September 17, 1998, during which the Tex Mex
continued to provide service under the terms of the emergency service order. As
a result of this emergency service order, Tex Mex revenues increased during
fourth quarter 1997 and through the first three quarters of 1998. However,
expenses associated with accommodating the increase in traffic and
congestion-related problems of the UP system offset this revenue increase.
As previously disclosed, the KCSR and Tex Mex, along with the Texas Railroad
Commission and several shipper advocate groups, filed the Houston Area Consensus
Plan ("Consensus Plan") with the STB during second quarter 1998. The Consensus
Plan sought to provide the Tex Mex with permanent access to the Houston/Gulf
Coast markets and to expand neutral switching to hundreds of shippers. On
December 21, 1998, the STB announced its ruling against the Consensus Plan,
denying the Tex Mex permanent access to the Houston area.
RESULTS OF OPERATIONS
In addition to the developments mentioned above, consolidated operating results
from 1996 to 1998 were affected by the following significant developments.
Acquisition of Nelson. On April 20, 1998, the Company completed its acquisition
of 80% of Nelson, an investment advisor and manager based in the United Kingdom
("UK"). Nelson has six offices throughout the UK and offers planning based asset
management services directly to private clients. Nelson managed approximately
$1.2 billion of assets as of December 31, 1998. The acquisition, accounted for
as a purchase, was completed using a combination of cash, KCSI common stock and
notes payable. The total purchase price was approximately $33 million. The
purchase price is in excess of the fair market value of the net tangible and
identifiable intangible assets received and this excess was recorded as goodwill
to be amortized over a period of 20 years. Assuming the transaction had been
completed January 1, 1998, inclusion of Nelson's results on a pro forma basis,
as of and for the year ended December 31, 1998, would not have been material to
the Company's consolidated results of operations.
<PAGE>16
Marketing Alliance with Canadian National Railway Company ("CN")/Illinois
Central Corporation ("IC"). On April 16, 1998, KCSR, CN and IC announced a
15-year marketing alliance that offers shippers new competitive options in a
rail freight transportation network that links key north-south continental
freight markets. The marketing alliance did not require approval from the STB
and was effective immediately. This alliance connects points in Canada with the
major U.S. Midwest markets of Detroit, Chicago, Kansas City and St. Louis, as
well as key Southern markets of Memphis, Dallas and Houston. It also provide
shippers with access to Mexico's rail system through Grupo TFM.
In addition to providing access to key north-south international and domestic
U.S. traffic corridors, the railways' seek to increase business in existing
markets, primarily automotive and intermodal, but also in other key carload
markets, including those for chemical and forest products. Traffic increases,
although not significant in 1998, have already been evident and Transportation
management expects this alliance to provide opportunities for revenue growth and
position the railway as a key provider of rail service to the North American
Free Trade Agreement ("NAFTA") corridor.
Under a separate access agreement, subject to STB approval of the proposed CN-IC
merger, CN and KCSR plan investments in automotive, intermodal and transload
facilities at Memphis, Dallas, Kansas City and Chicago to capitalize on the
growth potential represented by the marketing alliance. Access to proposed
terminals would be assured for the 25-year life span of the facilities,
regardless of any change in corporate control. Under the terms of this access
agreement, KCSR would extend its rail system in the Gulf area and, in the year
2000, gain access to three additional chemical customers in the Geismar,
Louisiana industrial area, one of the largest chemical production areas in the
world, through a haulage agreement. Management expects this access to provide
additional revenue opportunities for the Company. Prior to this access
agreement, the Company received preliminary STB approval for construction of a
nine-mile rail line from KCSR's main line into the Geismar industrial area,
which the chemical manufacturers requested be built to provide them with
competitive rail service. The Company will continue to hold the option of the
Geismar build-in provided that it is able to obtain the requisite approvals.
Voluntary Coordination Agreement with the Norfolk Southern Railway Company
("Norfolk Southern"). The Company entered into a Voluntary Coordination
marketing agreement with the Norfolk Southern that allows the Company to
capitalize on the east-west corridor between Meridian, Mississippi and Dallas,
Texas through incremental traffic volume gained through interchange with the
Norfolk Southern. This agreement provides the Norfolk Southern run-through
service with access to Dallas and Mexico while avoiding the congested rail
gateways of Memphis, Tennessee and New Orleans, Louisiana. In addition, KCSR and
Norfolk Southern have a new joint intermodal operation at Port Arthur, Texas,
which provides an alternative route for traffic from the Houston market by
utilizing KCSR's rail network.
Termination of the Kansas City Southern Industries, Inc. Employee Plan Funding
Trust ("EPFT" or "Trust"). Effective September 30, 1998, the Company terminated
the EPFT, which was established as a grantor trust for the purpose of holding
shares of KCSI Series B Convertible Preferred Stock ("Series B Preferred Stock")
for the benefit of various KCSI employee benefit plans, including the Employee
Stock Ownership Plan, Stock Option Plans and Employee Stock Purchase Plan
(collectively, "Benefit Plans"). The EPFT was administered by an independent
bank trustee ("Trustee") and included in the Company's consolidated financial
statements.
In 1993, KCSI transferred one million shares of Series B Preferred Stock to the
EPFT for a purchase price of $200 million (based on an independent valuation),
which the Trust financed through KCSI. The indebtedness of the EPFT to KCSI was
repayable over 27 years with interest at 6% per annum, with no principal
payments for the first three years. Principal payments from the EPFT to the
Company of $21.3 million since the date of inception decreased the indebtedness
to $178.7 million, plus accrued interest, on the date of termination. As a
result of these principal payments, 127,638 shares of Series B Preferred
<PAGE>17
Stock were released from the Trust's suspense account and available for
distribution to the Benefit Plans. None of these shares, however, were
distributed prior to termination of the EPFT.
In accordance with the agreement to terminate the EPFT, the Company received
872,362 shares of Series B Preferred Stock in full repayment of the indebtedness
from the Trust. In addition, the remaining 127,638 shares of Series B Preferred
Stock were converted by the Trustee into KCSI Common Stock, at the rate of 12 to
1, resulting in the issuance to the EPFT of 1,531,656 shares of such Common
Stock. This Common Stock was then transferred by the Trustee to KCSI and the
Company has set these shares aside for use in connection with the KCSI 1991
Stock Option and Performance Award Plan, as amended and restated effective July
15, 1998. Following the foregoing transactions, the EPFT was terminated.
The impact of the EPFT termination on the Company's consolidated financial
statements was a reclassification among the components of the stockholders'
equity accounts, with no change in the consolidated assets and liabilities of
the Company.
Restructuring, Asset Impairment and Other Charges. In connection with the
Company's review of its accounts for the year ended December 31, 1997 in
accordance with its established accounting policies, as well as a change in the
Company's methodology for evaluating the recoverability of goodwill during 1997
(as set forth in Note 1 to the consolidated financial statements), $196.4
million of restructuring, asset impairment and other charges were recorded
during fourth quarter 1997. After consideration of related tax effects, these
charges reduced consolidated earnings by $158.1 million, or $1.47 per share. The
charges included:
o A $91.3 million impairment of goodwill associated with KCSR's 1993
acquisition of MidSouth Corporation ("MidSouth"). In response to the
changing competitive and business environment in the rail industry, in 1997
the Company revised its accounting methodology for evaluating the
recoverability of intangibles from a business unit approach to analyzing
each of the Company's significant investment components. Based on this
analysis, the remaining purchase price in excess of fair value of the
MidSouth assets acquired was not recoverable.
o A $38.5 million charge representing long-lived assets held for disposal.
Certain branch lines on the MidSouth route and certain non-operating real
estate were designated for sale. During 1998, one of the branch lines was
sold for a pretax gain of approximately $2.9 million. Efforts are ongoing
to procure bids on the other branch line and non-operating real estate.
o Approximately $27.1 million in reserves related to termination of a union
productivity fund and employee separations. The union productivity fund was
established in connection with prior collective bargaining agreements and
required KCSR to pay employees when reduced crew levels were used. The
termination of this fund has resulted in a reduction of salaries and wages
expense for the year ended December 31, 1998 of approximately $4.8 million.
During 1998, approximately $23.1 million in cash payments reduced these
reserves and approximately $2.5 million of the reserves were reduced based
primarily on changes in the estimate of claims made relating to the union
productivity fund. Approximately $1.5 million of accruals related to the
union productivity fund and employee separations remain at December 31,
1998.
o A $12.7 million impairment of goodwill associated with the Company's
investment in Berger. In connection with the Company's review of the
carrying value of its various assets, management determined that a portion
of the intangibles recorded in connection with the Berger investment were
not recoverable, primarily due to below-peer performance and growth of the
core Berger funds.
o A $9.2 million impairment of assets at Pabtex, Inc. (a subsidiary of the
Company) as a result of continued operating losses and a decline in its
customer base.
o Approximately $17.6 million of other charges and reserves related to
leases, contracts, impaired investments and other reorganization costs.
Based on the Company's review of its assets and liabilities, certain
charges were recorded to reflect recoverability and/or obligation as of
December 31, 1997. During 1998, approximately $8.0 million in cash payments
were made leaving approximately $5.0 million accrued at December 31, 1998.
<PAGE>18
Operating Difficulties of the Union Pacific Railroad. As reported in the press,
the Union Pacific Railroad ("UP") experienced difficulties with its railroad
operations, reportedly linked to its acquisition of the Southern Pacific
Railroad ("SP"). UP is one of KCSR's largest interchange partners. The UP's
difficulties resulted in overall traffic congestion of the U.S. railroad system
and impacted KCSR's ability to interchange traffic with UP, both for domestic
and international traffic (i.e., to and from Mexico). This system congestion
resulted in certain equipment shortages due to KCSR's rolling stock being
retained within the UP system for unusually extended periods of time, for which
UP remits car hire amounts. During the fourth quarter of 1997, KCSR agreed to
accept certain UP trains in diverted traffic to assist in the easing of the UP's
system congestion, resulting in revenues of approximately $3.9 million.
Grupo TFM. As disclosed previously, Grupo TFM, a joint venture of the Company
and TMM, was awarded the right to purchase 80% of the common stock of TFM for
approximately 11.072 billion Mexican pesos (approximately $1.4 billion 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 50 years, with the
option of a 50 year extension (subject to certain conditions).
The remaining 20% of TFM was retained by the Government, which 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 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 $298 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 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); (ii) senior notes and senior
discount debentures ($400 million); (iii) proceeds from the sale of 24.6% of
Grupo TFM to the Government (approximately $199 million 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.
<PAGE>19
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 agreed to contribute up to $37.5 million of equity capital to Grupo
TFM if TMM and the Company were required to contribute under the capital call
provisions of the Contribution Agreement prior to July 16, 1998. As of July 16,
1998, no additional contributions from the Company were requested or made and,
therefore, the Government did not contribute additional equity capital to Grupo
TFM. The Government also committed that if it had not made any contributions by
July 16, 1998, it would, up to July 31, 1999, 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. As of December 31, 1998 no
additional contributions from the Company have been requested or made.
At December 31, 1998, the Company's investment in Grupo TFM was approximately
$285.1 million. The Company's interest in Grupo TFM is 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.
See "Recent Developments" above for discussion of the Company's option to
purchase a portion of the Government's interest in TFM.
I&M Rail Link. During 1997, KCSR entered into a marketing agreement with I&M
Rail Link, LLC, which provides KCSR with access to customers (primarily new
grain origins) in the upper Midwest, as well as Chicago and Minneapolis. This
agreement is similar to a haulage rights agreement, but without the restrictions
on traffic. The Company believes this agreement provides KCSR with the ability
to increase its traffic, particularly with respect to agricultural and mineral
products.
Berger Ownership Interest. As a result of certain transactions during 1997, the
Company increased its ownership in Berger to 100% from approximately 80% at
December 31, 1996. In January and December 1997, Berger purchased, for treasury,
the common stock of minority shareholders. Also in December 1997, the Company
acquired additional Berger shares from a minority shareholder through the
issuance of KCSI common stock. In connection with these transactions, Berger
granted options to acquire shares of Berger stock to certain of its employees.
At December 31, 1998, the Company's ownership would have been diluted to
approximately 91% if all of the outstanding options had been exercised. These
transactions resulted in approximately $17.8 million of goodwill, which is being
amortized over 15 years. However, see discussion of impairment of a portion of
this goodwill in "Restructuring, Asset Impairment and Other Charges" above.
The Company's 1994 acquisition of a controlling interest in Berger was completed
under a Stock Purchase Agreement ("Agreement") covering a five-year period
ending in October 1999. Pursuant to the Agreement, the Company may be required
to make additional purchase price payments (up to $36.6 million) based upon
Berger attaining certain incremental levels of assets under management up to $10
billion by October 1999. The Company made no payments under the Agreement during
1998. In 1997 and 1996, the Company made additional payments of $3.1 and $23.9
million, respectively, resulting in adjustments to the purchase price. The
goodwill amounts are amortized over 15 years.
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
<PAGE>20
$0.04 per share (post-split). Both dividends were paid on September 16, 1997 to
stockholders of record as of August 25, 1997. Amounts reported in this Form 10-K
reflect this 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 1998, there were no repurchases under these programs. During
1997, the Company purchased approximately 2.9 million shares (post-split) at an
aggregate cost of approximately $50 million. With these transactions, the
Company has repurchased approximately 27.6 million shares of its common shares,
completing the 1995 program and part of the 1996 program. In connection with
these programs, the Company entered into a forward stock purchase contract in
1995 for the repurchase of shares, which was completed during 1997. See
discussion in "Financial Instruments and Purchase Commitments" below.
Gateway Western. KCSTC 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
acquisition effective May 5, 1997. The consideration paid for Gateway Western
(including various acquisition costs and liabilities) was approximately $12.2
million, which exceeded the fair value of the underlying net assets by
approximately $12.1 million. The resulting intangible is being amortized over a
period of 40 years.
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
wholly-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 year ended December 31, 1997 reflect this restatement.
Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company,
Burlington Northern Santa Fe Corporation has the option of purchasing the assets
of Gateway Western (based on a fixed formula in the agreement) through the year
2004.
Southern Capital Joint Venture. In October 1996, the Company and GATX Capital
Corporation ("GATX") completed the formation and financing of a joint venture to
perform certain leasing and financing activities. The venture, Southern Capital,
was formed through a GATX contribution of $25 million in cash and a Company
contribution (through KCSR and Carland) of $25 million in net assets, comprising
a negotiated fair value of locomotives and rolling stock and long-term
indebtedness owed to KCSI and its subsidiaries. In an associated transaction,
Southern Leasing Corporation (an indirect wholly-owned subsidiary of the Company
prior to dissolution in October 1996) sold to Southern Capital approximately $75
million of loan portfolio assets and rail equipment.
As a result of these transactions and subsequent repayment by Southern Capital
of indebtedness owed to KCSI and its subsidiaries, the Company received cash
which exceeded the net book value of its assets by approximately $44.1 million.
Concurrent with the formation of the joint venture, KCSR entered into operating
leases with Southern Capital for the majority of the rail equipment acquired by
or contributed to Southern Capital. Accordingly, this excess fair value over
book value is being recognized over the terms of the leases (approximately $4.4
million in 1998 and $4.9 million in 1997).
The cash received by the Company was used to reduce outstanding indebtedness by
approximately $217 million, after consideration of applicable income taxes,
through repayments on various lines of credit and subsidiary indebtedness. The
Company reports its 50% ownership interest in Southern Capital under the equity
method of accounting.
<PAGE>21
1998 and 1997 net income was positively impacted as a result of the Southern
Capital transaction. Reduced depreciation and interest expense, together with
equity earnings from Southern Capital, has more than offset the increase in
fixed lease expense related to the transaction.
Under a prior agreement, GATX had an option to notify the Company of its intent
to cause disposal of the loan portfolio assets of Southern Capital. GATX
exercised its option with regard to this agreement and the Company and GATX are
jointly reviewing options for disposition of these loan portfolio assets. The
portfolio of rail assets would remain with Southern Capital. The disposal of the
loan portfolio assets is not expected to have a material impact on the Company's
results of operations, financial position or cash flows.
DST's Investment in Continuum. On August 1, 1996, The Continuum Company, Inc.
("Continuum"), formerly an approximate 23% owned DST equity affiliate, merged
with Computer Sciences Corporation ("CSC," a publicly traded company) in a
tax-free share exchange. In exchange for its ownership interest in Continuum,
DST received CSC common stock, which DST accounts for as available for sale
securities as defined in Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115").
As a result of the transaction, the Company's 1996 earnings included
approximately $47.7 million (after-tax), or $0.41 per share, representing the
Company's proportionate share of the one-time gain recognized by DST in
connection with the merger. Continuum ceased to be an equity affiliate of DST,
thereby eliminating any future Continuum equity earnings or losses. DST
recognized equity losses in Continuum of $4.9 million for the first six months
of 1996.
Railroad Industry Trends and Competition. During the period from 1996 to 1998,
the railroad industry has continued to experience ongoing consolidation.
Following the 1995 mergers involving the Burlington Northern, Inc. and Santa Fe
Pacific Corporation ("BN/SF") and the UP and the Chicago and North Western
Transportation Company ("UP/CNW"), in 1996, the UP merged with SP ("UP/SP"). In
1997, CSX Corporation ("CSX") and Norfolk Southern completed negotiations to
purchase parts of Conrail, Inc. ("Conrail"). The STB has approved this
transaction. Finally, in February 1998, the CN announced its intention to
acquire the IC, which is still awaiting STB approval.
The Company believes that KCSR revenues were negatively affected (primarily in
1996 and early 1997) by the UP/SP and BN/SF mergers as a result of the increased
competition which led to diversions of rail traffic away from KCSR lines. The
ongoing impact to KCSR of these mergers, as well as the merger of the CN/IC and
the CSX/Norfolk Southern/Conrail transaction is uncertain. Management believes,
however, that because of its investments and strategic alliances, it is well
positioned to attract additional rail traffic through its "NAFTA Railway."
In addition to competition within the railroad industry, highway carriers
compete with KCSR throughout its operating area. Since deregulation of the
railroad industry, competition has resulted in extensive downward pressure on
freight rates. Truck carriers have eroded the railroad industry's share of total
transportation revenues. However, rail carriers, including KCSR, have placed an
emphasis on competing in the intermodal marketplace, working together to provide
end-to-end transportation of products.
Mississippi and Missouri River barge traffic, among others, also competes with
KCSR in the transportation of bulk commodities such as grains, steel and
petroleum products.
In response to the changing competitive and business environment in the rail
industry, in 1997 the Company revised its accounting methodology for evaluating
the recoverability of intangibles from a business unit approach to analyzing
each of the Company's significant investment components. Based on this analysis,
$91.3 million of the remaining purchase price in excess of fair value of the
MidSouth assets acquired was not recoverable. This charge was recorded as of
December 31, 1997.
<PAGE>22
See "Union Labor Negotiations" below for a discussion of the impact of labor
issues and regulations on competition in the transportation industry.
Berger Joint Venture. During 1996, Berger entered into a joint venture agreement
with Bank of Ireland Asset Management (U.S.) Limited, a subsidiary of Bank of
Ireland, to develop and market a series of international and global mutual
funds. The new venture, named BBOI Worldwide LLC ("BBOI"), is headquartered in
Denver, Colorado. Regulatory approvals were received in October 1996, and the
first no-load mutual fund product - the Berger/BIAM International Fund - was
introduced in fourth quarter 1996. Currently, BBOI manages five funds and assets
under management for these funds totaled $522 million at December 31, 1998
compared with $161 million at December 31, 1997. Berger accounts for its 50%
investment in BBOI under the equity method.
Union Labor Negotiations. Approximately 84% of KCSR employees and 88% of Gateway
Western employees are covered under various collective bargaining agreements.
In 1996, national labor contracts governing the KCSR were negotiated with all
major railroad unions, including the United Transportation Union, the
Brotherhood of Locomotive Engineers, the Transportation Communications
International Union, the Brotherhood of Maintenance of Way Employees, and the
International Association of Machinists and Aerospace Workers. The provisions of
the various labor agreements, which extend to December 31, 1999, generally
include periodic general wage increases, lump-sum payments to workers, and
greater work rule flexibility, among other provisions. These agreements did not
have a material effect on the Company's consolidated results of operations,
financial position or cash flows. As a result of the operating efficiencies
gained by the existing agreements, management believes the Company is better
positioned to compete effectively with alternative forms of transportation.
Railroads continue, however, to be restricted by certain remaining restrictive
work rules and are thus prevented from achieving optimum productivity with
existing technology and systems. Currently, informal discussions are being held
with certain national labor unions with regard to the next labor contract. These
discussions are preliminary and formal negotiations will not begin until
November 1999. Management does not expect that this process or the resulting
labor agreements will have a material impact on its consolidated results of
operations, financial condition or cash flows.
Labor agreements related to former MidSouth employees covered by collective
bargaining agreements reopened for negotiations in 1996. These agreements entail
eighteen separate groups of employees and are not included in the national labor
contracts. KCSR management is currently in the process of meeting with these
unions representing its employees. While these discussions are ongoing, the
Company does not anticipate that this process or the resulting labor agreements
will have a material impact on its consolidated results of operations, financial
condition or cash flows.
The majority of employees of the Gateway Western are covered by collective
bargaining agreements which extend through December 1999. Unions representing
machinists and electrical workers, however, are operating under 1994 contracts
and are currently in negotiations to extend these contracts. Negotiations on the
agreements which extend through December 1999 are expected to begin in late
1999. The Company does not anticipate that this process or the resulting labor
agreements will have a material impact on its consolidated results of
operations, financial condition or cash flows.
KCSR, Gateway and other railroads continue to be affected by labor regulations
which are more burdensome than those governing non-rail industries, such as
trucking competitors. The Railroad Retirement Act requires up to a 23.75%
contribution by railroad employers on eligible wages, while the Social Security
and Medicare Acts only require a 7.65% employer contribution on similar wage
bases. Other programs, such as The Federal Employees Liability Act (FELA), when
compared to worker's compensation laws, vividly illustrate the competitive
disadvantage placed upon the rail industry by federal labor regulations.
<PAGE>23
During 1998, the Brotherhood of Locomotive Engineers and the United
Transportation Union, the two unions representing a majority of the Company's
employees, have agreed to merge. Currently, details of the merged union are
being discussed and determined by the involved parties. The merger of these two
unions is not expected to have a material impact on the Company's results of
operations, financial position or cash flows.
Safety and Quality Programs. During 1997, KCSR continued its implementation of
important safety and quality programs, including an extensive, cross-functional
"Pro-Formance" initiative focusing on continuous improvements in all aspects of
the organization. Because of the continued focus on safety and quality programs,
KCSR has experienced a decline in accident related statistics in recent years;
however reportable injuries increased slightly during 1998. Although total
derailments declined 18% from the period 1996-1998, two significant derailments
experienced during the latter half of 1998 led to an increase in derailment
costs during 1998. One of KCSR management's primary objectives is to operate in
the safest environment possible and efforts are ongoing to improve its safety
experience. "Safety" and "Quality" programs comprise two important ongoing
elements of KCSR management's goal of reducing employee injuries and related
benefits are expected to be recurring in nature and realizable over future
years. Program expenses are not anticipated to have a material impact on
operating results in future years.
INDUSTRY SEGMENT RESULTS
<TABLE>
The Company's revenues, operating income and net income by industry segment are
as follows (in millions):
<CAPTION>
1998(i) 1997(ii) 1996(iii)
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Transportation $ 613.5 $ 573.2 $ 517.7
Financial Services 670.8 485.1 329.6
----------- ----------- -----------
Total $ 1,284.3 $ 1,058.3 $ 847.3
=========== =========== ===========
Operating Income (Loss)
Transportation $ 113.9 $ (92.7) $ 72.1
Financial Services 280.6 199.2 131.8
----------- ----------- -----------
Total $ 394.5 $ 106.5 $ 203.9
=========== =========== ===========
Net Income (Loss)
Transportation $ 38.0 $ (132.1) $ 16.3
Financial Services 152.2 118.0 134.6
----------- ----------- -----------
Total $ 190.2 $ (14.1) $ 150.9
=========== =========== ===========
</TABLE>
(i) Includes a one-time non-cash charge of $36.0 million ($23.2 million
after-tax) resulting from the merger of a wholly-owned subsidiary of DST
with USCS. The merger was accounted for by DST under the pooling of
interests method. The charge reflects the Company's reduced ownership of
DST (from 41% to approximately 32%), together with the Company's
proportionate share of DST and USCS fourth quarter merger-related charges.
See Note 2 to the consolidated financial statements in this Form 10-K.
(ii) Includes $196.4 million ($158.1 million after-tax, comprised of $141.9
million -Transportation segment and $16.2 million Financial Services
segment) of restructuring, asset impairment and other charges recorded
during fourth quarter 1997. The charges reflect impairment of goodwill
associated with KCSR's 1993 acquisition of the MidSouth and the Company's
investment in Berger, long-lived assets held for disposal, impaired
long-lived assets, reserves related to termination of a union productivity
fund and employee separations, and other reserves for leases, contracts and
reorganization costs. See Notes 1 and 3 to the consolidated financial
statements in this Form 10-K. Additionally, Transportation results for the
year ended 1997 include revenues and expenses from Gateway Western.
<PAGE>24
(iii)Includes a one-time after-tax gain of $47.7 million representing the
Company's proportionate share of the one-time gain recognized by DST in
connection with the merger of Continuum with CSC (see Note 2 to the
consolidated financial statements in this Form 10-K).
Consolidated net income for 1998 increased to $190.2 million from a consolidated
loss of $14.1 million in 1997. Exclusive of the 1998 and 1997 one-time charges,
consolidated net income grew $69.4 million, or 48%, to $213.4 million from
$144.0 million in 1997, reflecting earnings improvements in both the
Transportation and Financial Services segments. Consolidated revenues for the
year ended December 31, 1998 were $226 million (21%) higher than 1997 as a
result of increases in both segments. Operating income, exclusive of 1997
restructuring, asset impairment and other charges, increased $91.6 million (30%)
year to year, driven by higher revenues as well as improved consolidated
operating margins.
Consolidated 1997 revenues increased $211.0 million over 1996, reflecting
improvements in both the Transportation and Financial Services segments year to
year, as well as the inclusion of Gateway Western revenues. While 1997 total
operating income decreased from 1996 by 48%, operating income exclusive of the
restructuring, asset impairment and other charges increased nearly $100 million,
indicative of a higher rate of revenue growth compared to expenses. The
consolidated loss of $14.1 million for the year ended December 31, 1997 includes
$196.4 million ($158.1 million after-tax) in restructuring, asset impairment and
other charges, as previously discussed. Consolidated net income of $150.9
million for the year ended 1996 includes a one-time gain of $47.7 million
resulting from the Continuum transaction. Exclusive of these amounts,
consolidated net income in 1997 of $144.0 million was $40.8 million, or 40%,
higher than 1996. This increase reflects improvement in ongoing operations for
both the Transportation and the Financial Services segments, primarily from
higher revenues and improved operating margins.
A discussion of each business segment's results of operations follows.
TRANSPORTATION (KCSL)
<TABLE>
The following summarizes the income statement components of the Transportation
segment and provides a reconciliation to ongoing domestic Transportation
earnings:
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues $ 613.5 $ 573.2 $ 517.7
Costs and expenses 442.9 426.1 382.7
Depreciation and amortization 56.7 61.8 62.9
Restructuring, asset impairment
and other charges - 178.0 -
---------- ---------- ----------
Operating income (loss) 113.9 (92.7) 72.1
Equity in net earnings (losses) of
unconsolidated affiliates (2.9) (9.7) 1.5
Interest expense (59.6) (53.3) (52.8)
Other, net 13.7 5.0 7.9
---------- ---------- ----------
Pretax income (loss) 65.1 (150.7) 28.7
Income tax expense (benefit) 27.1 (18.6) 12.4
---------- ---------- ----------
Transportation net income (loss) 38.0 (132.1) 16.3
Restructuring, asset impairment and
other charges, net of tax - 141.9 -
Grupo TFM losses and interest, net of tax 14.3 17.6 -
---------- ---------- ----------
Ongoing domestic Transportation
earnings $ 52.3 $ 27.4 $ 16.3
========== ========== ==========
</TABLE>
<PAGE>25
Ongoing domestic Transportation segment earnings increased $24.9 million, or
90.9%, to $52.3 million for the year ended December 31, 1998. This increase
resulted from higher revenues, which grew $40.3 million, or 7.0% (primarily from
a 6.5% increase in revenues at KCSR) and lower operating costs as a percentage
of revenue. The Transportation segment's operating income, exclusive of 1997
restructuring, asset impairment and other charges, increased 33.5% to $113.9
million from $85.3 million in 1997. This increase was driven by improved
operating margins as a result of a slower rate of growth in operating expenses
compared to revenues. Exclusive of depreciation and amortization and 1997
restructuring, asset impairment and other charges, the Transportation segment's
operating costs as a percentage of revenues decreased by more than 2% as a
result of continuing cost containment efforts. The termination of the union
productivity fund resulted in a savings of approximately $4.8 million during
1998 and these savings are expected to continue in the future. Depreciation and
amortization expenses declined $5.1 million, or 8.3%, chiefly due to the
reduction of amortization and depreciation expense of approximately $5.6 million
arising from the impairment of goodwill and certain branch lines held for sale
recorded during December 1997, partially offset by increased depreciation from
property additions. See "Results of Operations" above for further discussion.
Ongoing domestic Transportation segment earnings of $27.4 million for the year
ended December 31, 1997 were compared to $16.3 million for the prior year, an
increase of $11.1 million or 68%. This increase was driven by revenue growth
from $517.7 million to $573.2 million, chiefly due to higher KCSR revenues and
the addition of the Gateway Western, partially offset by the loss of revenues
from Southern Leasing Corporation, which was dissolved in the fourth quarter of
1996. In addition, cost containment initiatives by management in the second half
of 1997 helped to increase operating margins and contributed to higher earnings.
Transportation expenses, exclusive of the restructuring, asset impairment and
other charges, increased $42.3 million, or 9.5% to $487.9 million for 1997
compared with $445.6 million for 1996. The increase was attributable to
operating lease expenses resulting from the Southern Capital transaction and the
inclusion of Gateway Western expenses in 1997 (variable operating expenses were
essentially unchanged year to year). Depreciation and amortization expenses in
1997 for the Transportation segment decreased $1.1 million (1.7%) from 1996 due
to the transfer of assets to Southern Capital during the fourth quarter of 1996,
offset by the inclusion of Gateway Western.
Interest Expense and Other, net
Interest expense for the year ended December 31, 1998 increased $6.3 million, or
11.8%, to $59.6 million as a result of the inclusion of a full year's interest
associated with the debt related to the Company's investment in Grupo TFM,
partially offset by a decrease in average debt balances due to net repayments
and a slight decrease in interest rates relating to the lines of credit.
Additionally during 1997, interest of $7.4 million was capitalized as part of
the investment in Grupo TFM until operations commenced (June 23, 1997). Other,
net increased $8.7 million to $13.7 million for the year ended December 31,
1998. Included in this increase is a one-time gain of $2.9 million (pretax) from
the sale of a branch line and $2.8 million of interest related to a tax refund
in 1998. Other non-operating real estate sales comprised the majority of the
remaining increase.
The 1% increase in 1997 Transportation interest expense (to $53.3 million) is
due to interest associated with the investment in Grupo TFM, together with
interest on Gateway Western indebtedness, offset by debt repayments made at the
end of 1996 associated with the Southern Capital transaction. Capitalized
interest related to the Company's Grupo TFM investment totaled $7.4 million for
the year ended December 31, 1997, which ceased upon gaining operational control
of TFM on June 23, 1997. Other, net decreased $2.9 million, or 36.7%, to $5.0
million for 1997 from $7.9 million in 1996, primarily attributable to the 1996
one-time gain of approximately $2.9 million recorded by KCSR in connection with
the sale of real estate.
Income Taxes
Income taxes increased $45.7 million from a 1997 benefit of $18.6 million to a
$27.1 million expense for the year ended December 31, 1998. This fluctuation
resulted primarily because of the restructuring, asset
<PAGE>26
impairment and other charges in 1997. Exclusive of these charges, income
tax expense from year to year increased by $9.6 million, or 54.8%, primarily due
to higher operating income in 1998.
Income taxes decreased $31.0 million from $12.4 million of expense in 1996 to
$18.6 million of benefit for 1997, primarily as a result of the impact of
restructuring, asset impairment and other charges on pretax income. Exclusive of
these charges, income tax expense for 1997 would have been approximately $17.5
million.
KCSL Subsidiaries
Following is a detailed discussion of the primary subsidiaries and
unconsolidated affiliates comprising the Transportation segment. Results of less
significant subsidiaries have been omitted.
The Kansas City Southern Railway Company
KCSR operates in a nine state region, including Missouri, Kansas, Arkansas,
Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas. KCSR has the
shortest rail route between Kansas City and the Gulf of Mexico, serving the
ports of Beaumont and Port Arthur, Texas; and New Orleans, Baton Rouge, Reserve
and West Lake Charles, Louisiana. Through haulage rights, KCSR has access to the
states of Nebraska and Iowa and serves the ports of Houston and Galveston,
Texas. Kansas City, Missouri, as the second largest rail center in the United
States, represents an important interchange gateway for KCSR. KCSR also has
interchange gateways in New Orleans and Shreveport, Louisiana; Dallas and
Beaumont, Texas; and Jackson and Meridian, Mississippi.
Major commodities moved by KCSR include coal, grain and farm products,
petroleum, chemicals, paper and forest products, intermodal, as well as other
general commodities. Management believes that KCSR, in conjunction with the
Norfolk Southern, operates the most direct rail route, referred to as the
"Meridian Speedway," linking the Atlanta and Dallas gateways for traffic moving
between the rapidly-growing southeast and southwest regions of the United
States. The "Meridian Speedway" also provides eastern shippers and other U.S.
and Canadian railroads with an efficient connection to the Mexican markets and
has allowed KCSR to be more competitive in transcontinental intermodal
transportation.
For the year ended December 31, 1998, KCSR's contribution to the Company's
consolidated earnings increased $25.6 million to $53.0 million, compared to
$27.4 million (exclusive of restructuring, asset impairment and other charges)
in 1997. This increase was primarily due to a $33.8 million increase in
revenues, partially offset by a $4.0 million increase in variable and fixed
operating costs.
Exclusive of the restructuring, asset impairment and other charges recorded in
fourth quarter 1997, KCSR contributed $27.4 million to the Company's
consolidated earnings compared to $17.1 million in 1996. This increase is
primarily due to a $25.3 million increase in KCSR revenues offset by a lesser
increase in variable and fixed operating costs.
<PAGE>27
Revenues
<TABLE>
The following summarizes revenues, carloads and net ton miles of KCSR by
commodity mix:
<CAPTION>
Carloads and
Revenues Intermodal Units Net Ton Miles
------------------------- ----------------------- -----------------------
(in millions) (in thousands) (in millions)
1998 1997 1996 1998 1997 1996 1998 1997 1996
-------- ------- ------- ----- ----- ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
General commodities:
Chemical and petroleum $ 138.3 $ 133.1 $ 129.0 165.4 162.9 165.9 4,510 4,199 4,070
Paper and forest 108.8 106.4 103.5 172.5 175.8 177.3 3,121 3,072 2,910
Agricultural and mineral 94.7 85.0 75.0 130.8 119.6 113.2 4,574 4,002 3,306
Other 20.2 20.5 18.7 25.4 24.4 22.6 649 913 1,007
-------- ------- ------- ----- ----- ----- ------ ------ ------
Total general commodities 362.0 345.0 326.2 494.1 482.7 479.0 12,854 12,186 11,293
Intermodal 46.3 43.2 40.3 182.6 161.6 149.4 1,325 1,240 1,402
Coal 117.6 102.6 102.5 204.4 177.1 179.6 7,477 6,249 5,735
-------- ------- ------- ----- ----- ----- ------ ------ ------
Subtotal 525.9 490.8 469.0 881.1 821.4 808.0 21,656 19,675 18,430
Other 25.7 27.0 23.5 - - - - - -
-------- ------- ------- ----- ----- ----- ------ ------ ------
Total $ 551.6 $ 517.8 $ 492.5 881.1 821.4 808.0 21,656 19,675 18,430
======== ======= ======= ===== ===== ===== ====== ====== ======
</TABLE>
KCSR revenues for 1998 were $551.6 million, a $33.8 million increase over 1997
as a result of higher revenues in all major commodity groups. 1998 coal revenues
increased $15.0 million, or 14.7%, compared to 1997 while intermodal revenues
were 7.3% higher. General commodities, led by an increase of 11.4% in
agricultural and mineral products revenues, improved $17.0 million, or nearly
5%. A portion of increased revenues relate to traffic with Mexico, which
increased approximately 118% during 1998, resulting in an additional $10 million
of revenue. Also, increased carloads resulting from the CN/IC alliance
contributed to the higher revenues.
1997 KCSR revenues were $25.3 million, or 5.1%, higher than 1996 due to a 5.8%
increase in general commodities and a 7.2% increase in intermodal revenues.
Agricultural and mineral products led general commodities with a 13.3% increase
over 1996 comprised primarily of domestic and export grain and food products.
The following is a discussion of KCSR's major commodity groups.
Coal
Coal continues to be the largest single commodity handled by KCSR, which
delivers coal to seven electric generating plants, located at Amsterdam,
Missouri; Flint Creek, Arkansas; Welsh, Texas; Mossville, Louisiana; Kansas
City, Missouri; Pittsburg, Kansas; and Hugo, Oklahoma. Two coal customers,
Southwestern Electric Power Company ("SWEPCO") and Entergy Gulf States (formerly
Gulf States Utility Company), comprised approximately 81%, 82% and 83% of total
coal revenues generated by KCSR in 1998, 1997and 1996, respectively. KCSR also
delivers lignite to an electric generating plant at Monticello, Texas ("TUMCO").
KCSR's contract with SWEPCO, its largest customer, extends through the year
2006. During 1998, coal revenues increased notably over prior years; however,
historically coal revenues have a tendency to equalize on an annual basis.
Coal movements generated $117.6 million of revenue during 1998, a 14.7% increase
over 1997. This 1998 increase resulted from higher unit coal traffic (increase
in carloads of nearly 16%) arising from several factors. 1) In 1998,
unseasonably warm weather resulted in a higher demand for electric power in
certain regions served by the KCSR and several utility customers requested more
coal to handle this increased demand. Additionally, in order to replenish
inventory levels depleted from this excess demand, several locations increased
their coal shipments. 2) During 1997, unit coal revenues were negatively
<PAGE>28
affected by unplanned outages (primarily during first and second quarters) at
several utilities served by KCSR, and first quarter weather problems which
affected carriers and the mines originating the coal. During 1998, the level of
unplanned outages declined and, thus, more unit coal trains were delivered to
customers. Additionally, although KCSR experienced certain weather related
slow-downs due to flooding during fourth quarter 1998, it did not significantly
impact coal revenues. 3) 1998 results reflect a full year of revenues for a
utility customer not served by KCSR until after the first quarter of 1997. Coal
accounted for 22.4% of carload revenues during 1998 compared with 20.9% for
1997.
Coal revenues during 1997 were $102.6 million, virtually unchanged from 1996.
Coal traffic comprised 20.9% of carload revenues and 21.6% of carloads in 1997
compared with 21.9% and 22.2%, respectively, in 1996 indicating the growth
realized in other commodities.
Chemicals and Petroleum
Chemical and petroleum products, serviced via tank and hopper cars primarily to
markets in the Southeast and Northeast through interchange with other rail
carriers, as a combined group represent the largest commodity to KCSR in terms
of revenue. Management expects that revenues in this commodity group could grow
in future years as a result of KCSR's marketing agreement with the CN/IC, which
is expected to provide KCSR access to the manufacturing facilities of BASF
Corporation, Shell Chemical Company and Borden Chemical and Plastics in Geismar,
Louisiana, a large industrial corridor.
Chemical and petroleum revenues increased $5.2 million to $138.3 million in 1998
compared to 1997. Increases in miscellaneous chemicals and soda ash carloads,
coupled with higher revenues per carload for plastic and petroleum products,
were offset by lower carloads for plastics, petroleum products and petroleum
coke. The higher revenues per carload for plastics and petroleum products
resulted from a combination of rate increases and length of hauls, while the
increased miscellaneous chemical and soda ash carloads arose from the continued
strength of these markets. Shipments of plastic products have decreased as a
result of a reduced emphasis on low margin business, while petroleum and
petroleum coke carload declines are a result of economic turmoil overseas
(primarily Asia) affecting the export market. Chemical and petroleum products
accounted for 26.3% of total 1998 carload revenues compared with 27.1% for 1997.
During 1997, chemical and petroleum revenues increased to $133.1 million from
$129.0 million. This $4.1 million increase, or 3.2%, resulted primarily from
increased revenues in plastics, miscellaneous chemical, soda ash and petroleum
shipments offset by reduced petroleum coke shipments. Chemical and petroleum
products accounted for 27.1% of total 1997 carload revenues compared with 27.5%
for 1996.
Paper and Forest
KCSR, whose rail line runs through the heart of the southeastern U.S. timber
producing region, serves eleven paper mills directly (including International
Paper Co. and Georgia Pacific, Riverwood International, among others) and six
others indirectly through short-line connections, and transports pulpwood,
woodchips and raw fiber used in the production of paper, pulp and paperboard.
Paper and forest product revenues increased $2.4 million to $108.8 million for
1998, primarily as a result of increased carloads and revenues per carload for
pulp, paper and lumber products, offset by a reduction in pulpwood chip
shipments. Improved lumber shipments have resulted from the strong home building
and remodeling market in 1998, while pulp/paper increases are primarily a result
of paper mill expansions for several customers served by KCSR. Although paper
and forest revenues increased for 1998, fourth quarter carloads and revenues
decreased compared with fourth quarter of 1997. Paper and forest product
revenues are expected to remain somewhat flat during 1999 due to a reduced
demand for these products and higher current inventories and stockpiles. Paper
and forest traffic comprised 20.7% of carload revenues during 1998 compared to
21.7% in 1997.
Paper and forest products revenues increased $2.9 million, or 2.8%, to $106.4
million for the year ended December 31, 1997 from $103.5 million from the year
ended December 31, 1996 as a result of increased carloads for lumber/plywood and
higher revenues per carload for pulpwood and woodchips offset by
<PAGE>29
decreased pulpwood and woodchips carloads. Paper and forest traffic
comprised 21.7% of carload revenues in 1997 as compared to 22.1% in 1996.
Agricultural and Mineral
Agricultural and Mineral product revenues for the year ended December 31, 1998
were $94.7 million, an increase of $9.7 million, or 11.4%, compared to 1997.
Increased carloads for most agricultural and mineral products, including
domestic and export grain, food, nonmetallic ores, cement, glass and stone
contributed to the increase. Higher revenues per carload, most notably in export
grain and food products, were partially offset by a reduction in revenues per
carload from domestic grain movements. Changes in revenues per carload are
primarily due to mix in the length of haul. A portion of the volume increases
can be attributed to increased traffic flow with Mexico. Over the long-term, the
Company expects to continue to supply carloads of grain to Mexico through Grupo
TFM because of Mexico's reliance on imports of grain to meet its minimum needs.
Agricultural and mineral products comprised 18.0% of carload revenues in 1998
compared with 17.3% in 1997.
Agricultural and mineral products revenues for 1997 increased $10 million, or
13.3%, compared to 1996 primarily as a result of higher carloads of grain,
especially corn, due to a strong harvest. Additionally, carloads of nonmetallic
minerals increased approximately 18% over 1996 volume. Agricultural and mineral
products accounted for 17.3% of carload revenues in 1997 compared with 16% in
1996.
Intermodal
The intermodal freight business consists of hauling freight containers or truck
trailers by a combination of water, rail and motor carriers, with rail carriers
serving as the links between motor carriers and ports. KCSR increased its share
of the U.S. intermodal traffic primarily through the acquisition of the
MidSouth, which extended the Company's east/west line running from Dallas, Texas
to Shreveport, Louisiana to Meridian, Mississippi. During 1997, the Company
committed to a plan to pursue intermodal business based on operating margin
versus growth through carload volume. This strategy continues as the Company
increases its access to the intermodal marketplace through strategic alliances
with the Norfolk Southern and CN/IC.
During 1998, intermodal revenues increased $3.1 million, or 7.3%, over 1997
primarily as a result of higher unit shipments of approximately 13% year over
year, offset partially by a decrease in revenue per unit. Almost all of the 13%
volume growth related to containers. Container shipments have a lower rate per
unit shipped than trailers and, as a result revenues per unit shipped declined.
Container movements, however, also have more favorable profit margins due to
their lower inherent cost structure compared to trailers. Intermodal revenues
accounted for 8.8% of carload revenues in both 1998 and 1997.
Intermodal revenues for 1997 of $43.2 million increased $2.9 million, or 7.2%
from 1996 revenues of $40.3 million primarily as a result of increased units
shipped, offset by a slight decrease in revenue per unit. Revenues from United
Parcel Service of America, one of KCSR's largest customers, declined slightly
due to the International Brotherhood of Teamsters strike in August 1997;
however, the strike's overall impact on KCSR's operating results and financial
condition was not material. Intermodal traffic accounted for 8.8% of carload
revenues in 1997 compared with 8.6% in 1996.
Certain segments of KCSR's freight traffic, especially intermodal, face highly
price and service sensitive competition from trucks, although management
believes recent improvements in railroad operating efficiencies are lessening
the truckers' cost advantages. Trucks are not obligated to provide or to
maintain rights of way and do not have to pay real estate taxes on their routes.
In prior years, the trucking industry diverted a substantial amount of freight
from the railroads as truck operators' efficiency over long distances increased.
Because fuel costs constitute a larger percentage of the trucking industry's
costs, declining fuel prices disproportionately benefit trucking operations as
compared to railroad operations. Changing regulations, subsidized highway
improvement programs and favorable labor regulations have improved the
competitive position of trucks as an alternative mode of surface transportation
for many commodities. In recent years, railroad industry management has sought
avenues for improving its competitive positions and forged alliances with truck
companies in order to move more traffic by rail and provide faster, safer and
more
<PAGE>30
efficient service to its customers. KCSR has streamlined its intermodal
operations in the last few years, making its service competitive both in price
and service with trucking, and has entered into agreements with several trucking
companies for through train intermodal service between Dallas and Meridian. KCSR
has increased its intermodal traffic through its connections with eastern
railroads.
Other
KCSR's remaining freight business consists of scrap and slab steel, waste,
military equipment and automobiles. Other revenues accounted for 3.8% of carload
revenues during 1998, 4.2% during 1997, and 4.0% in 1996 with no material
variances. During the year ended December 31, 1997, KCSR accepted only a minimal
amount of diverted UP trains as a result of traffic congestion, resulting in
approximately $3.9 million in revenue. Revenue from these diverted trains was
recorded in other miscellaneous revenues, not in other carload revenues.
Costs and Expenses
<TABLE>
The following table summarizes KCSR's operating expenses (dollars in millions):
<CAPTION>
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Salaries, wages and benefits $ 168.9 $ 173.6 $ 173.2
Fuel 31.9 34.7 32.3
Material and supplies 33.9 30.9 29.6
Car hire 9.8 3.6 7.4
Purchased services 38.1 35.5 33.8
Casualties and insurance 27.0 21.4 23.1
Operating leases 56.5 56.8 40.1
Depreciation and amortization 50.6 54.7 59.1
Restructuring, asset impairment and other charges - 163.8 -
Other 25.0 26.5 19.8
--------- -------- --------
Total $ 441.7 $ 601.5 $ 418.4
========= ======== ========
</TABLE>
General
For the year ended December 31, 1998, KCSR's costs and expenses increased $4.0
million compared with 1997, exclusive of restructuring, asset impairment and
other charges recorded during fourth quarter 1997, primarily as a result of
increased materials and supplies, car hire, purchased services, and casualties
and insurance, largely offset by decreased salaries, wages and benefits, fuel
costs and depreciation and amortization. Salaries, wages and benefits and
depreciation and amortization expenses declined as expected primarily as a
result of the restructuring, asset impairment and other charges as discussed in
the "Results of Operations" above. Fuel costs decreased due to lower fuel prices
somewhat offset by higher usage.
1998 KCSR variable operating expenses declined 1.5% as a percentage of revenues,
exclusive of 1997 restructuring, asset impairment and other charges. This
improvement relates to the increase in revenues and the continuation of
management's cost control initiatives.
Exclusive of restructuring, asset impairment and other charges of $163.8 million
in 1997, total costs and expenses would have increased only $19.3 million, or
4.6% over 1996, primarily as a result of increased fuel costs and operating
lease expenses. Diesel fuel usage increased due to both an increase in ton miles
and carloads, while fuel prices were essentially unchanged. Costs related to
fixed equipment operating leases increased as a result of the Southern Capital
transaction (note, however, that the Company records equity earnings from
Southern Capital which partially mitigates this increase).
<PAGE>31
Overall, 1997 KCSR variable operating expenses, exclusive of restructuring,
asset impairment and other charges, declined 2.9% as a percentage of revenues
from 1996 indicative of a higher rate of growth for KCSR revenues than costs.
The improved cost structure resulted from cost containment initiatives
implemented by management. Improvements in variable expenses were somewhat
offset by increases in fixed expenses, primarily related to lease expenses
associated with Southern Capital in the fourth quarter of 1996, as discussed
above.
Fuel
KCSR locomotive fuel usage represented 7.2% of KCSR operating expenses in 1998 (
7.9% in 1997, exclusive of restructuring, asset impairment and other charges).
1998 fuel costs declined $2.8 million, or 8.1%, arising from a 15% decrease in
average fuel cost per gallon (primarily due to market driven factors) partially
offset by an increase in fuel usage of 9%.
Fuel costs are affected by traffic levels, efficiency of operations and
equipment, and petroleum market conditions. Control of fuel expenses is a
constant concern of management, and fuel savings remains a top priority. To
control fuel costs, based on favorable market conditions at the end of 1995, the
Company entered into purchase commitments for approximately 50% of expected 1996
diesel fuel usage. As a result of increasing fuel prices during 1996, these
commitments saved KCSR approximately $3.7 million. Due to higher fuel prices,
minimal commitments were made for 1997. At the end of 1997, the Company entered
into purchase commitments for approximately 27% of its expected 1998 diesel fuel
usage, as well as hedge transactions (fuel swaps) for approximately 37% of its
expected 1998 usage. As a result of fuel prices remaining below the committed
price during 1998, these purchase commitments resulted in a higher cost of
approximately $1.7 million. Additionally, the Company made payments of
approximately $2.3 million relating to the fuel swap transactions as a result of
actual fuel prices remaining lower than the swap price.
At December 31, 1998, the Company has entered into purchase commitments for
approximately 32% of its expected 1999 usage. Further, the Company has entered
into fuel swap transactions for approximately 16% of expected 1999 usage. See
"Financial Instruments and Purchase Commitments" for further information.
Roadway Maintenance
Portions of roadway maintenance costs are capitalized and other portions
expensed (as components of material and supplies, purchased services and other),
as appropriate. Expenses aggregated $40, $47 and $51 million for 1998, 1997 and
1996, respectively. Maintenance and capital improvement programs are in
conformity with the Federal Railroad Administration's track standards and are
accounted for in accordance with applicable regulatory accounting rules.
Management expects to continue to fund roadway maintenance expenditures with
internally generated cash flows.
Car Hire
Expenses for car hire payable, net of receivables increased $6.2 million for the
year ended December 31, 1998 compared to 1997. This increase in net expense
results from a change in equipment utilization (i.e. as certain leases expire,
KCSR is electing to use more foreign cars rather than renewing the lease and
switching fixed payment leases to utilization leases), increased carloads, track
congestion (primarily weather-related in third and fourth quarter) and decreased
amounts of car hire receivable, primarily due to the easing of the UP congestion
prevalent in 1997. A portion of the increased car hire costs were offset by a
decrease in related operating lease expenses as a result of these changes in
equipment utilization.
Expenses for car hire payable, net of receivables declined $3.8 million, or
51.3% for the year ended December 31, 1997 compared to 1996. This reduction in
net expense results from several factors including better fleet utilization and
increased amounts of car hire receivable related to KCSR owned equipment
utilization on foreign railroads. This was particularly evident as a result of
the congestion difficulties of the UP where KCSR equipment was held on UP lines
for longer than normal periods.
<PAGE>32
Casualties and Insurance
1998 casualties and insurance expense increased $5.6 million, or 26.2%, over
1997, primarily as a result of $3.7 million in higher derailment related costs
experienced during the latter half of 1998, as well as an increase in personal
injury related expenses. A primary objective of KCSR is to operate in the safest
environment possible and efforts are ongoing to improve its safety experience.
Casualties and insurance expense declined $1.7 million, or 7.4% to $21.4 million
for the year ended December 31, 1997 compared to $23.1 million in 1996. The
reduction in casualties and insurance costs from 1996 resulted from lower
derailment costs and reduced injuries, in part, caused by KCSR ongoing safety
initiatives.
Depreciation and amortization
For the year ended December 31, 1998, KCSR depreciation and amortization expense
declined $4.1 million, or 7.5%, to $50.6 million, primarily as a result of the
reduction of amortization and depreciation expense of approximately $5.6 million
arising from the impairment of goodwill and certain branch lines held for sale
recorded during December 1997, the effect of which was not realized until 1998.
See discussion above in "Results of Operations." This decline was partially
offset by increased depreciation from property additions.
KCSR depreciation and amortization expense declined $4.4 million, or 7.4% to
$54.7 million for the year ended December 31, 1997 from $59.1 million from the
year ended December 31, 1996, primarily due to the transfer of assets to
Southern Capital during the fourth quarter of 1996, offset by 1997 capital
expenditures.
Operating Income and Operating Ratio
Exclusive of 1997 restructuring, asset impairment and other charges, KCSR's
operating income increased $28.6 million, or 33.5%, to $113.9 million in 1998
from $85.3 million in 1997. This improved operating income, which was driven by
increased revenues and the continued containment of operating expenses, resulted
in a 1998 operating ratio of 79.9% compared with 83.4% in 1997 (exclusive of
restructuring, asset impairment and other charges). The operating ratio is a
common efficiency measurement among Class I railroads and management expects to
maintain its operating ratio below 80%, despite its substantial use of lease
financing for its locomotives and rolling stock.
Exclusive of the restructuring, asset impairment and other charges in 1997,
operating income increased $6.0 million, or 8.1%, from 1996, reflecting the
impact of KCSR's increased revenues and reduced costs. These improvements were
reflected in an improved KCSR operating ratio of 83.4% for the year ended
December 31, 1997, which is below the 84.5% operating ratio for 1996. This
reflects the marked improvement made during the last six months of 1997 in which
the average operating ratio was 79.3%, as a result of increased margins arising
primarily from cost containment initiatives by management.
KCSR Interest
For the year ended December 31, 1998, interest expense decreased 6%, to $35.6
million from $37.9 million in 1997. This decrease primarily reflects the
reduction in average debt balances during the year as a result of debt
repayments.
Interest expense decreased $11.5 million, or 23.3%, to $37.9 million in 1997
from $49.4 million in 1996 due to a full year's impact of the debt reduction
associated with the Southern Capital transaction.
Gateway Western
For the year ended December 31, 1998, Gateway Western contributed $4.1 million
to the Company's net income, a $1.1 million increase ( 36.7%) over the $3.0
million contributed in 1997. Freight revenues increased $2.5 million to $45.2
million from $42.7 million in 1997, while operating expenses increased
<PAGE>33
about $0.9 million to $36.1 million. These results helped lower Gateway
Western's operating ratio to 79.9% for 1998 from 82.4% in 1997.
At December 31, 1996, while the Company awaited approval from the STB of KCSI's
purchase, Gateway Western was accounted for under the equity method as a
majority-owned unconsolidated subsidiary.
Unconsolidated Affiliates
During 1998 and 1997, the Transportation segment's unconsolidated affiliates
were comprised primarily of Grupo TFM, Mexrail, and Southern Capital. The PCRC
has yet to begin operations. During 1996, the two primary unconsolidated
affiliates were Mexrail and Southern Capital.
For the year ended December 31, 1998, the Transportation segment recorded equity
in net losses of $2.9 million from unconsolidated affiliates compared to equity
in net losses of $9.7 million in 1997. The majority of this improvement relates
to the operations of Grupo TFM. In 1998, equity in net losses related to Grupo
TFM were $3.2 million compared to equity in net losses of $12.9 million in 1997
(for the period from June 23, 1997 to December 31, 1997). This improvement in
Grupo TFM is primarily attributable to higher revenues and operating income,
coupled with a higher tax benefit associated with the devaluation of the peso
(on a U.S. GAAP accounting basis) and one-time impact of a $10 million bridge
loan fee in 1997. Equity in net losses from Mexrail were $2.0 million in 1998
compared with equity in net earnings of $0.9 million in 1997. Tex Mex revenues
increased during the first three quarters of 1998 as a result of the Emergency
Service Order; however, expenses associated with accommodating the increase in
traffic and congestion-related problems of the UP system offset this revenue
growth. In 1998, equity in net earnings from Southern Capital was $2.0 million
compared with $2.1 million in 1997.
For the year ended December 31, 1997, the Transportation segment recorded a loss
of $9.7 million from unconsolidated affiliates compared to income of $1.5
million for 1996. In 1997, estimated losses of $12.9 million (from June 23,
1997, excluding interest) related to Grupo TFM were partially offset by equity
in earnings from Southern Capital and Mexrail. Grupo TFM experienced higher than
expected revenues during 1997 based on increased carloads, offset by higher
operating expenses necessary to maintain expected customer service levels. Grupo
TFM's results included a write-off of a bridge loan commitment fee during 1997
(of which the Company recorded $2.6 million as its proportionate share).
Grupo TFM
Similar to KCSR, Grupo TFM's subsidiary, TFM, derives its freight revenues from
a wide variety of commodity movements, including chemical and petroleum,
automotive, food and grain, manufacturing industry, metals, minerals and ores
and intermodal. For the year ended December 31, 1998, revenues improved to
$431.3 million from $206.4 million for the initial period of operations (June
23, 1997 - December 31, 1997) with average monthly revenues increasing
approximately 8%. In addition, during 1998 Grupo TFM management was able to
successfully implement cost reduction strategies while continuing to increase
revenues, thus improving operating income. Most notably, salaries and wages
declined due to headcount reductions while locomotive fuel expense decreased due
to favorable fuel prices. Evidence of these improvements is reflected in TFM's
1998 operating ratio, which improved to 85.5% from approximately 94% for 1997.
Grupo TFM management believes this trend will continue in 1999 as expenses are
expected to continue to decline as a percentage of revenues through effective
cost control measures and more efficient operations. As an example, salaries and
wages are expected to decrease further during 1999 as TFM continues to improve
its operating efficiency and reduce headcount.
<PAGE>34
Other Transportation-Related Affiliates and Holding Company Components
Other subsidiaries in the Transportation segment include:
* Trans-Serve, Inc., an owner of a railroad wood tie treating facility;
* Pabtex (located in Port Arthur, Texas with deep water access to the Gulf of
Mexico), an owner and operator of a bulk materials handling facility which
stores and transfers coal and petroleum coke from trucks and rail cars to
ships and barges primarily for export;
* Mid-South Microwave, Inc., which owns and leases a 1,600 mile industrial
frequency microwave transmission system that is the primary communications
facility used by KCSR;
* Rice-Carden Corporation and Tolmak, Inc., both owning and operating various
industrial real estate and spur rail trackage contiguous to the KCSR
right-of-way;
* Southern Development Company, the owner of the executive office building in
downtown Kansas City, Missouri used by KCSI and KCSR;
* Wyandotte Garage Corporation, an owner and operator of a parking facility
located in downtown Kansas City, Missouri used by KCSI and KCSR; and
* KCSL, a wholly-owned subsidiary of the Company, serving as a holding
company for Transportation-related entities.
1998 contributions to net income from other Transportation-related affiliates
and KCSL increased $10.0 million from 1997, primarily as a result of the asset
impairment charges recorded during fourth quarter 1997 as discussed below.
Exclusive of these charges, contributions to net income increased approximately
$1.0 million.
During 1997, contributions to net income from other Transportation-related
affiliates decreased $12.4 million, primarily as a result of $14.2 million of
asset impairment charges recorded during fourth quarter 1997 relating to Pabtex
and certain real estate. In addition, Pabtex continued to experience decreased
revenues resulting from the loss of petroleum coke customers.
TRANSPORTATION SEGMENT TRENDS and OUTLOOK
Assuming no major economic deterioration occurs in the region serviced by the
Company's Transportation segment, management expects the NAFTA Railway to
continue to have an attractive service offering for shippers. KCSR and Gateway
Western 1999 carloads and revenues are expected to increase over 1998 levels and
management expects to realize continued benefits from traffic with Mexico and
the KCSR/CN/IC alliance. Variable costs are expected to continue at levels
proportionate with revenues, assuming continued success of cost containment
efforts.
The Company expects to record equity in net earnings from its investment in
Grupo TFM during 1999. Initial projections did not anticipate recording equity
in net earnings until 2000. Revenues have continued to grow since inception
(June 23, 1997) and are expected to continue to grow during 1999. Costs were
reduced significantly during 1998 compared to 1997 levels, resulting in higher
operating profit. The anticipated equity in net earnings of Grupo TFM for 1999
will be offset by interest expense associated with the debt related to the
Company's investment in Grupo TFM, which is expected to result in an overall net
loss related to the Company's investment in Grupo TFM. These expected results
for Grupo TFM are based on current projections on the valuation of the peso for
1999. Management does not make any assurances as to the impact that a change in
the value of the peso will have on the results of Grupo TFM. See "Foreign
Exchange Matters" below and Item 7(A), Quantitative and Qualitative Disclosures
About Market Risk, of this Form 10-K for further information. Management also
expects to record equity in net earnings from its Southern Capital and Mexrail
investments during 1999. Similar to Grupo TFM, Mexrail's expected equity
earnings are expected to be offset by interest expense and amortization and
result in a slight overall net loss related to the Company's investment in
Mexrail.
<PAGE>35
FINANCIAL SERVICES
The Financial Services segment ("Financial Services") contributed $152.2 million
to the Company's consolidated earnings in 1998 versus $118.0 million in 1997.
Exclusive of the one-time items recorded in both years as discussed in the
"Results of Operations" section above, earnings were $36.6 million (27%) higher
than 1997. Revenues increased $185.7 million, or 38%, over 1997, leading to
higher operating income. While operating income increased, efforts to ensure an
adequate infrastructure to provide for consistent, reliable and accurate service
to investors caused a decrease in operating margins in 1998, from 45% for the
year ended December 31, 1997 to 42% for 1998. Total assets under management
increased $41.9 billion (59%) during 1998, reaching $113.5 billion at December
31, 1998. Janus and Berger shareowner accounts exceeded three million as of
December 31, 1998, a 12% increase over 1997.
Financial Services contributed $118.0 million to the Company's consolidated
results in 1997, a $16.6 million decline from 1996. Exclusive of certain
one-time items in both years as discussed in "Results of Operations" above,
however, earnings improved 54%. Revenues increased $155.5 million over 1996,
leading to higher operating income and improved operating margins. Operating
margins increased from 40% for the year ended December 31, 1996 to 45% for 1997.
Assets under management increased 42% during 1997, reaching $71.6 billion at
December 31, 1997. Further, Janus and Berger shareowner accounts neared 2.7
million as of December 31, 1997.
<TABLE>
The following table highlights key information:
<CAPTION>
1998 1997 1996
Assets Under Management (in billions):
<S> <C> <C> <C>
JANUS
Janus Investment Funds (i) $ 75.9 $ 47.5 $ 33.2
Janus Aspen Series (ii) 6.2 3.3 1.4
Janus World Funds (iii) 0.1 - -
Janus Money Market Funds 4.8 3.8 2.5
Subadvised and private accounts 21.3 13.2 9.6
------------- -------------- -------------
Total Janus 108.3 67.8 46.7
------------- -------------- -------------
BERGER
Berger No-Load Funds 3.3 3.3 3.2
Subadvised and private accounts 0.7 0.5 0.4
------------- -------------- -------------
Total Berger 4.0 3.8 3.6
------------- -------------- -------------
NELSON 1.2 - -
------------- -------------- -------------
Total Assets Under Management $ 113.5 $ 71.6 $ 50.3
============= ============== =============
</TABLE>
(i) Excludes money market funds
(ii) The Janus Aspen Series consists of eleven portfolios offered through
variable annuity and variable life insurance contracts, and certain
qualified pension plans
(iii)Janus World Funds PLC is a group of Ireland-domiciled funds introduced in
December 1998.
<PAGE>36
<TABLE>
<CAPTION>
1998 1997 1996
Operating Results (in millions):
<S> <C> <C> <C>
Revenues:
Janus $ 626.2 $ 450.1 $ 295.3
Berger 33.5 34.9 34.6
Other 11.1 0.1 (0.3)
------------- -------------- -------------
Total $ 670.8 $ 485.1 $ 329.6
============= ============== =============
Operating Income (Loss):
Janus $ 294.1 $ 224.4 $ 136.6
Berger 0.4 (14.3) 5.7
Other (13.9) (10.9) (10.5)
------------- -------------- ------------
Total $ 280.6 $ 199.2 $ 131.8
============= ============== =============
Net Income (Loss):
Janus $ 161.4 $ 117.7 $ 70.3
Berger (3.2) (17.8) (1.2)
Other (6.0) 18.1 65.5
------------- -------------- ------------
Total $ 152.2 $ 118.0 $ 134.6
============= ============== =============
</TABLE>
Increases in Financial Services revenue and operating income are a direct result
of growth in assets under management. Assets under management and shareholder
accounts have grown in recent years from a combination of new money investments
(i.e., fund sales) and market appreciation. Fund sales have risen in response to
marketing efforts, favorable fund performance, introduction and market reception
of new products, and the current popularity of no-load mutual funds. Market
appreciation has resulted from increases in investment values.
Following is a detailed discussion of the operating results of the primary
subsidiaries comprising the Financial Services segment.
Janus Capital Corporation
In connection with its 1984 acquisition of an interest in Janus, the Company
entered into an agreement which, as amended, provides that so long as Mr.
Bailey is a holder of at least 5% of the shares of Janus and continues to be
employed as President or Chairman of the Board of Janus (or if he does not
serve as President, James P. Craig, III serves as President and Chief
Executive Officer or Co-Chief Executive Officer with Mr. Bailey), Mr. Bailey
shall continue to establish and implement policy with respect to the
investment advisory and portfolio management activity of Janus. The
agreement also provides that, in furtherance of such objective, so long as
both the ownership threshold and officer status conditions described above
are satisfied by Mr. Bailey, KCSI will vote its shares of Janus stock to
elect directors of Janus, at least the majority of whom are selected by Mr.
Bailey, subject to KCSI's approval, which approval may not be unreasonably
withheld. The agreement further provides that any change in management
philosophy, style or approach with respect to investment advisory and
portfolio management policies of Janus shall be mutually agreed upon by KCSI
and Mr. Bailey.
Notwithstanding Mr. Bailey's rights under the above agreement, Colorado law
provides that removal of an officer of a Colorado corporation may be done
directly by its shareholders if the corporation's bylaws so provide. While
Janus' bylaws contain no such provision currently, KCSI has the ability to
cause Janus to amend its bylaws to include such a provision. Under Colorado
law, KCSI could take such action at an annual meeting of shareholders or make
demand for a special meeting of shareholders. Janus is required to hold a
special shareholders' meeting upon demand from a holder of more than 10% of its
common stock and to give notice of the meeting to all shareholders. If
notice of the meeting is not given within 30 days of such a demand, the
District Court is empowered to summarily order the holding of the meeting.
As the holder of more than 80% of the common stock of Janus, KCSI has the
requisite votes to obtain approval of the required actions at such a meeting.
By carrying out the above steps, KCSI has the unilateral ability under
Colorado law to terminate the rights under the above agreement.
KCSI has no current plan or intention to take any such action to remove Mr.
Bailey and in any event expects to continue its practice of encouraging
autonomy by its subsidiaries so that the management of Janus will continue to
have responsibility for Janus' day-to-day operations and investment advisory
and portfolio management policies.
1998
In 1998, assets under management increased 59.7% to $108.3 billion as a result
of net sales of $13.4 billion and $27.1 billion in market appreciation.
Approximately $87.0 billion was invested in the Janus Investment Funds
(including money market funds), the Janus Aspen Series and the Janus World
Funds, with the remainder held by sub-advised and private accounts. Equity
portfolios comprised 94% of total assets under management at December 31, 1998.
Excluding money market funds, 1998 net sales of the Janus Investment Funds,
Janus Aspen Series and Janus World Funds were $11.3 billion and net sales of
sub-advised and private accounts totaled $1.6 billion. Total Janus shareowner
accounts increased 353,000, or 15%, to 2.7 million.
Janus' revenues, derived largely from fees based upon a percent of assets under
management, increased $176.0 million (39%) to $626.2 million in 1998, driven by
the significant growth in assets under management year to year.
Exclusive of $2.7 and $2.2 million in amortization costs attributed to Janus in
1998 and 1997, respectively, operating expenses increased 47% from $223.5
million in 1997 to $329.4 million in 1998. This increase reflects the
significant growth in assets under management and revenues, as well as Janus'
efforts to
<PAGE>37
develop its infrastructure to ensure consistent quality of service.
Approximately 47% of Janus' 1998 operating expenses were variable (e.g.,
incentive compensation, mutual fund supermarket fees, etc.), 19% were
discretionary (principally marketing, pension plan contributions, etc.) and the
remainder fixed.
A brief discussion of key expense increases follows:
o Employee compensation and benefits increased $45 million, or 40%, in 1998
compared to 1997 due to an increased number of employees (including senior
investment management, marketing and administration employees, as well as
additional shareholder servicing and technology support personnel) and
incentive compensation. Incentive compensation increased principally due to
growth in assets under management combined with strong investment
performance. In particular, portfolio management incentive compensation --
formulated to reward top investment performance -- approached its highest
possible rate in 1998 as a result of more than 93% of assets under
management ending 1998 in the top quartile of investment performance
compared to their respective peer groups (as defined pursuant to
compensation agreements).
o Alliance and mutual fund supermarket fees increased 65% in 1998 to $62.3
million. This increase was principally due to an increase in assets under
management being distributed through these channels, from $19.0 billion at
December 31, 1997 to $32.3 billion at December 31, 1998.
o Marketing, promotional and advertising expenditures increased $17.5 million
during 1998 to capitalize on generally favorable market conditions, to
respond to market volatility and to continue establishing the Janus brand.
o Depreciation and amortization increased $2.3 million in 1998 compared to
1997 due to increased infrastructure spending as discussed below.
1997
Assets under management increased 45% during 1997 to $67.8 billion as a result
of net fund sales of $10.7 billion and market appreciation of $10.4 billion.
Approximately $54.6 billion was invested in the Janus Investment Funds and the
Janus Aspen Series, with the remainder held by sub-advised and private accounts.
Equity portfolios comprised 92% of total assets under management at December 31,
1997. Total shareowner accounts grew 10% during 1997 to 2.4 million.
Driven by the increase in assets under management from 1996 to 1997, Janus
revenues improved 52% during 1997. Additionally, as a result of a slower rate of
growth in expenses compared to revenues during 1997, operating margins improved
to 50% versus 46% in 1996. Approximately 43% of Janus' 1997 operating expenses
consisted of variable costs, 18% were discretionary and the remainder
represented fixed costs. The following discussion highlights changes in key
expense categories.
o Salaries and wages increased year to year, primarily from a higher number
of employees in 1997 compared to 1996 and variable compensation tied to
investment and financial performance.
o Alliance and mutual fund supermarket fees were higher in 1997 as a result
of a greater amount of assets being distributed through these channels --
approximately 28% of Janus' December 31, 1997 assets under management were
generated through these distribution arrangements compared to 23% as of
December 31, 1996.
General
The 60% and 45% increases in assets under management in 1998 and 1997,
respectively, are attributable to several factors including, among others: (i)
strong securities markets, particularly equities; (ii) strong investment
performance across all of Janus' products; (iii) strategic marketing and public
relations; (iv)
<PAGE>38
effective use of third party distribution channels for both
retail and sub-advised products; and (v) a strong brand awareness.
During December 1998, Janus introduced the Janus World Funds PLC ("Janus
World"), a group of offshore multiclass funds modeled after certain of the Janus
Investment Funds and domiciled in Dublin, Ireland. There are currently seven
investment portfolios offered for sale, including two equity portfolios, three
fixed income portfolios, a balanced portfolio and a money market portfolio.
Total assets at December 31, 1998 were $66 million. More than 80% of sales were
made into the funds' class B shares, which require Janus to advance sales
commissions to various financial intermediaries. Payment of these commissions,
although currently minor in relation to Janus' investment holdings, may impact
future liquidity and cash resources.
Janus introduced the following domestic funds during the three year period
ended December 31, 1998:
o 1998 - Janus Global Technology Fund; Janus Global Life Sciences Fund; Janus
Aspen Growth and Income Portfolio
o 1997 - Janus Aspen Capital Appreciation Portfolio; Janus Aspen Equity
Income Portfolio
o 1996 - Janus Aspen High Yield Portfolio; Janus Equity Income Fund; Janus
Special Situations Fund
In 1998 and 1997, Janus spent $41 and $11 million, respectively, on its
infrastructure to ensure uninterrupted service to shareholders; to provide
up-to-the-minute investment and securities trading data; to improve operating
efficiency; to integrate information systems; and to obtain additional physical
space for expansion. These efforts produced, among other things:
o an enterprise-wide reporting system, producing more efficient and timely
management reporting and allowing full integration
of portfolio management, human resources, budgeting and financial systems;
o a second investor service and data center opened in Austin, Texas in 1998,
including redundant data and telephone connections to allow the facility to
operate in the event that Denver facilities and personnel become
unavailable;
o an upgrade of Janus' web site, providing shareholders the opportunity to
customize their personal Janus home page and to process most transactions
on-line; and
o improvements of physical facilities, producing a more efficient workspace
and allowing Janus to accommodate additional growth and technology.
Berger Associates, Inc.
1998
Berger reported 1998 net earnings of $3.9 million compared to $4.3 million in
1997, exclusive of interest and amortization charges attributed to Berger in
both years and the 1997 one-time charges discussed in "Results of Operations"
above. Including the interest and amortization charges in both years, Berger
reported a net loss of $3.2 million in 1998 versus a loss of $3.5 million in
1997 (exclusive of the 1997 one-time charges). Total assets under management
held by the Berger Complex of funds increased to $4.0 billion as of December 31,
1998, a 5% increase over comparable 1997. This increase was attributable to
market appreciation of $0.9 billion, largely offset by net redemptions of $0.7
billion. While total Berger shareowner accounts decreased approximately 13%
during 1998, primarily within the Berger 100 Fund, the number of accounts in the
funds introduced during 1997 and 1998 increased 88% year to year. These
fluctuations in shareholder accounts generally are indicative of recent
performance compared to peer groups.
As a result of fluctuations in the level of assets under management throughout
1998, revenues decreased approximately 4% in 1998 from 1997. Berger's 1998
operating expenses were essentially even with 1997. While reductions in
marketing costs resulted from a more targeted advertising program, these savings
were offset by higher salaries and wages resulting from an increased average
<PAGE>39
number of employees during 1998 versus 1997. Amortization expense attributed to
Berger was lower in 1998 due to reduced goodwill from the 1997 impairment
discussed previously.
Berger recorded $1.5 million in equity earnings from its joint venture
investment, BBOI, for the year ended December 31, 1998 compared to $0.6 million
in 1997. This increase reflects continued growth in BBOI assets under
management, which totaled $522 million at December 31, 1998 versus $161 million
at December 31, 1997.
1997
Berger reported net earnings of $4.3 million in 1997 compared to $5.2 million in
1996, excluding interest and amortization charges attributed to Berger in both
years and the one-time 1997 charges. Including interest and amortization, Berger
reported net losses of $3.5 and $1.2 million in 1997 and 1996, respectively.
Assets under management increased to $3.8 billion at December 31, 1997 from $3.6
billion at December 31, 1996. Shareholder accounts declined 16% from 1996,
totaling 317,400 at December 31, 1997. This decrease generally reflects
shareholder reaction to below-peer performance by certain of the larger funds.
Due to higher average assets under management during 1997, Berger experienced a
slight increase in revenues year to year. Operating costs, however, increased
more than revenues thereby resulting in a higher net loss than prior year.
Higher expenses (e.g., consulting fees and advertising) reflected Berger's
efforts to enhance product awareness and acceptance. Additionally, during 1997,
the Company increased its ownership in Berger to 100% through several
transactions by Berger and the Company. The Company recorded approximately $17.8
million in goodwill as a result of these transactions. Accordingly, amortization
expense was higher in 1997 than in 1996.
In connection with the Company's review of the recoverability of its assets, the
Company determined that $12.7 million of goodwill associated with Berger was not
recoverable as of December 31, 1997, primarily due to below-peer performance and
growth of the core Berger funds. Accordingly, a portion of the goodwill recorded
in connection with the repurchase of Berger minority interest was charged to
expense.
General
During 1998 and 1997, Berger introduced five new equity funds: the Berger Mid
Cap Value Fund; the Berger Small Cap Value Fund; the Berger Balanced Fund; the
Berger Mid Cap Growth Fund; and the Berger Select Fund. These funds held
approximately $493 million of assets under management at December 31, 1998, more
than three times the $155 million at December 31, 1997.
While the core Berger Funds (i.e., those introduced prior to 1997) experienced
declines in assets under management during 1998 and 1997, the newer Berger
offerings, as noted above, reported a growth in assets. Berger made certain
changes in the portfolio management of these core equity funds during 1998 and
1997 and believes these changes improve Berger's opportunity for growth in the
future.
At December 31, 1998 and 1997, approximately 27.6% and 26.3%, respectively, of
Berger's total assets under management were generated through mutual fund
"supermarkets."
Other Financial Services-Related Affiliates and Holding Company Components
Nelson Money Managers plc
As noted in the "Results of Operation" section above, the Company acquired
Nelson in April 1998. Nelson contributed $0.6 million to consolidated earnings
in 1998, exclusive of charges attributed to Nelson
<PAGE>40
relating to the amortization of intangibles recorded in connection with the
acquisition. Including the amortization costs, Nelson reported a net loss of
$0.7 million for the period from acquisition to December 31, 1998. Nelson
revenues -- $11.1 million for the period from acquisition to year end 1998 --
are earned based on a percentage of funds under management, together with a fee
on the client's initial investment. Operating expenses, exclusive of
amortization of intangibles, totaled $9.9 million. The intangible amounts
associated with the acquisition of Nelson are being amortized over a 20 year
period.
Equity in Earnings of DST
Exclusive of the one-time fourth quarter merger-related charges resulting from
the DST and USCS merger, equity earnings from DST increased $6.3 million to
$30.6 million for the year ended December 31, 1998. This improvement over 1997
was attributable to revenue growth resulting from a 10.7% increase in mutual
fund shareowner accounts serviced (reaching 49.8 million at December 31, 1998),
improved international operating results and higher operating margins year to
year (15.1% versus 14.2% in 1997).
As discussed in the "Recent Developments" section above, fourth quarter and year
ended 1998 include a one-time $23.2 million (after-tax, $0.21 per share)
non-cash charge resulting from the merger of a wholly-owned subsidiary of DST
and USCS. This charge reflects the Company's reduced ownership of DST (from 41%
to approximately 32%), together with the Company's proportionate share of DST
and USCS fourth quarter merger-related costs.
Equity in net earnings of DST for the year ended December 31, 1997 totaled $24.3
million. Exclusive of the 1996 one-time gain on the Continuum merger discussed
in "Results of Operations" above, equity earnings from DST increased 48% year to
year. This increase in DST earnings reflects an increase in 1997 DST revenues
compared to 1996 (improvements in both domestic and international revenues) and
improved operating margins in 1997 (14.2% versus 9.8% in 1996).
Interest Expense and Other, net
Fluctuations in interest expense from 1996 through 1998 reflect changes in the
average debt balances during the respective years. In 1998, average debt
balances were lower than 1997 as repayments reduced outstanding balances early
in 1998; accordingly, 1998 interest expense declined from 1997. Interest expense
in 1997 was higher than 1996 as a result of borrowings in connection with KCSI
common stock repurchases. All of the indebtedness incurred to repurchase KCSI
common stock was allocated to the Financial Services segment.
Other, net increased in 1998 versus 1997 as a result of an $8.8 million (pretax)
gain on the sale of Janus' 50% interest in IDEX Management, Inc. ("IDEX"). Janus
continues as sub-advisor to the five portfolios in the IDEX group of mutual
funds it served prior to the sale. This gain was partially offset by reduced
1998 other income recorded at the Financial Services holding company level
relating to a sales agreement with a former affiliate. The change in other, net
between 1997 and 1996 was not material.
FINANCIAL SERVICES TRENDS and OUTLOOK
Future growth of the Company's Financial Services revenues and operating income
will be largely dependent on prevailing financial market conditions, relative
performance of Janus, Berger and Nelson products, introduction and market
reception of new products, as well as other factors, including changes in the
stock and bond markets, increases in the rate of return of alternative
investments, increasing competition as the number of mutual funds continues to
grow, and changes in marketing and distribution channels.
<PAGE>41
As a result of the rapid revenue growth during the last two years, operating
margins for the Financial Services segment have been strong. Management expects
that Financial Services will experience margin pressures in the future as the
various subsidiaries strive to ensure that the operational and administrative
infrastructure continues to meet the high standards of quality and service
historically provided to investors. Additionally, a higher rate of growth in
costs compared to revenues is expected in connection with Nelson's efforts to
expand its operations.
The Company expects to continue to participate in the earnings or losses from
its DST investment.
LIQUIDITY
<TABLE>
Summary cash flow data is as follows (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows provided by (used for):
Operating activities $ 222.8 $ 233.8 $ 121.0
Investing activities (154.6) (409.3) 20.9
Financing activities (74.5) 186.1 (150.8)
----------- ----------- -----------
Net increase (decrease) in
cash and equivalents (6.3) 10.6 (8.9)
Cash and equivalents at beginning of year 33.5 22.9 31.8
----------- ----------- -----------
Cash and equivalents at end of year $ 27.2 $ 33.5 $ 22.9
=========== =========== ===========
</TABLE>
Operating Cash Flows. The Company's cash flow from operations has historically
been positive and sufficient to fund operations, KCSR roadway capital
improvements, other capital improvements and debt service. External sources of
cash -- principally negotiated bank debt, public debt and sales of investments
- -- have typically been used to fund acquisitions, new investments, equipment
additions and Company stock repurchases.
The following table summarizes consolidated operating cash flow information.
Certain reclassifications have been made to prior years' information to conform
to current year presentation.
<TABLE>
(in millions):
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income (loss) $ 190.2 $ (14.1) $ 150.9
Depreciation and amortization 73.5 75.2 76.1
Equity in undistributed earnings (16.8) (15.0) (66.4)
Reduction in ownership of DST 29.7 - -
Restructuring, asset impairment and
other charges - 196.4 -
Deferred income taxes 23.2 (16.6) 18.6
Gains on sales of assets (20.2) (6.9) (2.6)
Minority interest in consolidated earnings 0.6 12.0 5.2
Change in working capital items (59.5) (7.4) (74.2)
Other 2.1 10.2 13.4
----------- ----------- -----------
Net operating cash flow $ 222.8 $ 233.8 $ 121.0
=========== =========== ===========
</TABLE>
1998 operating cash flows decreased by approximately $11.0 million from 1997.
This decrease was largely attributable to the first quarter 1998 KCSR payment
with respect to the productivity fund liability, lower interest payable as a
result of reduced indebtedness during 1998 and declines in contract
<PAGE>42
allowances and prepaid freight charges due other railroads. Also, due to
quarterly dividend payments by Janus in 1998 (in contrast to annual dividends in
previous years), minority interest in consolidated earnings did not increase as
it did in 1997. These decreases in operating cash flows from year to year were
offset by higher ongoing earnings (approximately $69 million) and increased
deferred tax expense (due to benefits booked in 1997 in connection with
restructuring, asset impairment and other charges).
Operating cash flows for the year ended December 31, 1997 nearly doubled when
compared to the prior year, primarily because of 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. Also, exclusive of the restructuring, asset impairment and other
charges recorded in fourth quarter 1997, the one-time Continuum gain in 1996 and
equity earnings from unconsolidated affiliates for both years, earnings were
approximately $44.0 million higher in 1997 than 1996.
Investing Cash Flows. Cash was used for the following investing activities: i)
property acquisitions of $105, $83, and $144 million in 1998, 1997, and 1996,
respectively; and ii) investments in and loans with affiliates of $25, $304, and
$42 million in 1998, 1997 and 1996, respectively. Included in the 1997
investments in affiliates was the Company's approximate $298 million capital
contribution to Grupo TFM.
Due to growth throughout the 1996 to 1998 period, Janus had invested an
additional $43, $35 and $39 million in short-term investments representing
invested cash at December 31, 1998, 1997 and 1996, respectively. Also, cash
received during 1996 in connection with the Southern Capital joint venture
formation and associated transactions (approximately $217 million, after
consideration of related income taxes) is included as proceeds from disposal of
property and from disposal of other investments based on the underlying assets
contributed/sold to Southern Capital.
Generally, operating cash flows and borrowings under lines of credit have been
used to finance property acquisitions and investments in and loans with
affiliates during the period from 1996 to 1998.
Financing Cash Flows. Financing cash flows include: (i) borrowings of $152,
$340, and $234 million in 1998, 1997 and 1996, respectively; (ii) repayment of
indebtedness in the amounts of $239, $110 and $233 million in 1998, 1997 and
1996, respectively; (iii) proceeds from stock plans of $30, $27 and $15 million
in 1998, 1997 and 1996, respectively; and (iv) cash dividends of $18, $15 and
$15 million in 1998, 1997 and 1996, respectively.
During 1998, proceeds from borrowings under existing lines of credit were used
to repay $100 million of 5.75% Notes which were due on July 1, 1998. Other 1998
borrowings were used to fund the KCSR union productivity fund termination ($23
million), for a portion of the Nelson acquisition ($24 million) and for working
capital purposes ($5 million). 1997 debt proceeds were used to fund the $298
million Grupo TFM capital contribution, repurchase Company common stock ($39
million) and for additional investment in Berger ($3 million). Proceeds from the
issuance of debt in 1996 were used for stock repurchases ($151 million),
additional investment in Berger ($24 million) and for working capital purposes
($59 million, including payments of federal and state income taxes associated
with the DST public offering).
During 1998, repayments of scheduled maturities (except for the $100 million
5.75% Notes discussed above) and outstanding lines of credit were funded through
operating cash flows. In 1997, operating cash flows were used to reduce amounts
outstanding under the Company's lines of credit. In 1996, proceeds
(approximately $217 million, after consideration of income taxes) received in
connection with the Southern Capital joint venture formation and associated
transactions were used to repay outstanding amounts under the Company's lines of
credit.
Repurchases of Company common stock during 1997 ($50 million) and 1996 ($151
million) were funded with borrowings under existing lines of credit (as noted
above), proceeds received from the DST public offering and repayment by DST of
indebtedness to KCSI, and the $150 million dividend from DST in 1995.
<PAGE>43
See discussion under "Financial Instruments and Purchase Commitments" for
information relative to certain anticipated 1999 cash expenditures. Also see
information under "Minority Purchase Agreements" for information relative to
other existing contingencies.
CAPITAL STRUCTURE
Capital Requirements. The Company has traditionally funded KCSR capital
expenditures using Equipment Trust Certificates for major purchases of
locomotive and rolling stock, while using internally generated cash flows or
leasing for other equipment. Capital improvements for KCSR roadway track
structure have historically been funded with cash flows from operations. KCSR
has, however, increasingly used lease financing alternatives for its locomotive
and rolling stock. Capital requirements for Janus, Berger, Nelson, and holding
company and other subsidiaries have been funded with cash flows from operations
and negotiated term financing. The Company has the ability to finance railroad
equipment through its Southern Capital joint venture.
Capital programs from 1996 to 1998 were primarily financed through internally
generated cash flows. These internally generated cash flows were used to finance
KCSR capital expenditures in 1998 ($65 million), 1997 ($68 million) and 1996
($135 million). The same source used for funding the Company's 1998 capital
programs are expected to be used in funding 1999 capital programs, currently
estimated at $123 million.
During 1998, Janus opened a new facility in Austin, Texas as an Investor Service
and Processing Center for transfer agent operations, allowing for continuous
service in the event the Denver facility is unavailable. Also, in 1998 and 1997,
Janus upgraded and expanded its information technology and facilities
infrastructure. These efforts were generally funded with existing cash flows.
<TABLE>
Capital. Components of capital are shown as follows (in millions):
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Debt due within one year $ 10.7 $ 110.7 $ 7.6
Long-term debt 825.6 805.9 637.5
---------- ----------- -----------
Total debt 836.3 916.6 645.1
Stockholders' equity 931.2 698.3 715.7
---------- ----------- -----------
Total debt plus equity $ 1,767.5 $ 1,614.9 $ 1,360.8
========== =========== ===========
Total debt as a percent of total debt plus equity 47.3% 56.8% 47.4%
---------- ----------- -----------
</TABLE>
At December 31, 1998, the Company's consolidated debt ratio (total debt as a
percent of total debt plus equity) decreased 9.5 percentage points to 47.3%
compared to December 31, 1997. Total debt decreased $80.3 million as repayments
exceeded borrowings. Stockholder's equity increased $232.9 million primarily as
a result of $190.2 million in earnings, $24.1 million in non-cash equity
adjustments related to unrealized gains (net of tax) on "available for sale"
securities and stock options exercised of approximately $33.5 million, partially
offset by dividends paid of $17.8 million. This increase in stockholders' equity
coupled with the decrease in debt resulted in the decrease in the debt ratio
from December 31, 1997.
Management anticipates that the debt ratio will decrease during 1999 as a result
of continued debt repayments and profitable operations. Note, however, that
unrealized gains on "available for sale"
<PAGE>44
securities, which are included net of deferred taxes as accumulated other
comprehensive income in stockholders' equity, are contingent on market
conditions and thus, are subject to significant fluctuations in value.
Significant declines in the value of these securities would negatively impact
stockholders' equity and increase the Company's debt ratio.
The Company's consolidated debt ratio increased by 9.4 percentage points from
December 31, 1996 to December 31, 1997. Total debt increased $271.5 million
during 1997, primarily as a result of borrowings to fund the Company's
investment in Grupo TFM and common stock repurchases, partially offset by
repayments on outstanding lines of credit. Stockholders' equity decreased by
$17.4 million, reflecting the Company's net loss for 1997 and essentially
offsetting capital stock transactions (e.g., issuances of common stock, common
stock repurchases, non-cash equity adjustments related to unrealized gains,
etc.). The combination of increased debt and reduced equity resulted in a higher
consolidated debt ratio in 1997 than 1996.
Debt Securities Registration and Offerings. The U.S. Securities and Exchange
Commission declared the Company's Registration Statement on Form S-3 (File No.
33-69648) effective April 22, 1996, registering $500 million in securities.
However, no securities have been issued. The securities may be offered in the
form of Common Stock, New Series Preferred Stock $1 par value, Convertible Debt
Securities or other Debt Securities (collectively, "the Securities"). It is
expected that any net proceeds from the sale of the Securities would be added to
the general funds of the Company and used principally for general corporate
purposes, including working capital, capital expenditures, and acquisitions of
or investments in businesses and assets.
KCSI Credit Agreements. On May 5, 1995, the Company established a credit
agreement in the amount of $400 million, comprised of a $300 million five-year
facility and a $100 million 364-day facility. The $300 million facility was
renewed in May 1997, extending through May 2002, while the $100 million facility
is expected to be renewed annually. Proceeds of these facilities have been and
are anticipated to be used for general corporate purposes. The agreements
contain a facility fee ranging from .07-.25% per annum and interest rates below
prime. Additionally, in May 1998, the Company established a $100 million 364-day
credit agreement assumable by the Financial Services segment for its use upon
separation of the Company's two segments. This facility is expected to be
renewed annually and proceeds of this facility have been and are anticipated to
be used to repay Company debt and for general corporate purposes. This agreement
contains a facility fee of .15% and interest rates below prime. The Company also
has various other lines of credit totaling $106 million. These additional lines,
which are available for general corporate purposes, have interest rates below
prime and terms of less than one year. At December 31, 1998, the Company had
borrowings of $343 million under its various lines of credit leaving $263
million available for use, subject to any limitations within existing financial
covenants.
As discussed earlier, the Company funded its proportionate amount (approximately
$298 million) of the TFM purchase price payment made by Grupo TFM to the Mexican
Government using borrowings under its lines of credit.
Minority Purchase Agreements. Agreements between KCSI and certain Janus minority
owners contain, among other provisions, mandatory stock purchase provisions
whereby under certain circumstances, KCSI would be required to purchase the
minority interest of Janus. If all of the provisions of the Janus minority owner
agreements became effective, KCSI would be required to purchase the respective
minority interests at a cost estimated to be approximately $456 million as of
December 31, 1998, compared to $337 and $220 million at December 31, 1997 and
1996, respectively. Management is currently exploring various financing
alternatives available in the event this would be required.
<PAGE>45
Overall Liquidity. The Company believes it has adequate resources available -
including sufficient lines of credit (within the financial covenants referred to
below), businesses which have historically been positive cash flow generators,
and the $500 million Shelf Registration Statement - to meet anticipated
operating, capital and debt service requirements and other commitments. As
discussed earlier, there exists a possible capital call if certain Grupo TFM
benchmarks are not met.
During the 1996 to 1998 period, the Company continued to strengthen its
strategic positions in the Transportation and Financial Services businesses. The
Southern Capital joint venture transactions, which resulted in repayment of the
majority of borrowings then outstanding under the Company's lines of credit,
provided the Company with flexibility as to future financing requirements (e.g.,
the 1997 investment in Grupo TFM). Additionally, based on DST's stated dividend
policy, the Company does not anticipate receiving any dividends from DST in the
foreseeable future. Furthermore, based on the current debt structure of Grupo
TFM, the Company does not anticipate receiving any dividends from Grupo TFM in
the foreseeable future.
The Company's cash management approach generally reflects efforts to minimize
cash balances. Cash not required for immediate operating or investing activities
will be utilized to repay indebtedness under lines of credit. This approach is
used to help mitigate the Company's floating-rate debt exposure to fluctuations
in interest rates.
The Company's credit agreements contain, among other provisions, various
financial covenants. The Company was in compliance with these various
provisions, including the financial covenants, as of December 31, 1998. Because
of certain financial covenants contained in the credit agreements, however,
maximum utilization of the Company's available lines of credit may be
restricted.
As discussed above in the "Recent Developments", the Company has the option to
purchase a portion of the Mexican Government's 20% interest in TFM at a
discount. Management is currently exploring various financing alternatives
available to fund this transaction in the event it elects to exercise this
option.
As discussed in the "Results of Operations" 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); however, this provision is not
exercisable prior to October 31, 2003. 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.
Pursuant to contractual agreement, Janus is required to distribute at least 90%
of its net income to its shareholders each year. The Company uses its portion of
these dividends in accordance with its strategic plans, which have included,
among others, repayment of KCSI indebtedness, repurchase of Company common stock
and investments in affiliates. Additionally, Janus' agreement with the Janus
World group of offshore funds includes an arrangement by which investors
purchases of Janus World class B shares require a commission to be advanced by
Janus. Although advanced commissions were not material to the December 31, 1998
consolidated financial statements, required funding could become significant in
future years.
As discussed in the "Recent Developments" above, the Company announced a planned
separation of its Transportation and Financial Services businesses. The Company
is pursuing this separation subject to receipt of a favorable tax ruling from
the IRS and other relevant factors. The Company is currently investigating the
potential impact of the proposed transaction on the liquidity and capital
structure of the Company and expects that this impact will be material.
<PAGE>46
OTHER
Year 2000. The Year 2000 discussion below contains forward-looking statements,
including those concerning the Company's plans and expected completion dates,
cost estimates, assessments of Year 2000 readiness for the Company as well as
for third parties, and the potential risks of any failure on the part of the
Company or third parties to be Year 2000 ready on a timely basis.
Forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ from those projected. See the "Overview"
section for additional information.
While the Company continues to evaluate and pursue discussions with its various
customers, partners and vendors with respect to their preparedness for Year 2000
issues, no assurance can be made that all such parties will be Year 2000 ready.
While the Company cannot fully determine its impact, the inability to complete
Year 2000 readiness for its computer systems could result in significant
difficulties in processing and completing fundamental transactions. In such
events, the Company's results of operations, financial position and cash flows
could be materially adversely affected.
Many existing computer programs and microprocessors that use only two digits
(rather than four) to identify a year could fail or create erroneous results
with respect to dates after December 31, 1999 if not corrected to read all four
digits. This computer program flaw is expected to affect all companies and
organizations, either directly (through a company's own computer programs or
systems that use computer programs, such as telephone systems) or indirectly
(through customers and vendors of the company).
These Year 2000 related issues are of particular importance to the Company. The
Company depends upon its computer and other systems and the computers and other
systems of third parties to conduct and manage the Company's Transportation and
Financial Services businesses. Additionally, the Company's products and services
are heavily dependent upon using accurate dates in order to function properly.
These Year 2000 related issues may also adversely affect the operations and
financial performance of one or more of the Company's customers and suppliers.
As a result, the failure of the Company's computer and other systems, products
or services, the computer systems and other systems upon which the Company
depends, or the Company's customers or suppliers to be Year 2000 ready could
have a material adverse impact on the Company's results of operations, financial
position and cash flows. The Company is unable to assess the extent or duration
of that impact at this time, but they could be substantial.
In 1997, the Company and its key subsidiaries formed project teams comprised of
employees and third party consultants to identify and resolve the numerous
issues surrounding the Year 2000. The project teams, which are supervised by
members of senior management, regularly report their progress toward remediating
Year 2000 issues to management and the Company's Board of Directors. The areas
in which the project teams are focusing most of their efforts are information
technology ("IT") systems, non-IT systems, and third party issues. The project
teams also provide comprehensive corporate tracking, coordination and monitoring
of all Year 2000 activities. As part of resolving any potential Year 2000
issues, the Company expects to: identify all computer systems, products,
services and other systems (including systems provided by third parties) that
must be modified; evaluate the alternatives available to make any identified
systems, products or services Year 2000 ready (including modification,
replacement or abandonment); complete the modifications and/or replacement of
identified systems; and conduct adequate testing of the systems, products and
services, including testing of certain key systems used by various North
American railroads and interoperability testing with clients and key
organizations in the financial services industry.
The following provides a summary of each area and the progress toward
identifying and resolving Year 2000 issues:
IT Systems. In the Transportation segment, all IT systems, including
mission critical systems and non-critical systems have been analyzed and
are in the process of being modified and tested for Year 2000 readiness. To
date, management believes that approximately 99% of the necessary
remediation and 94% of the testing has been completed. Final remediation
and testing for certain non-critical support
<PAGE>47
systems has been completed and management believes these systems are Year
2000 ready. Final remediation and testing of mission critical systems is
scheduled for completion by the end of June 1999.
In addition, the IT hardware and software necessary to operate the
mainframe computer and associated equipment are currently being evaluated
for Year 2000 issues. A compilation of the hardware and software
inventories was completed in 1998. The hardware and software, including the
completion of integrated testing of the infrastructure software and network
components, are expected to be Year 2000 ready by September 30, 1999.
The IT systems (including mission critical and significant non-critical
operating, accounting and supporting systems) and underlying hardware for
the companies comprising the Financial Services segment have been analyzed
and are being modified and tested for Year 2000 readiness. Management
believes that approximately 70% of mission critical systems, and 75% of all
systems, have been tested and are believed to be Year 2000 ready. Final
remediation and testing is expected to be completed by the end of second
quarter 1999.
Non-IT Systems. All equipment that contains an internal clock or embedded
micro-processor is being analyzed for Year 2000 readiness. This includes
PC's, software, fax machines, telephone systems, elevator systems, security
and fire control systems, locomotives, signal and communications systems
and other miscellaneous equipment. Replacement and upgrades of this type of
equipment is underway and expected to be completed for both segments of the
Company by June 30, 1999.
As of December 31, 1998, management believes that 53% of all PC's and 74%
of related software in the Transportation companies were Year 2000 ready.
In addition, all customized programs and external data interfaces are being
evaluated, modified and tested for Year 2000 readiness, as are locomotives,
signals and communication systems and other equipment with internal clocks
and embedded micro-processors.
As of December 31, 1998, approximately 60% of replacement and/or upgrade
efforts on the Financial Services hardware and software inventory have been
completed.
Third Party Systems. Both segments of the Company depend heavily on third
party systems in the operation of their businesses. As part of the Year
2000 project, significant third party relationships are being evaluated to
determine the status of their Year 2000 readiness and the potential impact
on the Company's operations if those significant third parties fail to
become Year 2000 ready. Questionnaires have been sent to critical
suppliers, major customers, key banking and financial institutions, utility
providers and interchange railroads to determine the status of their Year
2000 readiness.
The Transportation companies are working with the Association of American
Railroads ("AAR") and other AAR-member railroads to coordinate the testing
and certification of the systems administered by the AAR. These systems,
including interline settlement, shipment tracing and waybill processing are
relied on by a number of North American railroads and their customers.
Initial testing between railroads started during second quarter 1998 and
these systems are expected to be Year 2000 ready on a timely basis.
Similarly, the Financial Services entities are participating in various
industry-wide efforts (e.g., trading and account maintenance, trade
execution, confirmation, etc.) to facilitate testing of Year 2000
preparedness and reliability. Additionally, Janus and Berger are required
to periodically report to the SEC their progress with respect to Year 2000
preparedness.
Based upon the responses received to the questionnaires and ongoing
discussions with these third parties, the Company believes that the
majority of the significant customers, banking and financial institutions,
suppliers and interchange railroads are or will be Year 2000 ready in all
material respects by mid-1999. The Company does not anticipate, however,
performing significant independent testing procedures to verify that the
information received by the Company from these third parties is accurate
<PAGE>48
(except for the above mentioned industry-wide testing efforts). For those
third parties who have not responded or who have expressed uncertainty as
to their Year 2000 readiness, management is exploring alternatives to limit
the impact this will have on the Company's operations and financial
results. The Company will continue to monitor its third party relationships
for Year 2000 issues.
DST, an approximate 32% owned equity investment, provides various services
to Janus and Berger. DST has completed its review and evaluation of its
mission critical U.S. shareowner accounting and U.S. portfolio accounting
related products, services and internal systems and believes it has
achieved material Year 2000 readiness in such products, services and
systems as of December 31, 1998. The Company anticipates internal readiness
for all of its other mission critical systems and products by September 30,
1999. Additionally, DST intends on testing its systems with clients and
other third parties for Year 2000 related issues as needed throughout 1999.
DST is developing contingency plans for its U.S. shareowner accounting and
U.S. portfolio accounting business units (with testing expected to be
completed by June 30, 1999), as well as for other mission critical
products, services and systems. Formal contingency plans for DST's
Winchester and Poindexter Data Centers have been completed.
Testing and Documentation Procedures. All material modifications to IT and
non-IT systems are being documented and maintained by the project teams for
purposes of tracking the Year 2000 project and as a part of the Company's due
diligence process. All modified systems have been or are in the process of being
tested for Year 2000 remediation, unit acceptance, system acceptance and user
acceptance. The testing procedures used and the results of these tests are being
documented and maintained as a part of the Year 2000 due diligence process.
The project teams meet regularly to discuss their progress and ensure that all
issues and problems are identified and properly addressed. Quarterly meetings
are held with senior management to keep them apprised of the progress of the
Year 2000 project.
Year 2000 Risks. The Company continues to evaluate the principal risks
associated with its IT and non-IT systems, as well as third party systems if
they were not to be Year 2000 ready on a timely basis. Areas that could be
affected include, but are not limited to, the ability to: accurately track
pricing and trading information, obtain and process customer orders and investor
transactions, properly track and record revenue movements (including train
movements), order and obtain critical supplies, and operate equipment and
control systems. These risks are presently under assessment and the Company has
no basis to form an estimate of costs or lost revenues at this time.
The Company believes, however, that the risks involved with the successful
completion of its Year 2000 conversion relate primarily to available resources
and third party readiness. The key success factors include the proper quality
and quantity of human and capital resources to address the complexity and costs
of the project tasks. The Company has allocated substantial resources to the
Year 2000 project and believes that it is adequately staffed by employees,
consultants and contractors. The inability to complete Year 2000 readiness for
the computer systems of the Company could result in significant difficulties in
processing and completing fundamental transactions.
In addition, the Company is taking precautions to ensure its third party
relationships have been adequately addressed. Based on work performed and
information received to date, the Company believes its key suppliers, customers
and other significant third party relationships will be prepared for the Year
2000 in all material respects within an acceptable time frame (or that
acceptable alternatives will be available); however, management of the Company
makes no assurances that all such parties will be Year 2000 ready within an
acceptable time frame.
In the event that the Company or key third parties are not Year 2000 ready, the
Company's results of operations, financial position and cash flows could be
materially adversely affected.
<PAGE>49
Contingency Plans. The Company and its subsidiaries are in the process of
identifying alternative plans in the event that the Year 2000 project is not
completed on a timely basis or otherwise does not meet anticipated needs. A
business contingency planning specialist was hired by KCSR and is working on the
contingency plans for critical business processes. Similarly, consulting
professionals have been utilized by Janus, Berger and Nelson in connection with
Year 2000 efforts, including contingency planning. The Company is also making
alternative arrangements in the event that critical suppliers, customers,
utility providers and other significant third parties are not Year 2000 ready.
The contingency planning process is scheduled to be completed by July 1999.
In addition, information system black out periods have been scheduled at the
various Company subsidiaries, generally from third quarter 1999 through second
quarter 2000. During this period, the project team and other members of the
information systems group will focus all of their efforts and time toward
addressing Year 2000 related issues. No new project requests or
hardware/software upgrades will be allowed during this time.
Year 2000 Costs. To date, the Company has spent approximately $10.9 million in
connection with ensuring that all Company and subsidiary computer programs are
compatible with Year 2000 requirements. In addition, the Company anticipates
future spending of approximately $11 million in connection with this process.
Current accounting principles require all costs associated with Year 2000 issues
to be expensed as incurred. A portion of these costs will not result in an
increase in expense to the Company because existing employees and equipment are
being used to complete the project.
Financial Instruments and Purchase Commitments. During 1995, the Company entered
into a forward stock purchase contract as a means of securing a potentially
favorable price for the repurchase of six million shares of its common stock.
During 1997 and 1996, the Company purchased 2.4 and 3.6 million shares,
respectively, under this contract at an aggregate cost of $39 and $56 million
(including transaction premium), respectively.
From time to time, KCSR enters into forward purchase commitments for diesel fuel
as a means of securing volumes and reducing overall cost. The contracts normally
require KCSR to purchase certain quantities of diesel fuel at defined prices
established at the origination of the contract. As noted earlier, these
commitments saved KCSR approximately $3.7 million in operating expenses in 1996.
Minimal commitments were negotiated for 1997 because of higher fuel costs. At
the end of 1997, KCSR entered into purchase commitments for diesel fuel for
approximately 27% of 1998 expected usage. As a result of fuel prices remaining
below the committed price during 1998, these purchase commitments resulted in a
higher cost in 1998 of approximately $1.7 million.
KCSR has a program to hedge against fluctuations in the price of its diesel fuel
purchases. Beginning in 1998, KCSR entered into fuel swaps for approximately two
million gallons per month, or 37% of its anticipated 1998 fuel requirements. The
fuel swap contracts had expiration dates through February 28, 1999 and are
correlated to market benchmarks. Hedge positions are monitored to ensure that
they will not exceed actual fuel requirements in any period. During 1998, KCSR
made payments of approximately $2.3 million relating to these fuel swap
transactions as a result of actual fuel prices remaining lower than the fuel
swap price.
As of December 31, 1998, KCSR has entered into purchase commitments for
approximately 32% of its expected 1999 usage and has entered into fuel swap
transactions for approximately 16% of its expected 1999 fuel usage. These
transactions are intended to mitigate the impact of rising fuel prices and will
be recorded using hedge accounting policies as set forth in Note 1 to the
consolidated financial statements of this Form 10-K.
In general, the Company enters into transactions such as those discussed above
in limited situations based on management's assessment of current market
conditions and perceived risks. Historically, the Company has engaged in a
limited number of such transactions and their impact has been insignificant.
<PAGE>50
However, the Company intends to respond to evolving business and market
conditions in order to manage risks and exposures associated with the Company's
various operations, and in doing so, may enter into transactions similar to
those discussed above.
Foreign Exchange Matters. In connection with the Company's investment in Grupo
TFM, a Mexican company, and Nelson, an 80% owned subsidiary with operations in
the United Kingdom, matters arise with respect to financial accounting and
reporting for foreign currency transactions and for translating foreign currency
financial statements 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.
The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, Grupo TFM was exposed to fluctuations in
the U.S. dollar/Mexican peso exchange rate. In the event that the proceeds from
the various financing arrangements did not provide funds sufficient for Grupo
TFM to complete the purchase of TFM, the Company may have been required to make
additional capital contributions to Grupo TFM. Accordingly, in order to hedge a
portion of the Company's exposure to fluctuations in the value of the Mexican
peso versus the U.S. dollar, the Company entered into two separate forward
contracts to purchase Mexican pesos - $98 million in February 1997 and $100
million in March 1997. 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.
During 1997 and 1998, Mexico's economy was classified as "highly inflationary"
as defined in SFAS 52. Accordingly, the U.S. dollar was assumed to be Grupo
TFM's functional currency, and any gains or losses from translating Grupo TFM's
financial statements into U.S. dollars were included in the determination of its
net income. Equity losses from Grupo TFM included in the Company's results of
operations reflect the Company's share of such translation gains and losses.
Effective January 1, 1999, the SEC staff declared that Mexico should no longer
be considered a highly inflationary economy. Accordingly, the Company is in the
process of performing an analysis under the guidance of SFAS 52 to determine
whether the U.S. dollar or the Mexican peso should be used as the functional
currency for financial accounting and reporting purposes for periods subsequent
to December 31, 1998. Information for this analysis is currently being compiled
and reviewed. Management expects to complete this analysis by the end of the
first quarter 1999. If the peso is determined to be the appropriate functional
currency, the effect of translating Grupo TFM's 1999 financial statements could
have a material impact on the Company's results of operations and financial
position.
The Company completed its acquisition of 80% of Nelson on April 20, 1998.
Nelson's principal operations are in the United Kingdom and, therefore, its
financial statements are accounted for using the British pound as the functional
currency. Any gains or losses arising from transactions not denominated in the
British pound are recorded as a foreign currency gain or loss and included in
the results of operations of Nelson. The translation of Nelson's financial
statements from the British pound into the U.S. dollar results in an adjustment
to stockholders' equity as a cumulative translation adjustment. At December 31,
1998, the cumulative translation adjustment was not material.
The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Grupo TFM and Nelson as market conditions change or exchange rates fluctuate. At
December 31, 1998, the Company had no outstanding foreign currency hedging
instruments.
<PAGE>51
New Accounting Pronouncements. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities measured at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999
and should not be retroactively applied to financial statements of periods prior
to adoption.
KCSR currently has a program to hedge against fluctuations in the price of
diesel fuel purchases, and also enters into fuel purchase commitments from time
to time. In addition, the Company continues to evaluate alternatives with
respect to utilizing foreign currency instruments to hedge its U.S. dollar
investments in Grupo TFM and Nelson as market conditions change or exchange
rates fluctuate. Currently, the Company has no outstanding foreign currency
hedges. The Company is reviewing the provisions of SFAS 133 and expects adoption
by the required date. The adoption of SFAS 133 with respect to existing hedge
transactions is not expected to have a material impact on the Company's results
of operations, financial position or cash flows.
Statement of Financial Accounting Standards No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106" ("SFAS 132") was adopted by the Company in 1998 and prior year
information has been included pursuant to SFAS 132. SFAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. The standard does not change the measurement or
recognition of pension or postretirement benefit plans. The adoption of SFAS 132
did not have a material impact on the Company's disclosures.
In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the manner in
which public business enterprises report information about operating segments in
annual financial statements and requires disclosure of selected information
about operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
have a material impact on the disclosures of the Company. Segment financial
information is included in Note 13, Industry Segments, to the consolidated
financial statements included under Item 8 of this Form 10-K and prior year
information has been restated according to the provisions of SFAS 131.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and disclosure of comprehensive
income and its components in the financial statements. Prior year information
has been included pursuant to SFAS 130. The Company's other comprehensive income
consists primarily of unrealized gains and losses relating to investments held
as "available for sale" securities as defined by SFAS 115. The Company records
its proportionate share of any unrealized gains or losses related to these
investments, net of deferred taxes, in stockholders' equity as accumulated other
comprehensive income. The unrealized gain related to these investments increased
$40.3 million, $42.6 million and $30.1 million ($24.1 million, $25.9 million and
$18.5 million, net of deferred taxes) for the years ended December 31, 1998,
1997 and 1996, respectively.
In Issue No. 96-16, the Emerging Issues Task Force ("EITF 96-16") of the FASB,
reached a consensus that substantive minority rights which provide the minority
shareholder with the right to effectively control significant decisions in the
ordinary course of an investee's business could impact whether the majority
shareholder should consolidate the investee. After evaluation of the rights
of the minority shareholders of its consolidated subsidiaries and in particular
the contractual rights of Mr. Bailey described above, KCSI management concluded
that application of EITF 96-16 did not affect KCSI's consolidated financial
statements. See Note 12 to the Consolidated Financial Statements. This
conclusion as it relates to Janus is currently under discussion with the Staff
of the Securities and Exchange Commission and, accordingly, is subject to
change.
<PAGE>52
In 1998, the Company adopted the guidance outlined in American Institute of
Certified Public Accountant's Statement of Position 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1").
SOP 98-1 requires that computer software costs incurred in the preliminary
project stage, as well as training and maintenance costs be expensed as
incurred. This guidance also requires that direct and indirect costs associated
with the application development stage of internal use software be capitalized
until such time that the software is substantially complete and ready for its
intended use. Capitalized costs are to be amortized on a straight line basis
over the useful life of the software. The adoption of this guidance did not have
a material impact on the Company's results of operations, financial position or
cash flows.
Litigation. The Company and its subsidiaries are involved as plaintiff or
defendant in various legal actions arising in the normal course of business.
While the ultimate outcome of the various legal proceedings involving the
Company and its subsidiaries cannot be predicted with certainty, it is the
opinion of management (after consultation with legal counsel) that the Company's
litigation reserves are adequate and that these legal actions currently are not
material to the Company's consolidated results of operations or financial
position. The following outlines two significant ongoing cases:
Duncan case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR
in the amount of $16.3 million. This Louisiana state case arose from a railroad
crossing accident which occurred at Oretta, Louisiana on September 11, 1994, in
which three individuals were injured. Of the three, one was injured fatally, one
was rendered quadriplegic and the third suffered less serious injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed, dismissed
the verdict against one defendant and reallocated the amount of that verdict to
the remaining defendants. The resulting total judgment against KCSR, together
with interest, was $25.4 million as of December 31, 1998.
The judgment has been appealed and independent trial counsel has informed KCSR
management that the evidence presented at trial established no negligent conduct
on the part of KCSR and expressed confidence that the verdict will ultimately be
reversed. KCSR management believes it has meritorious defenses in this case and
that it will ultimately prevail in appeal. If the verdict were to stand,
however, the judgment and interest are in excess of existing insurance coverage
and could have an adverse effect on the Company's consolidated results of
operations and financial position.
Bogalusa Cases
In July 1996, KCSR 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.
KCSR neither owned nor leased the rail car or the rails on which it was located
at the time of the explosion in Bogalusa. KCSR 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 IC. The explosion occurred
more than 15 days after the Company last transported the rail car. The car was
loaded by the shipper in excess of its standard weight when it was transported
by the Company to interchange with the IC.
The Mississippi lawsuit arising from the chemical release has now been scheduled
for trial in late March 1999. KCSR sought dismissal of these suits in the state
appellate courts, and ultimately in the United States Supreme Court, but was
unsuccessful in obtaining the relief sought.
<PAGE>53
KCSR believes that its exposure to liability in these cases is remote. If,
however, KCSR were to be found liable for punitive damages in these cases, such
a judgment could have a material adverse effect on the results of operations and
financial position of the Company.
Environmental Matters. The Company and certain of its subsidiaries are subject
to extensive regulation under environmental protection laws concerning, among
other things, discharges to waters and the generation, handling, storage,
transportation and disposal of waste and other materials where environmental
risks are inherent. In particular, the Company is subject to various laws and
certain legislation including, among others, the Federal Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA," also known as
the Superfund law), the Toxic Substances Control Act, the Federal Water
Pollution Control Act, and the Hazardous Materials Transportation Act. This
legislation generally imposes joint and several liability for clean up and
enforcement costs, without regard to fault or legality of the original conduct,
on current and predecessor owners and operators of a site. The Company does not
foresee that compliance with the requirements imposed by the environmental
legislation will impair its competitive capability or result in any material
additional capital expenditures, operating or maintenance costs. As part of
serving the petroleum and chemicals industry, KCSR transports hazardous
materials and has a Shreveport, Louisiana-based hazardous materials emergency
team available to handle environmental issues which might occur in the transport
of such materials. Additionally, the Company performs ongoing review and
evaluation of the various environmental issues that arise in the Company's
operations, and, as necessary, takes actions to limit the Company's exposure to
potential liability.
In November 1997, representatives of KCSR met with representatives of the United
States Environmental Protection Agency ("EPA") at the site of two, contiguous
pieces of property in North Baton Rouge, Louisiana, abandoned leaseholds of
Western Petrochemicals and Export Drum. These properties had been the subjects
of voluntary clean up prior to the EPA's involvement. The site visit prompted
KCSR to obtain from the EPA, through the Freedom of Information Act, a
"Preliminary Assessment Report" concerning the properties, dated January, 1995,
and directing a "Site Investigation." The EPA's November 1997 visit to the site
was the start of that "Site Investigation." During the November 1997 site visit,
the EPA indicated it intended to recover, through litigation, all of its
investigation and remediation costs. At KCSR's request, the EPA agreed
informally to suspend its investigation pending an exchange of information and
negotiation of KCSR's participation in the "Site Investigation." Based upon
advice subsequently received from the Inactive and Abandoned Sites Division of
the Louisiana Department of Environmental Quality ("LADEQ"), KCSR will be
allowed to undertake the investigation and remediation of the site, pursuant to
the LADEQ's guidelines and oversight. The EPA's and LADEQ's involvement, and the
investigation and remediation of the sites pursuant to LADEQ's oversight and
guidelines, will increase the ultimate costs to KCSR beyond those anticipated.
However, those additional costs are not expected to have a material impact on
the Company's consolidated results of operations or financial position.
As previously reported, KCSR has been named as a "potentially responsible party"
by the Louisiana Department of Environmental Quality in a state environmental
proceeding, Louisiana Department of Environmental Quality, Docket No. IAS
88-0001-A, involving a location near Bossier City, Louisiana, which was the site
of a wood preservative treatment plant (Lincoln Creosoting). KCSR is a former
owner of part of the land in question. This matter was the subject of a trial in
the U.S. District Court in Shreveport, Louisiana which was concluded in July
1993. The court found that Joslyn Manufacturing Company ("Joslyn"), an operator
of the plant, was and is required to indemnify KCSR for damages arising out of
plant operations. (KCSR's potential liability is as a property owner rather than
as a generator or transporter of contaminants.) The case was appealed to the
U.S. Court of Appeals for the Fifth Circuit, which Court affirmed the U.S.
District Court ruling in favor of KCSR.
In early 1994, the EPA added the Lincoln Creosoting site to its CERCLA national
priority list. Since major remedial work has been performed at this site by
Joslyn, and KCSR has been held by the Federal District and Appeals Courts to be
entitled to indemnity for such costs, it would appear that KCSR should not incur
<PAGE>54
significant remedial liability. At this time, it is not possible to evaluate the
potential consequences of further remediation at the site.
The Louisiana Department of Transportation ("LDOT") has sued KCSR and a number
of other defendants in Louisiana state court to recover clean up costs incurred
by LDOT while constructing Interstate Highway 49 at Shreveport, Louisiana
(Louisiana Department of Transportation v. The Kansas City Southern Railway
Company, et al., Case No. 417190-B in the First Judicial District Court, Caddo
Parish, Louisiana). The clean up was associated with an old oil refinery site,
operated by the other named defendants. KCSR's main line was adjacent to that
site, and KCSR was included in the suit because LDOT claims that a 1966
derailment on the adjacent track released hazardous substances onto the site.
However, there is evidence that the derailment occurred on the side of the track
opposite from the refinery site. Furthermore, there appears to be no
relationship between the lading on the derailed train and any contaminants
identified at the site. Therefore, management believes that the Company's
exposure is limited.
In another proceeding, Louisiana Department of Environmental Quality, Docket No.
IE-0-91-0001, KCSR was named as a party in the alleged contamination of Capitol
Lake in Baton Rouge, Louisiana. During 1994, the list of potentially responsible
parties was significantly expanded to include the State of Louisiana, and the
City and Parish of Baton Rouge, among others. Studies commissioned by KCSR
indicate that contaminants contained in the lake were not generated by KCSR.
Management and counsel do not believe this proceeding will have a material
effect on the Company.
In the Ilada Superfund Site located in East Cape Girardeau, Ill., KCSR was cited
for furnishing one carload of used oil to this petroleum recycling facility.
Counsel advises that KCSR's liability, if any, should fall within the "de
minimus" provisions of the Superfund law, representing minimal exposure.
The Mississippi Department of Environmental Quality ("MDEQ") initiated a demand
on all railroads operating in Mississippi to clean up their refueling facilities
and investigate any soil and groundwater impacts resulting from past refueling
activities. KCSR has six facilities located in Mississippi. KCSR has developed a
plan, together with the State of Mississippi, that will satisfy the MDEQ's
initiative. Estimated costs to complete the studies and expected remediation
have been provided for in the Company's consolidated financial statements and
the resolution is not expected to have a material impact on the Company's
consolidated results of operations or financial position.
The Illinois Environmental Protection Agency ("IEPA") has sued the Gateway
Western for alleged violations of state environmental laws relating to the 1997
spill of methyl isobutyl carbinol in the East St. Louis yard. During switching
operations a tank car carrying this chemical was punctured and approximately
18,000 gallons were released. Emergency clean-up and removal of liquids and
contaminated soils occurred within two weeks and remaining residues of carbinol
in the soil and shallow groundwater were confined almost entirely to the Gateway
Western property. Remediation continues and progress is reported to the IEPA on
a quarterly basis and will continue until IEPA clean-up standards have been
achieved. Remediation is expected to be completed in the year 2000 and estimated
costs have been provided for in the Company's consolidated financial statements.
The parties reached a tentative negotiated settlement of the lawsuit in November
1998, which provides that the Gateway Western pay a penalty and further, that it
fund a Supplemental Environmental Project in St. Claire County, Illinois. The
clean-up costs and the settlement of the lawsuit are not expected to have a
material impact on the Company's consolidated results of operations or financial
position.
The Company has recorded liabilities with respect to various environmental
issues, which represent its best estimates of remediation and restoration costs
that may be required to comply with present laws and regulations. At December
31, 1998, these recorded liabilities were not material. Although these costs
cannot be predicted with certainty, management believes that the ultimate
outcome of identified matters will not have a material adverse effect on the
Company's consolidated results of operations, financial condition or cash flows.
<PAGE>55
Regulatory Influence. In addition to the environmental agencies mentioned above,
KCSR operations are regulated by the STB, various state regulatory agencies, and
the Occupational Safety and Health Administration ("OSHA"). Prior to January 1,
1996, the Interstate Commerce Commission ("ICC") had jurisdiction over
interstate rates charged, routes, service, issuance or guarantee of securities,
extension or abandonment of rail lines, and consolidation, merger or acquisition
of control of rail common carriers. As of January 1, 1996, Congress abolished
the ICC and transferred regulatory responsibility to the STB. State agencies
regulate some aspects of rail operations with respect to health and safety and
in some instances, intrastate freight rates. OSHA has jurisdiction over certain
health and safety features of railroad operations.
KCSR expects its railroad operations to be subject to future requirements
regulating exhaust emissions from diesel locomotives that may increase its
operating costs. During 1995 the EPA issued proposed regulations applicable to
locomotive engines. These regulations, which were issued as final in early 1998,
will be effective in stages for new or remanufactured locomotive engines
installed after year 2000. KCSR has reviewed these new regulations and
management does not expect that compliance with these regulations will have a
material impact on the Company's results of operations.
Financial Services businesses are subject to a variety of regulatory
requirements including, but not limited to, the rules and regulations of the
U.S. Securities and Exchange Commission and the guidelines set forth by the
National Association of Securities Dealers.
The Company does not foresee that compliance with the requirements imposed by
these agencies' standards under present statutes will impair its competitive
capability or result in any material effect on results of operations.
Inflation. Inflation has not had a significant impact on the Company's
operations in the past three years. Generally accepted accounting principles
require the use of historical costs. Replacement cost and related depreciation
expense of the Company's property would be substantially higher than the
historical costs reported. Any increase in expenses from these fixed costs,
coupled with variable cost increases due to significant inflation, would be
difficult to recover through price increases given the competitive environments
of the Company's principal subsidiaries. See "Foreign Exchange Matters" above
with respect to inflation in Mexico.
Strategic Review. The Company's management is responsible for the management of
the Company's primary assets - investments in subsidiaries and affiliates, as
described in detail in Item 1, Business, of this Form 10-K and in "Recent
Developments" and "Results of Operations" above. Accordingly, management of the
Company continually evaluates how to utilize the strength of the Company's
business lines and capabilities, provide for future growth opportunities, and
achieve the Company's financial objectives. This process has resulted in many
significant actions, including: the acquisition of Nelson in April of 1998; the
Company's investment and involvement in the Mexican rail privatization; the
December 1996 Gateway Western acquisition; the October 1996 Southern Capital
joint venture transactions; and the common stock repurchase program.
The Company's announcement to separate its Transportation and Financial Services
segments continues this process. A separation of the two segments would provide
the management of each segment the opportunity to focus on maximizing potential
as stand-alone entities.
1996 through 1998 have been, and future years will be, affected by these
strategic activities. Management's analysis and evaluation of the Company's
strategic alternatives are expected to continue to present growth opportunities
in future years.
<PAGE>56
Item 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company utilizes various financial instruments which entail certain inherent
market risks. Generally, these instruments have not been entered into for
trading purposes. The following information, together with information included
in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 11 and 13 to the Company's consolidated
financial statements in this Form 10-K, describe the key aspects of certain
financial instruments which have market risk to the Company.
Interest Rate Sensitivity
<TABLE>
The Company's interest sensitive liabilities include its long-term fixed and
floating-rate debt obligations. The table below provides information about the
Company's fixed rate obligations:
<CAPTION>
1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C>
Fixed Rate Debt (in millions) $ 482.6 $ 471.6 $ 458.9 $ 346.1 $ 329.7
Average interest rate 7.89% 7.86% 7.84% 7.74% 7.68%
</TABLE>
At December 31, 1998, the Company's floating-rate indebtedness totaled $343
million. A hypothetical 100 basis points increase in the LIBOR rate would result
in additional interest expense of approximately $3.4 million on an annualized
basis for the floating-rate indebtedness.
Based upon the borrowing rates currently available to the Company and its
subsidiaries for indebtedness with similar terms and average maturities, the
fair value of long-term debt was approximately $867 million at December 31,
1998.
The Company believes the mix of floating and fixed rate indebtedness contributes
to mitigating interest rate risk.
Commodity Price Sensitivity
KCSR has a program to hedge against fluctuations in the price of its diesel fuel
purchases. This program is primarily completed using various swap transactions.
These swap transactions are typically based on the price of heating oil #2,
which the Company believes to produce a reasonable correlation to the price of
diesel fuel. These transactions are generally settled monthly in cash with the
counterparty.
Additionally, from time to time, KCSR enters into forward purchase commitments
for diesel fuel as a means of securing volumes at competitive prices. These
contracts normally require the Company to purchase defined quantities of diesel
fuel at prices established at the origination of the contract.
The table below provides information about the various diesel fuel instruments
that are sensitive to fluctuations in commodity prices. The weighted average
contract prices presented below do not include taxes, transportation costs or
other incremental fuel handling costs.
<PAGE>57
<TABLE>
<CAPTION>
1999
<S> <C>
Diesel Fuel Swaps:
Gallons (in millions) 10.0
Weighted average Price per gallon $0.44
Diesel Fuel Purchase Commitments:
Gallons (in millions) 20.8
Weighted average Price per gallon $0.45
</TABLE>
The unrecognized loss related to the diesel fuel swaps based on the average
price of heating oil #2 approximated $1.2 million at December 31, 1998.
At December 31, 1998, the Company held fuel inventories for use in normal
operations. These inventories were not material to the Company's overall
financial position.
Foreign Exchange Sensitivity
The Company owns an approximate 37% interest in Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. ("Grupo TFM"), incorporated in Mexico. Also, in April
1998, the Company acquired 80% of Nelson Money Managers plc ("Nelson"), a United
Kingdom based financial services corporation. In connection with these
investments, matters arise with respect to financial accounting and reporting
for foreign currency transactions and for translating foreign currency financial
statements into U.S. dollars. Therefore, the Company has exposure to
fluctuations in the value of the Mexican peso and the British pound.
During 1997 and 1998, Mexico's economy was classified as "highly inflationary"
as defined in Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation" ("SFAS 52"). Accordingly, the U.S. dollar was assumed to
be Grupo TFM's functional currency, and any gains or losses from translating
Grupo TFM's financial statements into U.S. dollars are included in the
determination of its net income. Equity earnings or losses from Grupo TFM
included in the Company's results of operations reflect the Company's share of
such translation gains and losses.
Effective January 1, 1999, the SEC staff declared that Mexico should no longer
be considered a highly inflationary economy. Accordingly, the Company is in the
process of performing an analysis under the guidance of SFAS 52 to determine
whether the U.S. dollar or the Mexican peso should be used as the functional
currency for financial accounting and reporting purposes subsequent to December
31, 1998. Information for this analysis is currently being compiled and
reviewed. Management expects to complete this analysis by the end of the first
quarter 1999. If the peso is determined to be the appropriate functional
currency, the effect of translating Grupo TFM's 1999 financial statements from
the peso to the U.S. dollar could have a material impact on the Company's
results of operations and financial position.
With respect to Nelson, as the relative price of the British pound fluctuates
versus the U.S. dollar, the Company's proportionate share of the earnings or
losses of Nelson is affected. The following table provides an example of the
potential impact of a 10% change in the price of the British pound assuming that
Nelson has earnings of $1,000 and using its ownership interest at December 31,
1998. The British pound is Nelson's functional currency.
<PAGE>58
<TABLE>
<CAPTION>
Nelson
<S> <C>
Assumed Earnings 1,000
Exchange Rate (to U.S. $) 0.5 to 1
---------------------
Converted U.S. Dollars $ 2,000
Ownership Percentage 80%
---------------------
Assumed Earnings $ 1,600
---------------------
Assumed 10% increase in Exchange Rate 0.55 to 1
---------------------
Converted to U.S. Dollars $ 1,818
Ownership Percentage 80%
---------------------
Assumed Earnings $ 1,454
---------------------
Effect of 10% increase in Exchange Rate $ (146)
=====================
</TABLE>
The impact of changes in exchange rates on the balance sheet are reflected in a
cumulative translation adjustment account as a part of accumulated other
comprehensive income and do not affect earnings.
While not currently utilizing foreign currency instruments to hedge its U.S.
dollar investments in Grupo TFM and Nelson, the Company continues to evaluate
existing alternatives as market conditions and exchange rates fluctuate.
Available for Sale Investment Sensitivity
Both Janus and Berger invest a portion of the revenues earned from providing
investment advisory services in various of their respective sponsored funds.
These investments are classified as available for sale securities pursuant to
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities." Accordingly, these investments are
carried in the Company's consolidated financial statements at fair market value
and are subject to the investment performance of the underlying sponsored fund.
Any unrealized gain or loss is recognized upon the sale of the investment.
Additionally, DST, a 32% owned equity investment, holds available for sale
investments which may affect the Company's consolidated financial statements.
Similarly to the Janus and Berger securities, any changes to the market value of
the DST available for sale investments are reflected, net of tax, in DST's
"accumulated comprehensive income" component of its equity. Accordingly, the
Company records its proportionate share of this amount as part of the investment
in DST. While these changes in market value do not result in any impact to the
Company's consolidated results of operations currently, upon disposition by DST
of these investments, the Company will record its proportionate share of the
gain or loss as a component of equity earnings.
Equity Price Sensitivity
As noted above, the Company owns 32% of DST, a publicly traded company. While
changes in the market price of DST are not reflected in the Company's
consolidated results of operation or financial position, they may affect the
perceived value of the Company's common stock. Specifically, the DST market
value at any given point in time multiplied by the Company's ownership
percentage provides an amount, which when divided by the outstanding number of
KCSI common shares, derives a per share "value" presumably attributable to the
Company's investment in DST. Fluctuations in this "value" as a result of changes
in the DST market price may affect the Company's stock price.
<PAGE>59
The revenues earned by Janus, Berger and Nelson are dependent on the underlying
assets under management in the funds to which investment advisory services are
provided. The portfolio of investments included in these various funds include
combinations of equity, bond, annuity and other types of securities.
Fluctuations in the value of these various securities are common and are
generated by numerous factors, including, among others, market volatility, the
overall economy, inflation, changes in investor strategies, availability of
alternative investment vehicles, and others. Accordingly, declines in any one or
a combination of these factors, or other factors not separately identified, may
reduce the value of investment securities and, in turn, the underlying assets
under management on which Financial Services revenues are earned.
<PAGE>60
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Management Report on Responsibility for Financial Reporting....... 61
Financial Statements:
Report of Independent Accountants............................ 61
Consolidated Statements of Operations and Comprehensive
Income for the three years ended December 31, 1998......... 62
Consolidated Balance Sheets at December 31, 1998
1997 and 1996.............................................. 63
Consolidated Statements of Cash Flows for the three
years ended December 31, 1998.............................. 64
Consolidated Statements of Changes in Stockholders'
Equity for the three years ended December 31, 1998......... 65
Notes to Consolidated Financial Statements................... 66
Financial Statement Schedules:
All schedules are omitted because they are not applicable, insignificant or
the required information is shown in the consolidated financial statements
or notes thereto.
The consolidated financial statements and related notes, together with the
Report of Independent Accountants, of DST Systems, Inc. (an approximate 32%
owned affiliate of the Company accounted for under the equity method) for
the year ended December 31, 1998, which are included in the DST Systems,
Inc. Annual Report on Form 10-K for the year ended December 31, 1998
(Commission File No. 1-14036) have been incorporated by reference in this
Form 10-K as Exhibit 99.1.
<PAGE>61
Management Report on Responsibility for Financial Reporting
The accompanying consolidated financial statements and related notes of Kansas
City Southern Industries, Inc. and its subsidiaries were prepared by management
in conformity with generally accepted accounting principles appropriate in the
circumstances. In preparing the financial statements, management has made
judgments and estimates based on currently available information. Management is
responsible for not only the financial information, but also all other
information in this Annual Report on Form 10-K. Representations contained
elsewhere in this Annual Report on Form 10-K are consistent with the
consolidated financial statements and related notes thereto.
The Company has a formalized system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that its financial
records are reliable. Management monitors the system for compliance, and the
Company's internal auditors measure its effectiveness and recommend possible
improvements thereto. In addition, as part of their audit of the consolidated
financial statements, the Company's independent accountants, who are selected by
the stockholders, review and test the internal accounting controls on a
selective basis to establish the extent of their reliance thereon in determining
the nature, extent and timing of audit tests to be applied.
The Board of Directors pursues its oversight role in the area of financial
reporting and internal accounting control through its Audit Committee. This
committee, composed solely of non-management directors, meets regularly with the
independent accountants, management and internal auditors to monitor the proper
discharge of responsibilities relative to internal accounting controls and to
evaluate the quality of external financial reporting.
Report of Independent Accountants
To the Board of Directors and Stockholders of
Kansas City Southern Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, of changes in
stockholders' equity and of cash flows present fairly, in all material
respects, the financial position of Kansas City Southern Industries, Inc. and
its subsidiaries at December 31, 1998, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, effective
December 31, 1997 the Company changed its method of evaluating the
recoverability of goodwill. We concur with the change in accounting.
/s/ PricewaterhouseCoopers LLP
Kansas City, Missouri
March 4, 1999, except as to the sixth paragraph under the subheading of "Note
1. Significant Accounting Policies" entitled "New Accounting Pronouncements"
and the first two paragraphs of "Note 12. Control", which are as of February
4, 2000
<PAGE>62
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
Years Ended December 31
Dollars in Millions, Except per Share Amounts
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues $ 1,284.3 $ 1,058.3 $ 847.3
Costs and expenses 816.3 680.2 567.3
Depreciation and amortization 73.5 75.2 76.1
Restructuring, asset impairment
and other charges 196.4
------------- ------------ ------------
Operating income 394.5 106.5 203.9
Equity in net earnings (losses) of
unconsolidated affiliates (Notes 2, 5, 12):
DST Systems, Inc. 24.3 24.3 68.1
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. (3.2) (12.9)
Other 1.8 3.8 2.0
Interest expense (66.1) (63.7) (59.6)
Reduction in ownership of DST Systems, Inc. (29.7)
Other, net 32.8 21.2 22.9
------------- ------------ ------------
Pretax income 354.4 79.2 237.3
Income tax provision (Note 8) 130.8 68.4 70.6
Minority interest in consolidated
earnings (Note 11) 33.4 24.9 15.8
------------- ------------ ------------
Net income (loss) 190.2 (14.1) 150.9
Other comprehensive income, net of tax:
Unrealized gain on securities 24.1 25.9 18.5
Comprehensive income $ 214.3 $ 11.8 $ 169.4
============= ============ ============
Per Share Data (Note 1):
Basic earnings (loss) per share $ 1.74 $ (0.13) $ 1.33
============= ============ ============
Diluted earnings (loss) per share $ 1.66 $ (0.13) $ 1.31
============= ============ ============
Weighted average common shares
outstanding (in thousands):
Basic 109,219 107,602 113,169
Dilutive potential common shares 3,840 2,112
------------- ------------ ------------
Diluted 113,059 107,602 115,281
============= ============ ============
Dividends per share
Preferred $ 1.00 $ 1.00 $ 1.00
Common $ .16 $ .15 $ .13
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>63
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
at December 31
Dollars in Millions, Except per Share Amounts
<CAPTION>
1998 1997 1996
ASSETS
<S> <C> <C> <C>
Current Assets:
Cash and equivalents $ 27.2 $ 33.5 $ 22.9
Investments in advised funds (Note 6) 149.1 100.3 67.8
Accounts receivable, net (Note 6) 208.4 177.0 138.1
Inventories 47.0 38.4 39.3
Other current assets (Note 6) 37.8 23.9 24.0
------------ ------------ ------------
Total current assets 469.5 373.1 292.1
Investments held for operating purposes (Notes 2, 5) 707.1 683.5 335.2
Properties, net (Notes 3, 6) 1,266.7 1,227.2 1,219.3
Intangibles and Other Assets, net (Notes 2, 3, 6) 176.4 150.4 237.5
------------ ------------ ------------
Total assets $ 2,619.7 $ 2,434.2 $ 2,084.1
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year (Note 7) $ 10.7 $ 110.7 $ 7.6
Accounts and wages payable 125.8 109.0 102.6
Accrued liabilities (Notes 3, 6) 159.7 217.8 134.4
------------ ------------ ------------
Total current liabilities 296.2 437.5 244.6
------------ ------------ ------------
Other Liabilities:
Long-term debt (Note 7) 825.6 805.9 637.5
Deferred income taxes (Note 8) 403.6 332.2 337.7
Other deferred credits (Note 2) 128.8 132.1 129.8
Commitments and contingencies
(Notes 2, 7, 8, 9, 11, 12)
------------ ------------ ------------
Total other liabilities 1,358.0 1,270.2 1,105.0
------------ ------------ ------------
Minority Interest in consolidated
subsidiaries (Note 11) 34.3 28.2 18.8
------------ ------------ ------------
Stockholders' Equity (Notes 1, 4, 7, 9):
$25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1
$1 par, Series B convertible,
Preferred stock 1.0 1.0
$.01 par, Common stock 1.1 1.1 0.4
Retained earnings 849.1 839.3 883.3
Accumulated other comprehensive income 74.9 50.8 24.9
Shares held in trust (200.0) (200.0)
------------ ------------ ------------
Total stockholders' equity 931.2 698.3 715.7
------------ ------------ ------------
Total liabilities and stockholders' equity $ 2,619.7 $ 2,434.2 $ 2,084.1
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>64
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
Dollars in Millions
<CAPTION>
1998 1997 1996
CASH FLOWS PROVIDED BY (USED FOR):
<S> <C> <C> <C>
Operating Activities:
Net income (loss) $ 190.2 $ (14.1) $ 150.9
Adjustments to net income (loss):
Depreciation and amortization 73.5 75.2 76.1
Deferred income taxes 23.2 (16.6) 18.6
Equity in undistributed earnings (16.8) (15.0) (66.4)
Minority interest in consolidated earnings 0.6 12.0 5.2
Reduction in ownership of DST 29.7
Restructuring, asset impairment and other charges 196.4
Gain on sale of assets (20.2) (6.9) (2.6)
Employee benefit and deferred compensation
expenses not requiring operating cash 3.8 8.7 18.3
Changes in working capital items:
Accounts receivable (29.9) (29.0) (2.5)
Inventories (8.6) 2.5 0.5
Accounts and wages payable 19.6 (3.1) 7.2
Accrued liabilities (32.4) 24.4 (73.4)
Other current assets (8.2) (2.2) (6.0)
Other, net (1.7) 1.5 (4.9)
------- -------- --------
Net 222.8 233.8 121.0
------- -------- --------
Investing Activities:
Property acquisitions (104.9) (82.6) (144.0)
Proceeds from disposal of property 8.2 7.4 187.0
Investments in and loans with affiliates (25.3) (303.5) (41.9)
Purchase of short-term investments (43.2) (34.9) (39.2)
Proceeds from disposal of other investments 10.4 0.3 55.7
Other, net 0.2 4.0 3.3
------- -------- --------
Net (154.6) (409.3) 20.9
------- -------- --------
Financing Activities:
Proceeds from issuance of long-term debt 151.7 339.5 233.7
Repayment of long-term debt (238.6) (110.1) (233.1)
Proceeds from stock plans 30.1 26.6 14.6
Stock repurchased (50.2) (151.3)
Cash dividends paid (17.8) (15.2) (14.8)
Other, net 0.1 (4.5) 0.1
------- -------- --------
Net (74.5) 186.1 (150.8)
------- -------- --------
Cash and Equivalents:
Net increase (decrease) (6.3) 10.6 (8.9)
At beginning of year 33.5 22.9 31.8
------- -------- --------
At end of year (Note 4) $ 27.2 $ 33.5 $ 22.9
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>65
<TABLE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Dollars in Millions, Except per Share Amounts
<CAPTION>
$1 Par Accumulated
$25 Par Series B $.01 Par other Shares
Preferred Preferred Common Capital Retained comprehensive held
stock stock stock surplus earnings income in trust Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 $ 6.1 $ 1.0 $ 0.4 $ 127.5 $ 753.8 $ 6.4 $ (200.0) $ 695.2
Net income 150.9 150.9
Dividends (15.3) (15.3)
Stock repurchased (145.2) (6.1) (151.3)
Stock plan shares
issued from treasury 5.9 5.9
Options exercised and
stock subscribed 11.8 11.8
Other comprehensive
income 18.5 18.5
------ -------- ------ -------- -------- -------- --------- ---------
Balance at
December 31, 1996 6.1 1.0 0.4 - 883.3 24.9 (200.0) 715.7
Net loss (14.1) (14.1)
Dividends (16.0) (16.0)
Stock repurchased (50.2) (50.2)
3-for-1 stock split 0.7 (0.7) -
Stock plan shares
issued from treasury 3.1 3.1
Stock issued in
acquisition (Notes 2,4) 10.1 10.1
Options exercised and
stock subscribed 23.8 23.8
Other comprehensive
income 25.9 25.9
------ -------- ------ -------- -------- -------- --------- ---------
Balance at
December 31, 1997 6.1 1.0 1.1 - 839.3 50.8 (200.0) 698.3
Net income 190.2 190.2
Dividends (17.7) (17.7)
Stock plan shares
issued from treasury 3.0 3.0
Stock issued in
acquisition (Notes 2,4) 3.2 3.2
Options exercised and
stock subscribed 30.1 30.1
Termination of shares
held in trust (Note 9) (1.0) (199.0) 200.0 -
Other comprehensive
income 24.1 24.1
------ -------- ------ -------- -------- -------- --------- ---------
Balance at
December 31, 1998 $ 6.1 $ - $ 1.1 $ - $ 849.1 $ 74.9 $ - $ 931.2
====== ======== ====== ======== ======== ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>66
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Significant Accounting Policies
Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified
company which reports its financial information in two business segments:
Transportation and Financial Services. Note 13 further describes the operations
of the Company.
Kansas City Southern Lines, Inc. ("KCSL") is the holding company for
Transportation segment subsidiaries and affiliates. This segment includes, among
others, The Kansas City Southern Railway Company ("KCSR"), the Gateway Western
Railway Company ("Gateway Western"), and strategic joint venture interests in
Grupo Transportacion Ferroviaria Mexicana, S.A de C.V. ("Grupo TFM"), which owns
80% of the common stock of TFM, S.A. de C.V. ("TFM"), Mexrail, Inc. ("Mexrail"),
which wholly owns The Texas Mexican Railway Company ("Tex Mex"), and Southern
Capital Corporation LLC ("Southern Capital").
FAM Holdings, Inc. ("FAM HC") was formed for the purpose of becoming the holding
company for Financial Services segment subsidiaries and affiliates. The primary
entities comprising this segment are Janus Capital Corporation ("Janus" - 82%
owned, diluted), Berger Associates, Inc. ("Berger" - 100% owned) and Nelson
Money Managers plc ("Nelson" - 80% owned). Additionally, the Company owns an
approximate 32% equity interest in DST Systems, Inc. ("DST").
The accounting and financial reporting policies of the Company conform with
generally accepted accounting principles. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Use of the term "Company" as described in these Notes to Consolidated Financial
Statements means Kansas City Southern Industries, Inc. and all of its
consolidated subsidiary companies. Significant accounting and reporting policies
are described below. Certain prior year amounts have been reclassified to
conform to the current year presentation.
Principles of Consolidation. The consolidated financial statements generally
include all majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Cash Equivalents. Short-term liquid investments with an initial maturity of
generally three months or less are considered cash equivalents. Carrying value
approximates market value due to the short-term nature of these investments.
Inventories. Materials and supplies inventories for transportation operations
are valued at average cost.
Properties and Depreciation. Properties are stated at cost. Additions and
renewals constituting a unit of property are capitalized and all properties are
depreciated over the estimated remaining life of such assets. Ordinary
maintenance and repairs are charged to expense as incurred.
The cost of transportation equipment and road property normally retired, less
salvage value, is charged to accumulated depreciation. Conversely, the cost of
industrial and other property retired, and the cost of transportation property
abnormally retired, together with accumulated depreciation thereon, are
eliminated from the property accounts and the related gains or losses are
reflected in earnings.
<PAGE>67
Depreciation for transportation operations is computed using composite
straight-line rates for financial statement purposes. The Surface Transportation
Board ("STB") approves the depreciation rates used by KCSR. KCSR evaluates
depreciation rates for properties and equipment and implements approved rates.
Periodic revisions of rates have not had a material effect on operating results.
Unit depreciation methods, employing both accelerated and straight-line rates,
are employed in other business segments. Accelerated depreciation is used for
income tax purposes. The ranges of annual depreciation rates for financial
statement purposes are:
<TABLE>
<S> <C> <C>
Transportation
Road and structures 1% - 20%
Rolling stock and equipment 1% - 24%
Other equipment 1% - 33%
Capitalized leases 3% - 20%
</TABLE>
The Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS 121") effective January 1, 1996. SFAS 121 provides
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill, as well as for long-lived assets and
certain identifiable intangibles which are to be disposed. If events or changes
in circumstances of a long-lived asset indicate that the carrying amount of an
asset may not be recoverable, the Company must estimate the future cash flows
expected to result from the use of the asset and its eventual disposition. If
the sum of the expected future cash flows (undiscounted and without interest) is
lower than the carrying amount of the asset, an impairment loss must be
recognized to the extent that the carrying amount of the asset exceeds its fair
value. The adoption of SFAS 121 did not have a material effect on the Company's
financial position or results of operations. However, see Note 3 below with
respect to certain KCSR assets held for disposal and certain other impaired
assets.
Investments. The equity method of accounting is used for all entities in which
the Company or its subsidiaries have significant influence, but not more than
50% voting control interest; the cost method of accounting is generally used for
investments of less than 20% voting control interest. In December 1996 and the
first four months of 1997, Gateway Western was accounted for under the equity
method as a majority-owned unconsolidated subsidiary while the Company awaited
approval from the STB for the acquisition of Gateway Western. The STB approved
the Company's acquisition of Gateway Western effective May 5, 1997.
Subsequently, Gateway Western was included as a consolidated subsidiary of the
Company effective January 1, 1997. See Note 2 for additional information on the
Gateway Western acquisition.
Pursuant to Statement of Financial Accounting Standards No. 115 "Accounting for
Certain Investments in Debt and Equity Securities" ("SFAS 115"), investments
classified as "available for sale" are reported at fair value, with unrealized
gains and losses excluded from earnings and reported, net of deferred income
taxes, in accumulated other comprehensive income. Investments classified as
"trading" securities are reported at fair value, with unrealized gains and
losses included in earnings. Investments in advised funds are comprised of
shares of certain mutual funds advised by Janus and Berger. These investments
are generally used to fund operations and dividends. Realized gains and losses
are determined using the first-in, first-out method.
Revenue Recognition. Revenue is recognized by the Company's consolidated
railroad operations based upon the percentage of completion of a commodity
movement. Investment advisory revenues are recognized by Janus and Berger
primarily as a percentage of assets under management. Other subsidiaries, in
general, recognize revenue when the product is shipped or as services are
performed.
Advertising. The Company expenses all advertising as incurred. Direct response
advertising for which future economic benefits are probable and specifically
attributable to the advertising is not material.
<PAGE>68
Intangibles. Intangibles principally represent the excess of cost over the fair
value of net underlying assets of acquired companies using purchase accounting
and are amortized using the straight-line method over periods ranging from 5 to
40 years.
On an annual basis, the Company reviews the recoverability of goodwill. In
response to changes in the competitive and business environment in the rail
industry, the Company revised its methodology for evaluating goodwill
recoverability effective December 31, 1997. The change in this method of
measurement relates to the level at which assets are grouped from the business
unit level to the investment component level. At the same time, there were
changes in the estimates of future cash flows used to measure goodwill
recoverability. The effect of the change in method of applying the accounting
principle is inseparable from the changes in estimate. Accordingly, the combined
effects have been reported in the accompanying consolidated financial statements
as a change in estimate. The Company believes that the revised methodology
represents a preferable method of accounting because it more closely links the
fair value estimates to the asset whose recoverability is being evaluated. The
policy change did not impact the Company's Financial Services businesses as
their goodwill has always been evaluated on an investment component basis.
As a result of the changes discussed above, the Company determined that the
aggregate carrying value of the goodwill and other intangible assets associated
with the 1993 MidSouth Corporation ("MidSouth") purchase exceeded their fair
value. Accordingly, the Company recorded an impairment loss of $91.3 million in
the fourth quarter of 1997. Due to the fact that the change in accounting is
inseparable from the changes in estimates, the pro forma effects of retroactive
application cannot be determined.
Computer Software Costs. Costs incurred in conjunction with the purchase or
development of computer software for internal use are accounted for in
accordance with American Institute of Certified Public Accountant's Statement of
Position 98-1 "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). Costs incurred in the preliminary
project stage, as well as training and maintenance costs, are expensed as
incurred. Direct and indirect costs associated with the application development
stage of internal use software are capitalized until such time that the software
is substantially complete and ready for its intended use. Capitalized costs are
amortized on a straight line basis over the useful life of the software.
Derivative Financial Instruments. In 1997, the Company entered into foreign
currency contracts in order to reduce the impact of fluctuations in the value of
the Mexican peso on its 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.
The Company follows the requirements outlined in Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and
related authoritative guidance. Accordingly, gains and losses related to hedges
of the Company's investment in Grupo TFM were deferred and recognized as
adjustments to the carrying amount of the investment when the hedged transaction
occurred.
Any gains and losses qualifying as hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and are
ultimately recognized in income as part of those carrying amounts. Any gains or
losses on derivative contracts that do not qualify as hedges are recognized
currently as other income. Gains and losses on hedges are reflected in operating
activities in the statement of cash flows.
See Note 11 for additional information with respect to derivative financial
instruments and purchase commitments.
<PAGE>69
Income Taxes. Deferred income tax effects of transactions reported in different
periods for financial reporting and income tax return purposes are recorded
under the liability method of accounting for income taxes. This method gives
consideration to the future tax consequences of the deferred income tax items
and immediately recognizes changes in income tax laws upon enactment. The income
statement effect is generally derived from changes in deferred income taxes on
the balance sheet.
Treasury Stock. The excess of par over cost of the Preferred shares held in
Treasury is credited to capital surplus. Common shares held in Treasury are
accounted for as if they were retired and the excess of cost over par value of
such shares is charged to capital surplus, if available, and then to retained
earnings.
Stock Plans. Proceeds received from the exercise of stock options or
subscriptions are credited to the appropriate capital accounts in the year they
are exercised.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") in October 1995. This statement allows companies to continue under the
approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation
expense in the financial statements, but encourages companies to adopt the fair
value method of accounting for employee stock options. The Company has elected
to retain its accounting approach under APB 25, and has presented the applicable
pro forma disclosures in Note 9 to the consolidated financial statements
pursuant to the requirements of SFAS 123.
All shares held in the Employer Stock Ownership Plan ("ESOP") are treated as
outstanding for purposes of computing the Company's earnings per share. See
additional information on the ESOP in Note 10.
Earnings Per Share. The Company adopted Statement of Financial Accounting
Standards No. 128 "Earnings per Share" ("SFAS 128") in 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 shares had been issued).
SFAS 128 requires the Company to present basic and diluted per share amounts for
income (loss) from continuing operations and for net income (loss) on the face
of the statements of operations. All prior period earnings per share data have
been restated.
The effect of stock options to employees represent the only difference between
the weighted average shares used for the basic computation compared to the
diluted computation. The total incremental shares from assumed conversion of
stock options included in the computation of diluted earnings per share were
3,840,333 and 2,111,437 for the years ended December 31, 1998 and 1996,
respectively. Because of the net loss in 1997, all options were anti-dilutive
for the year ended December 31, 1997. The weighted average of options to
purchase 274,340 and 3,502,290 shares in 1998 and 1996, respectively, were
excluded from the diluted earnings per share computation because the exercise
prices were greater than the respective average market price of the common
shares.
The only adjustments that currently affect the numerator of the Company's
diluted earnings per share computation include preferred dividends and
potentially dilutive securities at subsidiaries and affiliates. These
adjustments totaled $2.3 million for the year ended December 31, 1998.
Adjustments for the years ended December 31, 1997 and 1996 were not material.
<PAGE>70
<TABLE>
Stockholders' Equity. Information regarding the Company's capital stock at
December 31, 1998 follows:
<CAPTION>
Shares Shares
Authorized Issued
<S> <C> <C>
$25 Par, 4% noncumulative, Preferred stock 840,000 649,736
$1 Par, Preferred stock 2,000,000 None
$1 Par, Series A, Preferred stock 150,000 None
$1 Par, Series B convertible, Preferred stock 1,000,000 None
$.01 Par, Common stock 400,000,000 146,738,232
</TABLE>
The Company's $1 Par Series B convertible Preferred stock ("Series B Preferred
stock"), issued in 1993, had a $200 per share liquidation preference and was
convertible to common stock at a ratio of twelve to one. As more fully discussed
in Note 9, effective September 30, 1998, the Company terminated the Employee
Plan Funding Trust ("EPFT" or "Trust"), which was established as a grantor trust
for the purpose of holding these shares of Series B Preferred stock for the
benefit of various KCSI employee benefit plans.
In accordance with the Agreement to terminate the EPFT, the Company received
872,362 shares of Series B Preferred stock in full repayment of the indebtedness
from the Trust ( $178.7 million plus accrued interest). In addition, the
remaining 127,638 shares of Series B Preferred stock were converted into KCSI
Common stock, resulting in the issuance to the EPFT of 1,531,656 shares of such
Common stock. This Common stock was then transferred to KCSI and the Company has
set these shares aside for use in connection with the KCSI Stock Option and
Performance Award Plan, as amended and restated effective July 15, 1998. As a
result of the termination of the Trust, the Series B Preferred stock is no
longer issued or outstanding and the converted Common stock has been included in
the shares issued above.
On July 29, 1997, the Company's Board of Directors authorized a 3-for-1 split in
the Company's common stock effected in the form of a stock dividend. All share
and per share data reflect this split.
The Company's stockholders approved a reverse stock split at a special
stockholders' meeting held on July 15, 1998. The Company will not effect a
reverse stock split until a separation of its two business segments
(Transportation and Financial Services) is completed.
<TABLE>
Shares outstanding are as follows at December 31, (in thousands):
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
$25 Par, 4% noncumulative, Preferred stock 242 242 242
$.01 Par, Common stock 109,815 108,084 108,918
</TABLE>
Retained earnings include equity in unremitted earnings of unconsolidated
affiliates of $125.9, $109.1 and $99.2 million at December 31, 1998, 1997 and
1996, respectively.
New Accounting Pronouncements. In June 1998, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities measured at fair value. SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999
and should not be retroactively applied to financial statements of periods prior
to adoption.
<PAGE>71
The Company currently has a program to hedge against fluctuations in the price
of diesel fuel purchases, and also enters into fuel purchase commitments from
time to time. In addition, the Company continues to evaluate alternatives with
respect to utilizing foreign currency instruments to hedge its U.S. dollar
investments in Grupo TFM and Nelson as market conditions change or exchange
rates fluctuate. Currently, the Company has no outstanding foreign currency
hedges. The Company is reviewing the provisions of SFAS 133 and expects adoption
by the required date. The adoption of SFAS 133 with respect to existing hedge
transactions is not expected to have a material impact on the Company's results
of operations, financial position or cash flows.
Statement of Financial Accounting Standards No. 132 "Employers' Disclosure about
Pensions and Other Postretirement Benefits - an amendment of FASB Statements No.
87, 88, and 106" ("SFAS 132") was adopted by the Company in 1998 and prior year
information has been included pursuant to SFAS 132. SFAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. The standard does not change the measurement or
recognition of pension or postretirement benefit plans. The adoption of SFAS 132
did not have a material impact on the Company's disclosures.
In 1998, the Company adopted the provisions of Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the manner in
which public business enterprises report information about operating segments in
annual financial statements and requires disclosure of selected information
about operating segments in interim financial reports issued to shareholders.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers. The adoption of SFAS 131 did not
have a material impact on the disclosures of the Company. See Note 13 for
segment financial information. Prior year information is reflected pursuant to
SFAS 131.
Effective January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS
130"), which establishes standards for reporting and disclosure of comprehensive
income and its components in the financial statements. Prior year information
has been included pursuant to SFAS 130. The Company's other comprehensive income
consists primarily of unrealized gains and losses relating to investments held
as "available for sale" securities as defined by SFAS 115. The unrealized gain
related to these investments increased $40.3 million, $42.6 million and $30.1
million ($24.1 million, $25.9 million and $18.5 million, net of deferred taxes)
for the years ended December 31, 1998, 1997 and 1996, respectively.
In Issue No. 96-16, the Emerging Issues Task Force ("EITF 96-16") of the FASB,
reached a consensus that substantive minority rights which provide the minority
shareholder with the right to effectively control significant decisions in the
ordinary course of an investee's business could impact whether the majority
shareholder should consolidate the investee. Management evaluated the rights of
the minority shareholders of its consolidated subsidiaries. Application of EITF
96-16 did not affect the Company's consolidated financial statements. This
conclusion is currently under discussion with the Staff of the Securities and
Exchange Commission and, accordingly, is subject to change. See Note 12 for
additional discussion.
In 1998, the Company adopted the guidance outlined in SOP 98-1. SOP 98-1
requires that computer software costs incurred in the preliminary project stage,
as well as training and maintenance costs be expensed as incurred. This guidance
also requires that direct and indirect costs associated with the application
development stage of internal use software be capitalized until such time that
the software is substantially complete and ready for its intended use.
Capitalized costs are to be amortized on a straight line basis over the useful
life of the software. The adoption of this guidance did not have a material
impact on the Company's results of operations, financial position or cash flows.
<PAGE>72
Note 2. Acquisitions and Dispositions
DST Transactions. On December 21, 1998, DST and USCS International, Inc.
("USCS") announced the completion of the merger of USCS with a wholly-owned DST
subsidiary. The merger, accounted for as a pooling of interests by DST, expands
DST's presence in the output solutions and customer management software and
services industries. USCS is a leading provider of customer management software
to the cable television and convergence industries. Under the terms of the
merger, USCS became a wholly-owned subsidiary of DST. DST issued approximately
13.8 million shares of its common stock in the transaction.
The issuance of additional DST common shares reduced KCSI's ownership interest
from 41% to approximately 32%. Additionally, the Company recorded a one-time
non-cash charge of approximately $36.0 million pretax ($23.2 million after-tax,
or $0.21 per share), reflecting the Company's reduced ownership of DST and the
Company's proportionate share of DST and USCS fourth quarter merger-related
costs. KCSI accounts for its investment in DST under the equity method.
On August 1, 1996, The Continuum Company, Inc. ("Continuum"), formerly an
approximate 23% owned DST equity affiliate, merged with Computer Sciences
Corporation ("CSC," a publicly traded company) in a tax-free share exchange. In
exchange for its ownership interest in Continuum, DST received CSC common stock,
which DST accounts for as available for sale securities pursuant to SFAS 115.
As a result of this CSC/Continuum transaction, the Company's earnings for the
year ended December 31, 1996 include approximately $47.7 million (after-tax, or
$0.41 per diluted share), representing the Company's proportionate share of the
one-time gain recognized by DST in connection with the merger. Continuum ceased
to be an equity affiliate of DST, thereby eliminating any future Continuum
equity affiliate earnings or losses. DST recognized equity losses in Continuum
of $4.9 million for the first six months of 1996.
Acquisition of Nelson. On April 20, 1998, the Company completed its acquisition
of 80% of Nelson, an investment advisor and manager based in the United Kingdom
("UK"). Nelson has six offices throughout the UK and offers planning based asset
management services directly to private clients. Nelson managed approximately
$1.2 billion of assets as of December 31, 1998. The acquisition, accounted for
as a purchase, was completed using a combination of cash, KCSI common stock and
notes payable. The total purchase price was approximately $33 million. The
purchase price is in excess of the fair market value of the net tangible and
identifiable intangible assets received and this excess was recorded as goodwill
to be amortized over a period of 20 years. Assuming the transaction had been
completed January 1, 1998, inclusion of Nelson's results on a pro forma basis,
as of and for the year ended December 31, 1998, would not have been material to
the Company's consolidated results of operations.
Grupo TFM. In June 1996, the Company and Transportacion Maritima Mexicana, S.A.
de C.V. ("TMM") formed Grupo TFM. Grupo TFM was formed to participate in the
privatization of the Mexican rail industry.
On December 6, 1996, Grupo TFM, TMM and the Company announced that the Mexican
Government ("Government") had 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 based on the U.S. dollar/Mexican peso exchange rate
on the award date). TFM holds the concession to operate Mexico's "Northeast Rail
Lines" for 50 years, with the option of a 50 year extension (subject to certain
conditions).
The Northeast Rail Lines are a strategically important rail link to Mexico and
the North American Free Trade Agreement ("NAFTA") corridor. The lines are
estimated to transport approximately 40% of Mexico's rail cargo and are located
next to primary north/south truck routes. The Northeast Rail Lines directly link
Mexico City and Monterrey, as well as Guadalajara (through trackage rights),
with the ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of
Matamoros and Nuevo Laredo. Nuevo Laredo is a primary transportation gateway
between Mexico and the United States. The Northeast Rail Lines connect
<PAGE>73
in Laredo, Texas to the Union Pacific Railroad and the Tex Mex. The Tex Mex
links to KCSR at Beaumont, Texas through trackage rights. With the KCSR and Tex
Mex interchange at Beaumont, and through KCSR's connections with major rail
carriers at various other points, KCSR has developed a NAFTA rail system which
is expected to facilitate the economic integration of the North American
marketplace.
On January 31, 1997, Grupo TFM paid the first installment of the purchase price
(approximately $565 million 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 $298 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 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); (ii) senior notes and senior
discount debentures ($400 million); (iii) proceeds from the sale of 24.6% of
Grupo TFM to the Government (approximately $199 million 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 agreed to contribute up to $37.5 million of equity capital to Grupo
TFM if TMM and the Company were required to contribute under the capital call
provisions of the Contribution Agreement prior to July 16, 1998. As of July 16,
1998, no additional contributions from the Company were requested or made and,
therefore, the Government did not contribute additional equity capital to Grupo
TFM. The Government also committed that if it had not made any contributions by
July 16, 1998, it would, up to July 31, 1999, 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. As of December 31, 1998 no
additional contributions from the Company have been requested or made.
At December 31, 1998, the Company's investment in Grupo TFM was approximately
$285.1 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.
<PAGE>74
On January 28, 1999, the Company, along with other direct and indirect
owners of TFM, entered into a preliminary agreement with the Government. As part
of that agreement, an option was granted to the Company, TMM and Grupo Servia,
S.A. de C.V. ("Grupo Servia") to purchase the Government's 20% ownership
interest in TFM at a discount. The option to purchase all or a portion of the
Government's interest expires on November 30, 1999. If the purchase of at least
35% of the Government's stock is not completed by May 31, 1999, the entire
option will expire on that date. If the option is fully exercised, the Company's
additional cash investment is not expected to exceed $88 million. As part of
this agreement and as a condition to exercise this option, the parties have
agreed to settle the oustanding claims against the Government regarding a refund
of Mexican Value Added Tax (VAT) payments. TFM has also agreed to sell to the
Government a small section of redundant trackage for inclusion in another
railroad concession. In addition, under the terms of the agreement, the
Government would be released from its capital call obligations at the moment
that the option is exercised in whole or in part. Furthermore, TFM, TMM, Grupo
Servia and the Company have agreed to sell, in a public offering, a direct or
indirect participation in at least the same percentage currently represented by
the shares exercised in this option, by October 31, 2003, at the latest, subject
to market conditions. The option and the other described agreements are
conditioned on the parties entering into a final written agreement and the
Company, TFM, TMM and Grupo Servia obtaining all necessary consents and
authorizations.
Gateway Western Acquisition. In May 1997, the STB approved the Company's
acquisition of Gateway Western, a regional rail carrier with operations from
Kansas City, Missouri to East St. Louis and Springfield, Illinois and haulage
rights between Springfield and Chicago, from the Southern Pacific Rail
Corporation. Prior to the STB approval -- from acquisition in December 1996
through May 1997 -- the Company's investment in Gateway Western was treated as a
majority-owned unconsolidated subsidiary accounted for under the equity method.
Upon approval from the STB, the assets, liabilities, revenues and expenses were
included in the Company's consolidated financial statements. The consideration
paid for Gateway Western (including various acquisition costs and liabilities)
was approximately $12.2 million, which exceeded the fair value of the underlying
net assets by approximately $12.1 million. The resulting intangible is being
amortized over a period of 40 years.
Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company,
Burlington Northern Santa Fe Corporation has the option of purchasing the assets
of Gateway Western (based on a fixed formula in the agreement) through the year
2004.
Assuming the transaction had been completed January 1, 1996, inclusion of
Gateway Western results on a pro forma basis, as of and for the year ended
December 31, 1996, would not have been material to the Company's consolidated
results of operations.
Berger Ownership Interest. As a result of certain transactions during 1997, the
Company increased its ownership in Berger to 100% from approximately 80% at
December 31, 1996. In January and December 1997, Berger purchased, for treasury,
the common stock of minority shareholders. Also in December 1997, the Company
acquired additional Berger shares from a minority shareholder through the
issuance of 330,000 shares of KCSI common stock. In connection with these
transactions, Berger granted options to acquire shares of Berger stock to
certain of its employees. At December 31, 1998, the Company's ownership would
have been diluted to approximately 91% if all of the outstanding options had
been exercised. These transactions resulted in approximately $17.8 million of
goodwill, which is being amortized over 15 years. However, see discussion of
impairment of a portion of this goodwill in Note 3.
The Company's 1994 acquisition of a controlling interest in Berger was completed
under a Stock Purchase Agreement ("Agreement") covering a five year period
ending in October 1999. Pursuant to the Agreement, the Company may be required
to make additional purchase price payments (up to $36.6 million) based upon
Berger attaining certain incremental levels of assets under management up to $10
billion by October 1999. The Company made no payments under the Agreement during
1998. In 1997 and 1996, the Company made additional payments of $3.1 and $23.9
million, respectively, resulting in adjustments to the purchase price. The
intangible amounts are amortized over 15 years.
<PAGE>75
Southern Capital. In October 1996, the Company and GATX Capital Corporation
("GATX") completed the transactions for the formation and financing of a joint
venture to perform certain leasing and financing activities. The venture,
Southern Capital, was formed through a GATX contribution of $25 million in cash,
and a Company contribution (through KCSR and Carland, Inc.) of $25 million in
net assets, comprising a negotiated fair value of locomotives and rolling stock
and long-term indebtedness owed to KCSI and its subsidiaries. In an associated
transaction, Southern Leasing Corporation ("SLC," an indirect wholly-owned
subsidiary of the Company prior to dissolution in October 1996), sold to
Southern Capital approximately $75 million of loan portfolio assets and rail
equipment at fair value which approximated historical cost.
As a result of these transactions and subsequent repayment by Southern Capital
of indebtedness owed to KCSI and its subsidiaries, the Company received cash
which exceeded the net book value of its assets by approximately $44.1 million.
Concurrent with the formation of the joint venture, KCSR entered into operating
leases with Southern Capital for the majority of the rail equipment acquired by
or contributed to Southern Capital. Accordingly, this excess fair value over
book value is being recognized over the terms of the leases (approximately $4.4
million in 1998 and $4.9 million in 1997).
The cash received by the Company was used to reduce outstanding indebtedness by
approximately $217 million, after consideration of applicable income taxes,
through repayments on various lines of credit and subsidiary indebtedness. The
Company reports its 50% ownership interest in Southern Capital under the equity
method of accounting. See Notes 4 and 5 for additional information.
Under a prior agreement, GATX had an option to notify the Company of its intent
to cause disposal of the loan portfolio assets of Southern Capital. GATX
exercised its option with regard to this agreement and the Company and GATX are
jointly reviewing options for disposition of these loan portfolio assets. The
portfolio of rail assets would remain with Southern Capital. The disposal of the
loan portfolio assets is not expected to have a material impact on the Company's
results of operations, financial position or cash flows.
Note 3. Restructuring, Asset Impairment and Other Charges
As discussed in Note 1, in response to changes in the competitive and business
environment in the rail industry, the Company revised its methodology for
evaluating goodwill recoverability effective December 31, 1997. As a result of
this revised methodology (as well as certain changes in estimate), the Company
determined that the aggregate carrying value of the goodwill and other
intangible assets associated with the 1993 MidSouth purchase exceeded their fair
value (measured by reference to the net present value of future cash flows).
Accordingly, the Company recorded an impairment loss of $91.3 million in 1997.
In connection with the review of its intangible assets, the Company determined
that the carrying value of the goodwill associated with Berger exceeded its fair
value (measured by reference to various valuation techniques commonly used in
the investment management industry) as a result of below-peer performance and
growth of the core Berger funds. Accordingly, the Company recorded an impairment
loss of $12.7 million.
During the fourth quarter of 1997, Transportation management committed to
dispose, as soon as practicable, certain under-performing branch lines acquired
in connection with the 1993 MidSouth purchase, as well as certain of the
Company's non-operating real estate. Accordingly, in accordance with SFAS 121,
the Company recognized losses aggregating $38.5 million which represented the
excess of carrying value over fair value less cost to sell. Results of
operations related to these assets included in the accompanying consolidated
financial statements cannot be separately identified. During 1998, one of the
branch lines was sold for a pretax gain of approximately $2.9 million.
Management efforts are ongoing to procure bids on the other branch line and
non-operating real estate.
<PAGE>76
In accordance with SFAS 121, the Company periodically evaluates the
recoverability of its operating properties. As a result of continuing operating
losses and a further decline in the customer base of the Transportation
segment's bulk coke handling facility (Pabtex, Inc.) the Company determined that
the long-lived assets related thereto may not be fully recoverable. Accordingly,
the Company recognized an impairment loss of $9.2 million in 1997 representing
the excess of carrying value over fair value.
Additionally, the Company recorded expenses aggregating $44.7 million related to
restructuring and other costs. This amount includes approximately $27.1 related
to the termination of a union productivity fund (which required KCSR to pay
certain employees when reduced crew levels were used) and employee separations,
as well as $17.6 million of other costs related to reserves for leases,
contracts, impaired investments and other reorganization costs. During 1998,
approximately $31.1 million of cash payments were made and approximately $2.5
million of the reserves were reduced based primarily on changes in the estimate
of claims made relating to the union productivity fund. Approximately $6.5
million of reserves remain accrued at December 31, 1998.
Note 4. Supplemental Cash Flow Disclosures
<TABLE>
Supplemental Disclosures of Cash Flow Information.
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash payments (in millions):
Interest $ 74.2 $ 64.5 $ 56.0
Income taxes 83.2 65.3 121.0
</TABLE>
Supplemental Schedule of Noncash Investing and Financing Activities. As
discussed in Note 2, during second quarter 1998, in connection with Company's
acquisition of Nelson, the Company issued approximately 67,000 shares of KCSI
Common stock (valued at $3.2 million) to certain of the sellers of the Nelson
shares. Also, notes payable of $4.9 million were recorded as part of the
purchase price, payable by March 31, 2005, bearing interest at 7 percent.
As discussed in Note 2, during 1997 the Company purchased a portion of the
Berger minority interest. The Company issued 330,000 shares of its common stock,
valued at $10.1 million, in exchange for the increased investment in Berger.
In connection with the Southern Capital joint venture formation, the Company
(through its subsidiaries KCSR, Carland, Inc. and SLC) contributed/sold to
Southern Capital rail equipment, current and non-current loan portfolio assets,
and long-term indebtedness owed to KCSI and its subsidiaries (see Note 2).
Southern Capital repaid the indebtedness owed KCSI and its subsidiaries with
borrowings under Southern Capital's credit facility. Cash received by KCSI from
Southern Capital of approximately $224 million is reflected in the Consolidated
Statement of Cash Flows for the year ended December 31, 1996 as proceeds from
disposal of property ($184 million) and proceeds from disposal of other
investments ($40 million). The Company accrued for expected income taxes on the
transaction and, as described in Note 2, deferred the excess cash received over
the book value of the assets contributed and sold.
Company subsidiaries and affiliates hold various investments which are accounted
for as "available for sale" securities as defined in SFAS 115. The Company
records its proportionate share of any unrealized gains or losses related to
these investments, net of deferred taxes, in accumulated other comprehensive
income. Stockholders' equity increased $24.1, $25.9, and $18.5 million in 1998,
1997 and 1996, respectively, as a result of unrealized gains related to these
investments.
During 1998, 1997 and 1996, the Company issued 227,178, 245,550 and 305,400
shares of KCSI Common stock, respectively, under various offerings of the
Employee Stock Purchase Plan ("ESPP").
<PAGE>77
These shares, totaling a purchase price of $3.0, $3.1 and $3.8 million in 1998,
1997 and 1996, respectively, were subscribed and paid for through employee
payroll deductions in years preceding the issuance of stock.
During 1998, 1997 and 1996, the Company's Board of Directors declared a
quarterly dividend totaling approximately $4.4, $4.5 and $3.6 million,
respectively, payable in January of the following year. The dividend declaration
reduced retained earnings and established a liability at the end of each
respective year. No cash outlay occurred until the subsequent year.
Note 5. Investments
<TABLE>
Investments held for operating purposes, which include investments in
unconsolidated affiliates, are as follows (in millions):
<CAPTION>
Percentage
Ownership
Company Name December 31, 1998 Carrying Value
- --------------------------- ----------------- ---------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C> <C>
DST (a) 32% $ 376.0 $ 345.3 $ 283.5
Grupo TFM (b) 37% 285.1 288.2 2.7
Southern Capital 50% 24.6 27.6 25.5
Mexrail 49% 13.0 14.9 14.1
Other 11.2 10.5 11.3
Market valuation allowances (2.8) (3.0) (1.9)
----------- ----------- -----------
Total (c) $ 707.1 $ 683.5 $ 335.2
=========== =========== ===========
</TABLE>
(a) On December 21, 1998, DST and USCS announced the completion of the merger
of USCS with a wholly-owned DST subsidiary. Under the terms of the merger,
which was accounted for as a pooling of interests by DST, USCS became a
wholly-owned subsidiary of DST. DST issued approximately 13.8 million
shares of its common stock in the transaction, resulting in a reduction of
KCSI's ownership interest from 41% to approximately 32%. (See Note 2). Fair
market value at December 31, 1998 (based on DST's New York Stock Exchange
closing market price) was approximately $1,156.7 million.
(a) In June 1997, the Mexican Government purchased approximately 24.6% of Grupo
TFM, reducing the Company's ownership in Grupo TFM from 49% to
approximately 37% (see Note 2).
(b) Fair market value is not readily determinable for investments other than
noted above, and in the opinion of management, market value approximates
carrying value
Additionally, DST holds investments in the common stock of State Street
Corporation and CSC, among others, which are accounted for as "available for
sale" securities as defined by SFAS 115. The Company records its proportionate
share of any unrealized DST gains or losses related to these investments, net of
deferred taxes, in accumulated other comprehensive income.
Transactions With and Between Unconsolidated Affiliates. The Company and its
subsidiary, KCSR, paid certain expenses on behalf of Grupo TFM during 1997. In
addition, the Company has a management services agreement with Grupo TFM to
provide certain consulting and management services. At December 31, 1998, $1.5
million is reflected as an accounts receivable in the Company's consolidated
balance sheet.
In connection with the October 1996 formation of the Southern Capital joint
venture, KCSR entered into operating leases with Southern Capital for
locomotives and rolling stock at rental rates management believes reflect
market. KCSR paid Southern Capital $25.1, $23.5 and $4.5 million under these
operating leases in 1998, 1997 and 1996, respectively. Additionally, Southern
Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, entered into a contract
with Southern Capital to manage the loan portfolio assets held
<PAGE>78
by Southern Capital, as well as to perform general administrative and accounting
functions for the venture. Payments under this contract were approximately $1.7
million in 1998 and 1997 and $0.3 million in 1996.
Together, Janus and Berger incurred approximately $5.5, $5.3 and $5.4 million in
1998, 1997 and 1996, respectively, in expenses associated with various services
provided by DST and its subsidiaries and affiliates.
Janus recorded $8.9, $7.1 and $5.9 million in revenues for the years ended
December 31, 1998, 1997 and 1996, respectively, representing management fees
earned from IDEX Management, Inc. ("IDEX"). IDEX was a 50% owned investment of
Janus prior to disposition during second quarter 1998. Janus recognized an $8.8
million pretax gain in connection with this disposition.
Throughout 1996, the Company repurchased KCSI common stock owned by DST's
portion of the ESOP. In total, 1,605,000 shares were repurchased for
approximately $24.2 million.
Financial Information. Combined financial information of all unconsolidated
affiliates that the Company and its subsidiaries account for under the equity
method follows. Note that information relating to DST (i.e., the equity in net
assets of unconsolidated affiliates, financial condition and operating results)
has been restated to combine the historical results of DST and USCS as a result
of their merger on December 21, 1998. All amounts are in millions.
<TABLE>
<CAPTION>
December 31, 1998
--------------------------------------------------------
Grupo
DST TFM (i) Other Total
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Investment in unconsolidated affiliates $ 376.0 $ 285.1 $ 38.6 $ 699.7
Equity in net assets of
unconsolidated affiliates 376.0 282.4 34.6 693.0
Dividends and distributions received
from unconsolidated affiliates - - 6.1 6.1
Financial Condition:
Current assets $ 385.7 $ 109.9 $ 33.1 $ 528.7
Non-current assets 1,514.3 1,974.7 277.0 3,766.0
----------- ----------- ---------- -----------
Assets $ 1,900.0 $ 2,084.6 $ 310.1 $ 4,294.7
=========== =========== ========== ===========
Current liabilities $ 271.6 $ 233.9 $ 48.6 $ 554.1
Non-current liabilities 461.4 745.0 191.7 1,398.1
Minority interest 0.8 342.4 - 343.2
Equity of stockholders and partners 1,166.2 763.3 69.8 1,999.3
----------- ----------- ---------- -----------
Liabilities and equity $ 1,900.0 $ 2,084.6 $ 310.1 $ 4,294.7
=========== =========== ========== ===========
Operating results:
Revenues $ 1,096.1 $ 431.3 $ 87.7 $ 1,615.1
----------- ----------- ---------- -----------
Costs and expenses $ 976.6 $ 368.8 $ 85.4 $ 1,430.8
----------- ----------- ---------- -----------
Net Income (loss) $ 71.6 $ (7.3) $ 2.4 $ 66.7
----------- ----------- ---------- -----------
</TABLE>
<PAGE>79
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------
Grupo
DST TFM (i) Other Total
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Investment in unconsolidated affiliates $ 345.3 $ 288.2 $ 44.6 $ 678.1
Equity in net assets of
unconsolidated affiliates 300.1 285.1 39.6 624.8
Dividends and distributions received
from unconsolidated affiliates - - 0.2 0.2
Financial Condition:
Current assets $ 351.2 $ 114.7 $ 29.9 $ 495.8
Non-current assets 1,197.3 1,990.4 255.1 3,442.8
----------- ----------- ---------- -----------
Assets $ 1,548.5 $ 2,105.1 $ 285.0 $ 3,938.6
=========== =========== ========== ===========
Current liabilities $ 212.0 $ 158.5 $ 13.2 $ 383.7
Non-current liabilities 404.2 830.6 191.7 1,426.5
Minority interest 1.4 345.4 - 346.8
Equity of stockholders and partners 930.9 770.6 80.1 1,781.6
----------- ----------- ---------- -----------
Liabilities and equity $ 1,548.5 $ 2,105.1 $ 285.0 $ 3,938.6
=========== =========== ========== ===========
Operating results:
Revenues $ 950.0 $ 206.4 $ 83.2 $ 1,239.6
----------- ----------- ---------- -----------
Costs and expenses $ 823.1 $ 190.5 $ 61.4 $ 1,075.0
----------- ----------- ---------- -----------
Net Income (loss) $ 79.4 $ (36.5) $ 5.9 $ 48.8
----------- ----------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
---------------------------------------------------------
Grupo
DST TFM (i) Other Total
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Investment in unconsolidated affiliates $ 283.5 $ 2.7 $ 39.7 $ 325.9
Equity in net assets of
unconsolidated affiliates 256.7 2.1 35.2 294.0
Dividends and distributions received
from unconsolidated affiliates - - 3.7 3.7
Financial Condition:
Current assets $ 300.2 $ 1.2 $ 34.4 $ 335.8
Non-current assets 1,003.5 4.2 331.7 1,339.4
----------- ----------- ---------- -----------
Assets $ 1,303.7 $ 5.4 $ 366.1 $ 1,675.2
=========== =========== ========== ===========
Current liabilities $ 188.9 $ 1.2 $ 27.2 $ 217.3
Non-current liabilities 318.6 - 267.7 586.3
Equity of stockholders and partners 796.2 4.2 71.2 871.6
----------- ----------- ---------- -----------
Liabilities and equity $ 1,303.7 $ 5.4 $ 366.1 $ 1,675.2
=========== =========== ========== ===========
<PAGE>80
Operating results:
Revenues $ 844.0 $ - $ 76.4 $ 920.4
----------- ----------- ---------- -----------
Costs and expenses $ 765.8 $ - $ 62.0 $ 827.8
----------- ----------- ---------- -----------
Net Income $ 177.8 $ - $ 4.9 $ 182.7
----------- ----------- ---------- -----------
</TABLE>
(i) Grupo TFM is presented on a U.S. GAAP basis.
Generally, the difference between the carrying amount of the Company's
investment in unconsolidated affiliates and the underlying equity in net assets
is attributable to certain equity investments whose carrying amounts have been
reduced to zero, and report a net deficit. For 1997 and 1996, the difference
between the Company's investment in DST and the underlying equity in net assets
is attributable to the effects of restating DST's financial statements for the
merger of a DST wholly-owned subsidiary with USCS. In addition, with respect to
the Company's investment in Grupo TFM, the effects of foreign currency
transactions and capitalized interest prior to June 23, 1997, which are not
recorded on the investee's books, also result in these differences.
Other. Interest income on cash and equivalents and investments in advised funds
was $8.1, $7.9 and $4.9 million in 1998, 1997 and 1996, respectively.
Note 6. Other Balance Sheet Captions
<TABLE>
Investments in Advised Funds. Information with respect to investments in advised
funds is summarized as follows (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Available for sale:
Cost basis $ 140.8 $ 95.5 $ 58.9
Gross unrealized gains 5.4 2.0 2.4
----------- ----------- ----------
Sub-total 146.2 97.5 61.3
----------- ----------- ----------
Trading:
Cost basis 3.2 2.1 5.6
Gross unrealized gains - 0.7 0.9
Gross unrealized losses (0.3) - -
----------- ----------- ----------
Sub-total 2.9 2.8 6.5
----------- ----------- ----------
Total $ 149.1 $ 100.3 $ 67.8
=========== =========== ==========
</TABLE>
Gross realized gains were not material to the Company's consolidated results of
operations for the years ended 1998, 1997 and 1996.
Investments in advised funds are generally used by Janus and Berger to fund
operations and dividends. Pursuant to contractual agreements, Janus is required
to pay at least 90% of its net income to its shareholders each year.
<TABLE>
Accounts Receivable. Accounts receivable include the following allowances (in
millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Accounts receivable $ 214.2 $ 181.9 $ 141.4
Allowance for doubtful accounts (5.8) (4.9) (3.3)
----------- ----------- ----------
Accounts receivable, net $ 208.4 $ 177.0 $ 138.1
=========== =========== ==========
Doubtful accounts expense $ 0.9 $ 1.6 $ 1.4
----------- ----------- ----------
</TABLE>
<PAGE>81
<TABLE>
Other Current Assets. Other current assets include the following items (in
millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Deferred income taxes $ 14.8 $ 10.1 $ 8.6
Other 23.0 13.8 15.4
----------- ----------- ----------
Total $ 37.8 $ 23.9 $ 24.0
=========== =========== ==========
</TABLE>
<TABLE>
Properties. Properties and related accumulated depreciation and amortization are
summarized below (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Properties, at cost
Transportation
Road properties $ 1,381.4 $ 1,306.4 $ 1,308.2
Equipment, including $6.7, $15.4 and
$15.4 financed under capital leases 327.7 294.6 289.2
Other 55.1 106.2 76.8
Financial Services, including $0, $1.4
and $1.4 equipment financed under
capital leases 69.6 38.6 36.4
----------- ----------- ----------
Total 1,833.8 1,745.8 1,710.6
----------- ----------- ----------
Accumulated depreciation and amortization
Transportation
Road properties 384.9 346.2 330.3
Equipment, including $3.5, $10.8
and $10.2 for capital leases 127.6 116.8 109.3
Other 22.4 26.4 24.1
Financial Services
including $0, $1.4 and $1.4
for equipment capital leases 32.2 29.2 27.6
----------- ----------- ----------
Total 567.1 518.6 491.3
----------- ----------- ----------
Net Properties $ 1,266.7 $ 1,227.2 $ 1,219.3
=========== =========== ==========
</TABLE>
As discussed in Note 3, effective December 31, 1997, the Company recorded a
charge representing long-lived assets held for disposal and impairment of assets
in accordance with SFAS 121.
<TABLE>
Intangibles and Other Assets. Intangibles and other assets include the following
items (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Identifiable Intangibles $ 49.5 $ 49.5 $ 49.5
Goodwill 125.7 91.7 200.8
Accumulated amortization ( 24.2) (18.1) (40.6)
----------- ----------- ----------
Net 151.0 123.1 209.7
Other assets 25.4 27.3 27.8
----------- ----------- ----------
Total $ 176.4 $ 150.4 $ 237.5
=========== =========== ==========
</TABLE>
<PAGE>82
As discussed in Note 1, effective December 31, 1997, the Company changed its
method of evaluating the recoverability of goodwill. Also, see Note 3 for
discussion of goodwill impairment recorded during fourth quarter 1997.
<TABLE>
Accrued Liabilities. Accrued liabilities include the following items (in
millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Prepaid freight charges due other railroads $ 30.4 $ 38.6 $ 26.1
Current interest payable on indebtedness 13.2 17.2 15.2
Contract allowances 12.7 20.2 14.0
Productivity Fund liability - 24.2 -
Other 103.4 117.6 79.1
----------- ----------- ----------
Total $ 159.7 $ 217.8 $ 134.4
=========== =========== ==========
</TABLE>
See Note 3 for discussion of reserves established in 1997 for restructuring and
other charges.
Note 7. Long-Term Debt
<TABLE>
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in
millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
KCSI
Competitive Advance & Revolving Credit
Facilities, through May 2002 $ 315.0 $ 282.0 $ 40.0
Rates: Below Prime
Notes and Debentures, due July
2002 to December 2025 400.0 500.0 500.0
Unamortized discount (2.4) (2.7) (3.0)
Rates: 6.625% to 8.80%
KCSR
Equipment trust indebtedness, due
serially to June 2009 78.8 88.9 96.1
Rates: 7.15% to 9.68%
Other
Short-term working capital lines 28.0 31.0 -
Rates: Below Prime
Subordinated and senior notes, secured term
loans and industrial revenue bonds, due
May 2004 to February 2018 16.9 17.4 12.0
Rates: 3.0% to 7.89%
----------- ----------- ----------
Total 836.3 916.6 645.1
Less: debt due within one year 10.7 110.7 7.6
----------- ----------- ----------
Long-term debt $ 825.6 $ 805.9 $ 637.5
=========== =========== ==========
</TABLE>
<PAGE>83
<TABLE>
KCSI Credit Agreements. The Company's lines of credit at December 31, 1998
follow (in millions):
<CAPTION>
Facility
Lines of Credit Fee Total Unused
- ------------------------------------------------------------- ------------ ------------
<S> <C> <C> <C>
KCSI .07 to .25% $ 555.0 $ 240.0
KCSR .1875% 5.0 5.0
Gateway Western .1875% 40.0 12.0
Berger .125% 6.0 6.0
------------ ------------
Total $ 606.0 $ 263.0
============ ============
</TABLE>
On May 5, 1995, the Company established a credit agreement in the amount of $400
million, comprised of a $300 million five-year facility and a $100 million
364-day facility. The $300 million facility was renewed in May 1997, extending
through May 2002, while the $100 million facility is expected to be renewed
annually. Proceeds of these facilities have been and are anticipated to be used
for general corporate purposes. The agreements contain a facility fee ranging
from .07-.25% per annum and interest rates below prime. Additionally, in May
1998, the Company established an additional $100 million 364-day credit
agreement assumable by the Financial Services segment for its use upon
separation of the Company's two segments. Proceeds of this facility have been
and are anticipated to be used to repay Company debt and for general corporate
purposes. This agreement contains a facility fee of .15% and interest rates
below prime. The Company also has various other lines of credit totaling $106
million. These additional lines, which are available for general corporate
purposes, have interest rates below prime and terms of less than one year. Among
other provisions, the agreements limit subsidiary indebtedness and sale of
assets, and require certain coverage ratios to be maintained. As of December 31,
1998, the Company was in compliance with all covenants of these agreements. At
December 31, 1998, the Company had borrowings of $343 million under its various
lines of credit leaving $263 million available for use, subject to limitations
within existing financial covenants as noted below.
As discussed in Note 2, in January 1997, the Company made an approximate $298
million capital contribution to Grupo TFM, of which approximately $277 million
was used by Grupo TFM for the purchase of TFM. This payment was funded using
borrowings under the Company's lines of credit.
Public Debt Transactions. During 1998, $100 million of 5.75% Notes which matured
on July 1, 1998 were repaid using borrowings under existing lines of credit.
Public indebtedness of the Company at December 31, 1998 includes: $100 million
of 7.875% Notes due 2002; $100 million of 6.625% Notes due in 2005; and $100
million of 8.8% Debentures due 2022; and $100 million of 7% Debentures due 2025.
The various Notes are not redeemable prior to their respective maturities. The
8.8% Debentures are redeemable on or after July 1, 2002 at a premium of 104.04%,
which declines to par on or after July 1, 2012. The 7% Debentures are redeemable
at the option of the Company, at any time, in whole or in part, at a redemption
price equal to the greater of (a) 100% of the principal amount of such
Debentures or (b) the sum of the present values of the remaining scheduled
payments of principal and interest thereon discounted to the date of redemption
on a semiannual basis at the Treasury Rate (as defined in the Debentures
agreement) plus 20 basis points, and in each case accrued interest thereon to
the date of redemption.
These various debt transactions were issued at a total discount of $4.1 million.
This discount is being amortized over the respective debt maturities on a
straight-line basis, which is not materially different from the interest method.
Deferred debt issue costs incurred in connection with these various transactions
(totaling approximately $4.8 million) are also being amortized on a
straight-line basis over the respective debt maturities.
<PAGE>84
KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales
agreements, equipment trust certificates and capitalized lease obligations,
which equipment has been pledged as collateral for the related indebtedness.
Other Agreements, Guarantees, Provisions and Restrictions. The Company has debt
agreements containing restrictions on subsidiary indebtedness, advances and
transfers of assets, and sale and leaseback transactions, as well as requiring
compliance with various financial covenants. At December 31, 1998, the Company
was in compliance with the provisions and restrictions of these agreements.
Because of certain financial covenants contained in the credit agreements,
however, maximum utilization of the Company's available lines of credit may be
restricted. Unrestricted retained earnings at December 31, 1998 was $480.9
million.
Leases and Debt Maturities. The Company and its subsidiaries lease
transportation equipment, as well as office and other operating facilities under
various capital and operating leases. Rental expenses under operating leases
were $70, $64 and $42 million for the years 1998, 1997 and 1996, respectively.
As more fully described in Note 2, in connection with the Southern Capital joint
venture transactions completed in October 1996, KCSR entered into operating
leases with Southern Capital for locomotives and railroad rolling stock.
Accordingly, beginning in 1997 rental expense under operating leases was higher
than previous years.
<TABLE>
Minimum annual payments and present value thereof under existing capital leases,
other debt maturities, and minimum annual rental commitments under
noncancellable operating leases are as follows (in millions):
<CAPTION>
Capital Leases Operating Leases
------------------------------------ ----------------------------------
Minimum Net
Lease Less Present Other Total
Payments Interest Value Debt Debt Affiliates Third Party Total
--------- --------- --------- --------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $ 0.8 $ 0.4 $ 0.4 $ 10.3 $ 10.7 $ 25.1 $ 37.1 $ 62.2
2000 0.8 0.4 0.4 10.6 11.0 25.1 25.1 50.2
2001 0.8 0.3 0.5 12.3 12.8 25.1 18.6 43.7
2002 0.8 0.3 0.5 112.3 112.8 25.1 13.8 38.9
2003 0.8 0.2 0.6 15.8 16.4 25.1 11.4 36.5
Later years 2.5 0.6 1.9 670.7 672.6 105.4 17.1 122.5
--------- --------- --------- --------- -------- -------- -------- -------
Total $ 6.5 $ 2.2 $ 4.3 $ 832.0 $ 836.3 $ 230.9 $ 123.1 $ 354.0
========= ========= ========= ========= ======== ======== ======== =======
</TABLE>
Fair Value of Long-Term Debt. Based upon the borrowing rates currently available
to the Company and its subsidiaries for indebtedness with similar terms and
average maturities, the fair value of long-term debt was approximately $867,
$947 and $663 million at December 31, 1998, 1997 and 1996, respectively.
Note 8. Income Taxes
Under the liability method of accounting for income taxes specified by Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes,"
deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax basis of assets and liabilities as
measured by the enacted tax rates which will be in effect when these differences
reverse. Generally, deferred tax expense is the result of changes in the
liability for deferred taxes.
<PAGE>85
<TABLE>
The following summarizes pretax income (loss) for the years ended December 31,
(in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Domestic $ 357.5 $ 91.8 $ 237.1
International (3.1) (12.6) 0.2
----------- ----------- ----------
Total $ 354.4 $ 79.2 $ 237.3
=========== =========== ==========
</TABLE>
<TABLE>
Tax Expense. Income tax expense (benefit) attributable to continuing operations
consists of the following components (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Current
Federal $ 91.6 $ 73.4 $ 45.6
State and local 16.0 11.6 6.4
----------- ----------- ----------
Total current 107.6 85.0 52.0
----------- ----------- ----------
Deferred
Federal 20.8 (14.1) 15.7
State and local 2.4 (2.5) 2.9
----------- ----------- ----------
Total deferred 23.2 (16.6) 18.6
----------- ----------- ----------
Total income tax provision $ 130.8 $ 68.4 $ 70.6
=========== =========== ==========
</TABLE>
<TABLE>
The federal and state deferred tax liabilities (assets) recorded on the
Consolidated Balance Sheets at December 31, 1998, 1997 and 1996, respectively,
follow (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Liabilities:
Depreciation $ 345.2 $ 306.6 $ 302.7
Equity, unconsolidated affiliates 119.5 106.8 93.4
Other, net 0.4 0.4 -
----------- ----------- ----------
Gross deferred tax liabilities 465.1 413.8 396.1
----------- ----------- ----------
Assets:
NOL and AMT credit carryovers (11.2) (11.2) (14.6)
Book reserves not currently deductible
for tax (38.0) (57.8) (34.7)
Deferred compensation and other
employee benefits (14.5) (13.3) (7.7)
Deferred revenue (2.2) (2.9) (4.2)
Vacation accrual (4.3) (3.3) (2.7)
Other, net (6.1) (3.2) (3.1)
----------- ----------- ----------
Gross deferred tax assets (76.3) (91.7) (67.0)
----------- ----------- ----------
Net deferred tax liability $ 388.8 $ 322.1 $ 329.1
=========== =========== ==========
</TABLE>
Based upon the Company's history of operating earnings and its expectations for
the future, management has determined that operating income of the Company will,
more likely than not, be sufficient to recognize fully the above gross deferred
tax assets.
<PAGE>86
<TABLE>
Tax Rates. Differences between the Company's effective income tax rates
applicable to continuing operations and the U.S. federal income tax statutory
rates of 35% in 1998, 1997 and 1996, are as follows (in millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Income tax expense using the
statutory rate in effect $ 124.0 $ 27.7 $ 83.0
Tax effect of:
Earnings of equity investees (6.3) (7.0) (19.5)
Goodwill Impairment (see Note 3) 35.0
Other, net (5.3) 3.6 (2.2)
----------- ----------- ----------
Federal income tax expense 112.4 59.3 61.3
State and local income tax expense 18.4 9.1 9.3
----------- ----------- ----------
Total $ 130.8 $ 68.4 $ 70.6
=========== =========== ==========
Effective tax rate 36.9% 86.4% 29.7%
=========== =========== ==========
</TABLE>
Tax Carryovers. At December 31, 1998, the Company had $4.0 million of
alternative minimum tax credit carryover generated by MidSouth and Gateway
Western prior to acquisition by the Company. These credits can be carried
forward indefinitely and are available on a "tax return basis" to reduce future
federal income taxes payable.
The amount of federal NOL carryover generated by MidSouth and Gateway Western
prior to acquisition was $67.8 million. The Company utilized approximately
$17.8, $0.7 and $31.9 million of these NOL's in 1998, 1997 and 1996,
respectively, leaving approximately $17.4 million of carryover available, with
expiration dates beginning in the year 2005. The use of preacquisition net
operating losses and tax credit carryovers is subject to limitations imposed by
the Internal Revenue Code. The Company does not anticipate that these
limitations will affect utilization of the carryovers prior to their expiration.
Tax Examinations. Examinations of the consolidated federal income tax returns
for the years 1993-1996 by the Internal Revenue Service ("IRS") have been
started. The IRS has completed examinations of the consolidated federal income
tax returns for the years 1990-1992 and has proposed certain tax assessments for
these years. For years prior to 1990, the statute of limitations has closed and
all issues raised by the IRS examinations have been resolved. In addition, other
taxing authorities are currently examining the years 1994-1996 and have proposed
additional tax assessments for which the Company believes it has recorded
adequate reserves.
Since most of these asserted tax deficiencies represent temporary differences,
subsequent payments of taxes will not require additional charges to income tax
expense. In addition, accruals have been made for interest (net of tax benefit)
for estimated settlement of the proposed tax assessments. Thus, management
believes that final settlement of these matters will not have a material adverse
effect on the Company's consolidated results of operations or financial
condition.
Note 9. Stockholders' Equity
<TABLE>
Pro Forma Fair Value Information for Stock-Based Compensation Plans. At December
31, 1998, the Company had several stock-based compensation plans, which are
described separately below. The Company applies APB 25 and related
interpretations in accounting for its plans, and accordingly, no
<PAGE>87
compensation
cost has been recognized for the Company's fixed stock option plans or the ESPP
programs. Had compensation cost for the Company's stock-based compensation plans
been determined in accordance with the fair value accounting method prescribed
by SFAS 123 for options issued after December 31, 1994, the Company's net income
(loss) and earnings (loss) per share would have been reduced to the pro forma
amounts indicated below:
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Net income (loss) (in millions):
As reported $ 190.2 $ (14.1) $ 150.9
Pro Forma 179.0 (21.1) 146.5
Earnings (loss) per Basic share:
As reported $ 1.74 $ (0.13) $ 1.33
Pro Forma 1.64 (0.20) 1.29
Earnings (loss) per Diluted share:
As reported $ 1.66 $ (0.13) $ 1.31
Pro Forma 1.58 (0.20) 1.26
</TABLE>
Stock Option Plans. During 1998, various existing Employee Stock Option Plans
were combined and amended as the Kansas City Southern Industries, Inc. 1991
Amended and Restated Stock Option and Performance Award Plan (as amended and
restated effective July 15, 1998) This amended Plan provides for the granting of
options to purchase up to 26.0 million shares of the Company's common stock by
officers and other designated employees. Such options have been granted at 100%
of the average market price of the Company's stock on the date of grant and
generally may not be exercised sooner than one year, or longer than ten years
following the date of the grant, except that options outstanding with limited
rights ("LR's") or limited stock appreciation rights ("LSAR's"), become
immediately exercisable upon certain defined circumstances constituting a change
in control of the Company. The Plans include provisions for stock appreciation
rights, LRs and LSAR's. All outstanding options include LRs, except for options
granted to non-employee Directors.
<TABLE>
For purposes of computing the pro forma effects of option grants under the fair
value accounting method prescribed by SFAS 123, the fair value of each option
grant is estimated on the date of grant using a version of the Black-Scholes
option pricing model. The following assumptions were used for the various grants
depending on the date of grant, nature of vesting and term of option:
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Dividend Yield .34% to .56% .47% to .82% .81% to .93%
Expected Volatility 30% to 42% 24% to 31% 30% to 32%
Risk-free Interest Rate 4.74% to 5.64% 5.73% to 6.57% 5.27% to 6.42%
Expected Life 3 years 3 years 3 years
</TABLE>
<PAGE>88
<TABLE>
A summary of the status of the Company's stock option plans as of December 31,
1998, 1997 and 1996, and changes during the years then ended, is presented
below:
<CAPTION>
1998 1997 1996
------------------ ------------------- -------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------ ---------- ------ ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at January 1 9,892,581 $12.12 10,384,149 $10.83 11,026,116 $ 9.68
Exercised (1,600,829) 13.07 (1,874,639) 10.33 (1,554,567) 5.48
Canceled/Expired (40,933) 21.75 (401,634) 15.40 (33,570) 14.57
Granted 1,177,123 39.62 1,784,705 18.51 946,170 15.57
--------- ------ ---------- ------ ---------- ------
Outstanding at December 31 9,427,942 15.35 9,892,581 12.12 10,384,149 10.83
========= ====== ========== ====== ========== ======
Exercisable at December 31 8,222,782 8,028,475 5,754,549
Weighted-Average Fair Value of options
granted during the year $12.31 $ 4.72 $ 4.10
</TABLE>
<TABLE>
The following table summarizes the information about stock options outstanding
at December 31, 1998:
<CAPTION>
OUTSTANDING EXERCISABLE
--------------------------------------------------- ------------------------------
Weighted- Weighted- Weighted-
Range of Number Average Average Number Average
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 12/31/98 Contractual Life Price at 12/31/98 Price
- ---------- ----------- ---------------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 2 - 10 2,980,530 3.0 years $ 4.95 2,980,530 $ 4.95
10 - 15 1,057,963 7.0 12.94 1,000,138 12.86
15 - 20 3,600,998 7.4 15.73 3,590,198 15.73
20 - 30 879,205 7.4 23.62 624,341 21.67
30 - 40 3,888 9.6 35.94 1,487 32.52
40 - 48 905,358 10.0 42.79 26,088 42.31
--------- ---------
2 - 48 9,427,942 6.2 15.35 8,222,782 12.01
========= =========
</TABLE>
Shares available for future grants at December 31, 1998 aggregated 9,206,449.
Stock Purchase Plan. The ESPP, established in 1977, provides to substantially
all full-time employees of the Company, certain subsidiaries and certain other
affiliated entities, the right to subscribe to an aggregate of 22.8 million
shares of common stock. The purchase price for shares under any stock offering
is to be 85% of the average market price on either the exercise date or the
offering date, whichever is lower, but in no event less than the par value of
the shares. At December 31, 1998, there were approximately 11.6 million shares
available for future offerings.
<PAGE>89
<TABLE>
The following table summarizes activity related to the various ESPP offerings:
<CAPTION>
Date Shares Shares Date
Initiated Subscribed Price Issued Issued
--------- ---------- ------- -------- ----------
<S> <C> <C> <C> <C> <C>
Eleventh Offering 1998 213,825 $35.97 - -
Tenth Offering 1996 251,079 13.35 233,133 1997/1998
Ninth Offering 1995 291,411 12.73 247,729 1996/1997
Eighth Offering 1993 661,728 12.73 481,929 1994 to 1996
</TABLE>
<TABLE>
For purposes of computing the pro forma effects of employees' purchase rights
under the fair value accounting method prescribed by SFAS 123, the fair value of
the Eleventh and Tenth Offerings under the ESPP are estimated on the date of
grant using a version of the Black-Scholes option pricing model. The following
weighted-average assumptions were used:
<CAPTION>
Eleventh Tenth
Offering Offering
-------- --------
<S> <C> <C>
Dividend Yield .95% .85%
Expected Volatility 42% 30%
Risk-free Interest Rate 4.63% 5.50%
Expected Life 1 year 1 year
</TABLE>
The weighted-average fair value of purchase rights granted under the Eleventh
and Tenth Offerings of the ESPP were $10.76 and $3.56, respectively. There were
no offerings in 1997.
Forward Stock Purchase Contract. During 1995, the Company entered into a forward
stock purchase contract ("the contract") as a means of securing a potentially
favorable price for the repurchase of six million shares of its common stock in
connection with the stock repurchase program authorized by the Company's Board
of Directors on April 24, 1995. During 1998, no shares were purchased under this
arrangement. During 1997 and 1996, the Company purchased 2.4 and 3.6 million
shares, respectively, under this arrangement at an aggregate price of $39 and
$56 million (including transaction premium), respectively. The contract
contained provisions which allowed the Company to elect a net cash or net share
settlement in lieu of physical settlement of the shares; however, all shares
were physically settled. The transaction was recorded in the Company's financial
statements upon settlement of the contract in accordance with the Company's
accounting policies described in Note 1.
Employee Plan Funding Trust ("EPFT" or "Trust"). Effective September 30, 1998,
the Company terminated the EPFT, which was established by KCSI as a grantor
trust for the purpose of holding shares of Series B Preferred stock for the
benefit of various KCSI employee benefit plans, including the ESOP, Stock Option
Plans and ESPP (collectively, "Benefit Plans"). The EPFT was administered by an
independent bank trustee ("Trustee") and included in the Company's consolidated
financial statements.
In October 1993, KCSI transferred one million shares of Series B Preferred stock
to the EPFT for a purchase price of $200 million (based on an independent
valuation), which the Trust financed through KCSI. The indebtedness of the EPFT
to KCSI was repayable over 27 years with interest at 6% per annum, with no
principal payments for the first three years. Principal payments from the EPFT
to the Company of $21.3 million since the date of inception decreased the
indebtedness to $178.7 million, plus accrued interest, on the date of
termination. As a result of these principal payments, 127,638 shares of Series B
Preferred stock were released from the Trust's suspense account and available
for distribution to the Benefit Plans. None of these shares, however, were
distributed prior to termination of the EPFT.
In accordance with the Agreement to terminate the EPFT, the Company received
872,362 shares of Series B Preferred stock in full repayment of the indebtedness
from the Trust. In addition, the remaining
<PAGE>90
127,638 shares of Series B Preferred stock were converted by the Trustee into
KCSI Common stock, at the rate of 12 to 1, resulting in the issuance to the EPFT
of 1,531,656 shares of such Common stock. This Common stock was then transferred
by the Trustee to KCSI and the Company has set these shares aside for use in
connection with the KCSI Stock Option and Performance Award Plan, as amended and
restated effective July 15, 1998. Following the foregoing transactions, the EPFT
was terminated.
The impact of the termination of the EPFT on the Company's consolidated
condensed financial statements was a reclassification among the components of
the stockholder's equity accounts, with no change in the consolidated assets and
liabilities of the Company.
Treasury Stock. The Company issued shares of common stock from Treasury -
1,663,349 in 1998, 2,031,162 in 1997, 1,557,804 in 1996 - to fund the exercise
of options and subscriptions under various employee stock option and purchase
plans. Approximately 67,000 shares were issued in conjunction with the
acquisition of Nelson. Treasury stock previously acquired had been accounted for
as if retired. The 1,531,656 shares received in conjunction with the termination
of the EPFT were added to Treasury stock during 1998. The Company purchased
shares as follows: 2,863,983 in 1997 and 9,829,599 in 1996. Shares purchased
during 1998 were not material.
Note 10. Profit Sharing and Other Postretirement Benefits
The Company maintains various plans for the benefit of its employees as
described below. The Company's employee benefit expense for these plans
aggregated $7.7, $6.3 and $5.4 million in 1998, 1997 and 1996, respectively.
Profit Sharing. Qualified profit sharing plans are maintained for most employees
not included in collective bargaining agreements. Contributions for the Company
and its subsidiaries are made at the discretion of the Boards of Directors in
amounts not to exceed the maximum allowable for federal income tax purposes.
401(k) Plan. The Company's 401(k) plan permits participants to make
contributions by salary reduction pursuant to section 401(k) of the Internal
Revenue Code. The Company matches contributions up to a maximum of 3% of
compensation.
Employee Stock Ownership Plan. In 1987 and 1988, KCSI and DST established
leveraged ESOPs for employees not covered by collective bargaining agreements by
collectively purchasing $69 million of KCSI common stock from Treasury at a then
current market price of $49 per share ($4.08 per share effected for stock
splits). During 1990, the two plans were merged into one plan known as the KCSI
ESOP. The indebtedness was retired in full during 1995. In October 1995, the
ESOP became a multiple employer plan covering both KCSI employees and DST
employees, and was renamed The Employee Stock Ownership Plan. KCSI contributions
to its portion of the ESOP are based on a percentage (determined by the
Compensation Committee of the Board of Directors) of wages earned by eligible
employees.
Other Postretirement Benefits. The Company adopted Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The Company and
several of its subsidiaries provide certain medical, life and other
postretirement benefits other than pensions to its retirees. With the exception
of the Gateway Western plans, which are discussed below, the medical and life
plans are available to employees not covered under collective bargaining
arrangements, who have attained age 60 and rendered ten years of service.
Individuals employed as of December 31, 1992 were excluded from a specific
service requirement. The medical plan is contributory and provides benefits for
retirees, their covered dependents and beneficiaries. Benefit expense begins to
accrue at age 40. The medical plan was amended effective January 1, 1993 to
provide for annual adjustment of retiree contributions, and also contains,
depending on the plan coverage
<PAGE>91
selected, certain deductibles, copayments, coinsurance and coordination with
Medicare. The life insurance plan is non-contributory and covers retirees only.
The Company's policy, in most cases, is to fund benefits payable under these
plans as the obligations become due. However, certain plan assets (e.g., money
market funds) do exist with respect to life insurance benefits.
During 1998, the Company adopted Statement of Financial Accounting Standards No.
132 "Employers' Disclosure about Pensions and Other Postretirement Benefits - an
amendment of FASB Statements No. 87, 88, and 106" ("SFAS 132") and prior year
information has been included pursuant to SFAS 132. SFAS 132 establishes
standardized disclosure requirements for pension and other postretirement
benefit plans, requires additional information on changes in the benefit
obligations and fair values of plan assets, and eliminates certain disclosures
that are no longer useful. The standard does not change the measurement or
recognition of pension or postretirement benefit plans.
<TABLE>
Reconciliation of the accumulated postretirement benefit obligation, change in
plan assets, and funded status, respectively, at December 31 follows (in
millions):
<CAPTION>
1998 1997(i) 1996
----------- ----------- ----------
<S> <C> <C> <C>
Accumulated postretirement
benefit obligation at beginning of year $ 13.7 $ 13.7 $ 10.5
Service cost 0.3 0.6 0.5
Interest cost 0.9 1.0 0.7
Amortization of transition obligation 0.1
Actuarial gain (0.2) (0.8) (0.1)
Benefits paid (ii) (0.8) (0.9) (0.7)
----------- ----------- ----------
Accumulated postretirement
benefit obligation at end of year 13.9 13.7 10.9
----------- ----------- ----------
Fair value of plan assets
at beginning of year 1.3 1.3 1.7
Actual return on plan assets 0.2 0.1 (0.2)
Benefits paid (ii) (0.1) (0.1) (0.2)
----------- ----------- ----------
Fair value of plan assets
at end of year 1.4 1.3 1.3
----------- ----------- ----------
Funded status and accrued benefit cost $ 12.5 $ 12.4 $ 9.6
=========== =========== ==========
</TABLE>
(i) The accumulated postretirement benefit obligation for the beginning of
1997 does not agree to the ending accumulated post retirement benefit
obligation as of December 31, 1996 due to the addition of the Gateway
Western effective as of January 1, 1997.
(ii) Benefits paid for the reconciliation of accumulated postretirement
benefit obligation include both medical and life insurance benefits,
whereas benefits paid for the fair value of plan assets reconciliation
include only life insurance benefits. Plan assets relate only to the
life insurance benefits. Medical benefits are funded as obligations
become due.
<PAGE>92
<TABLE>
Net periodic postretirement benefit cost included the following components (in
millions):
<CAPTION>
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Service cost $ 0.3 $ 0.6 $ 0.5
Interest cost 0.9 1.0 0.7
Amortization of unrecognized
transition obligation 0.1
Expected return on plan assets (0.1) (0.1) (0.1)
----------- ----------- ----------
Net periodic postretirement benefit cost $ 1.1 $ 1.6 $ 1.1
=========== =========== ==========
</TABLE>
The Company's health care costs, excluding Gateway Western, are limited to the
increase in the Consumer Price Index ("CPI") with a maximum annual increase of
5%. Accordingly, health care costs in excess of the CPI limit will be borne by
the plan participants, and therefore assumptions regarding health care cost
trend rates are not applicable.
<TABLE>
The following assumptions were used to determine the postretirement obligations
and costs for the years ended December 31:
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Annual increase in the CPI 2.50% 3.00% 3.00%
Expected rate of return on life
insurance plan assets 6.50 6.50 6.50
Discount rate 6.75 7.25 7.75
Salary increase 4.00 4.00 4.00
</TABLE>
Gateway Western's benefit plans are slightly different from those of the Company
and other subsidiaries. Gateway Western provides contributory health, dental and
life insurance benefits to substantially all of its active and retired
employees, including those covered by collective bargaining agreements.
Effective January 1, 1998, existing Gateway Western management employees
converted to the Company's benefit plans. In 1998, the assumed annual rate of
increase in health care costs for the non-management Gateway Western employees
choosing a preferred provider organization was 7.5% and 6.5% for those choosing
the health maintenance organization option, decreasing over five years to 5.5%
and 4.5%, respectively, to remain level thereafter.
The health care cost trend rate assumption has an effect on the Gateway Western
amounts represented. An increase in the assumed health care cost trend rates by
one percent in 1998 and 1997 would increase the accumulated postretirement
benefit obligation by $0.3 million and $0.4 million, respectively. A decrease in
the assumed health care cost trend by one percent would decrease the accumulated
postretirement benefit obligation by $0.2 million in 1998 and 1997. The effect
of this change on the aggregate of the service and interest cost components of
the net periodic postretirement benefit is not significant.
Note 11. Commitments and Contingencies
Minority Interest Purchase Agreements. Agreements between KCSI and Janus
minority owners contain, among other provisions, mandatory stock purchase
provisions whereby under certain circumstances, KCSI would be required to
purchase the minority interest of Janus. If all of the provisions of the Janus
minority owner agreements became effective, KCSI would be required to purchase
the respective minority interests at a cost estimated to be approximately $456
million as of December 31, 1998, compared to $337 and $220 million at December
31, 1997 and 1996, respectively.
<PAGE>93
Litigation Reserves. In the opinion of management, claims or lawsuits incidental
to the business of the Company and its subsidiaries have been adequately
provided for in the consolidated financial statements.
Duncan case
In 1998, a jury in Beauregard Parish, Louisiana returned a verdict against KCSR
in the amount of $16.3 million. This Louisiana state case arose from a railroad
crossing accident which occurred at Oretta, Louisiana on September 11, 1994, in
which three individuals were injured. Of the three, one was injured fatally, one
was rendered quadriplegic and the third suffered less serious injuries.
Subsequent to the verdict, the trial court held that the plaintiffs were
entitled to interest on the judgment from the date the suit was filed, dismissed
the verdict against one defendant and reallocated the amount of that verdict to
the remaining defendants. The resulting total judgment against KCSR, together
with interest, was $25.4 million as of December 31, 1998.
The judgment has been appealed and independent trial counsel has informed KCSR
management that the evidence presented at trial established no negligent conduct
on the part of KCSR and expressed confidence that the verdict will ultimately be
reversed. KCSR management believes it has meritorious defenses in this case and
that it will ultimately prevail on appeal. If the verdict were to stand,
however, the judgment and interest are in excess of existing insurance coverage
and could have an adverse effect on the Company's consolidated results of
operations and financial position.
Bogalusa Cases
In July 1996, KCSR 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.
KCSR neither owned nor leased the rail car or the rails on which it was located
at the time of the explosion in Bogalusa. KCSR 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 by the shipper in excess of its
standard weight when it was transported by the Company to interchange with the
IC.
The Mississippi lawsuit arising from the chemical release has now been scheduled
for trial in late March 1999. KCSR sought dismissal of these suits in the state
appellate courts, and ultimately in the United States Supreme Court, but was
unsuccessful in obtaining the relief sought.
KCSR believes that its exposure to liability in these cases is remote. If KCSR
were to be found liable for punitive damages in these cases, such a judgment
could have a material adverse effect on the results of operations and financial
position of the Company.
Diesel Fuel Commitments and Hedging Activities. From time to time, KCSR enters
into forward purchase commitments for diesel fuel as a means of securing volumes
and reducing overall cost. The contracts normally require KCSR to purchase
certain quantities of diesel fuel at defined prices established at the
origination of the contract.
As a result of fuel commitments made in 1995, KCSR saved approximately $3.7
million in operating expenses in 1996. Minimal commitments were negotiated for
1997 because of higher fuel costs. At the end of 1997, KCSR entered into
purchase commitments for diesel fuel for approximately 27% of its 1998 expected
usage. As a result of fuel prices remaining below the committed price during
1998, these
<PAGE>94
purchase commitments resulted in a higher cost in 1998 of
approximately $1.7 million. At December 31, 1998, the Company has entered into
purchase commitments for approximately 32% of its expected 1999 usage.
KCSR has a program to hedge against fluctuations in the price of its diesel fuel
purchases. The program is currently comprised of swap transactions accounted for
as hedges. Any gains or losses associated with changes in market value of these
hedges are deferred and recognized as a component of fuel cost in the period in
which the hedged fuel is purchase and used. To the extent KCSR hedges portions
of its fuel purchases, it may not fully benefit from decreases in fuel prices.
Beginning in 1998, KCSR entered into fuel swaps for approximately two million
gallons per month, or 37% of its anticipated 1998 fuel requirements. The fuel
swap contracts had expiration dates through February 28, 1999 and are correlated
to market benchmarks. Hedge positions are monitored to ensure that they will not
exceed actual fuel requirements in any period. During 1998, KCSR made payments
of approximately $2.3 million relating to these fuel swap transactions as a
result of actual fuel prices remaining lower than the fuel swap price. As of
December 31, 1998, the Company has entered into fuel swap transactions for
approximately 16% of expected 1999 usage.
Foreign Exchange Matters. As discussed in Note 1, in connection with the
Company's investment in Grupo TFM, a Mexican company, and Nelson, an 80% owned
subsidiary with operations in the United Kingdom, the Company follows the
requirements outlined in SFAS 52 (and related authoritative guidance) with
respect to financial accounting and reporting for foreign currency transactions
and for translating foreign currency financial statements from the entity's
functional currency into U.S. dollars.
The purchase price paid by Grupo TFM for 80% of the common stock of TFM was
fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuated as
the U.S. dollar/Mexican peso exchange rate changed. The Company's capital
contribution (approximately $298 million U.S.) to Grupo TFM in connection with
the initial installment of the TFM purchase price was made based on the U.S.
dollar/Mexican peso exchange rate on January 31, 1997.
Grupo TFM paid the remaining 60% of the purchase price in Mexican pesos on June
23, 1997. As discussed above, the final installment was funded using proceeds
from Grupo TFM debt financing and the sale of 24.6% of Grupo TFM to the Mexican
Government. In the event that the proceeds from these arrangements would not
have provided funds sufficient for Grupo TFM to make the final installment of
the purchase price, the Company may have been required to make additional
capital contributions. Accordingly, in order to hedge a portion of the Company's
exposure to a fluctuations in the value of the Mexican peso versus the U.S.
dollar, the Company entered into two separate forward contracts to purchase
Mexican pesos - $98 million in February 1997 and $100 million in March 1997. In
April 1997, the Company realized a $3.8 million pretax gain in connection with
these contracts. This gain was deferred until the final installment of the TFM
purchase price was made in June 1997, at which time, it was 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.
During 1997 and 1998, Mexico's economy was classified as "highly inflationary"
as defined in SFAS 52. Accordingly, the U.S. dollar was assumed to be Grupo
TFM's functional currency, and any gains or losses from translating Grupo TFM's
financial statements into U.S. dollars were included in the determination of its
net income. Equity losses from Grupo TFM included in the Company's results of
operations reflect the Company's share of such translation gains and losses.
<PAGE>95
Effective January 1, 1999, the SEC staff declared that Mexico should no longer
be considered a highly inflationary economy. Accordingly, the Company is in the
process of performing an analysis under the guidance of SFAS 52 to determine
whether the U.S. dollar or the Mexican peso should be used as the functional
currency for financial accounting and reporting purposes subsequent to December
31, 1998. Information for this analysis is currently being compiled and
reviewed. Management expects to complete this analysis by the end of the first
quarter 1999. If the peso is determined to be the appropriate functional
currency, the effect of translating Grupo TFM's financial statements could have
a material impact on the Company's results of operations and financial position.
The Company completed its acquisition of 80% of Nelson on April 20, 1998.
Nelson's principal operations are in the United Kingdom and, therefore, its
financial statements are accounted for using the British pound as the functional
currency. Any gains or losses arising from transactions not denominated in the
British pound are recorded as a foreign currency gain or loss and included in
the results of operations of Nelson. The translation of Nelson's financial
statements from the British pound into the U.S. dollar results in an adjustment
to stockholders' equity as a cumulative translation adjustment. At December 31,
1998, the cumulative translation adjustment was not material.
The Company continues to evaluate existing alternatives with respect to
utilizing foreign currency instruments to hedge its U.S. dollar investment in
Grupo TFM and Nelson as market conditions change or exchange rates fluctuate. At
December 31, 1998, the Company had no outstanding foreign currency hedging
instruments.
Environmental Liabilities. The Company's transportation operations are subject
to extensive regulation under environmental protection laws and its land
holdings have been used for transportation purposes or leased to third-parties
for commercial and industrial purposes. The Company records liabilities for
remediation and restoration costs related to past activities when the Company's
obligation is probable and the costs can be reasonably estimated. Costs of
ongoing compliance activities to current operations are expensed as incurred.
The Company's recorded liabilities for these issues represent its best estimates
(on an undiscounted basis) of remediation and restoration costs that may be
required to comply with present laws and regulations. At December 31, 1998,
these recorded liabilities were not material. Although these costs cannot be
predicted with certainty, management believes that the ultimate outcome of
identified matters will not have a material adverse effect on the Company's
consolidated results of operations or financial condition.
Panama Railroad Concession. The Government of Panama has granted a concession to
the Panama Canal Railway Company ("PCRC"), a joint venture of KCSI and Mi-Jack
Products, Inc., to operate a railroad between Panama City and Colon. Upon
completion of certain infrastructure improvements, the PCRC will operate an
approximate 47-mile railroad running parallel to the Panama Canal and connecting
parts of the Atlantic and Pacific Oceans. The PCRC has committed to making at
least $30 million in capital improvements and investments in Panama over the
next five year period. The Company expects its contribution related to the PCRC
project to be less than $15 million. PCRC is in the process of evaluating the
overall needs and requirements of the project and alternative financing
opportunities.
Note 12. Control
Subsidiaries and Affiliates. In connection with its 1984 acquisition of
an interest in Janus, the Company entered into an agreement which, as amended,
provides that so long as Mr. Bailey is a holder of at least 5% of the shares
of Janus and continues to be employed as President or Chairman of the Board
of Janus (or if he does not serve as President, James P. Craig, III serves as
President and Chief Executive Officer or Co-Chief Executive Officer with Mr.
Bailey), Mr. Bailey shall continue to establish and implement policy with
respect to the investment advisory and portfolio management activity of
Janus. The agreement also provides that, in furtherance of such objective,
so long as both the ownership threshold and officer status conditions
described above are satisfied by Mr. Bailey, KCSI will vote its shares of
Janus stock to elect directors of Janus, at least the majority of whom are
selected by Mr. Bailey, subject to KCSI's approval, which approval may not be
unreasonably withheld. The agreement further provides that any change in
management philosophy, style or approach with respect to investment advisory
and portfolio management policies of Janus shall be mutually agreed upon by
KCSI and Mr. Bailey.
Notwithstanding Mr. Bailey's rights under the above agreement, Colorado law
provides that removal of an officer of a Colorado corporation may be done
directly by its shareholders if the corporation's bylaws so provide. While
Janus' bylaws contain no such provision currently, KCSI has the ability to
cause Janus to amend its bylaws to include such a provision. Under Colorado
law, KCSI could take such action at an annual meeting of shareholders or make
demand for a special meeting of shareholders. Janus is required to hold a
special shareholders' meeting upon demand from a holder of more than 10% of its
common stock and to give notice of the meeting to all shareholders. If
notice of the meeting is not given within 30 days of such a demand, the
District Court is empowered to summarily order the holding of the meeting.
As the holder of more than 80% of the common stock of Janus, KCSI has the
requisite votes to obtain approval of the required actions at such a meeting.
By carrying out the above steps, KCSI has the unilateral ability under
Colorado law to terminate the rights under the above agreement.
Additionally, the above agreement provides for rights of first refusal on the
part of minority shareholders, Janus and the Company with respect to certain
sales of Janus stock by the minority shareholders. The agreement also
requires the Company to purchase the shares of minority shareholders in
certain circumstances. In addition, in the event of a "change of ownership"
of the Company, as defined in the agreement, the Company may be required to
sell its stock of Janus to the minority shareholders or to purchase such
holders' Janus stock. Purchase and sales transactions under the agreements
are to be made based upon a multiple of the net earnings of Janus and/or fair
market value determinations, as defined therein (see Note 11 for additional
details).
Under the Investment Company Act of 1940, certain changes in ownership of Janus
or Berger may result in termination of its investment advisory agreements with
the mutual funds and other accounts it manages, requiring approval of fund
shareholders and other account holders to obtain new agreements. Additionally,
there are Janus and Berger officers and directors that serve as officers and/or
directors of certain of the registered investment companies to which Janus and
Berger act as investment advisors.
DST, an approximate 32% owned unconsolidated affiliate of the Company, has a
Stockholders' Rights Agreement. Under certain circumstances following a "change
in control" of KCSI, as defined in DST's Stockholders' Rights Agreement,
substantial dilution of the Company's interest in DST could result.
The Company is party to certain agreements with TMM covering the Grupo TFM and
Mexrail ventures, which contain "change of control" provisions, provisions
intended to preserve 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.
Employees. The Company and certain of its subsidiaries have entered into
agreements with employees whereby, upon defined circumstances constituting a
change in control of the Company or subsidiary, certain stock options become
exercisable, certain benefit entitlements are automatically funded and such
employees are entitled to specified cash payments upon termination of
employment.
Assets. The Company and certain of its subsidiaries have established trusts to
provide for the funding of corporate commitments and entitlements of officers,
directors, employees and others in the event of a specified change in control of
the Company or subsidiary. Assets held in such trusts at December 31, 1998 were
not material. Depending upon the circumstances at the time of any such change in
control, the most significant factor of which would be the highest price paid
for KCSI common stock by a party seeking to control the Company, funding of the
Company's trusts could be very substantial.
Debt. Certain loan agreements and debt instruments entered into or guaranteed by
the Company and its subsidiaries provide for default in the event of a specified
change in control of the Company or particular subsidiaries of the Company.
Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the
Company declared a dividend distribution of one Right for each outstanding share
of the Company's common stock, $.01 par value per share (the "Common Stock"), to
the stockholders of record on October 12, 1995. Each Right entitles the
registered holder to purchase from the Company 1/1,000th of a share of Series A
Preferred Stock (the "Preferred Stock") or in some circumstances, Common Stock,
other securities, cash or other assets as the case may be, at a price of $210
per share, subject to adjustment.
<PAGE>97
The Rights, which are automatically attached to the Common Stock, are not
exercisable or transferable apart from the Common Stock until the tenth calendar
day following the earlier to occur of (unless extended by the Board of Directors
and subject to the earlier redemption or expiration of the Rights): (i) the date
of a public announcement that an acquiring person acquired, or obtained the
right to acquire, beneficial ownership of 20 percent or more of the outstanding
shares of the Common Stock of the Company (or 15 percent in the case that such
person is considered an "adverse person"), or (ii) the commencement or
announcement of an intention to make a tender offer or exchange offer that would
result in an acquiring person beneficially owning 20 percent or more of such
outstanding shares of Common Stock of the Company (or 15 percent in the case
that such person is considered an "adverse person"). Until exercised, the Right
will have no rights as a stockholder of the Company, including, without
limitation, the right to vote or to receive dividends. In connection with
certain business combinations resulting in the acquisition of the Company or
dispositions of more than 50% of Company assets or earnings power, each Right
shall thereafter have the right to receive, upon the exercise thereof at the
then current exercise price of the Right, that number of shares of the highest
priority voting securities of the acquiring company (or certain of its
affiliates) that at the time of such transaction would have a market value of
two times the exercise price of the Right. The Rights expire on October 12,
2005, unless earlier redeemed by the Company as described below.
At any time prior to the tenth calendar day after the first date after the
public announcement that an acquiring person has acquired beneficial ownership
of 20 percent (or 15 percent in some instances) or more of the outstanding
shares of the Common Stock of the Company, the Company may redeem the Rights in
whole, but not in part, at a price of $0.005 per Right. In addition, the
Company's right of redemption may be reinstated following an inadvertent trigger
of the Rights (as determined by the Board) if an acquiring person reduces its
beneficial ownership to 10 percent or less of the outstanding shares of Common
Stock of the Company in a transaction or series of transactions not involving
the Company.
The Series A Preferred shares purchasable upon exercise of the Rights will have
a cumulative quarterly dividend rate set by the Board of Directors or equal to
1,000 times the dividend declared on the Common Stock for such quarter. Each
share will have the voting rights of one vote on all matters voted at a meeting
of the stockholders for each 1/1,000th share of preferred stock held by such
stockholder. In the event of any merger, consolidation or other transaction in
which the common shares are exchanged, each Series A Preferred share will be
entitled to receive an amount equal to 1,000 times the amount to be received per
common share. In the event of a liquidation, the holders of Series A Preferred
shares will be entitled to receive $1,000 per share or an amount per share equal
to 1,000 times the aggregate amount to be distributed per share to holders of
Common Stock. The shares will not be redeemable. The vote of holders of a
majority of the Series A Preferred shares, voting together as a class, will be
required for any amendment to the Company's Certificate of Incorporation which
would materially and adversely alter or change the powers, preferences or
special rights of such shares.
Note 13. Industry Segments
As discussed in Note 1, in 1998, the Company adopted the provisions of SFAS 131.
SFAS 131 establishes standards for the manner in which public business
enterprises report information about operating segments in annual financial
statements and requires disclosure of selected information about operating
segments in interim financial reports issued to shareholders. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS 131 did not have a
material impact on the disclosures of the Company. Prior year information is
reflected pursuant to SFAS 131.
<PAGE>98
The Company's two segments, aligned to reflect the Company's current operations,
are as follows:
Transportation. The Company operates a Class I Common Carrier railroad system
through its wholly-owned subsidiary, KCSR. As a common carrier, KCSR's customer
base includes electric generating utilities and a wide range of companies in the
petroleum/chemical, agricultural and paper processing industries, among others.
The railroad system operates primarily in the United States, from the Midwest to
the Gulf of Mexico and on an East-West axis from Dallas, Texas to Meridian,
Mississippi. In addition, the Company's wholly-owned subsidiary Gateway Western,
operates a regional common carrier rail system primarily on an East-West axis
from East St. Louis, Illinois to Kansas City, Missouri. Like KCSR, Gateway
Western serves customers in a wide range of industries.
KCSR and Gateway Western's revenues and earnings are dependent on providing
reliable service to its customers at competitive rates, the general economic
conditions in the geographic region it serves, and its ability to effectively
compete against alternative forms of surface transportation, such as
over-the-road truck transportation. KCSR and Gateway Western's ability to
construct and maintain its roadway in order to provide safe and efficient
transportation service is important to its ongoing viability as a rail carrier.
Additionally, the containment of costs and expenses is important in maintaining
a competitive market position, particularly with respect to employee costs as
approximately 85% of KCSR and Gateway Western combined employees are covered
under various collective bargaining agreements.
The Transportation segment also includes the Company's equity investment in
Grupo TFM, a Mexican entity. Grupo TFM has certain risks associated with
operating in Mexico, including, among others, foreign currency exchange,
cultural differences, varying labor and operating practices, and differences
between the U.S. and Mexican economies.
Also included in the Transportation segment are several less material
subsidiaries (most of which provide support and/or services for KCSR), as well
as equity earnings from investments in certain unconsolidated affiliates other
than Grupo TFM (including Southern Capital and Mexrail), holding company
expenses and miscellaneous investment activities.
Financial Services. Janus (an 82% owned subsidiary, diluted) and Berger (a
wholly-owned subsidiary) manage investments for mutual funds and private
accounts. Both companies operate throughout the United States, with headquarters
in Denver, Colorado. Beginning in December 1998, Janus initiated portfolio
offerings in countries outside of the United States. Janus assets under
management at December 31, 1998, 1997 and 1996 were $108.3, $67.8 and $46.7
billion, respectively. Berger assets under management at December 31, 1998, 1997
and 1996 were $,4.0, $3.8 and $3.6 billion, respectively.
Nelson, an 80% owned United Kingdom subsidiary acquired in April 1998, provides
investment advice and investment management services to individuals that
generally are retired or contemplating retirement. At December 31, 1998, assets
under management approximated $1.2 billion.
Financial Services revenues and operating income are driven primarily by growth
in assets under management. The potential for growth may be negatively affected
by a decline in the stock and bond markets and/or an increase in the rate of
return of alternative investments, which could negatively impact the Financial
Services results of operations and financial position. In addition, the mutual
fund market, in general, faces increasing competition as the number of mutual
funds continues to increase, marketing and distribution channels become more
creative and complex, and investors place greater emphasis on published fund
recommendations and investment category rankings.
<PAGE>99
DST is included as an equity investment reported in the Financial Services
segment. DST, together with its subsidiaries and joint ventures, provides
sophisticated information processing and computer software services and products
to the financial services industry (primarily to mutual funds and investment
managers), communications industries and other service industries. DST is
organized into three operating segments: financial services, customer management
and output solutions. DST operates throughout the United States, with operations
in Kansas City, Northern California and various locations on the East Coast, as
well as internationally in Canada, Europe, Africa and the Pacific Rim.
As discussed in Note 2, on December 21, 1998, DST and USCS announced the
completion of the merger of USCS with a wholly-owned DST subsidiary. The merger
expands DST's presence in the output solutions and customer management software
and services industries. USCS is a leading provider of customer management
software to the cable television and convergence industries.
The earnings of DST are dependent in part upon the further growth of the mutual
fund industry in the United States, DST's ability to continue to adapt its
technology to meet increasingly complex and rapidly changing requirements and
various other factors including, but not limited to: reliance on a centralized
processing facility; further development of international businesses; continued
equity in earnings from joint ventures; and competition from other third party
providers of similar services and products as well as from in-house providers.
Segment Financial Information. Sales between segments were not material in 1998,
1997 or 1996. Certain amounts in prior years' segment information have been
reclassified to conform to the current year presentation.
<PAGE>100
<TABLE>
Segment Financial Information, dollars in millions, years ended December 31,
<CAPTION>
FINANCIAL
TRANSPORTATION SERVICES KCSI
-------------------------------------- ------------ ------------
KCSR Other Consolidated Consolidated Consolidated
---- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1998
Revenues $ 551.6 $ 61.9 $ 613.5 $ 670.8 $ 1,284.3
Costs and expenses 391.1 51.8 442.9 373.4 816.3
Depreciation and amortization 50.6 6.1 56.7 16.8 73.5
-------- --------- --------- -------- ---------
Operating income 109.9 4.0 113.9 280.6 394.5
Equity in net earnings (losses) of
unconsolidated affiliates 2.0 (4.9) (2.9) 25.8 22.9
Interest expense (35.6) (24.0) (59.6) (6.5) (66.1)
Reduction in ownership of DST - - - (29.7) (29.7)
Other, net 10.7 3.0 13.7 19.1 32.8
-------- --------- --------- -------- ---------
Pretax income (loss) 87.0 (21.9) 65.1 289.3 354.4
Income taxes (benefit) 34.0 (6.9) 27.1 103.7 130.8
Minority interest - - - 33.4 33.4
-------- --------- --------- -------- ---------
Net income (loss) $ 53.0 $ (15.0) $ 38.0 $ 152.2 $ 190.2
======== ========= ========= ======== =========
Capital expenditures $ 64.5 $ 5.4 $ 69.9 $ 35.0 $ 104.9
======== ========= ========= ======== =========
1997
Revenues $ 517.8 $ 55.4 $ 573.2 $ 485.1 $ 1,058.3
Costs and expenses 383.0 43.1 426.1 254.1 680.2
Depreciation and amortization 54.7 7.1 61.8 13.4 75.2
Restructuring, asset impairment
and other charges 163.8 14.2 178.0 18.4 196.4
-------- --------- --------- -------- ---------
Operating income (loss) (83.7) (9.0) (92.7) 199.2 106.5
Equity in net earnings (losses)
of unconsolidated affiliates 2.1 (11.8) (9.7) 24.9 15.2
Interest expense (37.9) (15.4) (53.3) (10.4) (63.7)
Other, net 4.5 0.5 5.0 16.2 21.2
-------- --------- --------- -------- ---------
Pretax income (loss) (115.0) (35.7) (150.7) 229.9 79.2
Income taxes (benefit) (9.5) (9.1) (18.6) 87.0 68.4
Minority interest - - - 24.9 24.9
-------- --------- --------- -------- ---------
Net income (loss) $ (105.5) $ (26.6) $ (132.1) $ 118.0 $ (14.1)
======== ========= ========= ======== =========
Capital expenditures $ 67.6 $ 9.2 $ 76.8 $ 5.8 $ 82.6
======== ========= ========= ======== =========
1996
Revenues $ 492.5 $ 25.2 $ 517.7 $ 329.6 $ 847.3
Costs and expenses 359.3 23.4 382.7 184.6 567.3
Depreciation and amortization 59.1 3.8 62.9 13.2 76.1
-------- --------- --------- -------- ---------
Operating income (loss) 74.1 (2.0) 72.1 131.8 203.9
Equity in net earnings
of unconsolidated affiliates 0.4 1.1 1.5 68.6 70.1
Interest expense (49.4) (3.4) (52.8) (6.8) (59.6)
Other, net 6.1 1.8 7.9 15.0 22.9
-------- --------- --------- -------- ---------
Pretax income (loss) 31.2 (2.5) 28.7 208.6 237.3
Income taxes (benefit) 14.1 (1.7) 12.4 58.2 70.6
Minority interest - - - 15.8 15.8
-------- --------- --------- -------- ---------
Net income (loss) $ 17.1 $ (0.8) $ 16.3 $ 134.6 $ 150.9
======== ========= ========= ======== =========
Capital expenditures $ 135.1 $ 7.5 $ 142.6 $ 1.4 $ 144.0
======== ========= ========= ======== =========
</TABLE>
<PAGE>101
<TABLE>
Segment Financial Information, dollars in millions, at December 31,
<CAPTION>
FINANCIAL
TRANSPORTATION SERVICES KCSI
-------------------------------------- ------------ ------------
KCSR Other Consolidated Consolidated Consolidated
---- ----- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1998
ASSETS
Current assets $ 173.3 $ 36.9 $ 210.2 $ 259.3 $ 469.5
Investments 28.2 299.7 327.9 379.2 707.1
Properties, net 1,135.2 94.1 1,229.3 37.4 1,266.7
Intangible assets, net 5.2 24.2 29.4 147.0 176.4
-------- --------- ---------- -------- ---------
Total $1,341.9 $ 454.9 $ 1,796.8 $ 822.9 $ 2,619.7
======== ========= ========== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 174.5 $ 34.0 $ 208.5 $ 87.7 $ 296.2
Long-term debt 445.5 380.1 825.6 - 825.6
Deferred income taxes 272.7 12.5 285.2 118.4 403.6
Other 73.1 13.3 86.4 76.7 163.1
Net worth 376.1 15.0 391.1 540.1 931.2
-------- --------- ---------- -------- ---------
Total $1,341.9 $ 454.9 $ 1,796.8 $ 822.9 $ 2,619.7
======== ========= ========== ======== =========
1997
ASSETS
Current assets $ 159.7 $ 19.3 $ 179.0 $ 194.1 $ 373.1
Investments 31.1 304.2 335.3 348.2 683.5
Properties, net 1,123.9 93.9 1,217.8 9.4 1,227.2
Intangible assets, net 6.5 23.0 29.5 120.9 150.4
-------- --------- ---------- -------- ---------
Total $1,321.2 $ 440.4 $ 1,761.6 $ 672.6 $ 2,434.2
======== ========= ========== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 254.0 $ 24.5 $ 278.5 $ 159.0 $ 437.5
Long-term debt 442.4 363.5 805.9 - 805.9
Deferred income taxes 232.8 4.1 236.9 95.3 332.2
Other 76.6 13.7 90.3 70.0 160.3
Net worth 315.4 34.6 350.0 348.3 698.3
-------- --------- ---------- -------- ---------
Total $1,321.2 $ 440.4 $ 1,761.6 $ 672.6 $ 2,434.2
======== ========= ========== ======== =========
1996
ASSETS
Current assets $ 149.3 $ 7.4 $ 156.7 $ 135.4 $ 292.1
Investments 29.2 18.1 47.3 287.9 335.2
Properties, net 1,148.2 62.5 1,210.7 8.6 1,219.3
Intangible assets, net 153.1 (31.9) 121.2 116.3 237.5
-------- --------- ---------- -------- ---------
Total $1,479.8 $ 56.1 $ 1,535.9 $ 548.2 $ 2,084.1
======== ========= ========== ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities $ 200.2 $ (6.8) $ 193.4 $ 51.2 $ 244.6
Long-term debt 484.8 36.4 521.2 116.3 637.5
Deferred income taxes 281.5 (32.3) 249.2 88.5 337.7
Other 85.2 6.0 91.2 57.4 148.6
Net worth 428.1 52.8 480.9 234.8 715.7
-------- --------- ---------- -------- ---------
Total $1,479.8 $ 56.1 $ 1,535.9 $ 548.2 $ 2,084.1
======== ========= ========== ======== =========
</TABLE>
<PAGE>102
Note 14. Quarterly Financial Data (Unaudited)
Fourth quarter 1998 includes a one-time pretax non-cash charge of approximately
36.0 million ($23.2 million after-tax, or $0.21 per share) arising from the
merger of a wholly-owned DST subsidiary with USCS. This charge reflects the
Company's reduced ownership of DST (from 41% to approximately 32%), together
with the Company's proportionate share of DST and USCS fourth quarter related
merger costs. See detail discussion in Notes 2 and 5.
<TABLE>
(in millions, except per share amounts):
<CAPTION>
1998
---------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 331.8 $ 334.2 $ 322.6 $ 295.7
Costs and expenses 217.4 210.1 200.3 188.5
Depreciation and amortization 20.1 18.7 17.9 16.8
---------- ----------- ----------- -----------
Operating income 94.3 105.4 104.4 90.4
Equity in net earnings (losses) of unconsolidated affiliates:
DST 1.6 7.7 7.5 7.5
Grupo TFM 0.2 1.8 (2.1) (3.1)
Other 0.1 0.8 0.5 0.4
Interest expense (15.4) (17.1) (16.2) (17.4)
Reduction in ownership of DST (29.7) - - -
Other, net 6.8 4.2 15.2 6.6
---------- ----------- ----------- -----------
Pretax income 57.9 102.8 109.3 84.4
Income taxes 20.2 38.2 40.9 31.5
Minority interest 7.6 9.4 9.7 6.7
---------- ----------- ----------- -----------
Net income 30.1 55.2 58.7 46.2
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities 8.2 (27.0) 13.0 29.9
---------- ----------- ----------- -----------
Comprehensive Income $ 38.3 $ 28.2 $ 71.7 $ 76.1
========== =========== =========== ===========
Earnings per share:
Basic $ 0.27 $ 0.50 $ 0.54 $ 0.43
========== =========== =========== ===========
Diluted $ 0.25 $ 0.49 $ 0.51 $ 0.41
========== =========== =========== ===========
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .04 $ .04 $ .04 $ .04
Stock Price Ranges:
Preferred - High $ 17.000 $ 17.750 $ 18.000 $ 18.000
- Low 14.000 15.250 16.000 16.625
Common - High 49.563 57.438 49.813 46.000
- Low 23.000 29.000 39.625 26.250
</TABLE>
<PAGE>103
Fourth Quarter 1997 includes an after-tax charge of $158.1 million, ($1.47 per
basic and diluted share) representing restructuring, asset impairment and other
charges. See detailed discussion in Notes 1, 3 and 6.
<TABLE>
(in millions, except per share amounts):
<CAPTION>
1997
---------------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter (i)
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 294.3 $ 273.6 $ 252.6 $ 237.8
Costs and expenses 179.9 169.8 166.8 163.7
Depreciation and amortization 19.0 19.3 18.4 18.5
Restructuring, asset impairment and
other charges 196.4 - - -
---------- ----------- ----------- -----------
Operating income (loss) (101.0) 84.5 67.4 55.6
Equity in net earnings (losses) of unconsolidated affiliates:
DST 6.9 5.6 5.7 6.1
Grupo TFM (7.6) (2.3) (3.0) -
Other 1.0 1.0 1.2 0.6
Interest expense (17.1) (19.3) (13.6) (13.7)
Other, net 6.5 4.4 4.3 6.0
---------- ----------- ----------- -----------
Pretax income (loss) (111.3) 73.9 62.0 54.6
Income taxes (benefit) (2.7) 25.4 24.3 21.4
Minority interest 7.6 6.7 5.9 4.7
---------- ----------- ----------- -----------
Net income (loss) (116.2) 41.8 31.8 28.5
Other Comprehensive Income (Loss), net of tax:
Unrealized gain (loss) on securities 3.0 13.8 18.0 (8.9)
---------- ----------- ----------- -----------
Comprehensive Income (Loss) $ (113.2) $ 55.6 $ 49.8 $ 19.6
========== =========== =========== ===========
Earnings (loss) per share (ii):
Basic $ (1.08) $ 0.39 $ 0.29 $ 0.26
========== =========== =========== ===========
Diluted $ (1.08) $ 0.38 $ 0.29 $ 0.26
========== =========== =========== ===========
Dividends per share:
Preferred $ .25 $ .25 $ .25 $ .25
Common $ .040 $ .040 $ .033 $ .033
Stock Price Ranges:
Preferred - High $ 18.000 $ 19.000 $ 17.500 $ 17.000
- Low 17.000 15.500 15.500 16.000
Common - High 34.875 34.438 21.583 18.958
- Low 27.125 21.292 16.625 14.583
</TABLE>
(i) The various components of the Statement of Operations were restated from
those reported in the Company's Form 10-Q for the three months ended March
31, 1997. This restatement was attributable to the inclusion of Gateway
Western as an unconsolidated wholly-owned subsidiary during first quarter
1997 pending approval of the Company's acquisition of Gateway Western from
the STB. Upon receiving STB approval in May 1997, Gateway Western was
included in the Company's consolidated financial statements retroactive to
January 1, 1997.
(ii) The accumulation of 1997's four quarters for Basic and Diluted earnings
(loss) per share does not total the Basic and Diluted loss per share,
respectively, for the year ended December 31, 1997 due to Common stock
repurchase and issuance transactions throughout the year, as well as the
anti-dilutive nature of options in the year ended December 31, 1997
calculations.
<PAGE>104
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
<PAGE>105
Part III
The Company has incorporated by reference certain responses to the Items of this
Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction
G(3) to Form 10-K. The Company's definitive proxy statement for the annual
meeting of stockholders scheduled for May 6, 1999 ("Proxy Statement") will be
filed no later than 120 days after December 31, 1998.
Item 10. Directors and Executive Officers of the Company
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under the
heading "Proposal 1 - Election of Two Directors" and "The Board of Directors" in
the Company's Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
"Executive Officers of the Company," an unnumbered Item in Part I (immediately
following Item 4, Submission of Matters to a Vote of Security Holders), of this
Form 10-K is incorporated herein by reference in partial response to this Item
10.
The information set forth in response to Item 405 of Regulation S-K under the
heading "Section 16(a) of Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement is incorporated herein by reference in partial
response to this Item 10.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation S-K under
"Management Compensation" and "Compensation of Directors" in the Company's Proxy
Statement, (other than The Compensation and Organization Committee Report on
Executive Compensation and the Stock Performance Graph), is incorporated by
reference in response to this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth in response to Item 403 of Regulation S-K under the
heading "Principal Stockholders and Stock Owned Beneficially by Directors and
Certain Executive Officers" in the Company's Proxy Statement is hereby
incorporated by reference in response to this Item 12.
The Company has no knowledge of any arrangement the operation of which may at a
subsequent date result in a change of control of the Company.
Item 13. Certain Relationships and Related Transactions
None
<PAGE>106
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Financial Statements
The financial statements and related notes, together with the report of
PricewaterhouseCoopers LLP dated March 4, 1999, appear in Part II Item 8,
Financial Statements and Supplementary Data, of this Form 10-K.
(2) Financial Statement Schedules
The schedules and exhibits for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission appear in Part
II Item 8, Financial Statements and Supplementary Data, under the Index to
Financial Statements of this Form 10-K.
(3) List of Exhibits
(a) Exhibits
The Company has incorporated by reference herein certain exhibits as specified
below pursuant to Rule 12b-32 under the Exchange Act.
(2) Plan of acquisition, reorganization, arrangement, liquidation or succession
(Inapplicable)
(3) Articles of Incorporation and Bylaws
Articles of Incorporation
3.1 Exhibit 4 to Company's Registration Statement on Form S-8
originally filed September 19, 1986 (Commission File No.
33-8880), Certificate of Incorporation as amended through May
14, 1985, is hereby incorporated by reference as Exhibit 3.1
3.2 Exhibit 4.1 to Company's Current Report on Form 8-K dated
October 1, 1993 (Commission File No. 1-4717), Certificate of
Designation dated September 29, 1993 Establishing Series B
Convertible Preferred Stock, par value $1.00, is hereby
incorporated by reference as Exhibit 3.2
3.3 Exhibit 3.1 to Company's Form 10-K for the fiscal year ended
December 31, 1994 (Commission File No. 1-4717), Amendment to
Company's Certificate of Incorporation to set par value for
common stock and increase the number of authorized common
shares dated May 6, 1994, is hereby incorporated by reference
as Exhibit 3.3
3.4 Exhibit 3.4 to Company's Form 10-K for the fiscal year ended
December 31, 1996 (Commission File No. 1-4717), Amended
Certificate of Designation Establishing the New Series A
Preferred Stock, par value $1.00, dated November 7, 1995, is
hereby incorporated by reference as Exhibit 3.4
<PAGE>107
3.5 Exhibit 3.5 to Company's Form 10-K for the fiscal year ended
December 31, 1996 (Commission File No. 1-4717), The
Certificate of Amendment dated May 12, 1987 of the Company's
Certificate of Incorporation adding the Sixteenth paragraph,
is hereby incorporated by reference as Exhibit 3.5
Bylaws
3.6 The Company's By-Laws, as amended and restated September 17,
1998, are attached to this Form 10-K as Exhibit 3.6
(4) Instruments Defining the Right of Security Holders, Including Indentures
4.1 The Fourth, Seventh, Eighth, Twelfth, Thirteenth, Fifteenth
and Sixteenth paragraphs of Exhibit 3.1 hereto are
incorporated by reference as Exhibit 4.1
4.2 Article I, Sections 1,3 and 11 of Article II, Article V and
Article VIII of Exhibit 3.6 hereto are incorporated by
reference as Exhibit 4.2
4.3 The Certificate of Designation dated September 29, 1993
establishing Series B Convertible Preferred Stock, par value
$1.00, which is attached hereto as Exhibit 3.2, is
incorporated by reference as Exhibit 4.3
4.4 The Amended Certificate of Designation dated November 7, 1995
establishing the New Series A Preferred Stock, par value
$1.00, which is attached hereto as Exhibit 3.4, is
incorporated by reference as Exhibit 4.4
4.5 Exhibit 4 to Company's Form S-3 filed June 19, 1992
(Commission File No. 33-47198), the Indenture to a $300
million Shelf Registration of Debt Securities dated July 1,
1992, is hereby incorporated by reference as Exhibit 4.5
4.6 Exhibit 4(a) to Company's Form S-3 filed March 29, 1993
(Commission File No. 33-60192), the Indenture to a $200
million Medium Term Notes Registration of Debt Securities
dated July 1, 1992, is hereby incorporated by reference as
Exhibit 4.6
4.7 Exhibit 99 to Company's Form 8-A dated October 24, 1995
(Commission File No. 1-4717), which is the Stockholder Rights
Agreement by and between the Company and Harris Trust and
Savings Bank dated as of September 19, 1995, is hereby
incorporated by reference as Exhibit 4.7
(9) Voting Trust Agreement
(Inapplicable)
(10) Material Contracts
10.1 Exhibit I to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.1
10.2 Exhibit B to Company's Definitive Proxy Statement for 1987
Annual Stockholder Meeting dated April 6, 1987, The Director
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.2
<PAGE>108
10.3 The Indenture dated July 1, 1992 to a $300 million Shelf
Registration of Debt Securities, which is incorporated by
reference as Exhibit 4.5 hereto, is hereby incorporated by
reference as Exhibit 10.3
10.4 Exhibit H to Company's Form 10-K for the fiscal year ended
December 31, 1987 (Commission File No. 1-4717), The Officer
Indemnification Agreement, is hereby incorporated by reference
as Exhibit 10.4
10.5 Exhibit 10.1 to Company's Form 10-Q for the period ended March
31, 1997 (Commission File No. 1-4717), The Kansas City
Southern Railway Company Directors' Deferred Fee Plan as
adopted August 20, 1982 and the amendment thereto effective
March 19, 1997 to such plan, is hereby incorporated by
reference as Exhibit 10.5
10.6 Exhibit 10.4 to Company's Form 10-K for the fiscal year ended
December 31, 1990 (Commission File No. 1-4717), Description of
the Company's 1991 incentive compensation plan, is hereby
incorporated by reference as Exhibit 10.6
10.7 The Indenture dated July 1, 1992 to a $200 million Medium Term
Notes Registration of Debt Securities, which is incorporated
as Exhibit 4.6 hereto, is hereby incorporated by reference as
Exhibit 10.7
10.8 Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended June 30, 1997 (Commission File No. 1-4717),
Five-Year Competitive Advance and Revolving Credit Facility
Agreement dated May 2, 1997, by and between the Company and
the lenders named therein, is hereby incorporated by reference
as Exhibit 10.8
10.9 Exhibit 10.4 in the DST Systems, Inc. Registration Statement
on Form S-1 dated October 30, 1995, as amended (Registration
No. 33-96526), Tax Disaffiliation Agreement, dated October 23,
1995, by and between the Company and DST Systems, Inc., is
hereby incorporated by reference as Exhibit 10.9
10.10 Exhibit 10.6 to the DST Systems, Inc. Annual Report on Form
10-K for the year ended December 31, 1995 (Commission File No.
1-14036), the 1995 Restatement of The Employee Stock Ownership
Plan and Trust Agreement, is hereby incorporated by reference
as Exhibit 10.10
10.11 Exhibit 4.1 to the DST Systems, Inc. Registration Statement on
Form S-1 dated October 30, 1995, as amended (Registration No.
33-96526), The Registration Rights Agreement dated October 24,
1995 by and between DST Systems, Inc. and the Company, is
hereby incorporated by reference as Exhibit 10.11
10.12 Exhibit 10.18 to Company's Form 10-K for the year ended
December 31, 1996 (Commission File No. 1-4717), Directors
Deferred Fee Plan, adopted August 20, 1982, amended and
restated February 1, 1997, is hereby incorporated by reference
as Exhibit 10.12
10.13 Appendix D to the Company's Notice and Proxy Statement
for A Special Meeting of Stockholders to held July 15,
1998, Kansas City Southern Industries, Inc. 1991 Amended
and Restated Stock Option and Performance Award Plan, as
amended and restated effective July 15, 1998, is hereby
incorporated by reference as Exhibit 10.13
10.14 Exhibit 10.20 to Company's Form 10-K for the year ended
December 31, 1997 (Commission File No. 1-4717), Employment
Agreement, as amended and restated September 18, 1997, by and
between the Company and Landon H. Rowland is hereby
incorporated by reference as Exhibit 10.14
<PAGE>109
10.15 Employment Agreement, as amended and restated January 1,
1999, by and between the Company, The Kansas City Southern
Railway Company and Michael R. Haverty, is attached to this
Form 10-K as Exhibit 10.15
10.16 Employment Agreement, as amended and restated January 1, 1999,
by and between the Company and Joseph D. Monello is attached
to this Form 10-K as Exhibit 10.16
10.17 Employment Agreement, as amended and restated January 1, 1999,
by an between the Company and Danny R. Carpenter is attached
to this Form 10-K as Exhibit 10.17
10.18 Kansas City Southern Industries, Inc. Executive Plan, as
amended and restated effective November 17, 1998, is attached
to this Form 10-K as Exhibit 10.18
10.19 Stock Purchase Agreement, dated April 13, 1984, by and
among Kansas City Southern Industries, Inc., Thomas H.
Bailey, William C. Mangus, Bernard E. Niedermeyer III,
Michael Stolper, and Jack R. Thompson is attached to
this Form 10-K/A as Exhibit 10.19
10.19.1 Amendment to Stock Purchase Agreement, dated January
4, 1985, by and among Kansas City Southern Industries,
Inc., Thomas H. Bailey, Bernard E. Niedermeyer III,
Michael Stolper, and Jack R. Thompson is attached to
this Form 10-K/A as 10.19.1
10.19.2 Second Amendment to Stock Purchase Agreement, dated
March 18, 1988, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Michael Stolper,
and Jack R. Thompson is attached to this Form 10-K/A
as Exhibit 10.19.2
10.19.3 Third Amendment to Stock Purchase Agreement, dated
February 5, 1990, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Michael Stolper,
and Jack R. Thompson is attached to this Form 10-K/A
as Exhibit 10.19.3
10.19.4 Fourth Amendment to Stock Purchase Agreement, dated
January 1, 1991, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Michael Stolper,
and Jack R. Thompson is attached to this Form 10-K/A
as Exhibit 10.19.4
10.19.5 Assignment and Assumption Agreement and Fifth
Amendment to Stock Purchase Agreement, dated
November 19, 1999, by and among Kansas City Southern
Industries, Inc., Stilwell Financial, Inc., Thomas H.
Bailey and Michael Stolper is attached to this
Form 10-K/A as Exhibit 10.19.5
(11) putation of Per Share Earnings
(Inapplicable)
(12) Statements Re Computation of Ratios
12.1 The Computation of Ratio of Earnings to Fixed Charges prepared
pursuant to Item 601(b)(12) of Regulation S-K is attached to
this Form 10-K as Exhibit 12.1
(13) Annual Report to Security Holders, Form 10-Q or Quarterly
Report to Security Holders
(Inapplicable)
(16) Letter Re Change in Certifying Accountant
(Inapplicable)
(18) Letter Re Change in Accounting Principles
(Inapplicable)
(21) Subsidiaries of the Company
21.1 The list of the Subsidiaries of the Company prepared pursuant
to Item 601(b)(21) of Regulation S-K is attached to this Form
10-K as Exhibit 21.1
(22) Published Report Regarding Matters Submitted to Vote of Security Holders
(Inapplicable)
(23) Consents of Experts and Counsel
23.1 The Consent of Independent Accountants prepared pursuant to
Item 601(b)(23) of Regulation S-K is attached to this Form
10-K as Exhibit 23.1
(24) Power of Attorney
(Inapplicable)
(27) Financial Data Schedule
27.1 The Financial Data Schedule prepared pursuant to Item
601(b)(27) of Regulation S-K is attached to this Form 10-K as
Exhibit 27.1
(28) Information from Reports Furnished to State Insurance Regulatory
Authorities
(Inapplicable)
<PAGE>110
(99) Additional Exhibits
99.1 The consolidated financial statements of DST Systems, Inc.
(including the notes thereto and the Report of Independent
Accountants thereon) set forth under Item 8 of the DST
Systems, Inc. Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission File No. 1-14036), as listed
under Item 14(a)(2) herein, are hereby incorporated by
reference as Exhibit 99.1
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K during the three months
ended December 31, 1998.
<PAGE>111
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
February 11, 2000.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President & Chief Financial Officer
(Principal Financial Officer)
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1998 FORM 10-K ANNUAL REPORT
INDEX TO EXHIBITS
Regulation S-K
Exhibit Item 601(b)
No. Document Exhibit No.
3.6 The Company's By-Laws, as amended and restated
as of September 17, 1998 3
10.15 Employment Agreement as amended and restated
January 1, 1999, by and between the Company and
Michael R. Haverty 10
10.16 Employment Agreement as amended and restated
January 1, 1999, by and between the Company and
Joseph D. Monello 10
10.17 Employment Agreement as amended and restated
January 1, 1999, by and between the Company and
Danny R. Carpenter 10
10.18 Kansas City Southern Industries, Inc. Executive Plan,
as amended and restated effective November 17, 1998 10
10.19 Stock Purchase Agreement, dated April 13, 1984, by and
and among Kansas City Southern Industries, Inc.,
Thomas H. Bailey, William C. Mangus, Bernard E.
Niedermeyer III, Michael Stolper, and Jack R.
Thompson 10
10.19.1 Amendment to Stock Purchase Agreement dated January 4,
1985, by and among Kansas City Southern Industries,
Inc., Thomas H. Bailey, Bernard E. Niedermeyer III,
Michael Stolper, and Jack R. Thompson 10
10.19.2 Second Amendment to Stock Purchase Agreement dated
March 18, 1988, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Bernard E.
Niedermeyer III, Michael Stolper, and
Jack R. Thompson 10
10.19.3 Third Amendment to Stock Purchase Agreement dated
February 5, 1990, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Bernard E.
Niedermeyer III, Michael Stolper, and
Jack R. Thompson 10
10.19.4 Fourth Amendment to Stock Purchase Agreement dated
January 1, 1991, by and among Kansas City Southern
Industries, Inc., Thomas H. Bailey, Bernard E.
Niedermeyer III, Michael Stolper, and
Jack R. Thompson 10
10.19.5 Assignment and Assumption Agreement and Fifth
Amendment to Stock Purchase Agreement, dated
November 19, 1999, by and among Kansas City Southern
Industries, Inc., Stilwell Financial, Inc.,
Thomas H. Bailey and Michael Stolper 10
12.1 Computation of Ratio of Earnings to Fixed Charges 12
21.1 Subsidiaries of the Company 21
23.1 Consent of Independent Accountants 23
27.1 Financial Data Schedule 27
-----------------------------
BY-LAWS
OF
KANSAS CITY SOUTHERN INDUSTRIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
As amended and restated to September 17, 1998
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.
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 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 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.
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.
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.
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 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.
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).
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 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.
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 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 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. The signature of any
officer, transfer agent, or registrar on a certificate for shares of the
Corporation may be facsimile. In case any officer, transfer agent or registrar
who has signed, or whose facsimile signature has been used on, any such
certificate or certificates shall cease to be such officer, transfer agent or
registrar 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, transfer
agent or registrar 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 canceled 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 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.
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 connection
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.
EMPLOYMENT AGREEMENT
(Amended and Restated January 1, 1999)
THIS AGREEMENT, made and entered into as of this 1st day of January,
1999, by and between The Kansas City Southern Railway Company, a Missouri
corporation ("Railway"), Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI") and Michael R. Haverty, an individual ("Executive").
WHEREAS, Executive is now employed by Railway, and Railway, KCSI and
Executive desire for Railway to continue to employ Executive on the terms and
conditions set forth in this Agreement and to provide an incentive to Executive
to remain in the employ of Railway hereafter, particularly in the event of any
change in control (as herein defined) of KCSI, Railway or Kansas City Southern
Lines, Inc., thereby establishing and preserving continuity of management of
Railway.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between Railway, KCSI and Executive as
follows:
1. Employment. Railway hereby continues the employment of Executive as
its President and Chief Executive Officer to have general supervision over,
responsibility for and control of the day-to-day business and affairs of
Railway, subject to the powers vested in the Railway Board and in the
stockholder of Railway. Executive shall have such other powers, duties and
responsibilities consistent with his position as President and Chief Executive
Officer of Railway as may be prescribed from time to time by the Board. KCSI
shall cause Executive to continue to be elected and retained as an Executive
Vice President of KCSI and as a Director of Railway and shall use its best
efforts to cause Executive to continue to be elected as a Director of KCSI.
Executive shall faithfully perform his duties under this Agreement to the best
of his ability and shall devote substantially all of his working time and
efforts to the business and affairs of Railway and its affiliates; provided,
however, that to an extent consistent with the needs of Railway and its
affiliates, Executive shall be entitled to expend a reasonable amount of time on
civic and philanthropic activities and the management of personal and family
investments.
2. Compensation.
(a) Base Compensation. Railway shall pay Executive as
compensation for his services hereunder an annual base salary at the rate
approved by the KCSI Compensation Committee on November 17, 1998. Such rate
shall not be increased prior to January 1, 2000 and shall not be reduced except
as agreed by the parties or except as part of a general salary reduction program
imposed by Railway for non-union employees and applicable to all officers of
Railway.
(b) Incentive Compensation. For the year 1999, Executive shall
not be entitled to participate in the Railway Incentive Compensation Plan.
(c) Stock Options. Executive acknowledges that he has been
granted KCSI stock options as follows:
(i) Options for 100,000 shares of KCSI common stock pursuant to a
stock option agreement dated May 15, 1995, representing options at the
option price of $38.3125 awarded at the time of Executive's initial
employment by Railway in accordance with the Employment Agreement between
Executive, Railway, and KCSI dated May 15, 1995 (the "1995 Employment
Agreement").
(ii) Options for the purchase of 150,000 shares of KCSI common stock,
pursuant to a stock option agreement dated November 6, 1995, representing
options at the option price of Forty-Six Dollars ($46.00) granted to
Executive in lieu of Performance Shares which Executive was to have the
right to earn under the 1995 Employment Agreement.
(iii) Options to purchase 45,000 shares of KCSI common, pursuant to a
stock option agreement dated January 25, 1996, representing stock options
at the option price of $43.1875 awarded to Executive in lieu of a cash
bonus for the period of May 15, 1995 through December 31, 1995 as
previously provided in the 1995 Employment Agreement.
Executive acknowledges and agrees that he has received the stock
options specified in subparagraphs (ii) and (iii) above in lieu of performance
shares and a cash bonus as previously provided in the 1995 Employment Agreement
and that Executive has no right or claim under the 1995 Employment Agreement or
otherwise for said performance shares or said cash bonus.
3. Benefits. During the period of his employment hereunder, Railway
shall provide Executive with coverage under such benefit plans and programs as
are made generally available to similarly situated employees of Railway,
provided (a) Railway shall have no obligation with respect to any plan or
program if Executive is not eligible for coverage thereunder, and (b) Executive
acknowledges that stock options and other stock and equity participation awards
are granted in the discretion of the Board of Directors of KCSI (the "KCSI
Board") or the Compensation Committee of the KCSI Board and that Executive has
no right to receive stock options or other equity participation awards or any
particular number or level of stock options or other awards. In determining
contributions, coverage and benefits under any disability insurance policy and
under any cash compensation-based plan provided to Executive by Railway, it
shall be assumed that the value of Executive's annual compensation, pursuant
to this Agreement, is 167.67% of Executive's annual base salary. Executive
acknowledges that all rights and benefits under benefit plans and programs shall
be governed by the official text of each plan or program and not by any summary
or description thereof or any provision of this Agreement (except to the extent
that this Agreement expressly modifies such benefit plans or programs) and that
none of KCSI, KCSL nor Railway is under any obligation to continue in effect or
to fund any such plan or program, except as provided in Paragraph 7 hereof.
4. Termination.
(a) Termination by Executive. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to Railway, except that in the event of any material breach of
this Agreement by Railway, Executive may terminate this Agreement and his
employment hereunder immediately upon notice to Railway.
(b) Death or Disability. This Agreement and Executive's
employment hereunder shall terminate automatically on the death or disability of
Executive, except to the extent employment is continued under Railway's
disability plan. For purposes of this Agreement, Executive shall be deemed to be
disabled if he qualifies for disability benefits under Railway's long-term
disability plan.
(c) Termination by Railway For Cause. Railway may terminate
this Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by Executive;
(ii) Executive's dishonesty involving Railway, KCSI, KCSL or any
subsidiary of Railway, KCSI or KCSL;
(iii) Gross negligence or willful misconduct in the performance of
Executive's duties as determined in good faith by the Railway Board;
(iv) Willful failure by Executive to follow reasonable instructions of
the President or other officer to whom Executive reports;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by Railway Other Than For Cause.
(i) Railway may terminate this Agreement and
Executive's employment other than for cause immediately upon notice to
Executive, and in such event, Railway shall provide severance benefits
to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this
Agreement are applicable, if Executive's employment is terminated under
Paragraph 4(d)(i), Railway shall continue, for a period of one (1) year
following such termination, (a) to pay to Executive as severance pay a
monthly amount equal to one-twelfth (1/12th) of the annual base salary
referenced in Paragraph 2(a) above, at the rate in effect immediately
prior to termination, and, (b) to reimburse Executive for the cost
(including state and federal income taxes payable with respect to this
reimbursement) of continuing the health insurance coverage provided
pursuant to this Agreement or obtaining health insurance coverage
comparable to the health insurance provided pursuant to this Agreement,
and obtaining coverage comparable to the life insurance provided
pursuant to this Agreement, unless Executive is provided comparable
health or life insurance coverage in connection with other employment.
The foregoing obligations of Railway shall continue until the end of
such one (1) year period notwithstanding the death or disability of
Executive during said period (except, in the event of death, the
obligation to reimburse Executive for the cost of life insurance shall
not continue). In the year in which termination of employment occurs,
Executive shall be eligible to receive benefits under the Railway
Incentive Compensation Plan and any Executive Plan in which Executive
participates (the "Executive Plan") (if such Plans then are in
existence and Executive was entitled to participate immediately prior
to termination) in accordance with the provisions of such plans then
applicable, and severance pay received in such year shall be taken into
account for the purpose of determining benefits, if any, under the
Railway Incentive Compensation Plan but not under the Executive Plan.
After the year in which termination occurs, Executive shall not be
entitled to accrue or receive benefits under the Railway Incentive
Compensation Plan or the Executive Plan with respect to the severance
pay provided herein, notwithstanding that benefits under such plan then
are still generally available to executive employees of Railway. After
termination of employment, Executive shall not be entitled to accrue or
receive benefits under any other employee benefit plan or program,
except that Executive shall be entitled to participate in the KCSI
Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the
KCSI Section 401(k) Plan (if Railway employees then still participate
in such plans) in the year of termination of employment only if
Executive meets all requirements of such plans for participation in
such year.
5. Non-Disclosure. During the term of this Agreement and at all times
after any termination of this Agreement, Executive shall not, either
directly or indirectly, use or disclose any Railway trade secret,
except to the extent necessary for Executive to perform his duties for
Railway while an employee. For purposes of this Agreement, the term
"Railway trade secret" shall mean any information regarding the
business or activities of Railway or any subsidiary or affiliate,
including any formula, pattern, compilation, program, device, method,
technique, process, customer list, technical information or other
confidential or proprietary information, that (a) derives independent
economic value, actual or potential, from not being generally known
to, and not being readily ascertainable by proper means by, other
persons who can obtain economic value from its disclosure or use, and
(b) is the subject of efforts of Railway or its subsidiary or
affiliate that are reasonable under the circumstance to maintain its
secrecy. In the event of any breach of this Paragraph 5 by Executive,
Railway shall be entitled to terminate any and all remaining severance
benefits under Paragraph 4(d)(ii) and shall be entitled to pursue such
other legal and equitable remedies as may be available.
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by Railway or
Executive for any reason, Executive shall immediately return to Railway all
Railway trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of Railway and all direct and indirect subsidiaries and
affiliates of Railway as may be requested by Railway and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as Railway may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of
this Agreement shall survive any termination of this Agreement by Railway or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by Railway under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control
(a) Continuation of Employment. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control (as defined
in Paragraph 7(d)) at any time during the term of this Agreement, Executive
agrees to remain in the employ of Railway for a period of three years (the
"Three-Year Period") from the date of such Change in Control (the "Control
Change Date"). Railway agrees to continue to employ Executive for the Three-Year
Period. During the Three-Year Period, (i) the Executive's position (including
offices, titles, reporting requirements and responsibilities), authority and
duties shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 12
month period immediately before the Control Change Date and (ii) the Executive's
services shall be performed at the location where Executive was employed
immediately before the Control Change Date or at any other location less than 40
miles from such former location. During the Three-Year Period, Railway shall
continue to pay to Executive an annual base salary on the same basis and at the
same intervals as in effect prior to the Control Change Date at a rate not less
than 12 times the highest monthly base salary paid or payable to the Executive
by Railway in respect of the 12-month period immediately before the Control
Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of the
following KCSI, KCSL or Railway plans (together, the "Specified Benefits") in
existence, and in accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated
therewith, related to (A) life, health, dental, disability, accidental
death and dismemberment insurance or accrued but unpaid vacation time,
(B) profit sharing, thrift or deferred savings (including deferred
compensation, such as under Sec. 401(k) plans), (C) retirement or
pension benefits, (D) ERISA excess benefits and similar plans and (E)
tax favored employee stock ownership (such as under ESOP, and Employee
Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally
available to executives of Executive's level or to the employees of
Railway generally. In addition, Railway and KCSI shall use their best
efforts to cause all outstanding options held by
Executive under any stock option plan of KCSI or its affiliates to become
immediately exercisable on the Control Change Date and to the extent that such
options are not vested and are subsequently forfeited, the Executive shall
receive a lump-sum cash payment within 5 days after the options are forfeited
equal to the difference between the fair market value of the shares of stock
subject to the non-vested, forfeited options determined as of the date such
options are forfeited and the exercise price for such options. During the
Three-Year Period Executive shall be entitled to participate, on the basis of
his executive position, in any incentive compensation plan of KCSI, KCSL or
Railway in accordance with the terms thereof at the Control Change Date;
provided that if under KCSI, KCSL or Railway programs or Executive's
Employment Agreement in existence immediately prior to the Control Change Date,
there are written limitations on participation for a designated time period in
any incentive compensation plan, such limitations shall continue after the
Control Change Date to the extent so provided for prior to the Control Change
Date.
If the amount of contributions or benefits with respect to the
Specified Benefits or any incentive compensation is determined on a
discretionary basis under the terms of the Specified Benefits or any incentive
compensation plan immediately prior to the Control Change Date, the amount of
such contributions or benefits during the Three-Year Period for each of the
Specified Benefits shall not be less than the average annual contributions or
benefits for each Specified Benefit for the three plan years ending prior to the
Control Change Date and, in the case of any incentive compensation plan, the
amount of the incentive compensation during the Three-Year Period shall not be
less than 75% of the maximum that could have been paid to the Executive under
the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of Railway which has
not been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within
five (5) days after such date full payment in cash (discounted to the then
present value on the basis of a rate of seven percent (7%) per annum) of all
amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence
of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if:
(i) for any reason at any time less than seventy-five
percent (75%) of the members of the KCSI Board shall be individuals who
fall into any of the following categories: (A) individuals who were
members of the KCSI Board on the date of the Agreement; or (B)
individuals whose election, or nomination for election by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
members of the KCSI Board on the date of the Agreement; or (C)
individuals whose election, or nomination for election, by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
elected in the manner described in (A) or (B) above, or
(ii) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act")) other than KCSI shall have become after September 18,
1997, according to a public announcement or filing, the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of KCSL, Railway or KCSI representing thirty
percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more
(calculated in accordance with Rule 13d-3) of the combined voting power
of KCSL's, Railway's or KCSI's then outstanding voting
securities; or
(iii) the stockholders of KCSL, Railway or KCSI shall
have approved a merger, consolidation or dissolution of KCSL, Railway
or KCSI or a sale, lease, exchange or disposition of all or
substantially all of KCSL's, Railway's or KCSI's assets, if
persons who were the beneficial owners of the combined voting power of
KCSL's, Railway's or KCSI's voting securities immediately
before any such merger, consolidation, dissolution, sale, lease,
exchange or disposition do not immediately thereafter, beneficially
own, directly or indirectly, in substantially the same proportions,
more than 60% of the combined voting power of any corporation or other
entity resulting from any such transaction.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the sale of shares of stock of KCSL pursuant to an initial public offering of
shares of stock of KCSL shall not constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change Date,
Railway may terminate the employment of Executive (the "Termination"), but
unless such Termination is for Cause as defined in subparagraph (g) or for
disability, within five (5) days of the Termination Railway shall pay to
Executive his full base salary through the Termination, to the extent not
theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal
to the product (discounted to the then present value on the basis of a rate of
seven percent (7%) per annum) of (i) 167.67% of his annual base salary specified
in Paragraph 7(a) multiplied by (ii) Three; and Specified Benefits (excluding
any incentive compensation) to which Executive was entitled immediately prior to
Termination shall continue until the end of the 3-year period ("Benefits
Period") beginning on the date of Termination. If any plan pursuant to which
Specified Benefits are provided immediately prior to Termination would not
permit continued participation by Executive after Termination, then Railway
shall pay to Executive within five (5) days after Termination a lump sum payment
equal to the amount of Specified Benefits Executive would have received under
such plan if Executive had been fully vested in the average annual contributions
or benefits in effect for the three plan years ending prior to the Control
Change Date (regardless of any limitations based on the earnings or performance
of KCSI, KCSL or Railway) and a continuing participant in such plan to the end
of the Benefits Period. Following the end of the Benefits Period, Railway shall
continue to provide to the Executive and the Executive's family the following
benefits ("Post-Period Benefits"): (1) prior to the Executive's attainment of
age sixty (60), health, prescription and dental benefits equivalent to those
then applicable to active peer executives of Railway) and their families, as the
same may be modified from time to time, and (2) following the Executive's
attainment of age sixty (60) (and without regard to the Executive's period of
service with Railway) health and prescription benefits equivalent to those then
applicable to retired peer executives of Railway and their families, as the same
may be modified from time to time. The cost to the Executive of such Post-Period
Benefits shall not exceed the cost of such benefits to active or retired (as
applicable) peer executives, as the same may be modified from time to time.
Notwithstanding the preceding two sentences of this Paragraph 7(e), if the
Executive is covered under any health, prescription or dental plan provided by a
subsequent employer, then the corresponding type of plan coverage (i.e., health,
prescription or dental), required to be provided as Post-Period Benefits under
this Paragraph 7(e) shall cease. The Executive's rights under this Paragraph
7(e) shall be in addition to, and not in lieu of, any post-termination
continuation coverage or conversion rights the Executive may have pursuant to
applicable law, including without limitation continuation coverage required by
Section 4980 of the Code. Nothing in this Paragraph 7(e) shall be deemed to
limit in any manner the reserved right of Railway, in its sole and absolute
discretion, to at any time amend, modify or terminate health, prescription or
dental benefits for active or retired employees generally.
(f) Resignation After Control Change Date. In the event of a
Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of
Railway and effective at the end of such notice period, resign his employment
with Railway (the "Resignation"). Within five (5) days of such a Resignation,
Railway shall pay to Executive his full base salary through the effective date
of such Resignation, to the extent not theretofore paid, plus a lump sum amount
equal to the Special Severance Payment (computed as provided in the first
sentence of Paragraph 7(e), except that for purposes of such computation all
references to "Termination" shall be deemed to be references to "Resignation").
Upon Resignation of Executive, Specified Benefits to which Executive was
entitled immediately prior to Resignation shall continue on the same terms and
conditions as provided in Paragraph 7(e) in the case of Termination (including
equivalent payments provided for therein), and Post-Period Benefits shall be
provided on the same terms and conditions as provided in Paragraph 7(e) in the
case of Termination. For purposes of this Agreement, "good reason" means any of
the following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position (including
offices, titles, reporting requirements or responsibilities), authority
or duties as contemplated by Section 7(a)(i), or any other action by
Railway which results in a diminution or other material adverse change
in such position, authority or duties;
(ii) any failure by Railway to comply with any of the
provisions of Paragraph 7; (iii) Railway's requiring
the Executive to be based at any office or location
other than the location described in Section 7(a)(ii);
(iv) any other material adverse change to the
terms and conditions of the Executive's employment; or
(v) any purported termination by Railway of the
Executive's employment other than as expressly permitted by this
Agreement (any such purported termination shall not be effective for
any other purpose under this Agreement).
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by Railway "for cause." Cause
means commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment; except that Cause shall
not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in
good faith to have been in or not opposed to the interest of Railway
(without intent of the Executive to gain, directly or indirectly, a
profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a
determination could properly have been made by the Railway Board that
the Executive met the applicable standard of conduct for
indemnification or reimbursement under Railway's by-laws, any
applicable indemnification agreement, or applicable law, in each case
in effect at the time of such act or omission; or
(iv) any act or omission with respect to which Notice
of Termination of the Executive is given more than 12 months after the
earliest date on which any member of the Railway Board, not a party to
the act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by Railway for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
reasonable computation of Railway's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from Railway, KCSL or KCSI pursuant to this Agreement
or otherwise (collectively, the "Payments") is or will become subject to any
excise tax under Section 4999 of the Code or any similar tax payable under any
United States federal, state, local or other law (such excise tax and all such
similar taxes collectively, "Excise Taxes"), then Railway shall, immediately
after such determination, pay the Executive an amount (the "Gross-up Payment")
equal to the product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph
7(k)).
The Gross-up Payment is intended to compensate the
Executive for the Excise Taxes and any federal, state, local or other
income or excise taxes or other taxes payable by the Executive with
respect to the Gross-up Payment. Railway shall cause the preparation
and delivery to the Executive of a Certificate upon request at any
time. Railway shall, in addition to complying with this Paragraph
7(h), cause all determinations and certifications under Paragraphs
7(h)-(o) to be made as soon as reasonably possible and in adequate
time to permit the Executive to prepare and file the Executive's
individual tax returns on a timely basis.
(i) Determination by the Executive.
(i) If Railway shall fail (A) to deliver a
Certificate to the Executive or (B) to pay to the Executive the amount
of the Gross-up Payment, if any, within 14 days after receipt from the
Executive of a written request for a Certificate, or if at any time
following receipt of a Certificate the Executive disputes the amount of
the Gross-up Payment set forth therein, the Executive may elect to
demand the payment of the amount which the Executive, in accordance
with an opinion of counsel to the Executive ("Executive Counsel
Opinion"), determines to be the Gross-up Payment. Any such demand by
the Executive shall be made by delivery to Railway of a written notice
which specifies the Gross-up Payment determined by the Executive and an
Executive Counsel Opinion regarding such Gross-up Payment (such written
notice and opinion collectively, the "Executive's Determination").
Within 14 days after delivery of the Executive's Determination to
Railway, Railway shall either (A) pay the Executive the Gross-up
Payment set forth in the Executive's Determination (less the
portion of such amount, if any, previously paid to the Executive by
Railway) or (B) deliver to the Executive a Certificate specifying the
Gross-up Payment determined by Railway's independent auditors,
together with an opinion of Railway's counsel ("Railway Counsel
Opinion"), and pay the Executive the Gross-up Payment specified in such
Certificate. If for any reason Railway fails to comply with clause (B)
of the preceding sentence, the Gross-up Payment specified in the
Executive's Determination shall be controlling for all purposes.
(ii) If the Executive does not make a request for,
and Railway does not deliver to the Executive, a Certificate, Railway
shall, for purposes of Paragraph 7(j), be deemed to have determined
that no Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial
conclusion of Railway and/or the Executive that certain Payments are neither
subject to Excise Taxes nor to be counted in determining whether other Payments
are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later
determined (pursuant to subsequently-enacted provisions of the Code, final
regulations or published rulings of the IRS, final IRS determination or judgment
of a court of competent jurisdiction or Railway's independent auditors) that any
of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in
determining whether any Payments are subject to Excise Taxes, with the result
that the amount of Excise Taxes payable by the Executive is greater than the
amount determined by Railway or the Executive pursuant to Paragraph 7(h) or
Paragraph 7(i), as applicable, then Railway shall pay the Executive an amount
(which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (A) such additional Excise Taxes and
(B) any interest, fines, penalties, expenses or other costs incurred by
the Executive as a result of having taken a position in accordance with
a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all
federal, state, local and other income and other taxes and any Excise Taxes
applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it
shall be deemed equal to 0.8 for purposes of this computation. (If different
rates of tax are applicable to various portions of a Gross-up Payment, the
weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a
legal opinion of nationally recognized executive compensation counsel that there
is a reasonable basis to support a conclusion that the Gross-up Payment
determined by the Executive has been calculated in accord with this Paragraph 7
and applicable law. "Company Counsel Opinion" means a legal opinion of
nationally recognized executive compensation counsel that (i) there is a
reasonable basis to support a conclusion that the Gross-up Payment set forth in
the Certificate of Railway's independent auditors has been calculated in
accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable
basis for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
Railway in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by Railway of a Gross-up Payment. Such
notice shall include the nature of such claim and the date on which such claim
is due to be paid. The Executive shall give such notice as soon as practicable,
but no later than 10 business days, after the Executive first obtains actual
knowledge of such claim; provided, however, that any failure to give or delay in
giving such notice shall affect Railway's obligations under this Paragraph 7
only if and to the extent that such failure results in actual prejudice to
Railway. The Executive shall not pay such claim less than 30 days after the
Executive gives such notice to Railway (or, if sooner, the date on which payment
of such claim is due). If Railway notifies the Executive in writing before the
expiration of such period that it desires to contest such claim, the Executive
shall:
(i) give Railway any information that it reasonably
requests relating to such claim;
(ii) take such action in connection with contesting
such claim as Railway reasonably requests in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by Railway;
(iii) cooperate with Railway in good faith to contest
such claim; and (iv) permit Railway to participate in any proceedings
relating to such claim;
provided, however, that Railway shall bear and pay directly all costs
and expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax,
including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, Railway shall control all proceedings in connection with
such contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as Railway shall determine; provided, however, that
if Railway directs the Executive to pay such claim and sue for a
refund, Railway shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify the Executive,
on an after-tax basis, for any Excise Tax or income tax, including
related interest or penalties, imposed with respect to such advance;
and further provided that any extension of the statute of limitations
relating to payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is limited
solely to such contested amount. The Railway's control of the contest
shall be limited to issues with respect to which a Gross-up Payment
would be payable. The Executive shall be entitled to settle or contest,
as the case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an
amount advanced by Railway pursuant to Paragraph 7(m), the Executive receives
any refund with respect to such claim, the Executive shall (subject to Railway's
complying with the requirements of Paragraph 7(m)) promptly pay Railway the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by Railway pursuant to Paragraph 7(m), a determination is made that the
Executive shall not be entitled to a full refund with respect to such claim and
Railway does not notify the Executive in writing of its intent to contest such
determination before the expiration of 30 days after such determination, then
the applicable part of such advance shall be forgiven and shall not be required
to be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-up Payment required to be paid. Any contest of a denial of
refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement
after the Control Change Date involving an effort by Executive to protect,
enforce or secure rights or benefits claimed by Executive hereunder, Railway
shall pay (promptly upon demand by Executive accompanied by reasonable evidence
of incurrence) all reasonable expenses (including attorneys' fees) incurred
by Executive in connection with such dispute, without regard to whether
Executive prevails in such dispute except that Executive shall repay Railway any
amounts so received if a court having jurisdiction shall make a final,
nonappealable determination that Executive acted frivolously or in bad faith by
such dispute. To assure Executive that adequate funds will be made available to
discharge Railway's obligations set forth in the preceding sentence, Railway has
established a trust and upon the occurrence of a Change in Control shall
promptly deliver to the trustee of such trust to hold in accordance with the
terms and conditions thereof that sum which the Railway Board shall have
determined is reasonably sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change
Date, the provisions of this Paragraph 7 shall control and take precedence over
any other provisions of this Agreement which are in conflict with or address the
same or a similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of
Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control
as defined in Paragraph 7(d), Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and except as otherwise specifically provided in Paragraph
4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with
respect to health, prescription and dental benefits, no such other employment,
if obtained, or compensation or benefits payable in connection therewith shall
reduce any amounts or benefits to which Executive is entitled hereunder. Such
amounts or benefits payable to Executive under this Agreement shall not be
treated as damages but as severance compensation to which Executive is entitled
because Executive's employment has been terminated.
9. KCSI Not An Obligor. Notwithstanding that KCSI has executed this
Agreement, it shall have no obligation for the payment of salary, benefits, or
other compensation hereunder, and all such obligations shall be the sole
responsibility of Railway.
10. Notice. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have been
given when personally delivered, delivered by facsimile or deposited in the
United States mail by certified or registered mail, postage prepaid, addressed,
in the case of Railway or KCSI, to Railway or KCSI at 114 West 11th Street,
Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the
Executive, to at 6410 Wenonga Road, Mission Hills, Kansas 66208, or to such
other address as a party shall designate by notice to the other party.
11. Amendment. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in writing signed by Executive, the President of Railway and the
President of KCSI. No waiver by any party hereto at any time of any breach by
another party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the time or at any prior or
subsequent time.
12. Successors in Interest. The rights and obligations of KCSI and
Railway under this Agreement shall inure to the benefit of and be binding in
each and every respect upon the direct and indirect successors and assigns of
KCSI and Railway, regardless of the manner in which such successors or assigns
shall succeed to the interest of KCSI or Railway hereunder, and this Agreement
shall not be terminated by the voluntary or involuntary dissolution of KCSI or
Railway or by any merger or consolidation or acquisition involving KCSI or
Railway, or upon any transfer of all or substantially all of KCSI's or
Railway's assets, or terminated otherwise than in accordance with its terms. In
the event of any such merger or consolidation or transfer of assets, the
provisions of this Agreement shall be binding upon and shall inure to the
benefit of the surviving corporation or the corporation or other person to which
such assets shall be transferred. Neither this Agreement nor any of the payments
or benefits hereunder may be pledged, assigned or transferred by Executive
either in whole or in part in any manner, without the prior written consent of
Railway.
13. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
14. Controlling Law and Jurisdiction. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
15. Entire Agreement. This Agreement constitutes the entire agreement
among the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Agreement as of the 1st day of January, 1999.
THE KANSAS CITY SOUTHERN RAILWAY
COMPANY
By /s/ Michael R. Haverty
----------------------------------
Michael R. Haverty, President
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Landon H. Rowland
----------------------------------
Landon H. Rowland, President
EXECUTIVE
/s/ Michael H. Haverty
-----------------------------------
Michael R. Haverty
EMPLOYMENT AGREEMENT
Amended and Restated January 1, 1999
THIS AGREEMENT, made and entered into as of this 1st day of January,
1999, by and between Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI") Joseph D. Monello, an individual ("Executive").
WHEREAS, Executive is now employed by KCSI, and KCSI and Executive
desire for KCSI to continue to employ Executive on the terms and conditions set
forth in this Agreement and to provide an incentive to Executive to remain in
the employ of KCSI hereafter, particularly in the event of any change in control
(as herein defined) of KCSI, Kansas City Southern Lines, Inc. ("KCSL") or The
Kansas City Southern Railway Company ("Railway"), thereby establishing and
preserving continuity of management of KCSI.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between KCSI and Executive as follows:
1. Employment. KCSI hereby continues the employment of Executive as its
Vice President and Chief Financial Officer to serve at the pleasure of the Board
of Directors of KCSI (the "KCSI Board") and to have such duties, powers and
responsibilities as may be prescribed or delegated from time to time by the
President or other officer to whom Executive reports, subject to the powers
vested in the KCSI Board and in the stockholders of KCSI. Executive shall
faithfully perform his duties under this Agreement to the best of his ability
and shall devote substantially all of his working time and efforts to the
business and affairs of KCSI and its affiliates.
2. Compensation.
(a) Base Compensation. KCSI shall pay Executive as
compensation for his services hereunder an annual base salary at the rate
approved by the KCSI Compensation Committee on November 17, 1998. Such rate
shall not be increased prior to January 1, 2000 and shall not be reduced except
as agreed by the parties or except as part of a general salary reduction program
imposed by KCSI and applicable to all officers of KCSI.
(b) Incentive Compensation. For the year 1999,
Executive shall not be entitled to participate in any KCSI incentive
compensation plan.
3. Benefits. During the period of his employment hereunder, KCSI shall
provide Executive with coverage under such benefit plans and programs as are
made generally available to similarly situated employees of KCSI, provided (a)
KCSI shall have no obligation with respect to any plan or program if Executive
is not eligible for coverage thereunder, and (b) Executive acknowledges that
stock options and other stock and equity participation awards are granted in the
discretion of the KCSI Board or the Compensation Committee of the KCSI Board and
that Executive has no right to receive stock options or other equity
participation awards or any particular number or level of stock options or other
awards. In determining contributions, coverage and benefits under any disability
insurance policy and under any cash compensation-based plan provided to
Executive by KCSI, it shall be assumed that the value of Executive's annual
compensation, pursuant to this Agreement, is 166.67% of Executive's annual
base salary. Executive acknowledges that all rights and benefits under benefit
plans and programs shall be governed by the official text of each such plan or
program and not by any summary or description thereof or any provision of this
Agreement (except to the extent this Agreement expressly modifies such benefit
plans or programs) and that KCSI is not under any obligation to continue in
effect or to fund any such plan or program, except as provided in Paragraph 7
hereof. KCSI also shall reimburse Executive for ordinary and necessary travel
and other business expenses in accordance with policies and procedures
established by KCSI.
<PAGE>
4. Termination.
]
(a) Termination by Executive. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to KCSI, except that in the event of any material breach of this
Agreement by KCSI, Executive may terminate this Agreement and his employment
hereunder immediately upon notice to KCSI.
(b) Death or Disability. This Agreement and Executive's
employment hereunder shall terminate automatically on the death or disability of
Executive, except to the extent employment is continued under KCSI's
disability plan. For purposes of this Agreement, Executive shall be deemed to be
disabled if he qualifies for disability benefits under KCSI's long-term
disability plan.
(c) Termination by KCSI For Cause. KCSI may terminate this
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by
Executive;
(ii) Executive's dishonesty involving KCSI
or any subsidiary of KCSI;
(iii) Gross negligence or
willful misconduct in the performance of Executive's
duties as determined in good faith by the KCSI Board;
(iv) Willful failure by Executive to follow
reasonable instructions of the President or other officer to whom
Executive reports concerning the operations or business of KCSI or any
subsidiary of KCSI;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
(d) Termination by KCSI Other Than For Cause.
(i) KCSI may terminate this Agreement and
Executive's employment other than for cause immediately upon notice
to Executive, and in such event, KCSI shall provide severance benefits
to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this
Agreement are applicable, if Executive's employment is terminated
under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1)
year following such termination, (a) to pay to Executive as severance
pay a monthly amount equal to one-twelfth (1/12th) of the annual base
salary referenced in Paragraph 2(a) above, at the rate in effect
immediately prior to termination, and, (b) to reimburse Executive for
the cost (including state and federal income taxes payable with respect
to this reimbursement) of continuing the health insurance coverage
provided pursuant to this Agreement or obtaining health insurance
coverage comparable to the health insurance provided pursuant to this
Agreement, and obtaining coverage comparable to the life insurance
provided pursuant to this Agreement, unless Executive is provided
comparable health or life insurance coverage in connection with other
employment. The foregoing obligations of KCSI shall continue until the
end of such one (1) year period notwithstanding the death or disability
of Executive during said period (except, in the event of death, the
obligation to reimburse Executive for the cost of life insurance shall
not continue). In the year in which termination of employment occurs,
Executive shall be eligible to receive benefits under the KCSI
Incentive Compensation Plan and the KCSI Executive Plan (if such Plans
then are in existence and Executive was entitled to participate
immediately prior to termination) in accordance with the provisions of
such plans then applicable, and severance pay received in such year
shall be taken into account for the purpose of determining benefits, if
any, under the KCSI Incentive Compensation Plan but not under the KCSI
Executive Plan. After the year in which termination occurs, Executive
shall not be entitled to accrue or receive benefits under the KCSI
Incentive Compensation Plan or the KCSI Executive Plan with respect to
the severance pay provided herein, notwithstanding that benefits under
such plan then are still generally available to executive employees of
KCSI. After termination of employment, Executive shall not be entitled
to accrue or receive benefits under any other employee benefit plan or
program, except that Executive shall be entitled to participate in the
KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and
the KCSI Section 401(k) Plan in the year of termination of employment
only if Executive meets all requirements of such plans for
participation in such year. 5. Non-Disclosure. During the term of this
Agreement and at all times after any termination of
this Agreement, Executive shall not, either directly or indirectly, use or
disclose any KCSI trade secret, except to the extent necessary for Executive to
perform his duties for KCSI while an employee. For purposes of this Agreement,
the term "KCSI trade secret" shall mean any information regarding the business
or activities of KCSI or any subsidiary or affiliate, including any formula,
pattern, compilation, program, device, method, technique, process, customer
list, technical information or other confidential or proprietary information,
that (a) derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or use, and (b)
is the subject of efforts of KCSI or its subsidiary or affiliate that are
reasonable under the circumstance to maintain its secrecy. In the event of any
breach of this Paragraph 5 by Executive, KCSI shall be entitled to terminate any
and all remaining severance benefits under Paragraph 4(d)(ii) and shall be
entitled to pursue such other legal and equitable remedies as may be available.
<PAGE>
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by KCSI or
Executive for any reason, Executive shall immediately return to KCSI all KCSI
trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of KCSI and all direct and indirect subsidiaries and
affiliates of KCSI as may be requested by KCSI and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as KCSI may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of
this Agreement shall survive any termination of this Agreement by KCSI or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by KCSI under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of KCSI.
(a) Continuation of Employment. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control (as defined
in Paragraph 7(d)) at any time during the term of this Agreement, Executive
agrees to remain in the employ of KCSI for a period of three years (the
"Three-Year Period") from the date of such Change in Control (the "Control
Change Date"). KCSI agrees to continue to employ Executive for the Three-Year
Period. During the Three-Year Period, (i) the Executive's position (including
offices, titles, reporting requirements and responsibilities), authority and
duties shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 12
month period immediately before the Control Change Date and (ii) the
Executive's services shall be performed at the location where Executive was
employed immediately before the Control Change Date or at any other location
less than 40 miles from such former location. During the Three-Year Period, KCSI
shall continue to pay to Executive an annual base salary on the same basis and
at the same intervals as in effect prior to the Control Change Date at a rate
not less than 12 times the highest monthly base salary paid or payable to the
Executive by KCSI in respect of the 12-month period immediately before the
Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of the
following KCSI plans (together, the "Specified Benefits") in existence, and in
accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated
therewith, related to (a) life, health, dental, disability, accidental
death and dismemberment insurance or accrued but unpaid vacation time,
(b) profit sharing, thrift or deferred savings (including deferred
compensation, such as under Sec. 401(k) plans), (c) retirement or
pension benefits, (d) ERISA excess benefits and similar plans and (e)
tax favored employee stock ownership (such as under ESOP, and Employee
Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally
available to executives of Executive's level or to the employees of
KCSI generally. In addition, KCSI shall use its best efforts to cause
all outstanding options held by Executive under
any stock option plan of KCSI or its affiliates to become immediately
exercisable on the Control Change Date and to the extent that such options are
not vested and are subsequently forfeited, the Executive shall receive a
lump-sum cash payment within 5 days after the options are forfeited equal to the
difference between the fair market value of the shares of stock subject to the
non-vested, forfeited options determined as of the date such options are
forfeited and the exercise price for such options. During the Three-Year Period
Executive shall be entitled to participate, on the basis of his executive
position, in any incentive compensation plan of KCSI in accordance with the
terms thereof at the Control Change Date; provided that if under KCSI programs
or Executive's Employment Agreement in existence immediately prior to the
Control Change Date, there are written limitations on participation for a
designated time period in any incentive compensation plan, such limitations
shall continue after the Control Change Date to the extent so provided for prior
to the Control Change Date.
If the amount of contributions or benefits with respect to the
Specified Benefits or any incentive compensation is determined on a
discretionary basis under the terms of the Specified Benefits or any incentive
compensation plan immediately prior to the Control Change Date, the amount of
such contributions or benefits during the Three-Year Period for each of the
Specified Benefits shall not be less than the average annual contributions or
benefits for each Specified Benefit for the three plan years ending prior to the
Control Change Date and, in the case of any incentive compensation plan, the
amount of the incentive compensation during the Three-Year Period shall not be
less than 75% of the maximum that could have been paid to the Executive under
the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of KCSI which has not
been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within
five (5) days after such date full payment in cash (discounted to the then
present value on the basis of a rate of seven percent (7%) per annum) of all
amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence
of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if:
<PAGE>
(i) for any reason at any time less than seventy-five
percent (75%) of the members of the KCSI Board shall be individuals who
fall into any of the following categories: (a) individuals who were
members of the KCSI Board on the date of the Agreement; or (b)
individuals whose election, or nomination for election by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
members of the KCSI Board on the date of the Agreement; or (c)
individuals whose election, or nomination for election, by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
elected in the manner described in (a) or (b) above, or
(ii) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act")) other than KCSI (as to KCSL and Railway securities)
shall have become, according to a public announcement or filing, the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of KCSI, KCSL or Railway
representing thirty percent (30%) (or, with respect to Paragraph 7(c)
hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the
combined voting power of KCSI's, KCSL's or Railway's then
outstanding voting securities; or
(iii) the stockholders of KCSI, KCSL or Railway shall
have approved a merger, consolidation or dissolution of KCSI, KCSL or
Railway or a sale, lease, exchange or disposition of all or
substantially all of KCSI's, KCSL's or Railway's assets, if
persons who were the beneficial owners of the combined voting power of
KCSI's, KCSL's or Railway's voting securities immediately
before any such merger, consolidation, dissolution, sale, lease,
exchange or disposition do not immediately thereafter, beneficially
own, directly or indirectly, in substantially the same proportions,
more than 60% of the combined voting power of any corporation or other
entity resulting from any such transaction.
Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary,
the sale of shares of stock of Kansas City Southern Lines, Inc. ("KCSL")
pursuant to an initial public offering of shares of stock of KCSL shall not
constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change Date,
KCSI may terminate the employment of Executive (the "Termination"), but unless
such Termination is for Cause as defined in subparagraph (g) or for disability,
within five (5) days of the Termination KCSI shall pay to Executive his full
base salary through the Termination, to the extent not theretofore paid, plus a
lump sum amount (the "Special Severance Payment") equal to the product
(discounted to the then present value on the basis of a rate of seven percent
(7%) per annum) of (i) 166.67% of his annual base salary specified in Paragraph
7(a) multiplied by (ii) Three and Specified Benefits (excluding any incentive
compensation) to which Executive was entitled immediately prior to Termination
shall continue until the end of the 3-year period ("Benefits Period") beginning
on the date of Termination. If any plan pursuant to which Specified Benefits are
provided immediately prior to Termination would not permit continued
participation by Executive after Termination, then KCSI shall pay to Executive
within five (5) days after Termination a lump sum payment equal to the amount of
Specified Benefits Executive would have received under such plan if Executive
had been fully vested in the average annual contributions or benefits in effect
for the three plan years ending prior to the Control Change Date (regardless of
any limitations based on the earnings or performance of KCSI) and a continuing
participant in such plan to the end of the Benefits Period. Following the end of
the Benefits Period, KCSI shall continue to provide to the Executive and the
Executive's family the following benefits ("Post-Period Benefits"): (1) prior to
the Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of KCSI
and their families, as the same may be modified from time to time, and (2)
following the Executive's attainment of age sixty (60) (and without regard to
the Executive's period of service with KCSI), health and prescription benefits
equivalent to those then applicable to retired peer executives of KCSI and their
families, as the same may be modified from time to time. The cost to the
Executive of such Post-Period Benefits shall not exceed the cost of such
benefits to active or retired (as applicable) peer executives, as the same may
be modified from time to time. Notwithstanding the preceding two sentences of
this Paragraph 7(e), if the Executive is covered under any health, prescription
or dental plan provided by a subsequent employer, then the corresponding type of
plan coverage (i.e., health, prescription or dental) required to be provided as
Post-Period Benefits under this Paragraph 7(e) shall cease. The Executive's
rights under this Paragraph 7(e) shall be in addition to, and not in lieu of,
any post-termination continuation coverage or conversion rights the Executive
may have pursuant to applicable law, including without limitation continuation
coverage required by Section 4980 of the Code. Nothing in this Paragraph 7(e)
shall be deemed to limit in any manner the reserved right of KCSI, in its sole
and absolute discretion, to at any time amend, modify or terminate health,
prescription or dental benefits for active or retired employees generally.
(f) Resignation After Control Change Date. In the event of a
Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of KCSI
and effective at the end of such notice period, resign his employment with KCSI
(the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay
to Executive his full base salary through the effective date of such
Resignation, to the extent not theretofore paid, plus a lump sum amount equal to
the Special Severance Payment (computed as provided in the first sentence of
Paragraph 7(e), except that for purposes of such computation all references to
"Termination" shall be deemed to be references to "Resignation"). Upon
Resignation of Executive, Specified Benefits to which Executive was entitled
immediately prior to Resignation shall continue on the same terms and conditions
as provided in Paragraph 7(e) in the case of Termination (including equivalent
payments provided for therein), and Post-Period Benefits shall be provided on
the same terms and conditions as provided in Paragraph 7(e) in the case of
Termination. For purposes of this Agreement, "good reason" means any of the
following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including offices, titles, reporting requirements or
responsibilities), authority or duties as contemplated by Section
7(a)(i), or any other action by KCSI which results in a diminution or
other material adverse change in such position, authority or duties;
(ii) any failure by KCSI to comply with any of the
provisions of Paragraph 7;
(iii) KCSI's requiring the Executive to be based at
any office or location other than the location described in Section
7(a)(ii);
(iv) any other material adverse change to
the terms and conditions of the Executives employment; or
(v) any purported termination by KCSI of the
Executive's employment other than as expressly permitted by this
Agreement (any such purported termination shall not be effective for
any other purpose under this Agreement).
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by KCSI "for cause." Cause
means commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment; except that Cause
shall not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in
good faith to have been in or not opposed to the interest of KCSI
(without intent of the Executive to gain, directly or indirectly, a
profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a
determination could properly have been made by the KCSI Board that the
Executive met the applicable standard of conduct for indemnification or
reimbursement under KCSI's by-laws, any applicable indemnification
agreement, or applicable law, in each case in effect at the time of
such act or omission; or
(iv) any act or omission with respect to which Notice
of Termination of the Executive is given more than 12 months after the
earliest date on which any member of the KCSI Board, not a party to the
act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by KCSI for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
reasonable computation of KCSI's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from KCSI pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then KCSI shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes;
multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
The Gross-up Payment is intended to compensate the
Executive for the Excise Taxes and any federal, state, local or other
income or excise taxes or other taxes payable by the Executive with
respect to the Gross-up Payment.
KCSI shall cause the preparation and delivery to the
Executive of a Certificate upon request at any time. KCSI shall, in
addition to complying with this Paragraph 7(h), cause all
determinations and certifications under Paragraphs 7(h)-(o) to be made
as soon as reasonably possible and in adequate time to permit the
Executive to prepare and file the Executive's individual tax returns on
a timely basis.
(i) Determination by the Executive.
(i) If KCSI shall fail (a) to deliver a Certificate
to the Executive or (b) to pay to the Executive the amount of the
Gross-up Payment, if any, within 14 days after receipt from the
Executive of a written request for a Certificate, or if at any time
following receipt of a Certificate the Executive disputes the amount of
the Gross-up Payment set forth therein, the Executive may elect to
demand the payment of the amount which the Executive, in accordance
with an opinion of counsel to the Executive ("Executive Counsel
Opinion"), determines to be the Gross-up Payment. Any such demand by
the Executive shall be made by delivery to KCSI of a written notice
which specifies the Gross-up Payment determined by the Executive and an
Executive Counsel Opinion regarding such Gross-up Payment (such written
notice and opinion collectively, the "Executive's Determination").
Within 14 days after delivery of the Executive's Determination to
KCSI, KCSI shall either (a) pay the Executive the Gross-up Payment set
forth in the Executive's Determination (less the portion of such
amount, if any, previously paid to the Executive by KCSI) or (b)
deliver to the Executive a Certificate specifying the Gross-up Payment
determined by KCSI's independent auditors, together with an opinion
of KCSI's counsel ("KCSI Counsel Opinion"), and pay the Executive
the Gross-up Payment specified in such Certificate. If for any reason
KCSI fails to comply with clause (b) of the preceding sentence, the
Gross-up Payment specified in the Executive's Determination shall
be controlling for all purposes.
(ii) If the Executive does not make a request for,
and KCSI does not deliver to the Executive, a Certificate, KCSI shall,
for purposes of Paragraph 7(j), be deemed to have determined that no
Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial
conclusion of KCSI and/or the Executive that certain Payments are neither
subject to Excise Taxes nor to be counted in determining whether other Payments
are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later
determined (pursuant to subsequently-enacted provisions of the Code, final
regulations or published rulings of the IRS, final IRS determination or judgment
of a court of competent jurisdiction or KCSI's independent auditors) that
any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted
in determining whether any Payments are subject to Excise Taxes, with the result
that the amount of Excise Taxes payable by the Executive is greater than the
amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or
Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount
(which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and
(b) any interest, fines, penalties, expenses or other costs incurred by
the Executive as a result of having taken a position in accordance with
a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all
federal, state, local and other income and other taxes and any Excise Taxes
applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it
shall be deemed equal to 0.8 for purposes of this computation. (If different
rates of tax are applicable to various portions of a Gross-up Payment, the
weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a
legal opinion of nationally recognized executive compensation counsel that there
is a reasonable basis to support a conclusion that the Gross-up Payment
determined by the Executive has been calculated in accord with this Paragraph 7
and applicable law. "Company Counsel Opinion" means a legal opinion of
nationally recognized executive compensation counsel that (i) there is a
reasonable basis to support a conclusion that the Gross-up Payment set forth in
the Certificate of KCSI's independent auditors has been calculated in accord
with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis
for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
KCSI in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by KCSI of a Gross-up Payment. Such notice
shall include the nature of such claim and the date on which such claim is due
to be paid. The Executive shall give such notice as soon as practicable, but no
later than 10 business days, after the Executive first obtains actual knowledge
of such claim; provided, however, that any failure to give or delay in giving
such notice shall affect KCSI's obligations under this Paragraph 7 only if
and to the extent that such failure results in actual prejudice to KCSI. The
Executive shall not pay such claim less than 30 days after the Executive gives
such notice to KCSI (or, if sooner, the date on which payment of such claim is
due). If KCSI notifies the Executive in writing before the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give KCSI any information that it reasonably
requests relating to such claim;
(ii) take such action in connection with contesting
such claim as KCSI reasonably requests in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by KCSI;
(iii) cooperate with KCSI in good faith to contest
such claim; and
(iv) permit KCSI to participate in any proceedings
relating to such claim; provided, however, that KCSI shall bear and pay
directly all costs and expenses (including additional interest and
penalties) incurred in connection with such contest and shall indemnify
and hold the Executive harmless, on an after-tax basis, for any Excise
Tax or income tax, including related interest and penalties,
imposed as a result of such representation and payment of costs and
expenses. Without limiting the foregoing, KCSI shall control all
proceedings in connection with such contest and, at its sole option,
may pursue or forego any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such
claim and may, at its sole option, either direct the Executive to pay
the tax claimed and sue for a refund or contest the claim in any
permissible manner. The Executive agrees to prosecute such contest to
a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as KCSI
shall determine; provided, however, that if KCSI directs the Executive
to pay such claim and sue for a refund, KCSI shall advance the amount
of such payment to the Executive, on an interest-free basis and shall
indemnify the Executive, on an after-tax basis, for any Excise Tax or
income tax, including related interest or penalties, imposed with
respect to such advance; and further provided that any extension of
the statute of limitations relating to payment of taxes for the taxable
year of the Executive with respect to which such contested amount
is claimed to be due is limited solely to such contested amount.
The KCSI's control of the contest shall be limited to issues
with respect to which a Gross-up Payment would be payable.
The Executive shall be entitled to settle or contest, as the case may
be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an
amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to KCSI's
complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the
Executive shall not be entitled to a full refund with respect to such claim and
KCSI does not notify the Executive in writing of its intent to contest such
determination before the expiration of 30 days after such determination, then
the applicable part of such advance shall be forgiven and shall not be required
to be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-up Payment required to be paid. Any contest of a denial of
refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement
after the Control Change Date involving an effort by Executive to protect,
enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall
pay (promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including attorneys' fees) incurred by
Executive in connection with such dispute, without regard to whether Executive
prevails in such dispute except that Executive shall repay KCSI any amounts so
received if a court having jurisdiction shall make a final, nonappealable
determination that Executive acted frivolously or in bad faith by such dispute.
To assure Executive that adequate funds will be made available to discharge
KCSI's obligations set forth in the preceding sentence, KCSI has established
a trust and upon the occurrence of a Change in Control shall promptly deliver to
the trustee of such trust to hold in accordance with the terms and conditions
thereof that sum which the KCSI Board shall have determined is reasonably
sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change
Date, the provisions of this Paragraph 7 shall control and take precedence over
any other provisions of this Agreement which are in conflict with or address the
same or a similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of
Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control
as defined in Paragraph 7(d), Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and except as otherwise specifically provided in Paragraph
4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with
respect to health, prescription and dental benefits, no such other employment,
if obtained, or compensation or benefits payable in connection therewith shall
reduce any amounts or benefits to which Executive is entitled hereunder. Such
amounts or benefits payable to Executive under this Agreement shall not be
treated as damages but as severance compensation to which Executive is entitled
because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have been
given when personally delivered, delivered by facsimile or deposited in the
United States mail by certified or registered mail, postage prepaid, addressed,
in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at 10051
Hardy Drive, Overland Park, Kansas 66212, or to such other address as a party
shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of KCSI. No waiver
by any party hereto at any time of any breach by another party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the time or at any prior or subsequent time.
11. Successors in Interest. The rights and obligations of KCSI under
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of KCSI, regardless
of the manner in which such successors or assigns shall succeed to the interest
of KCSI hereunder, and this Agreement shall not be terminated by the voluntary
or involuntary dissolution of KCSI, KCSL or Railway or by any merger or
consolidation or acquisition involving KCSI, KCSL or Railway, or upon any
transfer of all or substantially all of KCSI's, KCSL's or Railway's
assets, or terminated otherwise than in accordance with its terms. In the event
of any such merger or consolidation or transfer of assets, the provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
surviving corporation or the corporation or other person to which such assets
shall be transferred. Neither this Agreement nor any of the payments or benefits
hereunder may be pledged, assigned or transferred by Executive either in whole
or in part in any manner, without the prior written consent of KCSI.
12. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Agreement as of the 1st day of January, 1999.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Landon H. Rowland
---------------------------------
Landon H. Rowland, President
EXECUTIVE
/s/ Joseph D. Monello
-----------------------------------
Joseph D. Monello
EMPLOYMENT AGREEMENT
Amended and Restated January 1, 1999
THIS AGREEMENT, made and entered into as of this 1st day of January,
1999, by and between Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI") and Danny R. Carpenter, an individual ("Executive").
WHEREAS, Executive is now employed by KCSI, and KCSI and Executive
desire for KCSI to continue to employ Executive on the terms and conditions set
forth in this Agreement and to provide an incentive to Executive to remain in
the employ of KCSI hereafter, particularly in the event of any change in control
(as herein defined) of KCSI, Kansas City Southern Lines, Inc. ("KCSL") or The
Kansas City Southern Railway Company ("Railway"), thereby establishing and
preserving continuity of management of KCSI.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, it is agreed by and between KCSI and Executive as follows:
1. Employment. KCSI hereby continues the employment of Executive as its
Vice President Finance to serve at the pleasure of the Board of Directors of
KCSI (the "KCSI Board") and to have such duties, powers and responsibilities as
may be prescribed or delegated from time to time by the President or other
officer to whom Executive reports, subject to the powers vested in the KCSI
Board and in the stockholders of KCSI. Executive shall faithfully perform his
duties under this Agreement to the best of his ability and shall devote
substantially all of his working time and efforts to the business and affairs of
KCSI and its affiliates.
2. Compensation.
(a) Base Compensation. KCSI shall pay Executive as
compensation for his services hereunder an annual base salary at the rate
approved by the KCSI Compensation Committee on November 17, 1998. Such rate
shall not be increased prior to January 1, 2000 and shall not be reduced except
as agreed by the parties or except as part of a general salary reduction program
imposed by KCSI and applicable to all officers of KCSI.
(b) Incentive Compensation. For the year 1999,
Executive shall not be entitled to participate in any KCSI incentive
compensation plan.
3. Benefits. During the period of his employment hereunder, KCSI shall
provide Executive with coverage under such benefit plans and programs as are
made generally available to similarly situated employees of KCSI, provided (a)
KCSI shall have no obligation with respect to any plan or program if Executive
is not eligible for coverage thereunder, and (b) Executive acknowledges that
stock options and other stock and equity participation awards are granted in the
discretion of the KCSI Board or the Compensation Committee of the KCSI Board and
that Executive has no right to receive stock options or other equity
participation awards or any particular number or level of stock options or other
awards. In determining contributions, coverage and benefits under any disability
insurance policy and under any cash compensation-based plan provided to
Executive by KCSI, it shall be assumed that the value of Executive's annual
compensation, pursuant to this Agreement, is 175% of Executive's annual base
salary. Executive acknowledges that all rights and benefits under benefit plans
and programs shall be governed by the official text of each such plan or program
and not by any summary or description thereof or any provision of this Agreement
(except to the extent this Agreement expressly modifies such benefit plans or
programs) and that KCSI is not under any obligation to continue in effect or to
fund any such plan or program, except as provided in Paragraph 7 hereof. KCSI
also shall reimburse Executive for ordinary and necessary travel and other
business expenses in accordance with policies and procedures established by
KCSI.
<PAGE>
4. Termination.
(a) Termination by Executive. Executive may terminate this
Agreement and his employment hereunder by at least thirty (30) days advance
written notice to KCSI, except that in the event of any material breach of this
Agreement by KCSI, Executive may terminate this Agreement and his employment
hereunder immediately upon notice to KCSI.
(b) Death or Disability. This Agreement and Executive's
employment hereunder shall terminate automatically on the death or disability of
Executive, except to the extent employment is continued under KCSI's
disability plan. For purposes of this Agreement, Executive shall be deemed to be
disabled if he qualifies for disability benefits under KCSI's long-term
disability plan.
(c) Termination by KCSI For Cause. KCSI may terminate this
Agreement and Executive's employment "for cause" immediately upon notice to
Executive. For purposes of this Agreement (except for Paragraph 7), termination
"for cause" shall mean termination based upon any one or more of the following:
(i) Any material breach of this Agreement by
Executive;
(ii) Executive's dishonesty involving KCSI
or any subsidiary of KCSI;
(iii) Gross negligence or willful misconduct in the
performance of Executive's duties as determined in good faith by the
KCSI Board;
(iv) Willful failure by Executive to follow
reasonable instructions of the President or other officer to whom
Executive reports concerning the operations or business of KCSI or any
subsidiary of KCSI;
(v) Executive's fraud or criminal activity; or
(vi) Embezzlement or misappropriation by Executive.
<PAGE>
(d) Termination by KCSI Other Than For Cause.
(i) KCSI may terminate this Agreement and
Executive's employment other than for cause immediately upon notice
to Executive, and in such event, KCSI shall provide severance benefits
to Executive in accordance with Paragraph 4(d)(ii) below.
(ii) Unless the provisions of Paragraph 7 of this
Agreement are applicable, if Executive's employment is terminated
under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1)
year following such termination, (a) to pay to Executive as severance
pay a monthly amount equal to one-twelfth (1/12th) of the annual base
salary referenced in Paragraph 2(a) above, at the rate in effect
immediately prior to termination, and, (b) to reimburse Executive for
the cost (including state and federal income taxes payable with respect
to this reimbursement) of continuing the health insurance coverage
provided pursuant to this Agreement or obtaining health insurance
coverage comparable to the health insurance provided pursuant to this
Agreement, and obtaining coverage comparable to the life insurance
provided pursuant to this Agreement, unless Executive is provided
comparable health or life insurance coverage in connection with other
employment. The foregoing obligations of KCSI shall continue until the
end of such one (1) year period notwithstanding the death or disability
of Executive during said period (except, in the event of death, the
obligation to reimburse Executive for the cost of life insurance shall
not continue). In the year in which termination of employment occurs,
Executive shall be eligible to receive benefits under the KCSI
Incentive Compensation Plan and the KCSI Executive Plan (if such Plans
then are in existence and Executive was entitled to participate
immediately prior to termination) in accordance with the provisions of
such plans then applicable, and severance pay received in such year
shall be taken into account for the purpose of determining benefits, if
any, under the KCSI Incentive Compensation Plan but not under the KCSI
Executive Plan. After the year in which termination occurs, Executive
shall not be entitled to accrue or receive benefits under the KCSI
Incentive Compensation Plan or the KCSI Executive Plan with respect to
the severance pay provided herein, notwithstanding that benefits under
such plan then are still generally available to executive employees of
KCSI. After termination of employment, Executive shall not be entitled
to accrue or receive benefits under any other employee benefit plan or
program, except that Executive shall be entitled to participate in the
KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and
the KCSI Section 401(k) Plan in the year of termination of employment
only if Executive meets all requirements of such plans for
participation in such year. 5. Non-Disclosure. During the term of this
Agreement and at all times after any termination of this Agreement,
Executive shall not, either directly or indirectly, use or
disclose any KCSI trade secret, except to the extent necessary for
Executive to perform his duties for KCSI while an employee. For
purposes of this Agreement, the term "KCSI trade secret" shall mean
any information regarding the business or activities of KCSI or any
subsidiary or affiliate, including any formula, pattern, compilation,
program, device, method, technique, process, customer list, technical
information or other confidential or proprietary information, that (a)
derives independent economic value, actual or potential, from not being
generally known to, and not being readily ascertainable by proper
means by, other persons who can obtain economic value from its
disclosure or use, and (b) is the subject of efforts of KCSI or its
subsidiary or affiliate that are reasonable under the circumstance
to maintain its secrecy. In the event of any breach of this Paragraph
5 by Executive, KCSI shall be entitled to terminate any and all
remaining severance benefits under Paragraph 4(d)(ii) and shall be
entitled to pursue such other legal and equitable remedies as may be
available.
<PAGE>
6. Duties Upon Termination; Survival.
(a) Duties. Upon termination of this Agreement by KCSI or
Executive for any reason, Executive shall immediately return to KCSI all KCSI
trade secrets which exist in tangible form and shall sign such written
resignations from all positions as an officer, director or member of any
committee or board of KCSI and all direct and indirect subsidiaries and
affiliates of KCSI as may be requested by KCSI and shall sign such other
documents and papers relating to Executive's employment, benefits and benefit
plans as KCSI may reasonably request.
(b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of
this Agreement shall survive any termination of this Agreement by KCSI or
Executive, and the provisions of Paragraph 4(d)(ii) shall survive any
termination of this Agreement by KCSI under Paragraph 4(d)(i).
7. Continuation of Employment Upon Change in Control of KCSI.
(a) Continuation of Employment. Subject to the terms and
conditions of this Paragraph 7, in the event of a Change in Control (as defined
in Paragraph 7(d)) at any time during the term of this Agreement, Executive
agrees to remain in the employ of KCSI for a period of three years (the
"Three-Year Period") from the date of such Change in Control (the "Control
Change Date"). KCSI agrees to continue to employ Executive for the Three-Year
Period. During the Three-Year Period, (i) the Executive's position (including
offices, titles, reporting requirements and responsibilities), authority and
duties shall be at least commensurate in all material respects with the most
significant of those held, exercised and assigned at any time during the 12
month period immediately before the Control Change Date and (ii) the
Executive's services shall be performed at the location where Executive was
employed immediately before the Control Change Date or at any other location
less than 40 miles from such former location. During the Three-Year Period, KCSI
shall continue to pay to Executive an annual base salary on the same basis and
at the same intervals as in effect prior to the Control Change Date at a rate
not less than 12 times the highest monthly base salary paid or payable to the
Executive by KCSI in respect of the 12-month period immediately before the
Control Change Date.
(b) Benefits. During the Three-Year Period, Executive shall be
entitled to participate, on the basis of his executive position, in each of the
following KCSI plans (together, the "Specified Benefits") in existence, and in
accordance with the terms thereof, at the Control Change Date:
(i) any benefit plan, and trust fund associated
therewith, related to (a) life, health, dental, disability, accidental
death and dismemberment insurance or accrued but unpaid vacation time,
(b) profit sharing, thrift or deferred savings (including deferred
compensation, such as under Sec. 401(k) plans), (c) retirement or
pension benefits, (d) ERISA excess benefits and similar plans and (e)
tax favored employee stock ownership (such as under ESOP, and Employee
Stock Purchase programs); and
(ii) any other benefit plans hereafter made generally
available to executives of Executive's level or to the employees of
KCSI generally. In addition, KCSI shall use its best efforts to cause
all outstanding options held by Executive under any stock option plan
of KCSI or its affiliates to become immediately exercisable on
the Control Change Date and to the extent that such options are not
vested and are subsequently forfeited, the Executive shall receive a
lump-sum cash payment within 5 days after the options are forfeited
equal to the difference between the fair market value of the shares of
stock subject to the non-vested, forfeited options determined as of
the date such options are forfeited and the exercise price for such
options. During the Three-Year Period Executive shall be entitled to
participate, on the basis of his executive position, in any incentive
compensation plan of KCSI in accordance with the terms thereof at the
Control Change Date; provided that if under KCSI programs or
Executive's Employment Agreement in existence immediately prior to the
Control Change Date, there are written limitations on participation for
a designated time period in any incentive compensation plan, such
limitations shall continue after the Control Change Date to the extent
so provided for prior to the Control Change Date.
If the amount of contributions or benefits with respect to the
Specified Benefits or any incentive compensation is determined on a
discretionary basis under the terms of the Specified Benefits or any incentive
compensation plan immediately prior to the Control Change Date, the amount of
such contributions or benefits during the Three-Year Period for each of the
Specified Benefits shall not be less than the average annual contributions or
benefits for each Specified Benefit for the three plan years ending prior to the
Control Change Date and, in the case of any incentive compensation plan, the
amount of the incentive compensation during the Three-Year Period shall not be
less than 75% of the maximum that could have been paid to the Executive under
the terms of the incentive compensation plan.
(c) Payment. With respect to any plan or agreement under which
Executive would be entitled at the Control Change Date to receive Specified
Benefits or incentive compensation as a general obligation of KCSI which has not
been separately funded (including specifically, but not limited to, those
referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within
five (5) days after such date full payment in cash (discounted to the then
present value on the basis of a rate of seven percent (7%) per annum) of all
amounts to which he is then entitled thereunder.
(d) Change in Control. Except as provided in the last sentence
of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control"
shall be deemed to have occurred if:
<PAGE>
(i) for any reason at any time less than seventy-five
percent (75%) of the members of the KCSI Board shall be individuals who
fall into any of the following categories: (a) individuals who were
members of the KCSI Board on the date of the Agreement; or (b)
individuals whose election, or nomination for election by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
members of the KCSI Board on the date of the Agreement; or (c)
individuals whose election, or nomination for election, by KCSI's
stockholders, was approved by a vote of at least seventy-five percent
(75%) of the members of the KCSI Board then still in office who were
elected in the manner described in (a) or (b) above, or
(ii) any "person" (as such term is used in Sections
13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the
"Exchange Act")) other than KCSI (as to KCSL and Railway securities)
shall have become, according to a public announcement or filing, the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of KCSI, KCSL or Railway
representing thirty percent (30%) (or, with respect to Paragraph 7(c)
hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the
combined voting power of KCSI's, KCSL's or Railway's then
outstanding voting securities; or
(iii) the stockholders of KCSI, KCSL or Railway shall
have approved a merger, consolidation or dissolution of KCSI, KCSL or
Railway or a sale, lease, exchange or disposition of all or
substantially all of KCSI's, KCSL's or Railway's assets, if persons who
were the beneficial owners of the combined voting power of KCSI's,
KCSL's or Railway's voting securities immediately before any such
merger, consolidation, dissolution, sale, lease, exchange or
disposition do not immediately thereafter, beneficially own, directly
or indirectly, in substantially the same proportions, more than 60%
of the combined voting power of any corporation or other entity
resulting from any such transaction. Notwithstanding the foregoing
provisions of this Paragraph 7(d) to the contrary, the sale of shares
of stock of Kansas City Southern Lines, Inc. ("KCSL") pursuant
to an initial public offering of shares of stock of KCSL shall not
constitute a Change in Control.
(e) Termination After Control Change Date. Notwithstanding any
other provision of this Paragraph 7, at any time after the Control Change Date,
KCSI may terminate the employment of Executive (the "Termination"), but unless
such Termination is for Cause as defined in subparagraph (g) or for disability,
within five (5) days of the Termination KCSI shall pay to Executive his full
base salary through the Termination, to the extent not theretofore paid, plus a
lump sum amount (the "Special Severance Payment") equal to the product
(discounted to the then present value on the basis of a rate of seven percent
(7%) per annum) of (i) 175% of his annual base salary specified in Paragraph
7(a) multiplied by (ii) three and Specified Benefits (excluding any incentive
compensation) to which Executive was entitled immediately prior to Termination
shall continue until the end of the 3-year period ("Benefits Period") beginning
on the date of Termination. If any plan pursuant to which Specified Benefits are
provided immediately prior to Termination would not permit continued
participation by Executive after Termination, then KCSI shall pay to Executive
within five (5) days after Termination a lump sum payment equal to the amount of
Specified Benefits Executive would have received under such plan if Executive
had been fully vested in the average annual contributions or benefits in effect
for the three plan years ending prior to the Control Change Date (regardless of
any limitations based on the earnings or performance of KCSI) and a continuing
participant in such plan to the end of the Benefits Period. Following the end of
the Benefits Period, KCSI shall continue to provide to the Executive and the
Executive's family the following benefits ("Post-Period Benefits"): (1) prior to
the Executive's attainment of age sixty (60), health, prescription and dental
benefits equivalent to those then applicable to active peer executives of KCSI
and their families, as the same may be modified from time to time, and (2)
following the Executive's attainment of age sixty (60) (and without regard to
the Executive's period of service with KCSI), health and prescription benefits
equivalent to those then applicable to retired peer executives of KCSI and their
families, as the same may be modified from time to time. The cost to the
Executive of such Post-Period Benefits shall not exceed the cost of such
benefits to active or retired (as applicable) peer executives, as the same may
be modified from time to time. Notwithstanding the preceding two sentences of
this Paragraph 7(e), if the Executive is covered under any health, prescription
or dental plan provided by a subsequent employer, then the corresponding type of
plan coverage (i.e., health, prescription or dental) required to be provided as
Post-Period Benefits under this Paragraph 7(e) shall cease. The Executive's
rights under this Paragraph 7(e) shall be in addition to, and not in lieu of,
any post-termination continuation coverage or conversion rights the Executive
may have pursuant to applicable law, including without limitation continuation
coverage required by Section 4980 of the Code. Nothing in this Paragraph 7(e)
shall be deemed to limit in any manner the reserved right of KCSI, in its sole
and absolute discretion, to at any time amend, modify or terminate health,
prescription or dental benefits for active or retired employees generally.
(f) Resignation After Control Change Date. In the event of a
Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as
defined below), Executive may, at any time during the 3-year period following
the Change in Control, in his sole discretion, on not less than thirty (30)
days' written notice (the "Notice of Resignation") to the Secretary of KCSI
and effective at the end of such notice period, resign his employment with KCSI
(the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay
to Executive his full base salary through the effective date of such
Resignation, to the extent not theretofore paid, plus a lump sum amount equal to
the Special Severance Payment (computed as provided in the first sentence of
Paragraph 7(e), except that for purposes of such computation all references to
"Termination" shall be deemed to be references to "Resignation"). Upon
Resignation of Executive, Specified Benefits to which Executive was entitled
immediately prior to Resignation shall continue on the same terms and conditions
as provided in Paragraph 7(e) in the case of Termination (including equivalent
payments provided for therein), and Post-Period Benefits shall be provided on
the same terms and conditions as provided in Paragraph 7(e) in the case of
Termination. For purposes of this Agreement, "good reason" means any of the
following:
(i) the assignment to the Executive of any duties
inconsistent in any respect with the Executive's position
(including offices, titles, reporting requirements or
responsibilities), authority or duties as contemplated by Section
7(a)(i), or any other action by KCSI which results in a diminution or
other material adverse change in such position, authority or duties;
(ii) any failure by KCSI to comply with any of the
provisions of Paragraph 7;
(iii) KCSI's requiring the Executive to be based at
any office or location other than the location described in Section
7(a)(ii);
(iv) any other material adverse change to
the terms and conditions of the Executives employment; or
(v) any purported termination by KCSI of the
Executive's employment other than as expressly permitted by this
Agreement (any such purported termination shall not be effective for
any other purpose under this Agreement).
A passage of time prior to delivery of the Notice of Resignation or a failure by
the Executive to include in the Notice of Resignation any fact or circumstance
which contributes to a showing of Good Reason shall not waive any right of the
Executive under this Agreement or preclude the Executive from asserting such
fact or circumstance in enforcing rights under this Agreement.
(g) Termination for Cause After Control Change Date.
Notwithstanding any other provision of this Paragraph 7, at any time after the
Control Change Date, Executive may be terminated by KCSI "for cause." Cause
means commission by the Executive of any felony or willful breach of duty by the
Executive in the course of the Executive's employment; except that Cause
shall not mean:
(i) bad judgment or negligence;
(ii) any act or omission believed by the Executive in
good faith to have been in or not opposed to the interest of KCSI
(without intent of the Executive to gain, directly or indirectly, a
profit to which the Executive was not legally entitled);
(iii) any act or omission with respect to which a
determination could properly have been made by the KCSI Board that the
Executive met the applicable standard of conduct for indemnification or
reimbursement under KCSI's by-laws, any applicable indemnification
agreement, or applicable law, in each case in effect at the time of
such act or omission; or
(iv) any act or omission with respect to which Notice
of Termination of the Executive is given more than 12 months after the
earliest date on which any member of the KCSI Board, not a party to the
act or omission, knew or should have known of such act or omission.
Any Termination of the Executive's employment by KCSI for Cause shall be
communicated to the Executive by Notice of Termination.
(h) Gross-up for Certain Taxes. If it is determined (by the
reasonable computation of KCSI's independent auditors, which determinations
shall be certified to by such auditors and set forth in a written certificate
("Certificate") delivered to the Executive) that any benefit received or deemed
received by the Executive from KCSI pursuant to this Agreement or otherwise
(collectively, the "Payments") is or will become subject to any excise tax under
Section 4999 of the Code or any similar tax payable under any United States
federal, state, local or other law (such excise tax and all such similar taxes
collectively, "Excise Taxes"), then KCSI shall, immediately after such
determination, pay the Executive an amount (the "Gross-up Payment") equal to the
product of:
(i) the amount of such Excise Taxes; multiplied by
(ii) the Gross-up Multiple (as defined in Paragraph 7(k).
The Gross-up Payment is intended to compensate the
Executive for the Excise Taxes and any federal, state, local or other
income or excise taxes or other taxes payable by the Executive with
respect to the Gross-up Payment.
KCSI shall cause the preparation and delivery to the
Executive of a Certificate upon request at any time. KCSI shall, in
addition to complying with this Paragraph 7(h), cause all
determinations and certifications under Paragraphs 7(h)-(o) to be made
as soon as reasonably possible and in adequate time to permit the
Executive to prepare and file the Executive's individual tax returns on
a timely basis.
(i) Determination by the Executive.
(i) If KCSI shall fail (a) to deliver a Certificate
to the Executive or (b) to pay to the Executive the amount of the
Gross-up Payment, if any, within 14 days after receipt from the
Executive of a written request for a Certificate, or if at any time
following receipt of a Certificate the Executive disputes the amount of
the Gross-up Payment set forth therein, the Executive may elect to
demand the payment of the amount which the Executive, in accordance
with an opinion of counsel to the Executive ("Executive Counsel
Opinion"), determines to be the Gross-up Payment. Any such demand by
the Executive shall be made by delivery to KCSI of a written notice
which specifies the Gross-up Payment determined by the Executive and an
Executive Counsel Opinion regarding such Gross-up Payment (such written
notice and opinion collectively, the "Executive's Determination").
Within 14 days after delivery of the Executive's Determination to
KCSI, KCSI shall either (a) pay the Executive the Gross-up Payment set
forth in the Executive's Determination (less the portion of such
amount, if any, previously paid to the Executive by KCSI) or (b)
deliver to the Executive a Certificate specifying the Gross-up Payment
determined by KCSI's independent auditors, together with an opinion
of KCSI's counsel ("KCSI Counsel Opinion"), and pay the Executive
the Gross-up Payment specified in such Certificate. If for any reason
KCSI fails to comply with clause (b) of the preceding sentence, the
Gross-up Payment specified in the Executive's Determination shall
be controlling for all purposes.
(ii) If the Executive does not make a request for,
and KCSI does not deliver to the Executive, a Certificate, KCSI shall,
for purposes of Paragraph 7(j), be deemed to have determined that no
Gross-up Payment is due.
(j) Additional Gross-up Amounts. If, despite the initial
conclusion of KCSI and/or the Executive that certain Payments are neither
subject to Excise Taxes nor to be counted in determining whether other Payments
are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later
determined (pursuant to subsequently-enacted provisions of the Code, final
regulations or published rulings of the IRS, final IRS determination or judgment
of a court of competent jurisdiction or KCSI's independent auditors) that
any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted
in determining whether any Payments are subject to Excise Taxes, with the result
that the amount of Excise Taxes payable by the Executive is greater than the
amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or
Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount
(which shall also be deemed a Gross-up Payment) equal to the product of:
(i) the sum of (a) such additional Excise Taxes and
(b) any interest, fines, penalties, expenses or other costs incurred by
the Executive as a result of having taken a position in accordance with
a determination made pursuant to Paragraph 7(h); multiplied by
(ii) the Gross-up Multiple.
(k) Gross-up Multiple. The Gross-up Multiple shall equal a
fraction, the numerator of which is one (1.0), and the denominator of which is
one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all
federal, state, local and other income and other taxes and any Excise Taxes
applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it
shall be deemed equal to 0.8 for purposes of this computation. (If different
rates of tax are applicable to various portions of a Gross-up Payment, the
weighted average of such rates shall be used.)
(l) Opinion of Counsel. "Executive Counsel Opinion" means a
legal opinion of nationally recognized executive compensation counsel that there
is a reasonable basis to support a conclusion that the Gross-up Payment
determined by the Executive has been calculated in accord with this Paragraph 7
and applicable law. "Company Counsel Opinion" means a legal opinion of
nationally recognized executive compensation counsel that (i) there is a
reasonable basis to support a conclusion that the Gross-up Payment set forth in
the Certificate of KCSI's independent auditors has been calculated in accord
with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis
for the calculation of the Gross-up Payment determined by the Executive.
(m) Amount Increased or Contested. The Executive shall notify
KCSI in writing of any claim by the IRS or other taxing authority that, if
successful, would require the payment by KCSI of a Gross-up Payment. Such notice
shall include the nature of such claim and the date on which such claim is due
to be paid. The Executive shall give such notice as soon as practicable, but no
later than 10 business days, after the Executive first obtains actual knowledge
of such claim; provided, however, that any failure to give or delay in giving
such notice shall affect KCSI's obligations under this Paragraph 7 only if
and to the extent that such failure results in actual prejudice to KCSI. The
Executive shall not pay such claim less than 30 days after the Executive gives
such notice to KCSI (or, if sooner, the date on which payment of such claim is
due). If KCSI notifies the Executive in writing before the expiration of such
period that it desires to contest such claim, the Executive shall:
(i) give KCSI any information that it reasonably
requests relating to such claim;
(ii) take such action in connection with
contesting such claim as KCSI reasonably requests in writing from time
to time, including, without limitation, accepting legal representa-
tion with respect to such claim by an attorney reasonably
selected by KCSI;
(iii) cooperate with KCSI in good faith to contest
such claim; and (iv) permit KCSI to participate in
any proceedings relating to such claim;
provided, however, that KCSI shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold the Executive
harmless, on an after-tax basis, for any Excise Tax or income tax,
including related interest and penalties, imposed as a result of such
representation and payment of costs and expenses. Without limiting the
foregoing, KCSI shall control all proceedings in connection with such
contest and, at its sole option, may pursue or forego any and all
administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole option,
either direct the Executive to pay the tax claimed and sue for a refund
or contest the claim in any permissible manner. The Executive agrees to
prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more
appellate courts, as KCSI shall determine; provided, however, that if
KCSI directs the Executive to pay such claim and sue for a refund, KCSI
shall advance the amount of such payment to the Executive, on an
interest-free basis and shall indemnify the Executive, on an after-tax
basis, for any Excise Tax or income tax, including related interest or
penalties, imposed with respect to such advance; and further provided
that any extension of the statute of limitations relating to payment of
taxes for the taxable year of the Executive with respect to which such
contested amount is claimed to be due is limited solely to such
contested amount. The KCSI's control of the contest shall be
limited to issues with respect to which a Gross-up Payment would be
payable. The Executive shall be entitled to settle or contest, as the
case may be, any other issue raised by the IRS or other taxing
authority.
(n) Refunds. If, after the receipt by the Executive of an
amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any
refund with respect to such claim, the Executive shall (subject to KCSI's
complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount
of such refund (together with any interest paid or credited thereon after taxes
applicable thereto). If, after the receipt by the Executive of an amount
advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the
Executive shall not be entitled to a full refund with respect to such claim and
KCSI does not notify the Executive in writing of its intent to contest such
determination before the expiration of 30 days after such determination, then
the applicable part of such advance shall be forgiven and shall not be required
to be repaid and the amount of such advance shall offset, to the extent thereof,
the amount of Gross-up Payment required to be paid. Any contest of a denial of
refund shall be controlled by Paragraph 7(m).
(o) Expenses. If any dispute should arise under this Agreement
after the Control Change Date involving an effort by Executive to protect,
enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall
pay (promptly upon demand by Executive accompanied by reasonable evidence of
incurrence) all reasonable expenses (including attorneys' fees) incurred by
Executive in connection with such dispute, without regard to whether Executive
prevails in such dispute except that Executive shall repay KCSI any amounts so
received if a court having jurisdiction shall make a final, nonappealable
determination that Executive acted frivolously or in bad faith by such dispute.
To assure Executive that adequate funds will be made available to discharge
KCSI's obligations set forth in the preceding sentence, KCSI has established
a trust and upon the occurrence of a Change in Control shall promptly deliver to
the trustee of such trust to hold in accordance with the terms and conditions
thereof that sum which the KCSI Board shall have determined is reasonably
sufficient for such purpose.
(p) Prevailing Provisions. On and after the Control Change
Date, the provisions of this Paragraph 7 shall control and take precedence over
any other provisions of this Agreement which are in conflict with or address the
same or a similar subject matter as the provisions of this Paragraph 7.
8. Mitigation and Other Employment. After a termination of
Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control
as defined in Paragraph 7(d), Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other employment
or otherwise, and except as otherwise specifically provided in Paragraph
4(d)(ii) with respect to health and life insurance and in Paragraph 7(e) with
respect to health, prescription and dental benefits, no such other employment,
if obtained, or compensation or benefits payable in connection therewith shall
reduce any amounts or benefits to which Executive is entitled hereunder. Such
amounts or benefits payable to Executive under this Agreement shall not be
treated as damages but as severance compensation to which Executive is entitled
because Executive's employment has been terminated.
9. Notice. Notices and all other communications to either party
pursuant to this Agreement shall be in writing and shall be deemed to have been
given when personally delivered, delivered by facsimile or deposited in the
United States mail by certified or registered mail, postage prepaid, addressed,
in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri
64105, Attention: Secretary, or, in the case of the Executive, to him at 5639
High Drive, Shawnee Mission, Kansas 66208, or to such other address as a party
shall designate by notice to the other party.
10. Amendment. No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, waiver, modification or discharge is
agreed to in a writing signed by Executive and the President of KCSI. No waiver
by any party hereto at any time of any breach by another party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the time or at any prior or subsequent time.
<PAGE>
11. Successors in Interest. The rights and obligations of KCSI under
this Agreement shall inure to the benefit of and be binding in each and every
respect upon the direct and indirect successors and assigns of KCSI, regardless
of the manner in which such successors or assigns shall succeed to the interest
of KCSI hereunder, and this Agreement shall not be terminated by the voluntary
or involuntary dissolution of KCSI, KCSL or Railway or by any merger or
consolidation or acquisition involving KCSI, KCSL or Railway, or upon any
transfer of all or substantially all of KCSI's, KCSL's or Railway's
assets, or terminated otherwise than in accordance with its terms. In the event
of any such merger or consolidation or transfer of assets, the provisions of
this Agreement shall be binding upon and shall inure to the benefit of the
surviving corporation or the corporation or other person to which such assets
shall be transferred. Neither this Agreement nor any of the payments or benefits
hereunder may be pledged, assigned or transferred by Executive either in whole
or in part in any manner, without the prior written consent of KCSI.
12. Severability. The invalidity or unenforceability of any particular
provision of this Agreement shall not affect the other provisions hereof, and
this Agreement shall be construed in all respects as if such invalid or
unenforceable provisions were omitted.
13. Controlling Law and Jurisdiction. The validity, interpretation and
performance of this Agreement shall be subject to and construed under the laws
of the State of Missouri, without regard to principles of conflicts of law.
14. Entire Agreement. This Agreement constitutes the entire agreement
between the parties with respect to the subject matter hereof and terminates and
supersedes all other prior agreements and understandings, both written and oral,
between the parties with respect to the terms of Executive's employment or
severance arrangements.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amended and
Restated Agreement as of the 1st day of January, 1999.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By /s/ Landon H. Rowland
---------------------------------
Landon H. Rowland, President
EXECUTIVE
/s/ Danny R. Carpenter
-----------------------------------
Danny R. Carpenter
KANSAS CITY SOUTHERN INDUSTRIES, INC.
EXECUTIVE PLAN
(Restated November 17, 1998)
-------------------------------------------
THIS RESTATED EXECUTIVE PLAN (the "Plan") is executed this 17th day of
November, 1998, by Kansas City Southern Industries, Inc. ("KCSI"), a corporation
organized under the laws of the State of Delaware.
WITNESSETH:
WHEREAS, KCSI and certain of its subsidiaries maintain qualified plans
subject to Sections 401(a)(17) and 415 of the Internal Revenue Code, which limit
the annual contributions permitted to certain participants in such plans; and
WHEREAS, KCSI prefers to provide a benefit to certain participants in
addition to the annual contributions permitted under the qualified plans and
therefore established this Executive Plan on January 18, 1985; and
WHEREAS, KCSI now wishes to amend the Plan to change the method and
timing for the payment of benefits hereunder.
NOW, THEREFORE, KCSI hereby amends and restates the Plan to provide as
follows:
1.1 Definitions.
1.2 "Account" shall mean the separate account which the Company
has maintained for a Participant under the Plan through the date of this
restatement of the Plan.
1.3 "Annual Benefit" shall mean the amount of a Participant's
annual benefit under the Plan, which shall be the amount by which (a) below
exceeds (b) below:
(a) The amount of the annual contributions (other than elective
deferrals) and forfeitures which the Participant would have been entitled to
receive under one or more of the Qualified Plans, except that (1) any
limitations imposed on such contributions under Section 401(a)(17) or 415 of the
Internal Revenue Code shall be disregarded, (2) in computing such amount, the
definition of "Compensation" contained in Section 1.4 herein shall be used
instead of the definition of "Compensation" contained in such Qualified Plans,
if different, (3) the amount of matching contributions that the Participant
would have been entitled to receive under the Kansas City Southern Industries,
Inc. 401(k) Plan ("401(k) Plan") shall be deemed to be equal to 3% of the
Participant's Compensation, and (4) any eligibility requirements for
participation in the Qualified Plans shall be disregarded; and
(b) The amount of the annual contributions (other than elective
deferrals) and forfeitures which the Participant is entitled to receive under
the Qualified Plans as limited by Sections 401(a)(17) and 415 of the Internal
Revenue Code and any eligibility requirements for participation in the Qualified
Plans, and with respect to the 401(k) Plan, treating the Participant as having
received the maximum matching contributions available under Section 3.01 of the
401(k) Plan, as if the Participant had made the maximum elective deferrals
permitted by Section 402(g) of the Code, disregarding the limitations of Article
XII of the 401(k) Plan.
1.4 "Compensation" shall mean actual cash compensation paid to a
Participant as base compensation and incentive compensation for a taxable year,
but not including any amount paid as severance pay. If a Participant and the
Company have entered into an agreement fixing the value of a Participant's
annual compensation for purposes of this Plan for a particular year, then that
value shall be deemed to be such Participant's annual base and incentive
compensation for that year, and such annual base and incentive compensation
shall be deemed to be paid ratably throughout that year.
1.5 "Company" shall mean Kansas City Southern Industries, Inc., and
each of its subsidiary companies which is at least eighty percent (80%) owned.
1.6 "Compensation Committee" shall mean the Compensation and
Organization Committee of the Board of Directors of Kansas City Southern
Industries, Inc.
1.7 "Participant" is an employee of the Company who is eligible to
participate in the Plan under Section 2 and whose participation in the Plan is
approved by the Chief Executive Officer and the Chairman of the Board of the
Company (or upon the approval of the Chief Executive Officer alone, if there is
no Chairman of the Board then in office).
1.8 "Plan" shall mean the deferred compensation plan established
and continued by the Company in the form of this Plan, designated as the
"Kansas City Southern Industries, Inc. Executive Plan (Restated November 17,
1998)."
1.9 "Qualified Plans" shall mean the Kansas City Southern Industries,
Inc. Profit Sharing Plan, The Employee Stock Ownership Plan, and the Kansas City
Southern Industries, Inc. 401(k) Plan or any successor plans.
1.10 "Vesting Schedule" shall mean the vesting schedule applicable to
each Participant under the terms and provisions of the KCSI Profit Sharing Plan.
2. Eligibility. Eligibility in the Plan shall be limited to any
employee of the Company who is a corporate officer of the Company for whom the
Company's contributions to the Qualified Plans are limited or prohibited as
provided under (1) Section 401(a)(17) of the Internal Revenue Code, (2) Section
415 of the Internal Revenue Code, and/or (3) the eligibility requirements of one
or more of the Qualified Plans.
3. Election of Form of Benefits. Each Participant may elect to receive
the Annual Benefit available under the Plan either in cash or through a grant of
non-qualified stock options to purchase shares of common stock of the Company
("Stock Options"). Such election shall be made with respect to each calendar
year covered by the Plan, but will be an on-going election which remains in
effect until changed, unless the Participant otherwise specifies in the
election. The election for calendar year 1997 shall be made not later than the
later of November 15, 1997 or at least fifteen (15) days before the actual grant
of the Participant's benefits for 1997, and elections for subsequent calendar
years must be made not later than October 31 of that year, or, for 1998, at
least fifteen (15) days before the actual grant of benefits for the Participant
for 1998. An on-going election may be changed at any time by a Participant, but
any such change shall not be effective for the calendar year in which the
election is made unless such change is made prior to October 31 of such year,
except for 1998, such change must be made at least fifteen (15) days before the
actual grant of benefits for the Participant for 1998. If no election is made by
a Participant for a calendar year, the Participant's Annual Benefit for that
year shall be in the form of a grant of Stock Options. Elections of part cash
and part Stock Options will not be permitted. Notwithstanding the foregoing or
any election made by a Participant to receive an Annual Benefit in Stock
Options, no Stock Options will be issued unless the Participant is an active
employee of the Company on the date of grant of the Stock Options, but instead
the Annual Benefit will be paid in cash.
4.1 Payment of Annual Benefit. Annual Benefits under the Plan shall be
paid as Stock Options, unless the Participant shall have elected in accordance
with Section 3 hereof to receive cash.
4.2 Time of Payment. Annual Benefits shall be paid by no later than the
end of the year following the calendar year to which the Annual Benefits relate.
4.3 Stock Option Grants. If a Participant has elected to receive his or
her benefit in the form of Stock Options, the Compensation Committee shall grant
the Participant Stock Options which the Compensation Committee determines have a
value equal to 125% of the Annual Benefit, rounded to the nearest whole share.
The Compensation Committee shall value the Stock Options as of the time of grant
using the Black-Scholes method in the manner determined by the Compensation
Committee applied on a consistent basis.
4.4 Termination During a Calendar Year. If a Participant's
employment is terminated during a calendar year for any reason, the Participant
shall be entitled to an Annual Benefit for the year of termination only if the
Participant is entitled to a contribution under one or more Qualified Plans in
such year. Following the date of termination of employment, the Participant
shall not be entitled to any further benefits under the Plan (except for payment
of Annual Benefits, if any, through the date of termination of employment).
4.5 Vesting Schedule. Stock Options granted under this Plan shall
become exercisable in accordance with the Vesting Schedule. Notwithstanding any
other provision of this Plan to the contrary, no cash distributions shall be
made from the Plan except to the extent that the amount distributed is vested in
accordance with the Vesting Schedule, and any undistributed cash balance of any
Account shall earn a return based on a hypothetical investment of such
undistributed cash balance in the following investments: 33 1/3 percent in Janus
Venture Fund, 33 1/3 percent in Janus Twenty Fund and 33 1/3 percent in Janus
Worldwide Fund, and shall be distributed as it vests under the Vesting Schedule.
5. Distribution of Existing Balances. Each Participant with an existing
balance held in an Account as of November 17, 1998 shall be given an election to
receive his existing balance either in cash or through a grant of Stock Options.
Such election shall be made not later than at least fifteen (15) days before the
actual distribution of the existing balances from Accounts, which distribution
shall take place promptly following the restatement of this Plan on November 17,
1998.
6. No Trust. Nothing contained in this Plan and no action taken
pursuant to the provisions of the Plan shall create or be construed to create a
trust of any kind or a fiduciary relationship between the Company and the
Participant or any other person.
7. Source of Payments. The Participant and any other person or persons
having or claiming a right to benefits hereunder or to any interest in the Plan
shall rely solely on the unsecured promise of the Company set forth herein and
nothing in the Plan shall be construed to give the Participant or any other
person or persons any right, title, interest or claim in or to any specific
asset, fund, reserve, account or property of any kind whatsoever owned by the
Company or in which it may have any right, title or interest now or in the
future, but the Participant shall have the right to enforce his claim against
the Company in the same manner as any unsecured creditor.
8. No Assignment. The right of the Participant or any other
person to the payment of benefits under the Plan shall not be assigned,
transferred, pledged or encumbered in any way.
9. Incapacity of Participant or Beneficiary. If the Compensation
Committee shall find that any person to whom any payment is payable under the
Plan is unable to care for his affairs because of illness or accident or is a
minor, any payment due (unless a prior claim therefor shall have been made by
duly appointed guardian, committee or other legal representative) may be paid to
the spouse, a child, a parent or a brother or sister, or to any person deemed by
the Compensation Committee to have incurred expense for such person otherwise
entitled to payment in accordance with the applicable provisions of Section 4
above. Any such payment shall be a complete discharge of the liabilities of the
Company under the Plan.
10. Compensation Committee Powers and Liabilities. The Compensation
Committee in its absolute discretion shall have the full power and authority to
interpret, construe and administer the Plan and the Compensation Committee's
interpretations and construction thereof, and action thereunder, including the
determination of the amount or recipient of the payment to be made therefrom,
shall be binding and conclusive on all persons for all purposes. No member of
the Compensation Committee shall be liable to any person for any action taken or
omitted in connection with the interpretation and administration of the Plan.
11. Benefits Not Treated as Compensation. Any benefits payable under
the Plan shall not be deemed salary or other compensation to the Participant for
the purpose of computing benefits to which he may be entitled under the Plan or
any profit sharing plan, pension plan or any other arrangement of the Company
for the benefit of its employees.
12. Governing Law. This Plan shall be construed in accordance
with and governed by the law of the State of Missouri, excluding its choice of
laws.
13. Merger. The Company agrees it will not be a party to any merger,
consolidation or reorganization, unless and until its obligations hereunder
shall be expressly assumed by its successor or successors.
14. Amendment. This Plan may be amended at any time and from time
to time by the Compensation Committee.
<PAGE>
15. Binding Effect. This Plan shall be binding upon and inure to the
benefit of the Company, its successors and assigns and the Participants and
their heirs, executors, administrators and legal representatives.
IN WITNESS WHEREOF, this Restated Plan has been duly executed as of
the day and year first above stated.
Kansas City Southern Industries, Inc.
By /s/ Landon H. Rowland
-------------------------------
Landon H. Rowland, President
STOCK PURCHASE AGREEMENT, dated April 13, 1984, by and among Kansas
City Southern Industries, Inc., a Missouri corporation ("KCSI"), and Thomas
H. Bailey, William C. Mangus, Bernard E. Niedermeyer III, Michael Stolper,
and Jack R. Thompson, as individuals.
WHEREAS, Janus Capital Corporation, a Colorado corporation ("JCC"), is
a registered investment adviser under the Investment Advisers Act of 1940,
managing assets for corporations, individuals, and pension and profit-sharing
plans; and
WHEREAS, Janus Management Corporation, a Colorado corporation ("JMC"),
is a registered investment adviser under the Investment Advisers Act of 1940
and is the investment adviser to Janus Fund, Inc. ("Janus Fund"); and
WHEREAS, Thomas H. Bailey, William C. Mangus, Bernard E. Niedermeyer
III, Michael Stolper, and Jack R. Thompson (referred to collectively as the
"Shareholders of JCC") own all of the outstanding capital stock of JCC,
consisting of 400 shares of Common Stock, par value $.01 per share, and all
of the outstanding capital stock of JMC, consisting of 24,014 shares of
Common Stock, par value $.01 per share;
WHEREAS, immediately after the initial stock purchase by KCSI
contemplated by this Agreement, JMC will merge into JCC in accordance with
Colorado law, JCC to be the surviving corporation; and
WHEREAS, the Shareholders of JCC and KCSI after the merger of JMC into
JCC, will own all of the authorized and outstanding capital stock of JCC,
then consisting of 10,000,000 shares of common stock, $.01 par value per
share (the "JCC Shares"); and
WHEREAS, KCSI and the Shareholders of JCC desire that KCSI acquire from
the Shareholders of JCC, shares of JMC and JCC such that KCSI will own 80% of
the shares of JCC outstanding after such merger, on the terms and conditions
set forth herein.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
STOCK PURCHASES AND MERGER
Subject to the terms and conditions set forth below, the stock
purchases contemplated by the parties shall be effectuated at the following
times and in the following manner:
1.01 At the Closing provided for in paragraph 3.01 hereof, KCSI shall
purchase and each of the Shareholders of JCC shall sell, convey, assign,
transfer and deliver to KCSI, free and clear of all liens and encumbrances, a
total of 16,996 shares of JMC and 253 shares of JCC for a total price of
$10,937,922.24, in the following proportions:
NO. OF SHARES SOLD PURCHASE
NAME OF SELLER JMC JCC PRICE
- -------------- --- --- -------
Thomas H. Bailey 5,454 153 $5,016,009.33
William C. Mangus 10,054 100 $5,428,826.99
Bernard E. Niedermeyer III 645 -0- $ 213,736.84
Michael Stolper 843 -0- $ 279,349.08
Jack R. Thompson -0- -0- $ -0-
1.02 Immediately upon consummation of the stock purchases by KCSI
provided for in paragraph 1.01, KCSI and the Shareholders of JCC shall take
all steps necessary to effect a duly and validly authorized merger of JMC
into JCC in accordance with the laws of the State of Colorado and other
applicable laws, JCC to be the surviving corporation. Upon consummation of
such merger, each of the Shareholders of JCC and KCSI shall own the number of
JCC Shares set forth below, which shall be all of the issued and outstanding
capital stock of JCC:
NUMBER OF
SHARES OF
NAME OF HOLDER JCC
-------------- ---------
Thomas H. Bailey 2,898,671
William C. Mangus -0-
Bernard E. Niedermeyer III 134,039
Michael Stolper 175,181
Jack R. Thompson 75,789
KCSI 6,716,320
1.03 As soon after October 31, 1985 as the amount of Net After-Tax
Earnings of JCC for the fiscal year then ended has been determined as
provided in paragraph 2.04, but not later than thirty days after the date of
such determination, KCSI shall purchase and the Shareholders of JCC other
than William C. Mangus (the "Remaining Shareholders of JCC") shall sell,
convey, assign, transfer and deliver to KCSI, free and clear of all liens and
encumbrances, on a pro-rata basis, or on such other basis as the Shareholders
of JCC shall agree among themselves which does not violate the other
provisions of this Agreement, a total of 427,894 of the JCC shares at a price
per share equal to fifteen times the Net After-Tax Earnings per share of JCC
for the fiscal year ended October 31, 1985.
1.04 As soon after October 31, 1986 as the amount of Net After-Tax
Earnings of JCC for the fiscal year then ended has been determined as
provided in paragraph 2.04, but not later than thirty days after the date of
such determination, KCSI shall purchase and the Remaining Shareholders of JCC
shall sell, convey, assign, transfer and deliver to KCSI, free and clear of
all liens and encumbrances, on a pro-rata basis, or on such other basis as
the Shareholders of JCC shall agree among themselves which does not violate
the other provisions of this Agreement, a total of 427,893 of the JCC shares
at a price per share equal to fifteen times the Net After-Tax Earnings per
share of JCC for the fiscal year ended October 31, 1986.
1.05 As soon after October 31, 1987 as the amount of Net After-Tax
Earnings of JCC for the fiscal year then ended has been determined as
provided in paragraph 2.04, but not later than thirty days after the date of
such determination, KCSI shall purchase and the Remaining Shareholders of JCC
shall sell, convey, assign, transfer and deliver to KCSI, free and clear of
all liens and encumbrances, on a pro-rata basis, or on such other basis as
the Shareholders of JCC shall agree among themselves which does not violate
the other provisions of this Agreement, a total of 427,893 of the JCC shares
at a price per share equal to fifteen times the Net After-Tax Earnings per
share of JCC for the fiscal year ended October 31, 1987.
ARTICLE II
NET AFTER-TAX EARNINGS
2.01 The term "Net After-Tax Earnings of JCC" as used in this
Agreement shall mean all income of JCC for the applicable period from
operations in the ordinary course of business, less the expenses of JCC for
the applicable period, including salaries, bonuses and related employee
costs, rent, utilities, depreciation, taxes, travel and entertainment
expenses and all other operating expenses, and including federal and state
income taxes payable on account of such income, all calculated in accordance
with generally accepted accounting principles applied on a consistent basis;
provided that "Net After-Tax Earnings of JCC" shall not include earnings, nor
be reduced by losses, of any corporation or other entity acquired by JCC
(including any acquisition of substantially all the assets of any such
corporation or other entity) after the date of the Closing provided for in
Section 3.01 of this Agreement. For purposes of this calculation, (i) no
charge shall be made to JCC by KCSI or any affiliate of KCSI for any services
furnished to JCC by KCSI or any such affiliate unless such services have been
approved by Thomas H. Bailey and (ii) no change shall be made in the kind or
methods of computing of such expenses from the kind and methods employed
during the year ended October 31, 1983, without KCSI's consent in advance.
2.02 Whenever KCSI is permitted to consolidate the income of JCC with
the income of KCSI for federal income tax purposes, the tax rate to be
applied to net earnings to determine the Net After-Tax Earnings of JCC shall
be the federal income tax rate which would be applicable to JCC if no such
consolidation were to have occurred.
2.03 For purposes of determining the Net After-Tax Earnings of JCC,
the direct, out-of-pocket cost of organizing a new mutual fund requested in
writing by KCSI and initially registering such fund or its shares under the
Investment Company Act of 1940, the Securities Act of 1933 and state
securities or Blue Sky laws, including legal, accounting and printing costs,
shall be shared equally by JCC and by KCSI or an affiliate of KCSI.
2.04 At the end of each fiscal year during which at any time any of
the Shareholders of JCC owned, beneficially or otherwise, any JCC Shares, the
Net After-Tax Earnings of JCC as defined in this Article II shall be
determined and certified by Price Waterhouse, or a comparable certified
public accounting firm (one of the so called "Big Eight" firms) then
providing accounting services to JCC.
ARTICLE III
CLOSING
3.01 The Closing of the purchase and sale provided for in paragraph
1.01 (the "Closing") shall be held in the offices of Davis, Graham & Stubbs
in Denver, Colorado at 10:00 a.m. Mountain Standard Time on the first
business day following the obtaining of shareholder approval required by
paragraphs 7.06 and 8.02 (the "Closing Date"), or at such other time or place
as KCSI and the Shareholders of JCC may agree.
3.02 At the Closing, each of the Shareholders of JCC shall deliver a
certificate or certificates representing the shares of JMC and JCC being sold
by him pursuant to paragraph 1.01, duly endorsed to KCSI with such
endorsement signature guaranteed, and KCSI shall deliver to each of the
Shareholders of JCC a certified or bank check for the purchase price of the
shares being purchased from such Shareholder of JCC.
3.03 Closings of the purchases and sales of JCC Shares provided for in
paragraphs 1.03, 1.04 and 1.05 shall be held at the offices of JCC in Denver,
Colorado, at such time (no later than thirty days after the date that the
amount of Net After-Tax Earnings of JCC for the preceding fiscal year has
been determined as provided in paragraph 2.04) as KCSI and the Remaining
Shareholders of JCC may agree. At each such closing, the Remaining
Shareholders of JCC shall deliver certificates representing the JCC Shares
being sold and KCSI shall deliver payment for such shares in the manner
provided in paragraph 3.02.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF KCSI
KCSI hereby represents and warrants as follows:
4.01 KCSI is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware, and has full corporate
power and authority to carry on the business it is now conducting.
4.02 The execution, delivery and performance of this Agreement by KCSI
has been duly and validly authorized and approved by all necessary action of
KCSI, and this Agreement is a valid and binding obligation of KCSI,
enforceable against it in accordance with its terms.
4.03 Neither the execution, the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby nor compliance by KCSI
with any of the provisions hereof will (i) violate or conflict with, or
result in a breach of any provisions of the Certificate of Incorporation or
Bylaws of KCSI, or (ii) constitute a default under, or result in the
termination of, any material note, bond, mortgage, indenture, deed of trust,
license, agreement or other instrument or obligation to which KCSI is a
party, or (iii) violate any order, writ, injunction or decree applicable to
KCSI or any of KCSI's material assets, or (iv) violate any applicable law or
any order, rule or regulation of any regulatory or governmental authority
having jurisdiction.
4.04 KCSI has not entered into and will not enter into any agreement,
arrangement or understanding with any person or firm which will result in an
obligation of JCC or JMC to pay any finder's fee, brokerage commission, or
similar payment in connection with the transactions contemplated by this
Agreement.
4.05 The representations and warranties contained in this Article IV
shall survive the Closing, and remain in effect for a period of three years
following the Closing.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF
THE SHAREHOLDERS OF JCC
The Shareholders of JCC hereby represent and warrant as follows:
5.01 The shares of JMC and JCC to be sold under this Agreement have
been and will remain upon delivery to KCSI duly and validly authorized for
issuance, legally issued, fully paid and non-assessable. As to the shares
being delivered to KCSI at each closing provided for in Article III (i) each
of the Shareholders of JCC has and will have immediately prior to delivery to
KCSI hereunder full right, title and interest to his respective portion of
such shares free and clear of all liens and encumbrances, (ii) except as set
forth in this Agreement, there are no agreements or understandings with
respect to the voting of such shares, (iii) there are not outstanding, and
will not be outstanding at the Closing Date or at the date of the other
closings provided for in Article III any options, warrants or rights to
purchase or otherwise acquire any of such shares, except as provided herein,
and (iv) upon proper endorsement and delivery of the certificate or
certificates representing any such shares to KCSI, KCSI shall have full
right, title and interest to such shares free and clear of all liens and
encumbrances.
5.02 JCC and JMC are corporations duly organized, validly existing and
in good standing under the laws of the State of Colorado, have full corporate
power and authority to carry on the businesses they are now conducting and to
own or lease and operate the assets and properties now owned or leased and
operated by them, and are not required to be qualified to do business in any
other jurisdiction except for jurisdictions in which failure to be so
qualified could not subject JCC or JMC to any material liability or
disability by reason of such failure. Neither JCC nor JMC have any
subsidiaries.
5.03 The Shareholders of JCC have delivered to KCSI balance sheets of
JCC and JMC as of October 31, 1983, and statements of operations and
statements of changes in financial position of JCC and JMC for the fiscal
year ended October 31, 1983, all of which have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods indicated and present fairly the financial position of JCC and
JMC and their results of operations and changes in financial position for the
periods indicated. Other than as disclosed on the JCC and JMC balance sheets
dated October 31, 1983 and in exhibit 5.03 attached hereto and made a part
hereof, but without expanding the scope of the other representations and
warranties herein, JCC and JMC do not have any liability of any nature,
including without limitation liability for federal, state, local or foreign
taxes, which is material, whether accrued or contingent, other than
liabilities arising since October 31, 1983 in the ordinary course of business
which are not inconsistent with the representations and warranties made
herein.
5.04 JCC and JMC have filed, or caused to be filed, with the
appropriate governmental agencies, all federal, state and local tax returns
and all reports with respect to income and other reports, the filing of which
is necessary for the conduct of their businesses or required by any taxing
authority having jurisdiction. All such tax returns and reports properly
reflect the taxes attributable to the businesses of JCC and JMC for the
periods covered thereby. All federal, state and local taxes, assessments,
interest, penalties, deficiencies, fees or other governmental charges or
impositions called for by such tax returns or reports, or to JCC's or JMC's
knowledge are claimed to be due by any taxing authority, have been properly
paid. JCC or JMC have not received any notice of deficiency or assessment or
a proposed deficiency or assessment from the Internal Revenue Service or any
other taxing authority. JCC or JMC have not waived any law or regulation
fixing, or consented to the extension of, any period of time for assessment
of any tax.
5.05 The Shareholders of JCC have furnished to KCSI a schedule listing
all policies of insurance maintained by JCC and JMC. All such policies are
outstanding and duly in force on the date hereof, are in the amounts shown
in, and insure against the losses and risks described in said schedule. JCC
or JMC have not received notice from any insuror or its agent of cancellation
of any insurance policy or that substantial actions will have to be taken or
that substantial capital improvements or other expenditures will have to be
made in order to continue such insurance.
5.06 Other than as disclosed to KCSI in exhibits 5.06 and 5.08
attached hereto and made a part hereof, there is no (i) litigation,
proceeding, arbitral action or governmental investigation pending or, as far
as is known to any of the Shareholders of JCC or to JCC or JMC, threatened
against JCC or JMC or their assets, (ii) fact known to any of the
Shareholders of JCC or to JCC or JMC that may give rise to any such
litigation, proceeding or investigation, nor (iii) decree, injunction or
order of any court or governmental department or agency outstanding against
JCC or JMC with respect to its business.
5.07 To the best knowledge of the Shareholders of JCC after reasonable
investigation, except as disclosed to KCSI in exhibit 5.07 attached hereto
and made a part hereof, JCC and JMC hold all material licenses, permits, and
authorizations necessary for the lawful conduct of their businesses under,
and are otherwise in compliance with, all applicable statutes, regulations,
orders, ordinances, and other laws of the United States and all states and
local governments, and agencies thereof, that have a material effect upon
JCC or JMC or the conduct of their businesses. Neither JCC nor JMC has
received any notice or otherwise been advised that it is in violation of any
such statute, regulation, order, ordinance, or other law. Neither JCC, JMC
nor any of the Shareholders of JCC knows after reasonable investigation of
any existing circumstance that is likely to result in such a violation.
Except for properties which in the aggregate are not material to JCC or JMC,
JCC and JMC respectively have good and marketable title to all of their
respective real and personal properties except for such minor imperfections
in title which do not materially detract from the value, nor prohibit the
present use, of such properties. To the best knowledge of the Shareholders of
JCC after reasonable investigation, the respective real and personal
properties of JCC and JMC are subject to no mortgage, pledge, lien,
encumbrance, charge, security interest or other security arrangement except
for (i) liens for the payment of taxes, the payment of which is not
delinquent or subject to penalty and (ii) encumbrances incidental to the
conduct of their respective businesses which were not incurred in connection
with the borrowing of money and which do not in the aggregate materially
detract from the value of such properties or materially impair the use
thereof, except as disclosed on their respective financial statements or in
exhibit 5.07 attached hereto and made a part hereof. All leases pursuant to
which JCC or JMC lease any substantial amount of real or personal property
are valid and effective in accordance with their terms.
5.08 Except as disclosed to KCSI in exhibit 5.08 attached hereto and
made a part hereof, no officer, director, or employee of JCC or JMC is a
party or is expected to become a party to any material transaction with JCC
or JMC, including without limitation any contract, agreement, or other
arrangement (i) providing for the furnishing of services by, (ii) providing
for the rental of real or personal property from, or (iii) otherwise
requiring payments (other than for service as officer, director, or employee)
to any such person or corporation, partnership, trust, or other entity in
which any such person has a substantial interest as an officer, director,
trustee, or partner.
5.09 Since October 31, 1983, (i) JCC and JMC have operated their
businesses in the ordinary course and exercised all reasonable efforts to
preserve their businesses intact, to keep available the services of their
employees and to preserve the goodwill of their clients, (ii) there has been
no change in JCC's or JMC's condition (financial or otherwise), assets,
liabilities, earnings, or businesses, except for changes in the ordinary
course of business which are not individually or in the aggregate materially
adverse to JCC or JMC, and (iii) JCC and JMC have not declared or paid any
dividend or made any distribution in respect of any JCC or JMC shares, or
issued, redeemed, purchased or otherwise acquired or disposed of any of their
shares of capital stock except as contemplated herein.
5.10 To the best knowledge of the Shareholders of JCC after reasonable
investigation, JCC and JMC are in compliance with all provisions of the
Investment Advisers Act of 1940 applicable to them and their operations, and,
except as disclosed to KCSI in exhibit 5.10 attached hereto and made a part
hereof, with all investment adviser registration or qualification
requirements of applicable state securities or Blue Sky laws.
5.11 To the best knowledge of the Shareholders of JCC after reasonable
investigation, except as disclosed to KCSI in exhibit 5.11 attached hereto
and made a part hereof, Janus Fund is in compliance with all applicable
requirements of the Securities Act of 1933, the Investment Company Act of
1940.
5.12 Neither the execution or delivery of this Agreement, the
consummation of the transactions contemplated hereby, nor compliance by the
Shareholders of JCC with any of the provisions hereof will (i) violate or
conflict with, or result in a breach of any provisions of the Articles of
Incorporation or Bylaws of JCC or JMC, or (ii) constitute a default under, or
result in the termination of, any material note, bond, mortgage, indenture,
deed of trust, license, agreement or other instrument or obligation to which
JCC, JMC or the Shareholders of JCC is a party, or (iii) violate any order,
writ, injunction or decree applicable to JCC, JMC or the Shareholders of JCC,
or any of their material assets, or (iv) to the best knowledge of the
Shareholders of JCC after reasonable investigation, except as disclosed to
KCSI in exhibit 5.12 attached hereto and made a part hereof, violate any
applicable law or any order, rule or regulation of any regulatory or
governmental authority having jurisdiction.
5.13 JCC and JMC have not entered into and will not enter into any
agreement, arrangement or understanding with any person or firm which will
result in an obligation of JCC, JMC or KCSI to pay any finder's fee,
brokerage commission, or similar payment in connection with the transactions
contemplated by this Agreement.
5.14 JCC and JMC have delivered to KCSI a complete and accurate copy
of the Articles of Incorporation and Bylaws of JCC and JMC, as in effect on
the date hereof, and a list of all material investment advisory and other
contracts, agreements, instruments, leases and licenses of JMC and JCC. True
and complete copies of the documents referred to in such list have been made
available to KCSI. To the best knowledge of the Shareholders of JCC after
reasonable investigation neither JMC nor JCC nor any other party to any such
contract, agreement, instrument, lease or license is in default in complying
with any material provision thereof, and each such contract, agreement,
instrument, lease and license is in full force and is valid and effective in
accordance with its respective terms. Neither JCC nor JMC is a party to or is
bound by any contract, agreement, deed, instrument, lease or license, or
subject to any charter or other corporate restriction, which has had or which
is reasonably likely to have a material adverse effect on the financial
condition, results of operation, business, properties, assets or liabilities
of JMC or JCC.
5.15 JCC and JMC have delivered to KCSI a list of all pension,
profit-sharing, option and other employee benefit plans of JCC and JMC. True
and complete copies of the documents referred to in such list have been made
available to KCSI. All obligations of JCC and JMC under such plans are fully
funded as to past service benefits and all accrued payments thereunder have
been paid except as disclosed in such list. As to any plan purporting to be a
qualified plan under Section 401(a) of the Internal Revenue Code, (i) all
necessary action has been taken to effect and maintain the qualification of
such plan, (ii) any trust established in connection with any such plan has no
liability of any nature which is accrued or contingent including without
limitation liability for federal, state, local or foreign taxes, except as
described in such list, and (iii) no such plan or trust is in violation of,
or in default with respect to, any law, order, judgment, decree, or
regulation.
5.16 It is expressly understood that Michael Stolper is a Shareholder
of JCC but not an employee of JCC or JMC, and that he is not expected to make
inquiry into any of the matters about which the Shareholders of JCC make
representations to the best of their knowledge after reasonable investigation
in this Article V. The representations and warranties contained in this
Article V shall survive the Closing and remain in effect for a period of
three years following the Closing.
5.17 None of the Shareholders of JCC have any claims or causes of
action against JCC or JMC, or knowledge of any basis for any such claims or
causes under any contracts or agreements, for any tort or alleged tort, or
upon any other basis or with respect to any other matter.
ARTICLE VI
AFFIRMATIVE COVENANTS
6.01 Until the date of the Closing (the "Closing Date"), the
Shareholders of JCC will cause JCC and JMC to conduct their businesses only
in the ordinary course except as otherwise permitted or required by this
Agreement or consented to by KCSI in writing. In addition, JCC and JMC, prior
to the Closing Date, will not, except as otherwise permitted or required by
this Agreement or consented to by KCSI in writing, (i) declare, set aside or
pay any dividend or other distribution of assets to the Shareholders of JCC,
except that nothing herein shall prevent the payment of bonuses to employees
of JCC or JMC on a basis which is in accordance with past practices and is
not inconsistent with the financial projections heretofore furnished KCSI by
the Shareholders of JCC, (ii) make any change in the number of shares of
authorized or issued capital stock of JCC or JMC or other securities or
obligations to issue securities, (iii) lend any money or otherwise pledge the
credit of JCC or JMC except in the ordinary course of business, (iv) fail in
any material respect to comply with any statutes, laws, ordinances, rules,
regulations or other governmental restrictions applicable to them or with any
contract, commitment or agreement to which either of them is a party, or (v)
merge or consolidate with, purchase substantially all the assets of, or
otherwise acquire any business or proprietorship, firm, association,
corporation or other business organization or division thereof, other than
the merger of JMC into JCC contemplated herein.
6.02 Until the Closing Date, the Shareholders of JCC shall cause JCC
and JMC to (i) duly comply in all material respects with all laws and
regulations applicable to JCC and JMC and to the conduct of their businesses
and all laws and regulations applicable to the transactions contemplated by
this Agreement, (ii) maintain in full force and effect the insurance policies
heretofore maintained by JCC and JMC (or policies providing substantially the
same coverage), and (iii) maintain all books and records in the usual,
regular and ordinary manner and promptly advise KCSI in writing of any
material adverse change in their condition (financial or otherwise), assets,
liabilities or businesses.
6.03 Until the Closing Date, subject to the merger of JMC into JCC,
the Shareholders of JCC will use their best efforts to preserve the business
organizations of JCC and JMC intact, to continue operations as in the past,
to keep available to KCSI the services of the present officers and employees
of JCC and JMC, and to preserve for KCSI the goodwill of the clients and
others having business relations with JCC or JMC.
6.04 Prior to the Closing Date, the Shareholders of JCC shall seek the
approval of the Board of Directors and shareholders of Janus Fund to a new
Investment Advisory Agreement to be entered into between JCC and Janus Fund,
which shall become effective upon the purchase of stock of JMC and JCC by
KCSI as provided for in paragraph 1.01 and upon the consummation of the
merger between JMC and JCC as provided for in paragraph 1.02. Such Investment
Advisory Agreement shall contain terms substantially identical to the terms
of the present Investment Advisory Agreement between Janus Fund and JMC,
except for changes (none of which shall materially change the allocation of
expenses between Janus Fund and the investment adviser) that are deemed
necessary or desirable to conform to applicable rules or regulations of the
Securities and Exchange Commission or the National Association of Securities
Dealers, Inc. and which are consented to in advance by KCSI.
6.05 Prior to the Closing Date, the Shareholders of JCC shall seek the
consent of each of JCC's principal investment advisory clients to the
continuation of the investment advisory relationship between JCC and each of
such clients subsequent to the Closing Date.
6.06 The Shareholders of JCC shall deliver to KCSI copies of financial
statements of JCC or JMC prepared monthly commencing January 31, 1984 to the
Closing Date and copies of any filings by JCC or JMC with, and notices or
orders received by JCC or JMC from, the Securities and Exchange Commission,
and any state securities commission or authority, during such period.
6.07 Prior to the Closing Date, the Shareholders of JCC shall cause
JMC and JCC to allow the officers, employees and authorized representatives
of KCSI to have full access to all offices, properties, files, books and
records of JCC and JMC, and shall provide all information reasonably
requested by such officers, employees and authorized representatives of KCSI
which is within their knowledge or reasonably obtainable by them concerning
JCC, JMC and Janus Fund, including, without limitation, information about
their respective operations, capitalization and shareholders, and any of
their investment advisory clients. The Shareholders of JCC shall cause the
officers and employees of JMC and JCC to cooperate with and assist KCSI in
its review and investigation of the businesses and affairs of JCC, JMC and
Janus Fund and shall permit Price Waterhouse to review, audit or examine, at
KCSI's discretion and expense, such books, records, financial data and other
information relating to the business of JCC and JMC as KCSI may direct.
6.08 In addition to the approvals and consents to be obtained pursuant
to paragraphs 6.04 and 6.05, prior to the Closing Date, the Shareholders of
JCC shall cause JCC and JMC to use their best efforts, and KCSI shall use its
best efforts, to obtain all requisite approvals and consents from
governmental or regulatory bodies or agencies, or pursuant to leases,
mortgages, contracts or agreements, permits or licenses of or affecting JCC
or JMC or KCSI, respectively, relative to the transactions contemplated by
this Agreement.
6.09 The Shareholders of JCC shall not transfer, dispose of, or in any
way encumber any of their shares of JMC or JCC in any manner which would
prevent them from selling such shares to KCSI as herein provided and the
certificates for all shares of JCC to be delivered after the Closing Date
pursuant to the subsequent closings provided for in Article III shall bear a
legend disclosing the existence of this Agreement and the limitations upon
disposition set forth in this paragraph 6.10. Notwithstanding the
limitations set forth in this paragraph 6.10, any Shareholder of JCC may
transfer any share of JCC after the Closing Date to any relative of such
Shareholder, or to any trust or other entity for the benefit of such
relative, provided such transfer is effected in accordance with law,
including applicable securities laws and regulations, and such relative,
trust or entity agrees to be, and becomes at the time of such transfer, bound
by the terms and provisions of this Stock Purchase Agreement.
6.10 Settlement of the litigation pending in the District Court of
Denver County, Denver, Colorado, entitled GORDON YALE V. JANUS MANAGEMENT
CORPORATION, THOMAS H. BAILEY AND WILLIAM C. MANGUS, shall be made only as
approved or directed by KCSI, and any amounts paid, or obligations incurred,
by JMC or JCC (except for the fees and expenses of their counsel) in
connection with such litigation, including any settlement thereof not in
excess of $100,000 or satisfaction of any judgment obtained therein, shall be
borne solely by Thomas H. Bailey and William C. Mangus provided that they
shall bear the costs of settlement up to $100,000 only if they have approved
such settlement, in the same proportion as their respective ownership of the
shares of JCC and JMC owned by them immediately prior to the Closing Date.
If, at the time of any such settlement or judgment, Thomas H. Bailey or
William C. Mangus is an employee of JCC, in lieu of receiving reimbursement
for any amount that such employee may be liable for hereunder, JCC shall
reduce such employee's compensation by such amount.
ARTICLE VII
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE SHAREHOLDERS OF JCC TO CLOSE
The obligations of the Shareholders of JCC under this Agreement with
respect to the sale of their shares shall be subject to the fulfillment on or
prior to the Closing Date of each of the following conditions:
7.01 All of the representations and warranties by KCSI contained in
this Agreement shall be true and correct as of the Closing Date. KCSI shall
have complied with and performed all of the agreements, covenants and
conditions required by this Agreement to be performed and complied with by it
on or prior to the Closing Date. The Shareholders of JCC shall have been
furnished at the Closing Date with a Certificate dated the Closing Date,
signed by the President and Secretary of KCSI, certifying to the best of
their knowledge, but without personal liability under such certificate except
for intentional misstatements or omissions, the fulfillment of the foregoing
conditions.
7.02 There shall have been delivered to the Shareholders of JCC an
opinion, dated the Closing Date, and addressed to the Shareholders of JCC by
Richard P. Bruening, Esq., KCSI's general counsel, or such other counsel as
shall be acceptable to the parties hereto, to the effect that:
(a) KCSI is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has corporate
power to carry on its business as it is then being conducted;
(b) Such counsel does not know of any material litigation,
proceeding, arbitral action or governmental investigation pending or
threatened against KCSI that seeks to prevent, or claims damages arising out
of, the transactions contemplated by this Agreement;
(c) The execution, delivery and performance of this Agreement
has been duly authorized and approved on behalf of KCSI by all corporate
action required and this Agreement has been duly executed and delivered by
KCSI pursuant to such authorization and constitutes a valid and binding
obligation of KCSI subject to applicable bankruptcy, insolvency and other
laws affecting the enforcement of creditors' rights generally; and
(d) Neither the execution, the delivery of this Agreement, nor
the consummation of the transactions contemplated hereby nor compliance by
KCSI with any of the provisions hereof (i) violates or conflicts with, or
results in a breach of any provisions of the Certificate of Incorporation or
Bylaws of KCSI, or (ii) to the best of such counsel's knowledge constitutes a
default under, or results in the termination, any material note, bond,
mortgage, indenture, deed of trust, license, agreement or other instrument or
obligation of which such counsel has knowledge to which KCSI is a party,
except for such conflict, breach or default as to which requisite waivers or
consents shall have been obtained by KCSI prior to the Closing Date, or (iii)
violates any order, writ, injunction or decree, of which such counsel has
knowledge, applicable to KCSI or any of KCSI's material assets.
7.03 KCSI shall have obtained all approvals and consents required of
it from governmental or regulatory bodies or agencies or pursuant to leases,
mortgages, contracts, agreements, permits or licenses to which KCSI is a
party relative to the transactions contemplated by this Agreement.
7.04 No adverse change in ownership of KCSI (as defined in paragraph
10.06) shall have occurred after this date hereof and prior to the Closing
Date.
7.05 There shall not have been instituted any suit or proceeding to
restrain or invalidate this transaction or seeking damages from or to impose
obligations upon JCC or JMC which in JCC's or JMC's judgment, reasonably
exercised, would involve expenses or lapses of time that would be materially
adverse to JCC's or JMC's interests.
7.06 The approval of the Board of Directors and shareholders of Janus
Fund to a new Investment Advisory Agreement as provided for in paragraph 6.04
shall have been duly obtained.
ARTICLE VIII
CONDITIONS PRECEDENT TO KCSI'S OBLIGATION TO CLOSE
The obligation of KCSI under this Agreement to purchase shares of JMC
and JCC at the Closing shall be subject to the fulfillment of each of the
following conditions, on or prior to the Closing Date, and the obligation of
KCSI to purchase shares of JCC after the Closing Date shall be subject to
fulfillment of the conditions set forth in paragraphs 8.10 and 8.13 on or
prior to each of such closings;
8.01 All of the representations and warranties of the Shareholders of
JCC contained in this Agreement shall be true and correct at and as of the
Closing Date except for changes contemplated herein. The Shareholders of JCC
shall have complied with and performed all of the agreements, covenants, and
conditions required by this Agreement to be performed and complied with by
them on or prior to the Closing Date. KCSI shall have been furnished at the
Closing Date with a Certificate, dated as of the Closing Date, signed by
Thomas H. Bailey and William C. Mangus, individually and as officers of JCC,
certifying to the best of their knowledge, but without personal liability
under such certificate beyond their personal liability otherwise arising
hereunder except for intentional misstatements or omissions, the fulfillment
of the foregoing conditions.
8.02 The approval of the Board of Directors and shareholders of Janus
Fund to a new Investment Advisory Agreement as provided for in paragraph 6.04
shall have been duly and validly obtained.
8.03 Since October 31, 1983, there shall have been no change in the
condition (financial or otherwise), assets, liabilities, earnings, or
business of JCC from that of JCC and JMC combined as of October 31, 1983,
except for changes in the ordinary course of business of JCC and JMC which
are not in the aggregate materially adverse to JCC.
8.04 The principal advisory clients of JCC shall have been given
notice of the proposed change of control that will result from the
transactions provided for herein and advisory clients accounting for at least
75% of the assets managed by JCC at December 1, 1983 shall have consented to
such change.
8.05 The Shareholders of JCC and JMC shall have obtained all requisite
approvals and consents from governmental or regulatory bodies or agencies or
pursuant to leases, mortgages, contracts or agreements (other than those
referred to in paragraphs 6.04 and 6.05 hereof), permits or licenses relative
to the transactions contemplated by this Agreement.
8.06 There shall have been delivered to KCSI an opinion, dated the
Closing Date (and, at the option of KCSI, with respect to the Remaining
Shareholders' interests under paragraph 8.06(f), the date of each of the
other closings pursuant to Article III) and addressed to KCSI of Davis,
Graham & Stubbs, counsel to the Shareholders of JCC, to the effect that:
(a) JCC and JMC are corporations duly organized and existing
and in good standing under the laws of the State of Colorado;
(b) Such counsel does not know, after reasonable investigation,
of any material litigation, proceeding, arbitral action or governmental
investigation pending or threatened against JCC or JMC that seeks to prevent,
or claims damages arising out of, the transactions contemplated by this
Agreement;
(c) This Agreement constitutes a valid and binding obligation
of each of the Shareholders of JCC;
(d) Neither the execution or delivery of this Agreement, the
consummation of the transactions contemplated hereby, nor compliance by the
Shareholders of JCC with any of the provisions hereof violates or conflicts
with, or results in a breach of any provisions of (i) the Articles of
Incorporation or Bylaws of JMC or JCC, or (ii) to the best of such counsel's
knowledge constitutes a default under, or results in the termination of, any
material note, bond, mortgage, indenture, deed of trust, license, agreement
or other instrument or obligation of which such counsel has knowledge to
which JCC, JMC or the Shareholders of JCC is a party, except the Investment
Advisory Agreement between Janus Fund and JMC, and except for Investment
Advisory Agreements between JCC and any of its clients who have not consented
and do not consent to the change of control of JCC that results from the
transactions provided for herein, or (iii) violates any order, writ,
injunction or decree of which such counsel has knowledge, applicable to JCC,
JMC or the Shareholders of JCC, or any of their material assets;
(e) The authorized capital stock of JCC consists of 6,000
shares of common stock, $.01 par value per share and the authorized capital
stock of JMC consists of 50,000 shares of Common stock, $0.01 par value per
share; all outstanding shares of each such stock have been duly authorized
and are validly issued, fully paid and non-assessable; and
(f) To the best knowledge of such counsel, the Shareholders of
JCC own the JMC and JCC shares free and clear of any liens or encumbrances
and have full right, power and authority to sell and deliver said shares to
KCSI as contemplated in this Agreement.
(g) To the best knowledge of such counsel, no affiliation
between the Janus Fund and Cerberus Partners, Ltd. or between the Janus Fund
and Taurus Partners, Ltd. exists at the Closing Date which would result in
any transactions by such entities being deemed "joint transactions" violative
of Section 17(d) of the Investment Company Act of 1940 or Rule 17(d)
thereunder.
(h) The Janus Fund Proxy Statement does not contain any
material misstatements or omissions which would be in violation of SEC Rule
14a-9, except that such counsel need express no opinion with respect to
compliance with state securities or Blue Sky laws.
8.07 There shall have been delivered to KCSI an opinion, dated the
Closing Date and addressed to KCSI, of counsel to the Janus Fund to the
effect that the shareholders of such Fund have duly approved an Investment
Advisory Agreement, in the form attached as Exhibit 8.07 hereto, to be
entered into and to become effective immediately following the merger of JMC
and JCC, and upon due execution and delivery of such Agreement by such Fund
and JCC, such Agreement will be in full force and effect in accordance with
its terms.
8.08 The approval of the Janus Fund Board of Directors and
shareholders provided for in paragraph 6.04 shall have been duly obtained.
8.09 KCSI shall not have advised the Shareholders of JCC prior to that
date which shall be one week after the date hereof that KCSI is dissatisfied,
in its sole judgment, with the results of its investigation of JCC and JMC
pursuant to paragraph 6.07.
8.10 On or prior to each of the closings provided for under Article
III, the representations and warranties of the Shareholders of JCC provided
for in paragraph 5.01 remain true and correct at and as of each such date
except for changes contemplated herein.
8.11 All pending or known claims, and all litigation, against JCC, JMC
or the Janus Fund shall have been resolved, or provision for such resolution
made, on a basis which is satisfactory to KCSI.
8.12 Receipt by KCSI of the duly executed escrow agreement referred to
in paragraph 17.01.
8.13 Prior to any purchase by KCSI of shares of JCC after the Closing
Date, JMC shall have merged into JCC in a duly and validly authorized merger
in accordance with the laws of the State of Colorado and any other applicable
laws, and such merger shall have become effective.
8.14 JCC shall have registered in each state in which its rendition of
investment advisory service requires such registration.
8.15 There shall not have been any material revision of the Janus Fund
proxy material as filed with the Securities and Exchange Commission on or
about March 31, 1984, which revision is objected to by KCSI.
8.16 The Board of Directors or Executive Committee of KCSI shall have
approved this Agreement.
ARTICLE IX
OTHER TRANSFERS OF SHARES; RIGHTS OF FIRST REFUSAL
9.01 If at any time after the Closing Date, any Shareholder other than
Thomas H. Bailey of JCC desires to sell or otherwise dispose of any of his
remaining JCC Shares, he shall first offer the shares he desires to dispose
of to such employee or employees of JCC as might be designated by JCC
pursuant to paragraph 9.10 to be eligible to purchase such JCC Shares or a
portion thereof, and to the other Remaining Shareholders of JCC (other than
KCSI) in writing for thirty days, at a price per share equal to fifteen times
the Net After-Tax Earnings per share of JCC for the fiscal year ended
immediately prior to such sale, except that if such sale occurs before
October 31, 1985 the price shall be $1.6373 per share. Any such employee or
employees designated by JCC shall have a prior right to purchase an amount of
JCC Shares designated by JCC, and any remaining shares may be purchased by
the other Remaining Shareholders of JCC (other than KCSI) in the proportion
that each such other Shareholder's holding in JCC bears to the holdings of
all such other Remaining Shareholders of JCC. If any Shareholder of JCC to
whom an offer is made pursuant to this paragraph 9.01 does not accept the
offer with respect to all the JCC Shares offered to him, the other
Shareholders of JCC to whom an offer was also made shall have the right to
purchase any remaining JCC Shares on such basis as they may agree among
themselves and at the price specified herein, provided such purchase by such
other Shareholders of JCC occurs within thirty days after the offer to such
employee or employees made pursuant to this paragraph 9.01.
9.02 If within thirty days after any JCC Shares are offered pursuant
to paragraph 9.01, any designated employee or employees of JCC or the other
Shareholders of JCC (other than KCSI) have not accepted the offer with
respect to all of the JCC Shares offered, any remaining shares shall be
offered to JCC in writing for 30 days at the price specified in paragraph
9.01.
9.03 If within thirty days after the JCC Shares are offered pursuant
to paragraph 9.02, JCC has not accepted the offer with respect to all the JCC
Shares offered, any remaining shares shall be purchased by KCSI at the price
provided for in paragraph 9.01.
9.04 If, after the Closing Date, Bernard E. Niedermeyer III, Jack R.
Thompson or any employee of JCC who first acquired JCC Shares after the
Closing Date leaves the employ of JCC for any reason, including, without
limitation, death or disability, but not including sick leave or a leave of
absence or sabbatical for a period of up to one year that has been authorized
by the Board of Directors of JCC, the JCC Shares held by such Shareholder
shall be offered first to any designated employee or employees of JCC and the
other Shareholders of JCC, then to JCC, and finally to KCSI, under the
procedures and at the price specified in paragraphs 9.01 through 9.03.
9.05 If, after the Closing Date, Thomas H. Bailey dies or becomes
disabled, or if his employment by JCC is terminated by the Board of Directors
of JCC other than for cause (as hereinafter defined), Mr. Bailey (or his
personal representative if he is deceased or legally incompetent) shall sell,
and KCSI shall purchase all of Mr. Bailey's JCC Shares not theretofore
purchased by KCSI at a price equal to fifteen times the Net After-Tax
Earnings per share of JCC for the fiscal year ended immediately prior to the
date of such death, disability or termination, except that if such date is
before October 31, 1985, the price shall be $1.6373 per share.
9.06 Thomas H. Bailey hereby agrees that he will continue to serve as
the chief executive officer of JCC at least until October 31, 1987. If,
notwithstanding such agreement, Mr. Bailey terminates his employment by JCC
prior to October 31, 1987, or if his employment is terminated by the Board of
Directors of JCC for cause, KCSI is hereby granted an option, which KCSI may
exercise at any time within 120 days following such termination, to purchase
all of Mr. Bailey's JCC Shares at a price equal to fifteen times the Net
After-Tax Earnings per share of JCC for the fiscal year ended immediately
prior to the date of such termination of employment, except that if such date
is before October 31, 1985, the price shall be $1.6373 per share. Such option
may be exercised by written notice to Mr. Bailey within such 120-day period
and upon such exercise Mr. Bailey shall promptly sell and deliver such shares
to KCSI as provided in this paragraph 9.06.
9.07 If, after October 31, 1987, Thomas H. Bailey desires to sell or
otherwise dispose of any of his remaining JCC Shares, he shall notify KCSI
of such desire, stating the number of shares he desires to sell and he shall
thereupon be obligated to sell and KCSI shall be obligated to purchase the
specified shares at a price equal to fifteen times the Net After-Tax Earnings
per share of JCC for the fiscal year ended immediately prior to the date of
such notice.
9.08 For purposes of paragraphs 9.05 and 9.06, "cause" for terminating
the employment of Thomas H. Bailey shall be his failure or refusal to perform
the responsibilities of the chief executive officer of JCC as reasonably
prescribed by the Board of Directors of JCC, and the continuation of such
failure or refusal for 30 days after written notice to him by the Board of
Directors of JCC specifying the nature of such failure. Performance of his
responsibilities in a manner substantially similar to the manner in which Mr.
Bailey has performed those responsibilities prior to the date of this
Agreement shall not constitute "cause" for his termination, nor shall his
absence by reason of illness nor a leave of absence or sabbatical for a
period of up to one year that has been approved by the Board of Directors of
JCC constitute such "cause."
9.09 If Michael Stolper dies, or becomes disabled, or if Thomas H.
Bailey disposes of all of his JCC Shares or if his employment by JCC is
terminated for any reason, the JCC Shares held by Michael Stolper shall be
offered first to any designated employee or employees of JCC and the other
Shareholders of JCC, then to JCC, and finally to KCSI, under the procedures
and at the price provided for in paragraphs 9.01 to 9.03.
9.10 JCC shall be permitted in the discretion of its Board of
Directors after the Closing Date to designate an employee or employees, other
than Thomas H. Bailey, to be eligible to purchase a specified amount of any
JCC Shares offered pursuant to paragraphs 9.01, 9.04 or 9.09. JCC shall also
be permitted, in the discretion of its Board of Directors to sell to its
employees, other than Thomas H. Bailey, any JCC Shares acquired by JCC
pursuant to this Article IX, at a price no less than the price at which it
acquired such shares, on such terms as the Board of Directors of JCC may deem
appropriate. Each such JCC employee so purchasing any JCC Shares shall
thereafter (subject to the provisions of paragraph 9.12) be deemed to be a
Shareholder of JCC, with the same restrictions on transfer of his JCC Shares
and entitled to the same rights and obligations as the Remaining Shareholders
of JCC under the provisions of this Article IX, and shall be required at the
time of purchase to sign a written agreement to that effect.
9.11 During such time as any Remaining Shareholder of JCC holds any
JCC Shares, neither KCSI nor any of the Remaining Shareholders of JCC shall
cause JCC to transfer or otherwise dispose of any JCC Shares held by JCC to
anyone other than KCSI, the Remaining Shareholders of JCC, or JCC's
employees, in accordance with the provisions of this Agreement.
9.12 At such time as any Shareholder of JCC no longer holds any shares
of JCC, he shall cease to be a Shareholder of JCC with the rights and
obligations conferred upon Shareholders of JCC by the provisions of this
Article IX and Article X.
9.13 The closing of any purchase of JCC Shares made pursuant to this
Article IX shall take place as the parties to such sale may agree, within
thirty days after the date of acceptance of an offer to sell, the exercise of
an option to purchase, or the incurring of an obligation to purchase,
pursuant to this Article IX. At each such closing, the selling Shareholders
of JCC shall deliver certificates representing the JCC Shares being sold and
KCSI shall deliver payment for such shares in the manner provided in
paragraph 3.02.
9.14 No purchase by KCSI pursuant to the provisions of this Article IX
shall in any way affect the obligation and right of KCSI to purchase JCC
Shares from the Shareholders of JCC or their permitted purchasers under
paragraphs 9.01 and 9.02 in accordance with the provisions of Article I.
9.15 If after KCSI acquires 80% or more of the JCC Shares, KCSI
determines to sell all of its shares of JCC for cash, stock or other
consideration, the then owners of the JCC Shares not owned by KCSI shall at
KCSI's request, sell their shares of JCC to KCSI or to KCSI's designee at the
price which shall be the greater of $1.6373 per share, fifteen times the Net
After-Tax Earnings per share of JCC for the fiscal year immediately preceding
the year of such sale or the consideration to be received by KCSI in such
transaction, such sale to occur at such time and place and in such manner as
KCSI shall reasonably request.
ARTICLE X
ADVERSE CHANGE IN OWNERSHIP OF KCSI
10.01 If, after the Closing Date but prior to the time that KCSI owns
80% of the JCC Shares, there is an adverse change in ownership of KCSI (as
hereinafter defined), the Remaining Shareholders of JCC other than KCSI shall
have the option in the manner provided in this Article X either:
(a) to purchase from KCSI all JCC Shares acquired by KCSI; or
(b) to require KCSI to purchase from them all the JCC Shares
still owned by them, provided the condition precedent contained in paragraph
8.10 of this Agreement shall be met or waived by KCSI prior to such purchase.
10.02 Any sale of JCC Shares which occurs pursuant to this Article X
shall be at a price per share equal to fifteen times the Net After-Tax
Earnings per share of JCC for the fiscal year ending immediately after the
adverse change in ownership giving rise to such sale, or $1.6373, whichever
is greater.
10.03 If notice is served upon KCSI in accordance with paragraph 10.05
that the holders of a majority of the JCC Shares other than KCSI desire to
purchase shares from KCSI pursuant to paragraph 10.01(a), KCSI shall sell to
the JCC Shareholders, and the JCC Shareholders shall purchase from KCSI, all
of KCSI's JCC Shares on a pro rata basis according to the proportion that
each such purchasing Shareholder's holding in JCC bears to all such
purchasing Shareholders' holdings in JCC. Any JCC Shareholder who does not
purchase from KCSI his pro rata portion of KCSI's JCC Shares in accordance
with this paragraph shall sell all his JCC Shares to the other Shareholders
of JCC other than KCSI and such other Shareholders of JCC shall purchase such
JCC Shares of such JCC Shareholder and of KCSI on the same pro rata basis.
Until KCSI has acquired the JCC Shares to be acquired pursuant to Article I,
KCSI shall not transfer, dispose of, or in any way encumber any JCC Shares
acquired by it in any manner which would prevent it from complying with a
notice served under this paragraph 10.03.
10.04 If notice is served upon KCSI in accordance with paragraph 10.05
that the holders of a majority of the JCC Shares other than KCSI desire to
sell to KCSI in accordance with paragraph 10.01(b), KCSI shall purchase from
the Shareholders of JCC, and each such other Shareholder of JCC shall sell to
KCSI, any and all JCC Shares not owned by KCSI.
10.05 Written notice of a purchase or sale to occur pursuant to
paragraph 10.03 or 10.04 shall have been received by KCSI no more than six
months after the JCC Shareholders are notified by KCSI of the change in
ownership of KCSI. Such notice shall be signed by the holders of a majority
of the JCC Shares held by other than KCSI and shall state the date upon which
the Shareholders of JCC were notified by KCSI of the change in ownership.
10.06 For purposes of this Article X, "adverse change in ownership of
KCSI" shall mean a transfer of 25% or more of KCSI's voting stock outstanding
at the time of such transfer to one person, or to an identifiable group of
persons acting in concert, not presently controlling KCSI, which in the
reasonable judgment of the holders of a majority of the JCC Shares held at
that time by other than KCSI will have an adverse effect upon JCC or its
operations.
10.07 The closing of any purchase or sale of JCC Shares to occur
pursuant to this Article X shall take place as the parties to such purchase
or sale may agree, within 30 days of the date upon which KCSI receives notice
of the purchase or sale in accordance with paragraph 10.05, or within 30 days
after the date upon which the applicable Net After-Tax Earnings of JCC shall
be determined, whichever is later. At any such closing, the Remaining
Shareholders of JCC shall deliver certificates representing the JCC Shares
being sold and KCSI shall deliver payment for such shares, or vice versa as
the case may be, in the manner provided in paragraph 3.02.
ARTICLE XI
CONTINUITY OF MANAGEMENT
11.01 The parties hereto have agreed that the present management of JCC
shall continue to operate the business of JCC, including the business of JMC
prior to the merger of JMC into JCC, of providing investment advice and
management services to Janus Fund, as hereinafter provided. So long as Thomas
H. Bailey is a holder of at least 5% of the shares of JCC and continues to be
employed as President of JCC, (i) he shall continue to establish and
implement policy with respect to the investment advisory and portfolio
management activity of JCC, (ii) without his consent, KCSI shall not cause
JCC to implement, or impose on the management of JCC any policies, conditions
or restrictions regarding the policy referred to in (i) other than those
which were in place at November 15, 1983, and (iii) any changes in management
philosophy, style or approach influencing the management of JCC with respect
to the policy referred to in (i) shall be mutually agreed to by him and by
KCSI. In furtherance of this objective, so long as Thomas H. Bailey is a
holder of at least 5% of the shares of JCC and continues to be employed as
President of JCC, KCSI agrees to vote its JCC Shares to elect directors of
JCC, at least a majority of whom shall be selected by Thomas H. Bailey,
subject to KCSI's approval, which approval shall not be unreasonably
withheld. Immediately following the merger provided for in paragraph 1.07 the
Board of Directors of JCC shall consist of the persons whose names appear on
Exhibit 11.01 attached hereto. Each of the preceding provisions set forth in
this paragraph is expressly conditioned, however, upon such management and
Thomas H. Bailey continuing to perform their respective duties with
reasonable care and in a manner which is consistent with past practice and
not contrary to the best interests of JCC.
ARTICLE XII
DISTRIBUTION OF DIVIDENDS
12.01 So long as there are shareholders of JCC other than KCSI, KCSI
shall cause JCC, within four months after the end of each fiscal year of JCC,
to declare and distribute dividends to the shareholders of JCC (including
KCSI) in an amount equal to 90% of the Net After-Tax Earnings of JCC for each
such fiscal year. The record date for such dividends for the fiscal years
ended October 31, 1985, 1986, and 1987 shall be immediately prior to the date
that the purchases of JCC Shares by KCSI pursuant to paragraphs 1.03, 1.04
and 1.05, respectively, are made.
ARTICLE XIII
CONFIDENTIAL TREATMENT OF INFORMATION
13.01 Until the Closing Date, KCSI shall hold in strict confidence all
confidential information of whatever type or form which it obtains concerning
JCC, JMC or Janus Fund, and shall not use or disclose such information to
anyone other than such officers, employees and representatives of JCC and
KCSI as may be necessary or advisable to reasonably fulfill the purposes of
this Agreement, except as such information was public knowledge at the time
it was obtained, or became public knowledge thereafter other than by a breach
of this provision by KCSI, and except as may be necessary or advisable in
connection with the application for approvals or rulings from, or filing
reports or tax returns with, such governmental authorities as KCSI deems
necessary or advisable.
13.02 If for any reason the purchase of shares of JMC and JCC provided
for in paragraph 1.01 does not occur on or before June 30, 1984, or such
later date to which the Closing Date may be extended pursuant to paragraph
3.01, or if before KCSI acquires the JCC Shares to be acquired under Article
I, the Shareholders of JCC elect to repurchase the JCC Shares pursuant to
Article X, KCSI shall cause all confidential information concerning JCC, JMC
or Janus Fund of whatever type or form obtained in connection with the
negotiation and performance of this Agreement, which information was not
public knowledge at the time it was obtained by KCSI, or became public
knowledge thereafter other than by a breach of this provision by KCSI, to
continue being treated confidentially, as provided in paragraph 13.01, and to
the extent practicable, shall cause all copies of documents containing such
information to be returned to JCC, and KCSI shall not use, or knowingly
permit others to use, any such information in any manner.
ARTICLE XIV
COVENANT OF NON-SOLICITATION
14.01 Simultaneously with the purchase of shares of JMC and JCC by KCSI
provided for in paragraph 1.01, Thomas H. Bailey shall execute and deliver to
KCSI a covenant of non-solicitation, by which shall be prohibited, for a
period of one year from the date of his notice of termination from the
employment of JCC, from soliciting any client who has an account being
managed or advised by JCC at the date of his notice of termination, other
than the Taurus Partnership and the Cerberus Partnership; provided that, if
such notice of termination is given before October 31, 1987 such prohibition
shall be for a period of three years or until that date which shall be 1 year
after October 31, 1987, whichever is sooner. Such covenant of nonsolicitation
shall not apply in the event that Mr. Bailey's employment by JCC is
terminated concurrently with or following a notice to KCSI pursuant to
paragraph 10.05 hereof of a purchase of KCSI's JCC Shares pursuant to
paragraph 10.01(a).
ARTICLE XV
NO UNFAIR BURDEN ON FUND
15.01 KCSI and the Shareholders of JCC shall not impose, and shall not
cause or permit JCC to impose, any unfair burden upon Janus Fund as a result
of the transactions contemplated herein, or any expressed or implied terms,
conditions, or understandings applicable thereto, and specifically shall not
cause or permit any arrangement, during the two-year period after the Closing
Date, whereby JCC or any interested person of JCC (as that term is defined in
the Investment Company Act of 1940) receives or is entitled to receive any
compensation directly or indirectly
(i) from any person in connection with the purchase or sale of
securities or other property to, from, or on behalf of Janus
Fund, other than bona fide ordinary compensation as principal
underwriter for such company; or
(ii) from Janus Fund or its security holders for other than bona fide
investment advisory or other services;
ARTICLE XVI
TERMINATION
16.01 This Agreement may be terminated at or at any time prior to the
Closing Date as follows: (i) by mutual consent of the Shareholders of JCC
and.KCSI; (ii) by KCSI or the Shareholders of JCC, respectively, if, upon the
Closing Date, any condition precedent to closing set forth herein for the
benefit of KCSI or the Shareholders of JCC, respectively, shall not have been
timely met; (iii) by KCSI or the Shareholders of JCC if the Closing shall not
have occurred on or before June 30, 1984, or such later date as may have been
agreed upon by KCSI and the Shareholders of JCC; or (iv) by KCSI or the
Shareholders of JCC, respectively, if a material representation or warranty
made herein for the benefit of KCSI or the Shareholders of JCC, respectively,
or in any certificate, schedule or document furnished to KCSI or the
Shareholders of JCC, respectively, pursuant to this Agreement is untrue in
any material respect, or KCSI or the Shareholders of JCC, respectively, shall
have defaulted in material respect in the performance of any material
obligations of this Agreement.
16.02 Upon termination of this Agreement pursuant to paragraph 16.01,
no party shall have any liability or obligation hereunder (except to observe
the confidentiality of information provisions hereof), and each party shall
bear the expenses incurred by it.
ARTICLE XVII
ESCROW AND INDEMNITY
17.01 William C. Mangus agrees to deposit in escrow with Investors
Fiduciary Trust Company, 1006 Baltimore Avenue, Kansas City, Missouri, the
sum of $250,000 to secure his obligations, if any, which may arise with
respect to the litigation referred to in paragraph 6.10, such escrow to be
pursuant to a written escrow agreement acceptable to William C. Mangus and
KCSI which is executed and delivered at the Closing Date.
17.02 The Shareholders of JCC hereby indemnify and hold harmless KCSI
from and against any and all liability, cost, loss and expense of any kind
whatsoever, including but not limited to liability for any taxes, incurred by
KCSI which it would not have incurred had KCSI not become a shareholder of
JMC or JCC prior to the merger of JMC into JCC. The provisions of this
paragraph 17.02 shall survive execution, delivery and performance of this
Stock Purchase Agreement.
17.03 JCC shall recommend to the Janus Fund that Janus Fund undertake
to make offers of rescission to all persons who purchased shares of the Janus
Fund prior to the date of this Agreement pursuant to offers made in states
where such shares were not registered for sale and the Closing shall not
occur prior to substantial completion of such rescission offers and
expiration of applicable waiting periods with respect thereto.
ARTICLE XVIII
MISCELLANEOUS
18.01 All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to have been fully
given if delivered or mailed, first class, postage prepaid, to the following
addresses:
(a) If to KCSI:
Kansas City Southern Industries, Inc.
114 West Eleventh Street
Kansas City, Missouri 64105
cc: John F. Marvin, Esq.
Watson, Ess, Marshall & Enggas
15th Floor, 1006 Grand Avenue
Kansas City, Missouri 64106
(b) If to the Shareholders of JCC:
Janus Capital Corporation
100 Fillmore Street, Suite 300
Denver, Colorado 80206
cc: Lester R. Woodward, Esq.
Davis, Graham & Stubbs
2600 Colorado National Building
Post Office Box 185
Denver, Colorado 80201
or to any other address or addresses as may hereafter be specified by notice
given by any of the above for itself to the others.
18.02 Each party shall bear its own expenses and costs, including the
fees of any attorney retained by it, incurred in connection with the
preparation of this Agreement and the consummation of the transactions
contemplated hereby.
18.03 This Agreement shall not be assignable by any of the parties
hereto. This Agreement shall inure to the benefit of and be binding upon the
parties hereto and their respective heirs and successors. Nothing in this
Agreement is intended to confer, expressly or by implication, upon any person
who is not a party or who does not become a party as permitted herein any
rights or remedies under or by reason of this Agreement.
18.04 This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of Colorado.
18.05 This Agreement may be executed simultaneously in one or more
counterparts, each of which shall be deemed an original.
18.06 KCSI and the Shareholders of JCC agree that the content and
timing of press releases and other announcements with respect to this
Agreement shall be subject to mutual agreement, provided, however, that such
agreement shall not prohibit either party from furnishing any information to
any governmental, regulatory or administrative agency or authority or from
making any other disclosure required by applicable law.
18.07 This Agreement, any exhibits hereto and the documents delivered
pursuant hereto or referred to herein contain the entire Agreement among the
parties with respect to the transactions contemplated among them and, except
as otherwise provided, supercede all previous negotiations, commitments and
writings.
18.08 No alteration, modification or change of this Agreement shall be
valid unless made in writing executed by the parties hereto. No failure or
delay by any party hereto in exercising any right, power or privilege
hereunder (and no course of dealing between or among any of the parties)
shall operate as a waiver of any right, power or privilege. No waiver of any
default on any one occasion shall constitute a waiver of any subsequent or
other default. No single or partial exercise of any right, power or privilege
shall preclude the further or full exercise thereof.
18.09 The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation
of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By: /s/ Landon H. Rowland
--------------------------------
LANDON H. ROWLAND, PRESIDENT
/s/ Thomas H. Bailey
-----------------------------------
THOMAS H. BAILEY
/s/ William C. Mangus
-----------------------------------
WILLIAM C. MANGUS
/s/ Bernard E. Niedermeyer III
-----------------------------------
BERNARD E. NIEDERMEYER III
/s/ Michael Stolper
-----------------------------------
MICHAEL STOLPER
/s/ Jack R. Thompson
-----------------------------------
JACK R. THOMPSON
AMENDMENT TO STOCK PURCHASE AGREEMENT
THIS AMENDMENT to Stock Purchase Agreement, dated as of January
4, 1985, by and among KANSAS CITY SOUTHERN INDUSTRIES, INC., a Delaware
corporation ("KCSI"), and THOMAS H. BAILEY, BERNARD E. NIEDERMEYER III,
MICHAEL STOLPER, and JACK R. THOMPSON, individuals (the "Selling Shareholders
of JCC").
WHEREAS, on April 13, 1984, the parties hereto (with the addition
of WILLIAM C. MANGUS) entered into a Stock Purchase Agreement (the
"Agreement") whereby, under the terms and conditions thereof, KCSI agreed to
purchase certain stock interests in Janus Capital Corporation (the "JCC
Shares");
WHEREAS, on January 4, 1985, the parties hereto entered into a
certain letter agreement (the "Letter Agreement") modifying the Agreement to
permit KCSI to acquire, as of December 31, 1984, additional JCC Shares from
the Selling Shareholders of JCC, such that KCSI holds 80% of the outstanding
capital stock of Janus Capital; and
WHEREAS, the parties desire to amend the Agreement as set forth
below in order to implement the terms of the Letter Agreement.
NOW, THEREFORE, in exchange for good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties
hereto agree as follows:
1. Paragraphs 1.03 through 1.05 of the Agreement are hereby
deleted in their entirety, and the following are substituted in their place:
1.03 As of December 31, 1984, KCSI shall
purchase and each of the Shareholders of JCC other
than William C. Mangus (the "Remaining Shareholders
of JCC") shall sell, convey, assign, transfer and
deliver to KCSI, free and clear of all liens and
encumbrances, a total of 1,283,680 shares of JCC, in
the proportions specified below:
NAME OF SELLER NO. OF SHARES SOLD
-------------- ------------------
Thomas H. Bailey 1,159,933
Bernard E. Niedermeyer III 53,658
Michael Stolper 70,089
Jack R. Thompson -0-
1.04 Payment for the JCC Shares purchased by KCSI
pursuant to paragraph 1.03 shall be made on an
installment basis, as follows: As soon after each of
December 31, 1985, 1986 and 1987 as the amount of Net
After-Tax Earnings of JCC for each of the fiscal
years then ended has been determined as provided in
paragraph 2.04, but not later than 30 days after the
date of each such determination, KCSI shall deliver
to each of the Selling Shareholders of JCC a
certified or bank check in an amount equal to the sum
of (i) a principal payment in the amount of fifteen
times the Net After-Tax Earnings per share of JCC
times a number equal to one-third the number of
shares sold by each such Shareholder of JCC in
accordance with paragraph 1.03, and (ii) an amount
equal to interest computed at a rate of 14.75% per
annum from the later of January 1, 1985 or the date
of the last previous installment payment on the total
principal amount of the obligation outstanding at the
date of such payment (calculated by adding the
principal amount due at such installment as
calculated above, plus the principal amount that
would be due in future installments if the Net
After-Tax Earnings of JCC is unchanged at the time
that future principal payments are calculated).
The interest payable with respect to each
principal payment shall be based upon the actual
amount of such principal payment, although with
respect to the second and third installments, the
interest payable before the principal payment is
calculated can only be estimated as provided above.
At the time of the second and third installment
payments provided for hereby, an adjustment shall be
made for any overpayment or underpayment of interest
in the previous year or years with respect to that
principal payment, which has occurred as a result of
the Net After-Tax Earnings of JCC for the then
current year not being the same as for the previous
year, as was assumed in the previous year's interest
calculation."
2. Paragraph 3.03 of the Agreement is hereby deleted in its
entirety.
3. As soon as practicable after the date hereof, the Selling
Shareholders of JCC shall deliver to KCSI certificates representing the JCC
Shares sold pursuant to paragraph 1.03 of the Agreement, as revised.
4. The Selling Shareholders of JCC hereby represent and
warrant to KCSI the matters contained in paragraph 5.01 of the Agreement as
if such representations and warranties were herein restated in their entirety
with respect to the sale of JCC Shares provided for in paragraph 1.03 of the
Agreement, as revised.
5. For purposes of the sale of JCC Shares pursuant to
paragraph 1.03, as revised, KCSI and each of the Selling JCC Shareholders
hereby waives any right of first refusal it or he may have pursuant to
paragraph 9.01 of the Agreement.
6. Paragraph 9.15 of the Agreement is hereby deleted in its
entirety, and the following is substituted in its place:
"9.15 If after March 1, 1988, KCSI determines
to sell all of its shares of JCC for cash, stock or
other consideration, the then owners of the JCC
Shares not owned by KCSI shall at KCSI's request,
sell their shares of JCC to KCSI or to KCSI's
designee at the price which shall be the greater of
$1.6373 per share, fifteen times the Net After-Tax
Earnings per share of JCC for the fiscal year
immediately preceding the year of such sale or the
consideration to be received by KCSI in such
transaction, such sale to occur at such time and
place and in such manner as KCSI shall reasonably
request."
7. Paragraph 10.01 of the Agreement is hereby deleted in its
entirety, and the following is substituted in its place:
"10.01 If, after the Closing Date but prior to
March 1, 1988, there is an adverse change in
ownership of KCSI (as hereinafter defined), the
Remaining Shareholders of JCC other than KCSI shall
have the option in the manner provided in this
Article X either:
(a) to purchase from KCSI all JCC Shares
acquired by KCSI; or
(b) to require KCSI to purchase from them all
the JCC Shares still owned by them, provided the
condition precedent contained in paragraph 8.10 of
this Agreement shall be met or waived by KCSI prior
to such purchase."
8. The second sentence of paragraph 12.01 of the Agreement is
hereby deleted in its entirety.
9. All terms and provisions of the Agreement not hereby
amended shall remain in full force and effect.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By: /s/ Landon H. Rowland
-----------------------------------
President
/s/ Thomas H. Bailey
----------------------------------------
THOMAS H. BAILEY
/s/ Bernard E. Niedermeyer III
----------------------------------------
BERNARD E. NIEDERMEYER III
/s/ Michael Stolper
----------------------------------------
MICHAEL STOLPER
/s/ Jack R. Thompson
----------------------------------------
JACK R. THOMPSON
SECOND AMENDMENT TO
STOCK PURCHASE AGREEMENT
THIS SECOND AMENDMENT TO STOCK PURCHASE AGREEMENT ("SECOND AMENDMENT")
is executed this 18th day of March, 1988, by and among KANSAS CITY SOUTHERN
INDUSTRIES, INC., a Delaware corporation ("KCSI"), THOMAS H. BAILEY, MICHAEL
STOLPER, and JACK R. THOMPSON, individually.
RECITALS:
A. The undersigned (with the addition of WILLIAM C. MANGUS and
BERNARD E. NIEDERMEYER III) are all parties to that certain Stock Purchase
Agreement, dated April 13, 1984, as amended by that certain First Amendment
to Stock Purchase Agreement, dated January 4, 1985 (the "STOCK PURCHASE
AGREEMENT");
B. The parties now desire to amend the Stock Purchase Agreement, as
provided for herein in order to more clearly set forth their respective
rights, duties, and obligations; and
C. The parties desire to set forth such amendments in writing.
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein set forth, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree to hereby
amend the Stock Purchase Agreement as follows:
1. The parties hereby consent and agree to the deletion of Paragraph
9.07 from Article IX of the Stock Purchase Agreement, and the addition of the
following Paragraph 9.07 to Article IX of the Stock Purchase Agreement in
full substitution therefor:
9.07. If Thomas H. Bailey desires to sell or
otherwise dispose of his remaining JCC Shares, he
shall notify KCSI of such desire, stating the number
of Shares he desires to sell and he shall thereupon
be obligated to sell and KCSI shall be obligated to
purchase the specified Shares at a price equal to the
greater of:
(a) 15 times the Net After-Tax Earnings per
Share of JCC for the fiscal year ended December 31,
1987; or
(b) 15 times the Net After-Tax Earnings per
Share of JCC for the fiscal year ended immediately
prior to the date of such notice.
2. The parties hereby consent and agree to the deletion of Paragraph
9.09 from Article IX of the Stock Purchase Agreement and the addition of the
following Paragraph 9.09 to Article IX of the Stock Purchase Agreement in
full substitution therefor:
9.09. If Michael Stolper dies, or become
disabled, or if Thomas H. Bailey disposes of all of
his JCC Shares, or if his employment by JCC is
terminated for any reason, Michael Stolper and Jack
R. Thompson shall thereupon be obligated to sell, and
KCSI shall be obligated to purchase all of the JCC
Shares owned by Michael Stolper and Jack R. Thompson
at a price equal to the greater of:
(a) 15 times the Net After-Tax Earnings per
Share of JCC for the fiscal year ended December 31,
1987; or
(b) 15 times the Net After-Tax Earnings per
Share of JCC for the fiscal year ended immediately
prior to the date of such death, disability,
disposition or termination.
3. The parties hereby consent and agree to delete the word "Adverse"
from the caption of Article X of the Stock Purchase Agreement, and hereby
further consent and agree to the deletion of Paragraph 10.01 from Article X
of the Stock Purchase Agreement and the addition of the following Paragraph
10.01 to Article X of the Stock Purchase Agreement in full substitution
therefor:
10.01. If there is a Change in Ownership of KCSI (as
hereinafter defined), the Remaining Shareholders of JCC, other
than KCSI, shall have the option in the manner provided in this
Article X either:
(a) to purchase from KCSI all JCC Shares
acquired by KCSI; or
(b) to require KCSI to purchase from them all
the JCC Shares still owned by them, provided the
condition precedent contained in Paragraph 8.10 of
this Agreement shall be met or waived by KCSI prior
to such purchase.
4. The parties hereby consent and agree to the deletion of Paragraph
10.02 from Article X of the Stock Purchase Agreement and the addition of the
following Paragraph 10.02 to Article X of the Stock Purchase Agreement in
full substitution therefor:
10.02. Any sale of JCC Shares which occurs pursuant to
this Article X shall be at a price per Share equal to:
(a) 15 times the Net After-Tax Earnings per
Share of JCC for the fiscal year ending immediately
after the Change in Ownership giving rise to such
sale; or
(b) as otherwise negotiated between the
parties.
5. The parties hereby consent and agree to the deletion of Paragraph
10.06 from Article X of the Stock Purchase Agreement and the addition of the
following Paragraph 10.06 to Article X of the Stock Purchase Agreement in
full substitution therefor:
10.06. For purposes of this Article X and elsewhere in
this Agreement, the term "CHANGE IN OWNERSHIP" shall mean the
earlier to occur of the following:
(a) less than 75% of the members of the Board
of Directors of KCSI shall be individuals who were
members of the Board on the date of this Amendment or
individuals whose election, or nomination for
election by KCSI's stockholders, was approved by a
vote of at least 75% of the members of the Board then
still in office who were members of the Board on the
date of this Amendment; or
(b) any "person" (as such term is used in
Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934 (the "EXCHANGE ACT")) shall have
become, without the prior approval of at least 75% of
the members of the Board of Directors of KCSI then
still in office who were members of such Board on the
date of this Amendment, the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of
securities of KCSI representing 25% or more
(calculated in accordance with Rule 13d-3) of the
combined voting power of KCSI's then outstanding
voting securities, and such person shall have filed a
proxy statement, or tender offer materials, or any
other statement or schedule with the Securities
Exchange Commission, indicating an intention to
acquire control of KCSI.
6. The parties hereby consent and agree to the addition of the
following Paragraph 12.02 to Article XII of the Stock Purchase Agreement.
12.02. Notwithstanding anything to the contrary in
Paragraph 12.01 of this Agreement, in the event that the
Shareholders of JCC, other than KCSI, exercise any provision of
this Agreement whereunder such persons' JCC Shares are acquired
by JCC or KCSI, KCSI shall cause JCC to distribute dividends to
the Shareholders of JCC, other than KCSI, in accordance with
Paragraph 12.01 of this Agreement, prorated to the date of the
acquisition of such persons' JCC's Shares (using the prior
year's dividend rate).
7. The parties hereby consent and agree to the deletion of Article
XIV from the Stock Purchase Agreement and the addition of the following
Article XIV to the Stock Purchase Agreement in full substitution therefor:
ARTICLE XIV
COMPENSATION UPON TERMINATION
14.01. The parties hereto agree that if the employment by
JCC of those persons listed in Paragraph 14.02, or any of them,
is terminated for any reason, such terminated employee shall
receive from JCC and/or by KCSI (KCSI hereby guaranteeing any
obligation of JCC) a payment equal to the amounts as set forth in
Paragraph 14.02 as of the date he received notice of his
termination. Such payment shall be made in a lump sum not later
than thirty (30) days after his receipt of notice of termination.
14.02. If any person listed in this Paragraph 14.02 is
terminated as provided in Paragraph 14.01, he shall be
compensated as follows:
(a) if Thomas H. Bailey, Thomas F. Marsico,
James P. Craig, III, Jack R. Thompson, or Michael E.
McGoldrick is such terminated employee, he shall
receive payment equal to 100% of his prior year's
current and deferred compensation, including salary,
bonuses and profit sharing contributions.
(b) if Susan R. Hughes or Kathleen A. Burns
is such terminated employee, she shall receive
payment equal to 50% of her prior year's current and
deferred compensation, including salary, bonuses and
profit sharing contributions.
(c) if Warren B. Lammert or Helen Y. Hayes is
such terminated employee, he or she shall receive
payment equal to 25% of his or her prior year's
current and deferred compensation, including salary,
bonuses and profit sharing contributions.
14.03. Notwithstanding Paragraphs 14.01 and 14.02, the
payments provided for in such Paragraphs 14.01 and 14.02 shall
only be made on the event of the following:
(a) a Change in Ownership;
(b) termination occurs within one (1) year
from the date of the Change in Ownership; and
(c) Thomas H. Bailey does not terminate such
person.
14.04. The Covenant of Non-Solicitation dated June 14,
1984, executed by Thomas H. Bailey, attached hereto as Exhibit A,
shall remain in full force and effect in accordance with its
terms, except that the provison in the second paragraph thereof
shall be deleted, as noted in Exhibit A.
8. The parties hereby consent and agree to the addition of the
following Paragraphs 18.10 and 18.11 to Article XVIII of the Stock Purchase
Agreement:
18.10. On or before the 10th day following any Change of
Ownership (as defined in Paragraph 10.06 of the Agreement), KCSI
shall deliver to Thomas H. Bailey as representative of the
Remaining Shareholders of JCC, other than KCSI, a clean
irrevocable Letter of Credit (in form and substance acceptable to
Thomas H. Bailey) drawn on a financial institution acceptable to
Thomas H. Bailey in the amount of 110% of the greatest of the
total amounts which would be due under this Agreement to Thomas
H. Bailey, any employee of JCC, and/or the Remaining Shareholders
of JCC, other than KCSI, if the provisions of this Agreement were
exercised by such persons, as applicable, in order to secure
payment to such persons under the applicable provisions of this
Agreement. Such Letter of Credit shall be maintained by KCSI at
its sole cost and expense for a period ending on the earlier to
occur of the following:
(a) the date that is one (1) year from the
date such Letter of Credit is delivered to Thomas H.
Bailey and is accepted by him in writing, which
acceptance will not be unreasonably withheld;
(b) the date that such Letter of Credit is
drawn; or
(c) the date that all payments due to Thomas
H. Bailey, those employees of JCC entitled to
payments, and all Remaining Shareholders of JCC,
other than KCSI, have been made in full under any
applicable provisions of this Agreement.
18.11. In the event that the Letter of Credit provided for
in Paragraph 18.10 of this Agreement is not timely delivered, and
subsequently KCSI defaults in its obligations to Thomas H.
Bailey, employees of JCC entitled to payments under this
Agreement, and the Remaining Shareholders of JCC, other than
KCSI, or any of them, KCSI shall be liable for and shall pay to
such persons as liquidated damages an amount equal to two (2)
times the amount determined to be owing to such persons under the
applicable provisions of this Agreement. The parties hereby
acknowledge that in the event of such default by KCSI, Thomas H.
Bailey, the employees of JCC, and the remaining Shareholders of
JCC, other than KCSI, will suffer substantial damages, the
amount of which cannot be reasonably ascertained. Therefore, the
parties agree that the amount of liquidated damages set forth
above is fair and equitable.
9. Except as expressly amended herein, the Stock Purchase Agreement
shall remain in full force and effect.
10. If any conflict shall arise between the terms and conditions of
this Second Amendment and the terms and conditions of the Stock Purchase
Agreement, this Second Amendment shall govern with respect to the matters
described herein.
IN WITNESS WHEREOF, the parties have executed this Second Amendment on
the date and year first above written.
"KCSI"
KANSAS CITY SOUTHERN INDUSTRIES, INC.,
a Delaware corporation
By: /s/ Landon H. Rowland
-----------------------------------
LANDON H. ROWLAND, PRESIDENT
/s/ Thomas H. Bailey
-----------------------------------
THOMAS H. BAILEY
/s/ Bernard E. Niedermeyer III
-----------------------------------
BERNARD E. NIEDERMEYER III
/s/ Michael Stolper
-----------------------------------
MICHAEL STOLPER
/s/ Jack R. Thompson
-----------------------------------
JACK R. THOMPSON
THIRD AMENDMENT TO STOCK PURCHASE AGREEMENT
This Third Amendment to Stock Purchase Agreement ("Third Amendment") is
executed this 5th day of February 1990, by and among Kansas City Southern
Industries, Inc., a Delaware corporation ("KCSI"), Thomas H. Bailey, Michael
Stolper and Jack R. Thompson, individually.
RECITALS:
A. The undersigned (with the addition of William C. Mangus and
Bernard E. Niedermeyer III) are all parties to that certain Stock Purchase
Agreement, dated April 13, 1984, as amended by that certain First Amendment
to Stock Purchase Agreement, dated January 4, 1985 and that certain Second
Amendment to Stock Purchase Agreement, dated March 18, 1988 (the "Stock
Purchase Agreement");
B. The parties now desire to amend further the Stock Purchase
Agreement, as provided for herein in order to more clearly set forth their
respective rights, duties and obligations.
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties agree to hereby amend the Stock
Purchase Agreement as follows:
1. The parties hereby consent and agree to the deletion of Paragraph
9.15 from Article IX of the Stock Purchase Agreement, and the addition of the
following paragraph 9.15 to Article IX of the Stock Purchase Agreement in
full substitution therefor:
9.15 If KCSI determines to sell all of its shares of JCC for
cash, stock or other consideration, the then owners of the JCC Shares
not owned by KCSI shall at KCSI's request, sell their shares of JCC to
KCSI or to KCSI's designee at the price which shall be the greater of
the following:
(a) $1.6373 per share; or
(b) Fifteen times the Net After-Tax Earnings per Share of
JCC for the fiscal year ended December 31, 1987; or
(c) Fifteen times the Net After-Tax Earnings per Share of
JCC for the fiscal year ended immediately prior to the date of
such sale; or
(d) The per share consideration to be received by KCSI in
such transaction.
Such sale shall occur at such time and place and in such manner
as KCSI shall reasonably request.
2. Except as expressly amended herein, the Stock Purchase Agreement
shall remain in full force and effect.
3. If any conflict shall arise between the terms and conditions of
this Third Amendment and the terms and conditions of the Stock Purchase
Agreement, this Third Amendment shall govern with respect to the matters
described herein.
IN WITNESS WHEREOF, the parties have executed this Third Amendment on
the date first above written.
KANSAS CITY SOUTHERN INDUSTRIES, INC.,
a Delaware corporation
By: /s/ Landon H. Rowland
--------------------------------
LANDON H. ROWLAND, PRESIDENT
/s/ Thomas H. Bailey
-----------------------------------
THOMAS H. BAILEY
/s/ Michael Stolper
-----------------------------------
MICHAEL STOLPER
/s/ Jack R. Thompson
-----------------------------------
JACK R. THOMPSON
FOURTH AMENDMENT TO STOCK PURCHASE AGREEMENT
This Fourth Amendment to Stock Purchase Agreement ("Fourth Amendment")
is executed as of this 1st day of January, 1991, by and among Kansas City
Southern Industries, Inc., a Delaware corporation ("KCSI"), Thomas H. Bailey,
Michael Stolper and Jack R. Thompson, individually.
RECITALS
A. The undersigned (with the addition of William C. Mangus and
Bernard E. Niedermeyer III) are all parties to that certain Stock Purchase
Agreement, dated April 13, 1984, as amended by that certain First Amendment
to Stock Purchase Agreement, dated January 4, 1985, that certain Second
Amendment to Stock Purchase Agreement, dated March 18, 1988, and that certain
Third Amendment to Stock Purchase Agreement, dated February 5, 1990
(collectively, "Stock Purchase Agreement");
B. The parties now desire to further amend the Stock Purchase
Agreement, as provided for herein in order to more clearly set forth their
respective rights, duties and obligations.
NOW, THEREFORE, in consideration of the mutual covenants herein set
forth, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree to
amend the Stock Purchase Agreement as follows:
1. The parties hereby consent and agree to the addition of the
following paragraph 2.05 to Article II of the Stock Purchase Agreement:
2.05 For the purposes of determining for any period the Net
After-Tax Earnings of JCC for all purposes under this Agreement
other than the distribution of dividends pursuant to paragraph
12.01, the Net After-Tax Earnings of JCC as otherwise determined
shall be adjusted by adding back any amounts which were deducted
from the Net After-Tax Earnings of JCC and which are attributable
to any payments or accruals made for such period for Dividend
Bonuses, Termination Bonuses, Change of Control Bonuses or
Disability Bonuses pursuant to the section entitled "Additional
Incentive Compensation" contained in the Employment Agreements
dated as of January 1, 1991 between JCC and Messrs. Thomas F.
Marsico, James P. Craig III and Jack R. Thompson (the "Employment
Agreements").
2. The parties hereby consent and agree to the revision of paragraph
12.01 to Article XII of the Stock Purchase Agreement which shall read in its
*entirety as follows:
12.01 So long as there are shareholders of JCC other than KCSI,
KCSI shall cause JCC, within four (4) months after the end of
each fiscal year of JCC, to declare and distribute dividends to
the shareholders of JCC (including KCSI) in an amount equal to
ninety percent (90%) of the Net After-Tax Earnings of JCC for
each such fiscal year. For the purpose of computing the amount of
dividends to be paid to JCC shareholders for each year, all
outstanding Share Equivalents granted to employees entitled to a
Dividend Bonus for such year pursuant to the Employment
Agreements, shall be regarded as if such Share Equivalents were
outstanding shares of stock of JCC entitled to receive dividends
at the same rate as such stock, thereby reducing proportionately
the amount of such dividends payable to JCC shareholders with
respect to JCC stock. For purposes of this Section 12.01,
notwithstanding the provisions of Section 2.05, Net After-Tax
Earnings of JCC for each such year shall include a reduction for
any accruals or payments made for such year with respect to any
Termination Bonus, Change in Control Bonus or Disability Bonus
pursuant to the Employment Agreements.
3. Section 14.02 (contained in the Second Amendment to Stock
Purchase Agreement) is hereby amended by deleting therefrom the names "Thomas
F. Marsico, James P. Craig III and Jack R. Thompson," to avoid a duplication
of benefits to such persons.
4. If any conflict shall arise between the terms and conditions of
this Fourth Amendment and the terms and conditions of the Stock Purchase
Agreement, the Fourth Amendment shall govern with respect to the matters
described herein.
5. Except as expressly amended herein, the Stock Purchase Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Fourth Amendment as
of the date first above written.
KANSAS CITY SOUTHERN INDUSTRIES, INC.,
a Delaware corporation
By: /s/ Landon H. Rowland
--------------------------------
LANDON H. ROWLAND, PRESIDENT
/s/ Thomas H. Bailey
-----------------------------------
THOMAS H. BAILEY
/s/ Michael Stolper
-----------------------------------
MICHAEL STOLPER
/s/ Jack R. Thompson
-----------------------------------
JACK R. THOMPSON
ASSIGNMENT AND ASSUMPTION AGREEMENT AND FIFTH AMENDMENT
TO STOCK PURCHASE AGREEMENT
This Assignment and Assumption Agreement and Fifth Amendment to Stock
Purchase Agreement ("Agreement") is made and entered into this 19th day of
November, 1999 by and among Kansas City Southern Industries, Inc., a Delaware
corporation ("KCSI"), Stilwell Financial, Inc., a Delaware corporation
("Stilwell") and Thomas H. Bailey and Michael Stolper, as individuals.
WHEREAS, KCSI, Thomas H. Bailey and Michael Stolper are parties to that
certain Stock Purchase Agreement dated April 13, 1984, as amended by that
certain Amendment to Stock Purchase Agreement dated January 4, 1985, that
certain Second Amendment to Stock Purchase Agreement dated March 18, 1988,
that certain Third Amendment to Stock Purchase Agreement dated February 5,
1990, and that certain Fourth Amendment to Stock Purchase Agreement dated
January 1, 1991 (collectively, "Stock Purchase Agreement");
WHEREAS, other individuals initially were also parties to the Stock
Purchase Agreement but have ceased to be shareholders of Janus Capital
Corporation ("JCC") and therefore, in accordance with paragraph 9.12 of the
Stock Purchase Agreement, no longer have any rights or obligations under the
Stock Purchase Agreement;
WHEREAS, KCSI proposes to assign the Stock Purchase Agreement to
Stilwell and Stilwell is willing to assume the obligations of KCSI under such
agreement;
WHEREAS, Thomas H. Bailey and Michael Stolper are willing to consent to
the assignment and assumption of the Stock Purchase Agreement; and
WHEREAS, the parties desire to amend the Stock Purchase Agreement as
provided herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, the parties hereby agree as follows:
1. Assignment and Assumption.
-------------------------
KCSI hereby assigns and transfers to Stilwell all of its interests in
and rights under the Stock Purchase Agreement and Stilwell hereby assumes and
agrees to be bound by, satisfy and discharge all of KCSI's obligations under
the Stock Purchase Agreement. The actions taken in the preceding sentence
hereinafter are referred to as the "Assignment".
2. Consent.
-------
Thomas H. Bailey and Michael Stolper hereby consent to the aforesaid
Assignment of the Stock Purchase Agreement.
3. Effective Date.
--------------
The Assignment of the Stock Purchase Agreement shall become effective
on the date that the Board of Directors of KCSI approves the distribution of
all or substantially all of the shares of Stilwell stock owned by KCSI to the
shareholders of KCSI and fixes a record date and distribution date for such
distribution (the "Effective Date"). The amendments to the Stock Purchase
Agreement set forth below shall become effective as of the date of this
Agreement set forth above.
4. Effect of Assignment.
--------------------
(a) The Assignment shall not constitute or result in a release of KCSI
from its obligations under the Stock Purchase Agreement, and KCSI shall
remain obligated under such agreement as a guarantor of the obligations of
Stilwell, and also shall continue to be bound by paragraph 18.06 in the same
manner as KCSI was bound thereby prior to the execution of this Agreement.
In the event that Stilwell fails to perform any obligation under the Stock
Purchase Agreement within the time fixed by such agreement, Thomas H. Bailey
or Michael Stolper may give written notice to Stilwell and KCSI of such
failure, and if such failure continues for a period of thirty days after the
giving of such notice, KCSI then shall be obligated to immediately perform
such obligation. From and after the Effective Date of the Assignment, the
obligations of KCSI under the Stock Purchase Agreement shall be solely as set
forth in this paragraph 4(a).
(b) From and after the Effective Date of the Assignment, all
references to KCSI in the Stock Purchase Agreement which involve or relate to
continuing performance obligations are hereby amended to refer instead to
Stilwell. Prior to the Effective Date of the Assignment, all references to
Stilwell in the amendments to the Stock Purchase Agreement set forth below
shall be deemed to refer to KCSI.
5. Amendment of Paragraph 9.13.
---------------------------
Paragraph 9.13 of the Stock Purchase Agreement shall be amended and
restated to read in its entirety as follows:
9. 13 The closing of any purchase of JCC Shares made pursuant to this
Article IX shall take place as the parties to such sale may agree, within 120
days after the date of acceptance of an offer to sell, the exercise of an
option to purchase, or the incurring of an obligation to purchase, pursuant
to this Article IX. At each such closing, the selling Shareholders of JCC
shall deliver certificates representing the JCC Shares being sold and
Stilwell shall deliver payment for such shares in the manner provided in
paragraph 3.02. If the closing occurs on or after the 30th day following the
date of acceptance of an offer to sell, the exercise of an option to
purchase, or the incurring of an obligation to purchase, Stilwell also shall
pay interest on the purchase price for such shares from such 30th day until
the closing at a rate equal to 50 basis points above the London Inter-Bank
Offered Rate on such 30th day for borrowings with a maturity of 30 days.
6. Amendment of Paragraph 9.15.
---------------------------
Paragraph 9.15 of the Stock Purchase Agreement shall be amended and
restated to read in its entirety as follows:
9.15
(a) If Stilwell determines to sell its shares of JCC common stock for
cash, stock or other consideration ("Sale of JCC"), and such sale reduces its
ownership of JCC to less than 20% of the voting stock of JCC, Stilwell shall,
upon such determination, give prompt written notice to the Remaining
Shareholders of JCC (other than Stilwell) of such determination. Such
Remaining Shareholders shall at Stilwell's request, sell their Shares that
are subject to this Agreement to Stilwell or to Stilwell's designee at the
price set forth in paragraph 9.15 (c) below. Such sale shall occur at such
time and place and in such manner as Stilwell shall reasonably request;
provided such sale shall not occur prior to the time Stilwell sells all or a
majority of its shares of JCC common stock as set forth in this paragraph.
(b) If Stilwell does not request that such Remaining Shareholders sell
their Shares as set forth in paragraph 9.15(a) above, each such Remaining
Shareholder may, with respect to the Shares that are subject to this
Agreement, require (i) Stilwell to purchase all such Shares held by such
Remaining Shareholder, or (ii) Stilwell to cause the Remaining Shareholder to
be included as a seller in the Sale of JCC at the price set forth in
paragraph 9.15(c) below and on the other terms agreed to by the parties to
such sale. If a Remaining Shareholder exercises such right, Stilwell shall
determine which alternative applies. A Remaining Shareholder may exercise
such right by giving written notice to Stilwell within thirty days after such
Remaining Shareholder receives notice from Stilwell of Stilwell's
determination to enter into a Sale of JCC.
(c) The purchase price under this paragraph shall be the greater of:
(i) fifteen times the Net After-Tax Earnings per Share of JCC for
the fiscal year ended immediately prior to the date of the Sale of JCC, or
(ii) the per share consideration to be received by Stilwell for
the Sale of JCC.
7. Amendment of Paragraph 10.06.
----------------------------
Paragraph 10.06 of the Stock Purchase Agreement shall be amended and
restated to read in its entirety as follows:
10.06 For purposes of this Article X and elsewhere in this Agreement,
the term "Change in Ownership" shall mean the earlier to occur of the
following:
(a) less than 75% of the members of the Board of Directors of Stilwell
shall be individuals who were members of the Board on the effective date of
this Amendment or individuals whose election, or nomination for election by
Stilwell stockholders, was approved by a vote of at least 75% of the members
of the Board in office prior to such election or nomination; or
(b) Any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934 (the "Exchange Act")) shall have
become, without the prior approval of at least 75% of the members of the
Board of Directors of Stilwell then still in office who were members of such
Board on the effective date of this Amendment or whose election or nomination
for election by Stilwell's stockholders was approved by a vote of at least
75% of members of the Board in office at any time after the date of this
Agreement, the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act) of securities of Stilwell representing 25% or more (calculated
in accordance with Rule 13d-3) of the combined voting power of Stilwell's
then outstanding voting securities, and such person shall have filed a proxy
statement, or tender offer materials, or any other statement or schedule with
the Securities and Exchange Commission, indicating an intention to acquire
control of Stilwell.
8. Amendment of Paragraph 11.01.
----------------------------
Paragraph 11.01 of the Stock Purchase Agreement shall be amended and
restated to read in its entirety as follows:
11.01 The parties hereto have AGREED that the present management of
JCC shall continue to operate the business of JCC, including the business of
JMC prior to the merger of JMC into JCC, of providing investment advice and
management services to Janus Fund, as hereinafter provided. So long as
Thomas H. Bailey is a holder of at least 5% of the shares of JCC and
continues to be employed as President or Chairman of the Board of JCC and if
Thomas H. Bailey does not serve as President of JCC, James P. Craig, III
serves as President and Chief Executive Officer (or Co-Chief Executive
Officer with Thomas H. Bailey) of JCC, (i) Thomas H. Bailey shall continue to
establish and implement policy with respect to the investment advisory and
portfolio management activity of JCC, (ii) without Thomas H. Bailey's
consent, Stilwell shall not cause JCC to implement, or impose on the
management of JCC any policies, conditions or restrictions regarding the
policy referred to in (i) other than those which were in place at November
15, 1983, and (iii) any changes in management philosophy, style or approach
influencing the management of JCC with respect to the policy referred to in
(i) shall be mutually agreed to by Thomas H. Bailey and by Stilwell. In
furtherance of this objective, so long as Thomas H. Bailey is a holder of at
least 5% of the shares of JCC and continues to be employed as President or
Chairman of the Board of JCC and if Thomas H. Bailey does not serve as
President of JCC, James P. Craig, III serves as President and Chief Executive
Officer (or Co-Chief Executive Officer with Thomas H. Bailey) of JCC,
Stilwell agrees to vote its JCC Shares to elect directors of JCC, at least a
majority of whom shall be selected by Thomas H. Bailey, subject to Stilwell's
approval, which approval shall not be unreasonably withheld. Each of the
preceding provisions set forth in this paragraph is expressly conditioned,
however, upon such management and Thomas H. Bailey continuing to perform
their respective duties with reasonable care and in a manner which is
consistent with past practice and not contrary to the best interests of JCC.
9. Amendment of Paragraph 18.0 1.
-----------------------------
Paragraph 18.01 of the Stock Purchase Agreement shall be amended and
restated to read in its entirety as follows:
18.01 All notices and other communications required or permitted to be
given hereunder shall be in writing and shall be deemed to have
been fully given if delivered or mailed, first class, postage
paid, to the following addresses:
(a) If to KCSI:
Kansas City Southern Industries, Inc.
114 West Eleventh Street
Kansas City, Missouri 64105
cc: John F. Marvin, Esq.
Sonnenschein, Nath & Rosenthal
4520 Main Street, Suite 1100
Kansas City, Missouri 64111
(b) If to the Shareholders of JCC:
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
cc: Jennings J. Newcom, Esq.
Davis, Graham & Stubbs
370 17th Street
Republic Plaza Building, Suite 4700
Denver, Colorado 80202
Thomas A. Early, Esq.
Janus Capital Corporation
100 Fillmore Street
Denver, Colorado 80206
(c) If to Stilwell:
Stilwell Financial, Inc
114 West Eleventh Street
Kansas City, Missouri 64105
cc: John F. Marvin, Esq.
Sonnenschein, Nath & Rosenthal
4520 Main Street, Suite 1100
Kansas City, Missouri 64111
or to any other address or addresses as may hereafter be specified by notice
given by any of the above for itself to the others.
10. Conflict.
--------
If any conflict shall arise between the terms and conditions of this
Agreement and the Stock Purchase Agreement, this Agreement shall govern with
respect to the matters described herein. Subject to the Assignment and the
amendments made herein, the Stock Purchase Agreement shall remain in full
force and effect and is hereby reaffirmed by the parties as amended herein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
KANSAS CITY SOUTHERN INDUSTRIES, INC.
By: /s/ L.H. Rowland
-------------------------------------------------
Landon H. Rowland, Chairman, President and Chief
Executive Officer
STILWELL FINANCIAL INC.
By: /s/ L.H. Rowland
-------------------------------------------------
Landon H. Rowland, President
/s/ Thomas H. Bailey
-------------------------------------------------
THOMAS H. BAILEY
/s/ Michael Stolper
-------------------------------------------------
MICHAEL STOLPER
KANSAS CITY SOUTHERN INDUSTRIES, INC.
AND SUBSIDIARY COMPANIES
<TABLE>
COMPUTATION OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<CAPTION>
Years ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax Income, Excluding Equity
in Earnings (Losses) of
Unconsolidated Affiliates $ 331.5 $ 64.0 $ 167.2 $ 484.5 $ 148.9
Interest Expense on Indebtedness 66.1 63.7 59.6 77.0 53.6
Portion of Rents Representative
of an Appropriate Interest Factor 23.5 21.3 13.9 17.2 17.7
Equity in Undistributed Earnings
of 50% Owned Affiliates (2.3) 2.8 0.8 5.7 15.6
Distributed Earnings of Less
Than 50% Owned Affiliates - - 3.7 0.9 0.1
Fixed Charges of 50% Owned
Affiliates 6.0 6.0 1.3 1.3 0.9
----------- ----------- ----------- ----------- -----------
Income, as Adjusted $ 424.8 $ 157.8 $ 246.5 $ 586.6 $ 236.8
----------- ----------- ----------- ----------- -----------
Fixed Charges:
Interest Expense on Indebtedness $ 66.1 $ 63.7 $ 59.6 $ 77.0 $ 53.6
Capitalized Interest - 7.4 - - -
Portion of Rents Representative
of an Appropriate Interest Factor 23.5 21.3 13.9 17.2 17.7
Fixed Charges of 50% Owned
Affiliates 6.0 6.0 1.3 1.3 0.9
----------- ----------- ----------- ----------- -----------
Total Fixed Charges $ 95.6 $ 98.4 $ 74.8 $ 95.5 $ 72.2
----------- ----------- ----------- ----------- -----------
Ratio of Earnings to Fixed
Charges 4.44 (i) 1.60 (ii) 3.30 6.14 (iii) 3.28
----------- ----------- ----------- ----------- -----------
</TABLE>
(i) Includes one-time non-cash charge resulting from the merger of a
wholly-owned subsidiary of DST Systems, Inc. (DST) with USCS
International, Inc. Excluding this one-time item, the ratio for 1998 is
4.75.
(ii) Includes one-time restructuring, asset impairment and other charges.
Excluding these one-time items, the ratio for 1997 is 3.60.
(iii) Reflects DST as a majority owned unconsolidated subsidiary through
October 31, 1995, and an unconsolidated 41% owned affiliate thereafter.
If the ratio was computed to exclude the one-time gain associated with the
November 1995 public offering of DST and associated transactions, the 1995
ratio for 1995 would have been 3.04.
Note: Exclude amortization expense on intangible debt discount
due to immateriality.
Page 1
Subsidiaries of the Company
Kansas City Southern Industries, Inc., a Delaware Corporation, has no parent.
All subsidiaries of the Company listed below are included in the consolidated
financial statements unless otherwise indicated
State or
Percentage other Jurisdiction
of of Incorporation
Ownership or Organization
Animal Resources, Inc. (3)* 49% Missouri
BBOI Worldwide LLC * (7) 50 Delaware
Berger Associates, Inc. 100 Delaware
Berger/Bay Isle LLC * (7) 50 Delaware
Berger Distributors, Inc. (21) 100 Delaware
Canama Transportation (15) 100 Cayman Islands
Carland, Inc. (2) 100 Delaware
Caymex Transportation, Inc. (22) 100 Delaware
DST Systems, Inc.* 32 Missouri
FAM Holdings, Inc. 100 Delaware
FAM UK Limited (17) 100 United Kingdom
Fillmore Agency, Inc. (6) 100 Colorado
Fountain Investments, Inc. 100 Missouri
Fountain Investments UK (17) 100 United Kingdom
Gateway Eastern Railway Company (13) 100 Illinois
Gateway Western Railway Company (8) 100 Illinois
Global Terminaling Services(4)
(formerly Pabtex, Inc) 100 Delaware
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V.*(14) 37 Mexico
Janus Capital Corporation 82 Colorado
Janus Capital International Ltd (6) 100 Colorado
Janus Distributors, Inc. (6) 100 Colorado
Janus Service Corp. (6) 100 Colorado
Joplin Southern Corporation (12) 47 Missouri
Joplin Union Depot* 33 Missouri
Joseph Nelson Limited (19) 100 United Kingdom
Kansas City Southern Lines, Inc. 100 Delaware
KC Terminal Railway (23) 8 Missouri
KCS Transportation Company (22) 100 Delaware
KCS Transport Co., Inc. (4) 100 Louisiana
Landa Motor Lines (4) 100 Texas
Louisiana, Arkansas & Texas Trans. Co. (4) 100 Delaware
Martec Pharmaceutical, Inc. * (3) 49 Delaware
Mexrail, Inc.* 49 Delaware
Mid-South Microwave, Inc. 100 Delaware
NAFTA Rail, S.A. de C.V. (15) 100 Mexico
Nelson Investment Planning Limited (20) 100 United Kingdom
Nelson Investment Management Limited (19) 100 United Kingdom
Nelson Money Managers plc (18) 80 United Kingdom
North American Freight Transportation
Alliance Rail Corporation (15) 100 Delaware
Panama Canal Railway Company (16) 50 Cayman Islands
Port Arthur Bulk Marine Terminal Co. (10) 80 Partnership
PVI, Inc. 100 100 Delaware
Rice-Carden Corporation (22) 100 Missouri
Southern Capital Corporation, LLC * (23) 50 Delaware
<PAGE>2
State or
Percentage other Jurisdiction
of of Incorporation
Ownership or Organization
Southern Development Company (22) 100 Missouri
Southern Group, Inc. (1) 100 Delaware
Southern Industrial Services, Inc. (22) 100 Delaware
Taproot Limited (19) 100 United Kingdom
The Kansas City Southern Railway Company (22) 100 Missouri
The Texas Mexican Railway Company* (9) 100 Texas
TFM, S.A. de C.V.* (11) 80 Mexico
Tolmak, Inc. (22) 100 Delaware
TransFin Insurance, Ltd. (22) 100 Vermont
Trans-Serve, Inc. (4) (5) 100 Delaware
Veals, Inc. (22) 100 Delaware
Wyandotte Garage Corporation (22) 80 Missouri
* Unconsolidated Affiliate, Accounted for Using the Equity Method
(1) Subsidiary of The Kansas City Southern Railway Company
(2) Subsidiary of Southern Group, Inc.
(3) Subsidiary of PVI, Inc.
(4) Subsidiary of Southern Industrial Services, Inc.
(5) Conducting business as Superior Tie & Timber
(6) Subsidiary of Janus Capital Corporation
(7) Unconsolidated Affiliate of Berger Associates, Inc.
(8) Subsidiary of KCS Transportation Company
(9) Subsidiary of Mexrail, Inc.
(10) Subsidiary of Rice-Carden Corporation
(11) Subsidiary of Grupo TFM
(12) Subsidiary of Southern Development Company
(13) Subsidiary of Gateway Western Railway Company
(14) Subsidiary of NAFTA Rail, S.A. de C.V.
(15) Subsidiary of Caymex Transportation, Inc.
(16) Subsidiary of Canama Transportation
(17) Subsidiary of FAM Holdings, Inc.
(18) Subsidiary of FAM UK Limited
(19) Subsidiary of Nelson Money Managers plc
(20) Subsidiary of Joseph Nelson Limited
(21) Subsidiary of Berger Associates, Inc.
(22) Subsidiary of Kansas City Southern Lines, Inc.
(23) Unconsolidated affiliate of The Kansas City Southern Railway Company
Subsidiaries and Affiliates not shown, if taken in the aggregate, would not
constitute a significant subsidiary of the Company. Subsidiaries and
affiliates of DST Systems, Inc. are not shown.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 33-50517, 33-50519, 33-64511 and 333-91993) and
on Form S-3 (No. 33-69648) of Kansas City Southern Industries, Inc. of our
report dated March 4, 1999, except as to the sixth paragraph under the
subheading of "Note 1. Significant Accounting Policies" entitled "New
Accounting Pronouncements" and the first two paragraphs of "Note 12.
Control", which are as of February 4, 2000, relating to the financial
statements, which appears in this Form 10-K/A. We also consent to the
incorporation by reference in the Registration Statements referred to
above of our report dated February 25, 1999 relating to the financial
statements of DST Systems, Inc., which appears in the DST Systems, Inc.
Annual Report on Form 10-K for the year ended December 31, 1998. The
financial statements of DST Systems, Inc. for the year ended December
31, 1998 together with our report thereon have been incorporated by
reference in this Form 10-K/A.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Kansas City, Missouri
February 9, 2000
<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 STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1998
<CASH> 27,200,000
<SECURITIES> 149,100,000
<RECEIVABLES> 208,400,000
<ALLOWANCES> 0
<INVENTORY> 47,000,000
<CURRENT-ASSETS> 469,500,000
<PP&E> 1,833,800,000
<DEPRECIATION> 567,100,000
<TOTAL-ASSETS> 2,619,700,000
<CURRENT-LIABILITIES> 296,200,000
<BONDS> 825,600,000
0
6,100,000
<COMMON> 1,100,000
<OTHER-SE> 924,000,000
<TOTAL-LIABILITY-AND-EQUITY> 2,619,700,000
<SALES> 0
<TOTAL-REVENUES> 1,284,300,000
<CGS> 0
<TOTAL-COSTS> 889,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 66,100,000
<INCOME-PRETAX> 354,400,000
<INCOME-TAX> 130,800,000
<INCOME-CONTINUING> 190,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 190,200,000
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.66
</TABLE>
