FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission File Number 1-4717
KANSAS CITY SOUTHERN INDUSTRIES, INC.
(Exact name of Company as specified in its charter)
Delaware 44-0663509
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 West 11th Street, Kansas City, Missouri 64105
(Address of principal executive offices) (Zip Code)
(816) 983-1303
(Company's telephone number, including area code)
No Changes
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 2000
Common Stock, $.01 per share par value 111,430,088 Shares
<PAGE>
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 2000
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Introductory Comments 2
Consolidated Condensed Balance Sheets -
March 31, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Basic and Diluted Earnings per Common Share 4
Consolidated Condensed Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3. Qualitative and Quantitative Disclosures About Market Risk 27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
SIGNATURES 29
<PAGE>2
KANSAS CITY SOUTHERN INDUSTRIES, INC.
FORM 10-Q
MARCH 31, 2000
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INTRODUCTORY COMMENTS
The Consolidated Condensed Financial Statements included herein have been
prepared by Kansas City Southern Industries, Inc. ("Company" or "KCSI"), without
audit, pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These
Consolidated Condensed Financial Statements should be read in conjunction with
the financial statements and the notes thereto, as well as Management's
Discussion and Analysis of Financial Condition and Results of Operations,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and Management's Discussion and Analysis of Financial Condition and
Results of Operations included in this Form 10-Q. Results for the three months
ended March 31, 2000 are not necessarily indicative of the results expected for
the full year 2000.
<PAGE>3
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(Dollars in Millions)
(Unaudited)
<TABLE>
March 31, December 31,
2000 1999
-------- ---------
<CAPTION>
ASSETS
<S> <C> <C>
Current Assets:
Cash and equivalents $ 388.5 $ 336.1
Investments in advised funds 33.0 23.9
Accounts receivable, net 343.7 287.9
Inventories 39.4 40.5
Other current assets 55.0 45.1
-------- ---------
Total current assets 859.6 733.5
Investments held for operating purposes 845.9 811.2
Properties (net of $642.7 and $623.3 accumulated
depreciation and amortization, respectively) 1,377.3 1,347.8
Intangibles and Other Assets, net 234.6 196.4
-------- ---------
Total assets $3,317.4 $ 3,088.9
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Debt due within one year $ 11.6 $ 10.9
Accounts and wages payable 223.9 199.1
Accrued liabilities 216.0 206.7
-------- ---------
Total current liabilities 451.5 416.7
-------- ---------
Other Liabilities:
Long-term debt 688.3 750.0
Deferred income taxes 467.8 449.2
Other deferred credits 129.0 132.6
-------- ---------
Total other liabilities 1,285.1 1,331.8
-------- ---------
Minority Interest in consolidated subsidiaries 66.9 57.3
-------- ---------
Stockholders' Equity:
Preferred stock 6.1 6.1
Common stock 1.1 1.1
Retained earnings 1,394.7 1,167.0
Accumulated other comprehensive income 112.0 108.9
-------- ---------
Total stockholders' equity 1,513.9 1,283.1
-------- ---------
Total liabilities and stockholders' equity $3,317.4 $ 3,088.9
======== =========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>4
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Dollars in Millions, Except per Share Data)
(Unaudited)
Three Months
Ended March 31,
-------------------
2000 1999
-------- -------
Revenues $ 694.0 $ 385.2
Costs and expenses 399.6 242.5
Depreciation and amortization 31.5 21.1
-------- -------
Operating Income 262.9 121.6
Equity in net earnings of unconsolidated affiliates:
DST Systems, Inc. 18.0 10.7
Grupo Transportacion Ferroviaria
Mexicana, S.A. de C.V. 8.2 0.5
Other 1.4 1.1
Interest expense (20.1) (15.0)
Gain on litigation settlement 44.2 -
Gain on sale of Janus Capital Corporation stock 15.1 -
Other, net 12.6 5.8
-------- -------
Income before income tax, minority
interest and extraordinary item 342.3 124.7
Income tax provision 115.9 44.9
Minority interest in consolidated earnings 27.3 11.2
-------- -------
Income before extraordinary item 199.1 68.6
Extraordinary item, net of income tax
Debt retirement costs (5.9) -
-------- -------
Net Income 193.2 68.6
Other Comprehensive Income (Loss), net of tax:
Unrealized gain on securities 5.0 0.2
Less: reclassification adjustment for
gains included in net income (1.3) (0.3)
Foreign currency translation adjustments (0.6) (1.0)
-------- -------
Comprehensive Income $ 196.3 $ 67.5
======== =======
Basic Earnings per Common Share
Before Extraordinary item $ 1.79 $ 0.62
Extraordinary item (0.05) -
-------- -------
Total Basic Earnings per Common Share $ 1.74 $ 0.62
======== =======
Diluted Earnings per Common Share
Before Extraordinary item $ 1.71 $ 0.60
Extraordinary item (0.05) -
-------- -------
Total Diluted Earnings per Common Share $ 1.66 $ 0.60
======== =======
Weighted Average Common Shares Outstanding (in thousands)
Basic 111,087 109,843
Dilutive potential common shares 3,878 3,832
-------- -------
Diluted 114,965 113,675
======== =======
Dividends Per Share:
Per Preferred share $ .25 $ .25
Per Common share $ - $ .04
See accompanying notes to consolidated condensed financial statements.
<PAGE>5
KANSAS CITY SOUTHERN INDUSTRIES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
(Unaudited)
<TABLE>
Three Months
Ended March 31,
-------------------
2000 1999
-------- -------
<CAPTION>
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 193.2 $ 68.6
Adjustments to net income:
Depreciation and amortization 31.5 21.1
Deferred income taxes 31.0 15.0
Equity in undistributed net earnings of
unconsolidated affiliates (27.6) (12.3)
Minority interest in consolidated earnings 27.3 11.2
Employee deferred compensation expenses 1.0 (3.6)
Gain on sale of Janus Capital Corporation stock (15.1) -
Extraordinary item, debt retirement
costs, net of income tax 5.9 -
Deferred commissions (44.7) -
Changes in working capital items:
Accounts receivable (55.8) (36.6)
Inventories 1.1 (3.5)
Other current assets 5.4 7.7
Accounts and wages payable 29.3 (1.7)
Accrued liabilities 6.5 35.6
Other, net (2.4) (8.7)
-------- -------
Net 186.6 92.8
-------- -------
INVESTING ACTIVITIES:
Property acquisitions (51.8) (23.9)
Investment in and loans with affiliates (3.5) (1.7)
Net purchases of investments in advised funds (6.8) -
Other, net (4.7) 0.6
-------- -------
Net (66.8) (25.0)
-------- -------
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 760.0 31.8
Repayment of long-term debt (827.6) (28.2)
Proceeds from stock plans 26.6 13.4
Stock repurchased - (22.3)
Distributions to minority stockholders of
consolidated subsidiaries (7.0) (19.6)
Debt issuance costs (13.4) -
Cash dividends paid (4.7) (8.9)
Other, net (1.3) (0.2)
-------- -------
Net (67.4) (34.0)
-------- -------
CASH AND EQUIVALENTS:
Net increase 52.4 33.8
At beginning of year 336.1 144.1
-------- -------
At end of period $ 388.5 $ 177.9
======== =======
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>6
KANSAS CITY SOUTHERN INDUSTRIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. In the opinion of the management of Kansas City Southern Industries, Inc.
("Company"; "KCSI"), the accompanying unaudited consolidated condensed financial
statements contain all adjustments (consisting of normal closing procedures)
necessary to present fairly the financial position of the Company and its
subsidiary companies as of March 31, 2000 and December 31, 1999, and the results
of operations and cash flows for the three months ended March 31, 2000 and 1999.
2. The accompanying consolidated condensed financial statements have been
prepared consistently with accounting policies described in Note 2 to the
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1999. The results of operations for
the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year 2000. Certain 1999 information has been
reclassified to conform to the current period presentation.
3. Separation of Business Segments. On July 9, 1999, KCSI received a tax ruling
from the Internal Revenue Service ("IRS") to the effect that for United States
federal income tax purposes, the planned separation of the Financial Services
segment from KCSI through a pro-rata distribution of Stilwell Financial, Inc.
("Stilwell") common stock to KCSI stockholders (the "Separation") qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, the Company received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of $125
million of KCSI debt by Stilwell (in connection with the Company's
re-capitalization of its debt structure as discussed in Note 4) would have no
effect on the previously issued tax ruling. In contemplation of the Separation,
the Company's stockholders approved a one-for-two 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.
Stilwell Registration Statement on Form 10. On August 19, 1999, the Company
reported that Stilwell filed a Form 10 with the Securities and Exchange
Commission ("SEC") in connection with KCSI's proposed Separation. The filing
includes an Information Statement that will be provided to KCSI shareholders
after the Form 10 becomes effective. The Company has received comments from the
SEC and has been involved in detailed discussions with the SEC on such items. As
part of this process, the Company filed Amendment #1 to the Stilwell Form 10 on
October 18, 1999, Amendment #2 on December 22, 1999, Amendment #3 on January 19,
2000 and Amendment #4 dated April 28, 2000. The Stilwell Form 10 has not been
declared effective.
Consolidation of Janus. In Issue No. 96-16, the Emerging Issues Task Force
("EITF 96-16") of the Financial Accounting Standards Board reached a consensus
that substantive minority rights that provide a minority stockholder with the
right to effectively control significant decisions in the ordinary course of an
investee's business could impact whether the majority stockholder should
consolidate the investee. Management evaluated the rights of the minority
stockholders of its consolidated subsidiaries and concluded that the application
of EITF 96-16 did not affect the Company's consolidated financial statements.
This conclusion with respect to Janus Capital Corporation ("Janus") is currently
under discussion with the Staff of the SEC and, accordingly, is subject to
change.
4. In preparation for the Separation, the Company re-capitalized its debt
structure in January 2000 through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI commenced offers
to purchase and consent solicitations with respect to any and all of the
Company's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1,
2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025
(collectively "Debt Securities" or "notes and debentures").
<PAGE>7
Approximately $398.4 million of the $400 million outstanding Debt Securities
were validly tendered and accepted by the Company. Total consideration paid for
the repurchase of these outstanding notes and debentures was $401.2 million.
Funding for the repurchase of these Debt Securities and for the repayment of
$264 million of borrowings under then existing revolving credit facilities was
obtained from two new credit facilities (the "KCS Credit Facility" and the
"Stilwell Credit Facility", or collectively "New Credit Facilities"), each of
which was entered into on January 11, 2000. These New Credit Facilities, as
described further below, provide for total commitments of $950 million.
In first quarter 2000, the Company reported an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million, net of income taxes of approximately $3.2 million.
KCS Credit Facility. The KCS Credit Facility provides for a total commitment of
$750 million, comprised of three separate term loans totaling $600 million with
$200 million due January 11, 2001, $150 million due December 30, 2005 and $250
million due December 30, 2006 and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The availability under the KCS Revolver is
$150 million and will be reduced to $100 million on the later of January 2, 2001
and the expiration date with respect to the Grupo TFM Capital Contribution
Agreement. Letters of credit are also available under the KCS Revolver up to a
limit of $90 million. Borrowings under the KCS Credit Facility are secured by
substantially all of the Transportation segment's assets.
On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term
loans and used the proceeds to repurchase the Debt Securities, retire other debt
obligations and pay related fees and expenses. No funds were initially borrowed
under the KCS Revolver. Proceeds of future borrowings under the KCS Revolver are
to be used for working capital and for other general corporate purposes. The
letters of credit under the KCS Revolver are to be used to support obligations
in connection with the Grupo TFM Capital Contribution Agreement ($15 million may
be used for general corporate purposes).
Interest on the outstanding loans under the KCS Credit Facility shall accrue at
a rate per annum based on the London interbank offered rate ("LIBOR") or the
prime rate, as the Company shall select. Each loan shall accrue interest at the
selected rate plus the applicable margin, which will be determined by the type
of loan. Until the term loan maturing in 2001 is repaid in full, the term loans
maturing in 2001 and 2005 and all loans under the KCS Revolver will have an
applicable margin of 2.75% per annum for LIBOR priced loans and 1.75% per annum
for prime rate priced loans and the term loan maturing in 2006 will have an
applicable margin of 3.00% per annum for LIBOR priced loans and 2.00% per annum
for prime rate based loans. The interest rate with respect to the term loan
maturing in 2001 is also subject to 0.25% per annum interest rate increases
every three months until such term loan is paid in full, at which time, the
applicable margins for all other loans will be reduced and may fluctuate based
on the leverage ratio of the Company at that time.
The KCS Credit Facility requires the payment to the banks of a commitment fee of
0.50% per annum on the average daily, unused amount of the KCS Revolver.
Additionally a fee equal to a per annum rate equal to 0.25% plus the applicable
margin for LIBOR priced revolving loans will be paid on any letter of credit
issued under the KCS Credit Facility. The KCS Credit Facility contains certain
covenants, among others, as follows: i) restricts the payment of cash dividends
to common stockholders; ii) limits annual capital expenditures; iii) requires
hedging instruments with respect to at least 50% of the outstanding balances of
each of the term loans maturing in 2005 and 2006 to mitigate interest rate risk
associated with the new variable rate debt; and iv) provides leverage ratio and
interest coverage ratio requirements typical of this type of debt instrument.
These covenants, along with other provisions could restrict maximum utilization
of the facility. Issue costs relating to the KCS Credit Facility of
approximately $17.6 million were deferred and are being amortized on a
straight-line basis over the respective term of the loans. The difference
between the straight-line method and interest method of amortization is not
material.
<PAGE>8
In accordance with the provision requiring the Company to manage its interest
rate risk through hedging activity, in first quarter 2000 the Company entered
into five separate interest rate cap agreements for an aggregate notional amount
of $200 million expiring on various dates in 2002. The interest rate caps are
linked to LIBOR. $100 million of the aggregate notional amount provides a cap on
the Company's interest rate of 7.25% plus the applicable spread, while $100
million limits the interest rate to 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who also participate in the New Credit Facilities. The Company
believes that credit loss from counterparty non-performance is remote.
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new $200
million 364-day senior unsecured competitive Advance/Revolving Credit Facility
("Stilwell Credit Facility"). KCSI borrowed $125 million under this facility and
used the proceeds to retire debt obligations as discussed above. Stilwell has
assumed this credit facility, including the $125 million borrowed thereunder,
and upon completion of the Separation, KCSI will be released from all
obligations thereunder. Stilwell repaid the $125 million in March 2000.
Two borrowing options are available under the Stilwell Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lender's
standard competitive auction procedures. Interest on the revolving credit option
accrues based on the type of loan (e.g., Eurodollar, Swingline, etc.) with rates
computed using LIBOR plus 0.35% per annum or, alternatively, the highest of the
prime rate, the Federal Funds Effective Rate plus 0.005%, and the Base
Certificate of Deposit Rate plus 1%.
The Stilwell Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of the outstanding loans under the
facility for each day on which the aggregate utilization of the Stilwell Credit
Facility exceeds 33% of the aggregate commitments of the various lenders.
Additionally, the Stilwell Credit Facility contains, among other provisions,
various financial covenants, which could restrict maximum utilization of the
Stilwell Credit Facility. Stilwell may assign or delegate all or a portion of
its rights and obligations under the Stilwell Credit Facility to one or more of
its domestic subsidiaries.
5. The effect of stock options to employees represent the only difference
between the weighted average shares used for the basic earnings per share
computation compared to the diluted earnings per share computation. For the
three months ended March 31, 2000 and 1999, the total incremental shares from
assumed conversion of stock options was 3,878,307 and 3,832,025, respectively,
and these incremental shares were included in the computation of diluted
earnings per share. However, options to purchase 12,827 shares were excluded in
the first quarter 2000 computation because the exercise prices exceeded the
average market price of the common shares. No options to purchase shares were
excluded in the first quarter 1999 computation.
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 were $2.3 and $0.8 million for the three months ended March 31, 2000
and 1999, respectively.
6. The Company's inventories primarily consist of material and supplies
related to rail transportation. Other components of inventories are not
significant.
7. Investments in unconsolidated affiliates and certain other investments
accounted for under the equity method generally include all entities in which
the Company or its subsidiaries have significant influence, but not more than
50% voting control. Investments in unconsolidated affiliates at March 31, 2000
include, among others, equity interests in DST Systems, Inc. ("DST"), Grupo
Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM"), Southern
Capital Corporation, LLC ("Southern Capital"), Mexrail, Inc. ("Mexrail") and the
Panama Canal Railway Company.
<PAGE>9
The Company is party to certain agreements with Transportacion Maritima
Mexicana, S.A. de C.V. ("TMM") covering the Grupo TFM and Mexrail ventures. TMM
(including its affiliates) owns approximately 38.4% of Grupo TFM and 51% of
Mexrail. These agreements contain "change in control" provisions, provisions
intended to preserve the Company's and TMM's proportionate ownership of the
ventures, and super-majority provisions with respect to voting on certain
significant transactions. Such agreements also provide a right of first refusal
in the event that either party initiates a divestiture of its equity interest in
Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect
the Company's ownership percentage and rights in these equity affiliates.
Combined condensed financial information of unconsolidated affiliates is shown
below:
<TABLE>
Financial Condition (dollars in millions):
<CAPTION>
March 31, 2000 December 31, 1999
----------------------------- -----------------------------
DST Grupo TFM (a) Other DST Grupo TFM (a) Other
-------- ------------ ------ -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
Current assets $ 452.1 $ 145.0 $ 36.8 $ 464.5 $ 134.4 $ 35.8
Non-current
assets 1,906.4 1,913.9 315.6 1,861.8 1,905.7 319.1
-------- --------- ------- --------- --------- ------
Assets $2,358.5 $ 2,058.9 $ 352.4 $ 2,326.3 $ 2,040.1 $354.9
======== ========= ======= ========= ========= ======
Current liabi-
lities $ 259.2 $ 251.4 $ 41.4 $ 285.8 $ 255.9 $ 42.1
Non-current
liabilities 597.0 660.3 225.0 576.9 672.9 230.0
Minority interest - 351.1 - - 343.9 -
Equity of stockholders
and partners 1,502.3 796.1 86.0 1,463.6 767.4 82.8
-------- --------- ------- --------- --------- ------
Liabilities and
equity $2,358.5 $ 2,058.9 $ 352.4 $ 2,326.3 $ 2,040.1 $354.9
======== ========= ======= ========= ========= ======
KCSI's invest-
ment $ 485.5 $ 294.6 $ 46.8 $ 470.2 $ 286.5 $ 45.0
======== ========= ======= ========= ========= ======
(a) Grupo TFM is presented on a U.S. GAAP basis.
</TABLE>
<TABLE>
Operating Results (dollars in millions):
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
DST $ 340.4 $ 292.8
Grupo TFM (a) 146.7 112.5
All others 27.4 24.7
------- -------
Total revenues $ 514.5 $ 430.0
======= =======
Operating costs and expenses:
DST $ 276.7 $ 242.9
Grupo TFM (a) 106.3 88.7
All others 26.3 23.0
------- -------
Total operating costs
and expenses $ 409.3 $ 354.6
======= =======
Net income:
DST $ 56.2 $ 33.6
Grupo TFM (a) 19.9 1.4
All others 2.2 2.2
------- -------
Total net income $ 78.3 $ 37.2
======= =======
(a) Grupo TFM is presented on a U.S. GAAP basis.
</TABLE>
<PAGE>10
8. For purposes of the Statement of Cash Flows, the Company considers all
short-term liquid investments with a maturity of generally three months or less
to be cash equivalents.
<TABLE>
Supplemental Cash Flow Information (in millions):
<CAPTION>
Three Months
Ended March 31,
-----------------
2000 1999
------- ------
<S> <C> <C>
Interest paid $ 27.5 $ 17.3
Income taxes paid 23.9 6.0
</TABLE>
Noncash Investing and Financing Activities:
In first quarter 2000, the Company issued approximately 183,117 shares of KCSI
common stock under the Eleventh Offering of the Employee Stock Purchase Plan
("ESPP"). These shares, totaling a purchase price of approximately $6.3 million,
were subscribed and paid for through employee payroll deductions in 1999. There
were no shares of KCSI common stock issued under an offering of the ESPP during
the first quarter of 1999.
The Company's Board of Directors declared a quarterly dividend of $4.6 million
in December 1999, payable in January 2000. Upon declaration, the Company reduced
retained earnings and recorded a liability for the required payment. In January
2000, the cash was paid to the Company's stockholders.
Company subsidiaries and affiliates hold various investments which are accounted
for as "available for sale" securities as defined by Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities". The Company records its proportionate share of any
unrealized gains or losses related to these investments, net of deferred taxes,
in stockholders' equity as accumulated other comprehensive income. For the three
months ended March 31, 2000, the Company recorded its proportionate share of the
increase in the market value of these investments of $8.0 million ($5.0 million,
net of deferred income taxes). For the three months ended March 31, 1999, the
Company' recorded its proportionate share of the increase in market value of
these investments of $0.3 million ($0.2 million, net of deferred income taxes).
9. Pursuant to Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), the following provides selected interim financial information
for the Transportation and Financial Services segments (in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Transportation $ 148.9 $ 151.9
Financial Services 545.1 233.3
-------- --------
KCSI Consolidated $ 694.0 $ 385.2
======== ========
Net Income:
Transportation $ 4.5 $ 7.6
Financial Services 188.7 61.0
-------- --------
KCSI Consolidated $ 193.2 $ 68.6
======== ========
</TABLE>
<PAGE>11
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- --------
<S> <C> <C>
Total Assets:
Transportation $ 1,884.7 $1,857.4
Financial Services 1,432.7 1,231.5
--------- --------
KCSI Consolidated $ 3,317.4 $3,088.9
========= ========
</TABLE>
Sales between segments were not material for the three months ended March 31,
2000 and 1999, respectively.
10. 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. Initially, the effective date of SFAS 133
was for all fiscal quarters for fiscal years beginning after June 15, 1999. In
June 1999, however, the FASB issued Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133 - an amendment of FASB Statement
No. 133", which deferred the effective date of SFAS 133 for one year so that it
will be effective for all fiscal quarters of all fiscal years beginning after
June 15, 2000. 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 discussed below is not expected to have a material impact on
the Company's results of operations, financial position or cash flows.
The Company currently has a program to hedge against fluctuations in the price
of diesel fuel, and also enters into fuel purchase commitments from time to
time. At March 31, 2000 KCSR had a diesel fuel cap transaction effective from
April 1, 2000 through June 30, 2000 for three million gallons at a cap price of
$0.60 per gallon. The Company also had a diesel fuel cap for three million
gallons at a cap price of $0.60 per gallon, which expired on March 31, 2000. The
Company received approximately $396,000 related to this diesel fuel cap
transaction and recorded the proceeds as a reduction of diesel fuel expense.
Additionally, in accordance with the provision of the KCS Credit Facility
requiring the Company to manage its interest rate risk through hedging activity,
in first quarter 2000 the Company entered into five separate interest rate cap
agreements for an aggregate notional amount of $200 million expiring on various
dates in 2002. The interest rate caps are linked to LIBOR. $100 million of the
aggregate notional amount provides a cap on the Company's interest rate of 7.25%
plus the applicable spread, while $100 million limits the interest rate to 7%
plus the applicable spread. Counterparties to the interest rate cap agreements
are major financial institutions who also participate in the New Credit
Facilities. The Company believes that credit loss from counterparty
non-performance is remote.
Further, 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.
11. The Company has had no significant changes in its outstanding litigation or
other contingencies from that previously reported in the Company's Annual Report
on Form 10-K for the year ended December 31, 1999. The following provides a
discussion of the Bogalusa Cases and the Duncan Case.
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
<PAGE>12
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 in excess of its standard weight, but under the car's capacity, when it
was transported by the Company to interchange with the IC.
The trial of a group of twenty plaintiffs in the Mississippi lawsuits arising
from the chemical release resulted in a jury verdict and judgment in favor of
KCSR in June 1999. The jury found that KCSR was not negligent and that the
plaintiffs had failed to prove that they were damaged. The trial of the
Louisiana class action is scheduled to commence on June 11, 2001. No date has
been scheduled for the trial of the additional plaintiffs in Mississippi.
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 Company's results of operations,
financial position and cash flows.
Duncan Case. In 1998, a jury in Beauregard Parish, Louisiana returned a verdict
against KCSR in the amount of $16.3 million. The 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 $27.4 million as of March 31, 2000.
On November 3, 1999, the Third Circuit Court of Appeals in Louisiana affirmed
the judgment. Review is now being sought in the Louisiana Supreme Court. On
March 24, 2000, the Louisiana Supreme Court granted KCSR's Application for a
Writ of Review regarding this case. Independent trial counsel has expressed
confidence to KCSR management that the Louisiana Supreme Court will set aside
the district court and court of appeals judgments in this case. KCSR management
believes it has meritorious defenses and that it will ultimately prevail in its
appeal to the Louisiana Supreme Court. 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,
financial position and cash flows.
12. Sale of Janus Stock. In first quarter 2000, Stilwell sold to Janus, for
treasury, 192,408 shares of Janus common stock and such shares will be available
for awards under Janus' recently adopted Long Term Incentive Plan. Janus has
agreed that for as long as it has available shares of Janus common stock for
grant under that plan, it will not award phantom stock, stock appreciation
rights or similar rights. The sale of these shares resulted in an after-tax gain
of approximately $15.1 million, and together with the issuance by Janus of
approximately 35,000 shares of restricted stock in first quarter 2000, reduced
Stilwell's ownership to approximately 81.5%. After this first quarter 2000
issuance, more than 157,000 shares of Janus stock remain in treasury for use in
connection with its Long Term Incentive Plan. Upon issuance of all of these
shares in future years, the Company's ownership interest in Janus will be 80.1%.
<PAGE>13
13. Litigation Settlement. In January 2000, Stilwell received approximately
$44.2 million in connection with the settlement of a legal dispute related to a
former equity investment. The settlement agreement resolves all outstanding
issues related to this former equity investment. In first quarter 2000, Stilwell
recognized an after-tax gain of approximately $27.3 million as a result of this
settlement.
14. Dividends Suspended for KCSI Common Stock. During first quarter 2000, the
Company's Board of Directors announced that, based upon a review of the
Company's dividend policy in conjunction with the New Credit Facilities
discussed above and in light of the anticipated Separation, it decided to
suspend the Common stock dividend of KCSI under the existing structure of the
Company. This action complies with the terms and covenants of the New Credit
Facilities. Subsequent to the Separation, the separate Boards of KCSI and
Stilwell will determine the appropriate dividend policy for their respective
companies.
<PAGE>14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The discussion set forth below, as well as other portions of this Form 10-Q,
contains comments not based upon historical fact. Such forward-looking comments
are based upon information currently available to management and management's
perception thereof as of the date of this Form 10-Q. Readers can identify these
forward-looking comments by 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/A dated June 3, 1997, which is on file with the U.S.
Securities and Exchange Commission (File No. 1-4717) and is hereby incorporated
by reference herein. Readers are strongly encouraged to consider these factors
when evaluating any forward-looking comments. The Company will not update any
forward-looking comments set forth in this Form 10-Q.
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
condensed financial statements included under Item 1 of this Form 10-Q. As
discussed below, the Company is in discussions with the Staff of the Securities
and Exchange Commission as to whether or not Janus Capital Corporation should
continue to be classified as a consolidated subsidiary for financial reporting
purposes. The outcome of these discussions could result in the Company restating
certain of its consolidated financial statements to reflect Janus as a
majority-owned unconsolidated subsidiary accounted for under the equity method
for financial reporting purposes. This discussion should be read in conjunction
with these consolidated condensed financial statements and the related notes
thereto, 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 asset management.
The Company supplies its various subsidiaries with managerial, legal, tax,
financial and accounting services, in addition to managing other "non-operating"
and more passive investments.
The Company's business activities by industry segment and principal subsidiary
companies are:
Transportation. Kansas City Southern Lines, Inc. ("KCSL"), a wholly-owned
subsidiary of the Company, is the holding company for Transportation
segment subsidiaries and affiliates. This segment includes, among others:
o The Kansas City Southern Railway Company ("KCSR"), a wholly-owned
subsidiary;
o Gateway Western Railway Company ("Gateway Western"), a wholly-owned
subsidiary;
o Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo
TFM"), a 37% owned affiliate, which owns 80% of the common stock of TFM,
S.A. de C.V. ("TFM");
o Mexrail, Inc. ("Mexrail"), a 49% owned affiliate, which wholly owns
the Texas Mexican Railway Company ("Tex Mex");
o Southern Capital Corporation, LLC ("Southern Capital"), a 50% owned
affiliate; and
o Panama Canal Railway Company ("PCRC"), a 50% owned affiliate.
The businesses that comprise the Transportation segment operate a railroad
system that provides shippers with rail freight service in key commercial and
industrial markets of the United States and Mexico.
<PAGE>15
Financial Services. Stilwell Financial, Inc. ("Stilwell" - formerly FAM
Holdings, Inc.), a wholly-owned subsidiary of the Company, is the holding
company for subsidiaries and affiliates comprising the Financial Services
segment. The primary entities comprising the Financial Services segment are:
o Janus Capital Corporation ("Janus"), an approximate 81.5% owned
subsidiary;
o Stilwell Management, Inc. ("SMI"), a wholly-owned subsidiary of
Stilwell;
o Berger LLC ("Berger"), of which SMI owns 100% of the Berger preferred limited
liability company interests and approximately 86% of the Berger regular
limited liability company interests;
o Nelson Money Managers Plc ("Nelson"), an 80% owned subsidiary; and
o DST Systems Inc. ("DST"), an approximate 32% equity investment owned
by SMI.
The businesses that comprise the Financial Services segment offer a variety of
asset management and related financial services to registered investment
companies, retail investors, institutions and individuals.
RECENT DEVELOPMENTS
Planned Separation of the Company Business Segments. On July 9, 1999, KCSI
received a tax ruling from the Internal Revenue Service ("IRS") to the effect
that for United States federal income tax purposes, the planned separation of
the Financial Services segment from KCSI through a pro-rata distribution of
Stilwell common stock to KCSI stockholders (the "Separation") qualifies as a
tax-free distribution under Section 355 of the Internal Revenue Code of 1986, as
amended. Additionally, in February 2000, the Company received a favorable
supplementary tax ruling from the IRS to the effect that the assumption of $125
million of KCSI debt by Stilwell (in connection with the Company's
re-capitalization of its debt structure as discussed below) would have no effect
on the previously issued tax ruling. In contemplation of the Separation, the
Company's stockholders approved a one-for-two 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.
Stilwell Registration Statement on Form 10. On August 19, 1999, the Company
reported that Stilwell filed a Form 10 with the Securities and Exchange
Commission ("SEC") in connection with KCSI's proposed Separation. The filing
includes an Information Statement that will be provided to KCSI shareholders
after the Form 10 becomes effective. The Company has received comments from the
SEC and has been involved in detailed discussions with the SEC on such items. As
part of this process, the Company filed Amendment #1 to the Stilwell Form 10 on
October 18, 1999, Amendment #2 on December 22, 1999, Amendment #3 on January 19,
2000 and Amendment #4 dated April 28, 2000. The Stilwell Form 10 has not been
declared effective.
Consolidation of Janus. In Issue No. 96-16, the Emerging Issues Task Force
("EITF 96-16") of the Financial Accounting Standards Board reached a consensus
that substantive minority rights that provide a minority stockholder with the
right to effectively control significant decisions in the ordinary course of an
investee's business could impact whether the majority stockholder should
consolidate the investee. Management evaluated the rights of the minority
stockholders of its consolidated subsidiaries and concluded that the application
of EITF 96-16 did not affect the Company's consolidated financial statements.
This conclusion with respect to Janus is currently under discussion with the
Staff of the SEC and, accordingly, is subject to change.
Re-capitalization of the Company's Debt Structure. In preparation for the
Separation, the Company re-capitalized its debt structure in January 2000
through a series of transactions as follows:
Bond Tender and Other Debt Repayment. On December 6, 1999, KCSI commenced offers
to purchase and consent solicitations with respect to any and all of the
Company's outstanding 7.875% Notes due July 1, 2002, 6.625% Notes due March 1,
2005, 8.8% Debentures due July 1, 2022, and 7% Debentures due December 15, 2025
(collectively "Debt Securities" or "notes and debentures").
<PAGE>16
Approximately $398.4 million of the $400 million outstanding Debt Securities
were validly tendered and accepted by the Company. Total consideration paid for
the repurchase of these outstanding notes and debentures was $401.2 million.
Funding for the repurchase of these Debt Securities and for the repayment of
$264 million of borrowings under then existing revolving credit facilities was
obtained from two new credit facilities (the "KCS Credit Facility" and the
"Stilwell Credit Facility", or collectively "New Credit Facilities"), each of
which was entered into on January 11, 2000. These New Credit Facilities, as
described further below, provide for total commitments of $950 million.
In first quarter 2000, the Company reported an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million, net of income taxes of approximately $3.2 million.
KCS Credit Facility. The KCS Credit Facility provides for a total commitment of
$750 million, comprised of three separate term loans totaling $600 million with
$200 million due January 11, 2001, $150 million due December 30, 2005 and $250
million due December 30, 2006 and a revolving credit facility available until
January 11, 2006 ("KCS Revolver"). The availability under the KCS Revolver is
$150 million and will be reduced to $100 million on the later of January 2, 2001
and the expiration date with respect to the Grupo TFM Capital Contribution
Agreement. Letters of credit are also available under the KCS Revolver up to a
limit of $90 million. Borrowings under the KCS Credit Facility are secured by
substantially all of the Transportation segment's assets.
On January 11, 2000, KCSR borrowed the full amount ($600 million) of the term
loans and used the proceeds to repurchase the Debt Securities, retire other debt
obligations and pay related fees and expenses. No funds were initially borrowed
under the KCS Revolver. Proceeds of future borrowings under the KCS Revolver are
to be used for working capital and for other general corporate purposes. The
letters of credit under the KCS Revolver are to be used to support obligations
in connection with the Grupo TFM Capital Contribution Agreement ($15 million may
be used for general corporate purposes).
Interest on the outstanding loans under the KCS Credit Facility shall accrue at
a rate per annum based on the London interbank offered rate ("LIBOR") or the
prime rate, as the Company shall select. Each loan shall accrue interest at the
selected rate plus the applicable margin, which will be determined by the type
of loan. Until the term loan maturing in 2001 is repaid in full, the term loans
maturing in 2001 and 2005 and all loans under the KCS Revolver will have an
applicable margin of 2.75% per annum for LIBOR priced loans and 1.75% per annum
for prime rate priced loans and the term loan maturing in 2006 will have an
applicable margin of 3.00% per annum for LIBOR priced loans and 2.00% per annum
for prime rate based loans. The interest rate with respect to the term loan
maturing in 2001 is also subject to 0.25% per annum interest rate increases
every three months until such term loan is paid in full, at which time, the
applicable margins for all other loans will be reduced and may fluctuate based
on the leverage ratio of the Company at that time.
The KCS Credit Facility requires the payment to the banks of a commitment fee of
0.50% per annum on the average daily, unused amount of the KCS Revolver.
Additionally a fee equal to a per annum rate equal to 0.25% plus the applicable
margin for LIBOR priced revolving loans will be paid on any letter of credit
issued under the KCS Credit Facility. The KCS Credit Facility contains certain
covenants, among others, as follows: i) restricts the payment of cash dividends
to common stockholders; ii) limits annual capital expenditures; iii) requires
hedging instruments with respect to at least 50% of the outstanding balances of
each of the term loans maturing in 2005 and 2006 to mitigate interest rate risk
associated with the new variable rate debt; and iv) provides leverage ratio and
interest coverage ratio requirements typical of this type of debt instrument.
These covenants, along with other provisions could restrict maximum utilization
of the facility. Issue costs relating to the KCS Credit Facility of
approximately $17.6 million were deferred and are being amortized on a
straight-line basis over the respective term of the loans. The difference
between the straight-line method and interest method of amortization is not
material.
<PAGE>17
In accordance with the provision requiring the Company to manage its interest
rate risk through hedging activity, in first quarter 2000 the Company entered
into five separate interest rate cap agreements for an aggregate notional amount
of $200 million expiring on various dates in 2002. The interest rate caps are
linked to LIBOR. $100 million of the aggregate notional amount provides a cap on
the Company's interest rate of 7.25% plus the applicable spread, while $100
million limits the interest rate to 7% plus the applicable spread.
Counterparties to the interest rate cap agreements are major financial
institutions who also participate in the New Credit Facilities. The Company
believes that credit loss from counterparty non-performance is remote.
Stilwell Credit Facility. On January 11, 2000, KCSI also arranged a new $200
million 364-day senior unsecured competitive Advance/Revolving Credit Facility
("Stilwell Credit Facility"). KCSI borrowed $125 million under this facility and
used the proceeds to retire debt obligations as discussed above. Stilwell has
assumed this credit facility, including the $125 million borrowed thereunder,
and upon completion of the Separation, KCSI will be released from all
obligations thereunder. Stilwell repaid the $125 million in March 2000.
Two borrowing options are available under the Stilwell Credit Facility: a
competitive advance option, which is uncommitted, and a committed revolving
credit option. Interest on the competitive advance option is based on rates
obtained from bids as selected by Stilwell in accordance with the lender's
standard competitive auction procedures. Interest on the revolving credit option
accrues based on the type of loan (e.g., Eurodollar, Swingline, etc.) with rates
computed using LIBOR plus 0.35% per annum or, alternatively, the highest of the
prime rate, the Federal Funds Effective Rate plus 0.005%, and the Base
Certificate of Deposit Rate plus 1%.
The Stilwell Credit Facility includes a facility fee of 0.15% per annum and a
utilization fee of 0.125% on the amount of the outstanding loans under the
facility for each day on which the aggregate utilization of the Stilwell Credit
Facility exceeds 33% of the aggregate commitments of the various lenders.
Additionally, the Stilwell Credit Facility contains, among other provisions,
various financial covenants, which could restrict maximum utilization of the
Stilwell Credit Facility. Stilwell may assign or delegate all or a portion of
its rights and obligations under the Stilwell Credit Facility to one or more of
its domestic subsidiaries.
Sale of Janus Stock. In first quarter 2000, Stilwell sold to Janus, for
treasury, 192,408 shares of Janus common stock and such shares will be available
for awards under Janus' recently adopted Long Term Incentive Plan. Janus has
agreed that for as long as it has available shares of Janus common stock for
grant under that plan, it will not award phantom stock, stock appreciation
rights or similar rights. The sale of these shares resulted in an after-tax gain
of approximately $15.1 million, and together with the issuance by Janus of
approximately 35,000 shares of restricted stock in first quarter 2000, reduced
Stilwell's ownership to approximately 81.5%. After this first quarter 2000
issuance, more than 157,000 shares of Janus stock remain in treasury for use in
connection with its Long Term Incentive Plan. Upon issuance of all of these
shares in future years, the Company's ownership interest in Janus will be 80.1%.
Litigation Settlement. In January 2000, Stilwell received approximately $44.2
million in connection with the settlement of a legal dispute related to a former
equity investment. The settlement agreement resolves all outstanding issues
related to this former equity investment. In first quarter 2000, Stilwell
recognized an after-tax gain of approximately $27.3 million as a result of this
settlement.
Dividends Suspended for KCSI Common Stock. During first quarter 2000, the
Company's Board announced that, based upon a review of the Company's dividend
policy in conjunction with the New Credit Facilities discussed above and in
light of the anticipated Separation, it decided to suspend the Common stock
dividend of KCSI under the existing structure of the Company. This action
complies with the terms and covenants of the New Credit Facilities. Subsequent
to the Separation, the separate Boards of KCSI and Stilwell will determine the
appropriate dividend policy for their respective companies.
<PAGE>18
RESULTS OF OPERATIONS
The Company's revenues, operating income and net income by industry segment were
as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
2000 1999
------- -------
<S> <C> <C>
Revenues:
Transportation $ 148.9 $ 151.9
Financial Services 545.1 233.3
------- -------
Total $ 694.0 $ 385.2
======= =======
Operating Income:
Transportation $ 18.0 $ 24.4
Financial Services 244.9 97.2
------- -------
Total $ 262.9 $ 121.6
======= =======
Net Income:
Transportation $ 4.5 $ 7.6
Financial Services 188.7 61.0
------- -------
Total $ 193.2 $ 68.6
======= =======
</TABLE>
The Company reported first quarter 2000 consolidated earnings of $193.2 million
($1.66 per diluted share) compared to $68.6 million ($0.60 per diluted share) in
first quarter 1999. Consolidated revenues rose 80% to $694.0 million during
first quarter 2000 versus first quarter 1999, resulting from higher revenues in
the Financial Services segment, led by Janus. Operating expenses increased
approximately 64% quarter to quarter primarily due to increases in the Financial
Services segment reflecting higher costs associated with the growth in revenues.
First quarter 2000 depreciation and amortization increased nearly 49%, chiefly
because of higher depreciation arising from Janus' infrastructure development
and higher amortization associated with the deferred commissions paid by Janus
under the Janus World Funds Plc B shares arrangement.
Operating income for the three months ended March 31, 2000 increased to $262.9
million, 116% higher than the comparable 1999 period. This increase was
primarily due to lower proportionate growth in operating expenses compared to
revenues in the Financial Services segment. Equity earnings in unconsolidated
affiliates improved $15.3 million, or 124%, due to higher contributions from DST
and Grupo TFM. DST equity earnings increased $7.3 million, while equity earnings
from Grupo TFM were $7.7 million higher (exclusive of related interest expense).
Interest expense increased $5.1 million (34%) for the three months ended March
31, 2000 versus the comparable 1999 period due to higher interest rates
associated with the January 2000 debt re-capitalization, as well as increased
amortization due to related debt issue costs.
In connection with the Company's re-capitalization of its debt, in first quarter
2000 the Transportation segment recorded extraordinary debt retirement costs of
approximately $5.9 million, after-tax ($0.05 per diluted share). In the
Financial Services segment, one-time after-tax items contributed approximately
$0.39 per diluted share to the Company's consolidated earnings per share. These
items were comprised of the following: i) an after-tax gain of approximately
$27.3 million resulting from the settlement of litigation with a former equity
affiliate; ii) a $15.1 million after-tax gain associated with the Company's sale
of 192,408 shares of its Janus common stock to Janus as discussed above; and
iii) approximately $3.6 million in equity earnings representing the Company's
proportionate share of non-recurring items recorded by DST in first quarter
2000.
<PAGE>19
TRANSPORTATION
The Transportation segment's condensed Statement of Income was as follows (in
millions):
<TABLE>
<CAPTION>
Consolidated Transportation
(in millions)
Three Months
Ended March 31,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 148.9 $ 151.9
Costs and expenses 115.0 113.2
Depreciation and amortization 15.9 14.3
----------- -----------
Operating income 18.0 24.4
Equity in net earnings of
unconsolidated affiliates:
Grupo TFM 8.2 0.5
Other 0.6 0.6
Interest expense (17.5) (14.0)
Other, net 2.7 0.9
----------- -----------
Pretax income 12.0 12.4
Income tax provision 1.6 4.8
----------- -----------
Income before
extraordinary item, net of tax 10.4 7.6
Extraordinary item, net of tax:
Debt retirement costs (5.9) -
----------- -----------
Net Income $ 4.5 $ 7.6
=========== ===========
</TABLE>
The Transportation segment contributed $4.5 million to the Company's first
quarter 2000 consolidated net income, a $3.1 million decrease compared to first
quarter 1999. Exclusive of the extraordinary debt retirement costs of $5.9
million associated with the re-capitalization of the Company's debt during
January 2000 (see "Recent Developments"), the Transportation segment's net
income increased $2.8 million, or 37%, quarter to quarter. This increase was
primarily due to a $5.7 million improvement in the contribution (including
related interest expense) from Grupo TFM, partially offset by a decrease in
ongoing net income from KCSR/Gateway Western of approximately $2.7 million.
Transportation revenues for first quarter 2000 decreased $3.0 million (2%)
compared to first quarter 1999. Combined KCSR and Gateway Western revenues
increased approximately $0.7 million quarter to quarter (see below for
explanation of commodity groups), offset by lower revenues at two smaller
Transportation companies resulting from reduced demand. Operating expenses
increased approximately $3.4 million quarter to quarter primarily due to a 5%
increase in combined KCSR and Gateway Western operating expenses offset by lower
expenses at several smaller Transportation subsidiaries. First quarter interest
expense increased 25% from the prior year quarter due to higher interest rates
associated with the debt re-capitalization, as well as increased amortization
due to related debt issue costs.
<PAGE>20
The following is a summary of revenues and carloads for the combined KCSR and
Gateway Western major commodity groups:
<TABLE>
<CAPTION>
Carloads and
Revenues Intermodal Units
------------------ -----------------
(in millions) (in thousands)
Three months Three months
ended March 31, ended March 31,
------------------ -----------------
2000 1999 2000 1999
------ ------ ----- -----
<S> <C> <C> <C> <C>
General commodities:
Agricultural and mineral $ 32.5 $ 31.3 44.4 43.6
Chemical and petroleum 32.0 33.5 39.8 42.1
Paper and forest 26.2 25.9 41.1 41.3
Other 1.6 2.9 6.6 10.7
------ ------ ----- -----
Total general commodities 92.3 93.6 131.9 137.7
Coal 29.2 29.7 48.0 52.8
Intermodal 12.3 11.7 52.5 48.6
Automotive 3.1 1.1 5.2 1.4
------ ------ ----- -----
Subtotal - Carload revenues 136.9 136.1 237.6 240.5
Other 9.4 9.1 - -
------ ------ ----- -----
Total $146.3 $145.2 237.6 240.5
====== ====== ====== =====
</TABLE>
Agricultural and mineral products - Agricultural and mineral product
revenues increased $1.2 million, (3.7%), for the three months ended March 31,
2000 versus the comparable 1999 period. The increase resulted primarily from
higher metal/scrap product revenues of approximately $2.3 million due to an
improvement in the domestic oil market, which utilizes steel for oil
exploration. This increase was partially offset by lower revenues for domestic
and export grain movements due to competitive pricing issues and a weakness in
the export market. First quarter 2000 domestic grain revenues continued to be
impacted by a loss of market share due to a rail line build-in by the Union
Pacific to a feed mill serviced by KCSR. Management believes this competitive
situation could continue to affect domestic grain revenues in the near future.
Chemical and petroleum products - Chemical and petroleum product revenues
decreased $1.5 million (4.3%) quarter to quarter, primarily as a result of
declines in plastics and soda ash revenues. The revenue decrease for these
commodities is due primarily to a continuing decline in demand due to both
domestic and international chemical market conditions and pricing pressures
driven by competitive market dynamics. Also, lower demand for petroleum-related
products resulted in a slight decrease in related shipments and revenues during
the first quarter 2000. These declines were partially offset by an increase in
miscellaneous chemicals due to increased demand and changes in traffic mix and
length of haul.
Paper and forest products - Paper and forest product revenues increased
1.2% for the three months ended March 31, 2000 compared to the three months
ended March 31, 1999. This increase is primarily due to increased demand for
lumber products. Management believes that the market for paper and forest
products will improve during the remainder of 2000 compared to the weak market
experienced in 1999. Further, management believes there is potential for an
increase in shipments to Mexico due to higher demand for woodpulp and scrap
paper, and a potential market for lumber and panel products as frame and panel
construction methods become more widely accepted in Mexico.
Coal - Coal revenues decreased 1.6% for the three months ended March 31,
2000 compared to the three months ended March 31, 1999, resulting from a decline
in net tons delivered of approximately 7%. This decline was partially due to a
decrease of tons delivered to one plant because of a longer than planned outage,
as well as reduced demand at other plants due to existing stockpiles. These
declines were partially offset by the addition of a new customer. In fourth
quarter
<PAGE>21
1999, KCSR began serving as a bridge carrier for coal deliveries to a Texas
Utilities electric generating plant in Martin Lake, Texas. Management believes
that, even though coal revenues were down quarter to quarter, increases in
average tons per train coupled with improved cycle times will improve the
profitability of coal traffic and provide for revenue growth.
Intermodal, automotive and other carload - Intermodal, automotive and
other carload revenues increased $1.3 million for the three months ended March
31, 2000 versus the comparable 1999 period arising primarily from more
intermodal unit shipments (8.1%) quarter to quarter, as well an approximate $2
million increase (174%) in automotive revenues. The increase in intermodal
traffic is attributable to several factors including the alliance with Canadian
National / Illinois Central ("CN/IC") and east-west intermodal traffic
originating from the Norfolk Southern Corporation ("NS"). Automotive traffic has
increased, in part, due to an agreement with General Motors for automobile parts
traffic originating in the upper midwest and terminating in Mexico. Also
contributing to the increase in automotive revenues was additional automotive
traffic handled by Gateway Western from Mexico, Missouri to Kansas City
originating from the NS. Increases in intermodal and automotive traffic were
partially offset by a decrease in other carload revenues, which is comprised
primarily of haulage traffic at Gateway Western. This revenue has declined due
to competitive issues with the related rail carriers. Management expects that
both intermodal and automotive revenues will continue to increase for the
foreseeable future as the alliance with CN/IC matures.
The Transportation segment's total operating expenses increased $3.4 million
(2.7%), to $130.9 million for the three months ended March 31, 2000 from $127.5
million for the three months ended March 31, 1999. First quarter KCSR/Gateway
Western operating costs increased $6.3 million from 1999, largely due to higher
fuel costs associated with the recent increase in oil prices, as well as higher
locomotive lease and maintenance costs. Additionally, an increase in stock
option exercises has led to an increase in fringe benefit costs. These increases
were partially offset by a decrease in car hire expense arising primarily from
improved operations and the easing of congestion. Declines in other
Transportation subsidiaries operating costs of approximately $2.9 million
related primarily to volume-related revenue declines.
As a result of the lower proportional growth in revenues compared to operating
expenses, operating income for the Transportation segment declined $6.4 million
quarter to quarter. This factor also resulted in a combined KCSR and Gateway
Western operating ratio of 86.0% in first quarter 2000 compared to 82.2% in
first quarter 1999.
The Transportation segment recorded equity earnings of $8.8 million from
unconsolidated affiliates for the three months ended March 31, 2000 compared to
$1.1 million for the three months ended March 31, 1999. The increase is
attributed primarily to equity earnings from Grupo TFM, reflecting continued
operating improvements and the tax impact of inflation and fluctuations in the
valuation of the peso versus the U.S. dollar. Grupo TFM's operating ratio
improved to 72.7% in first quarter 2000 versus 78.8% in first quarter 1999 as
revenues increased approximately 30% quarter to quarter. Results of Grupo TFM
are reported on a U.S. GAAP basis.
First quarter interest expense increased 25% from the prior year quarter due to
higher interest rates associated with the debt re-capitalization, as well as
increased amortization due to related debt issue costs.
<PAGE>22
FINANCIAL SERVICES
The Financial Services segment's condensed Statement of Income was as follows
(in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------
2000 1999
--------- ---------
<S> <C> <C>
Revenues $ 545.1 $ 233.3
Costs and expenses 284.6 129.3
Depreciation and amortization 15.6 6.8
--------- ---------
Operating income 244.9 97.2
Equity in net earnings of
unconsolidated affiliates:
DST Systems, Inc. 18.0 10.7
Other 0.8 0.5
Gain on litigation settlement 44.2 -
Gain on sale of Janus stock 15.1 -
Interest expense (2.6) (1.0)
Other, net 9.9 4.9
--------- ---------
Pretax income 330.3 112.3
Income tax provision 114.3 40.1
Minority interest 27.3 11.2
--------- ---------
Net income $ 188.7 $ 61.0
========= =========
</TABLE>
Assets under management as of March 31, 2000 and 1999 were as follows (in
billions):
<TABLE>
<CAPTION>
March 31,
------------------------
2000 1999
------ ------
<S> <C> <C>
JANUS
Janus Advised Funds:
Janus Investment Funds (i) $218.2 $ 96.1
Janus Aspen Series 24.0 7.6
Janus Money Market Funds 9.4 6.3
Janus World Funds 3.4 0.3
------ ------
Total Janus Advised Funds 255.0 110.3
Janus Sub-Advised Funds
and Private Accounts 60.3 26.5
------ ------
Total Janus 315.3 136.8
------ ------
BERGER
Berger Advised Funds 7.1 3.3
Berger Sub-Advised Funds
and Private Accounts 1.1 0.4
------ ------
Total Berger 8.2 3.7
------ ------
NELSON 1.4 1.2
------ ------
Total Assets Under Management $324.9 $141.7
====== ======
(i) Excludes money market funds.
</TABLE>
<PAGE>23
For the three months ended March 31, 2000, the Financial Services segment
reported consolidated earnings of $188.7 million, a $127.7 million increase over
first quarter 1999. Exclusive of the one-time items discussed in "Recent
Developments" above, ongoing net income was $86.0 million, or 141%, higher than
comparable 1999. As a result of a 126% increase in average assets under
management quarter to quarter, Financial Services consolidated revenues reached
$545.1 million, an increase of 134% over prior year, and consolidated operating
margins improved to 44.9% versus 41.7% in first quarter 1999. These improved
revenues and operating margins resulted in a 152% increase in operating income
(to $244.9 million).
Assets under management increased approximately billion during the three months
ended March 31, 2000, reaching $324.9 billion. Net sales and market appreciation
for the quarter totaled $42.8 and $24. billion, respectively, with Janus
contributing $42.1 and $23.6 billion of the respective totals. Average assets
under management for the current three-month period were 126% higher than the
same period in 1999. In addition, shareowner accounts grew more than 28% during
first quarter 2000, surpassing 5.5 million as of March 31, 2000.
Consolidated operating expenses increased 121% (to $300.2 million) in first
quarter 2000 compared to 1999, largely reflecting the significant growth in
revenues. Higher expenses were evident in the following components: i) salaries
and wages, primarily due to investment performance-based incentive compensation
and an increased number of employees; ii) alliance and third party administrator
fees resulting from increased assets under management through this distribution
channel; and iii) marketing and promotion, reflecting efforts to capitalize on
strong investment performance by both Janus and Berger in the last two years.
Additionally, depreciation and amortization increased by 129% as a result of the
significant infrastructure developments by Janus, as well as amortization
associated with the deferred commissions paid on the Janus World Funds Plc B
shares.
Equity in net earnings of DST for the three months ended March 31, 2000 improved
to $18.0 million from $10.7 million in 1999. This $7.3 million improvement
includes approximately $3.6 million from two non-recurring DST items - a gain on
the settlement of a legal dispute with a former equity affiliate and gains
related to sales of marketable securities. Exclusive of these DST gain items,
the Company's proportionate share of DST earnings improved $3.7 million largely
due to the following: i) a 14.1% increase in revenues, reflecting growth in the
financial services segment (shareowner accounts serviced reached 61.0 million as
of March 31, 2000 compared to 56.4 million at December 31, 1999 and 51.6 million
at March 31, 1999) and output solutions segment; and ii) improved consolidated
operating margins.
The 102% increase in Other, net quarter to quarter is attributable to realized
gains by Janus on the sale of short-term investments, higher interest income
resulting from an increase in cash and gains resulting from the issuance of
Janus shares to certain of its employees, which reduced the Company's ownership
of Janus.
A brief discussion of significant Janus, Berger and Nelson items during the
three months ended March 31, 2000 follows:
Janus
Janus assets under management increased $65.8 billion during first quarter
2000 and $178.5 billion from March 31, 1999. Janus' net sales growth was
more than 40% of the total growth experienced during all of 1999. This
growth generally reflects ongoing favorable investment performance by the
various funds/portfolios within the Janus group of mutual funds (as
demonstrated by market appreciation of approximately $23.6 billion in first
quarter 2000), marketing and promotional efforts and competitive levels of
expenses and fees compared to industry standards.
<PAGE>24
Berger
Berger assets under management increased 24% (to $8.2 billion) during the
three months ended March 31, 2000 and 122% compared to the $3.7 billion in
assets under management at March 31, 1999. For the first time in over two
years, Berger's shareowner accounts increased during a quarter - almost 7%
- reflecting positive investment performance during 1999 and first quarter
2000.
Nelson
Nelson's assets under management increased to (pound)866 million, a 3% and
17% improvement compared to asset levels at December 31, 1999 and March 31,
1999, respectively. Nelson continues its expansion efforts and the Company
expects that during this phase of Nelson's development, Nelson will operate
at a loss. These losses, however, are not expected to have a material
impact on the Company's results of operations or financial position.
TRENDS AND OUTLOOK
The Company's first quarter 2000 diluted earnings per share of $1.66 was more
than 176% higher than the $0.60 per share in first quarter 1999. Revenue growth
in the Financial Services segment for the first three months of 2000, partially
offset by lower proportionate increases in operating costs, resulted in a 116%
improvement in consolidated operating income quarter to quarter. While the
Transportation segment experienced a decline in revenues and operating income
for the first quarter 2000, Grupo TFM results continued to improve due to
revenue growth and operating improvements and helped to increase ongoing
Transportation net income. Domestically, results were affected by minimal
revenue growth at KCSR and Gateway, which was the residual effect of the service
issues experienced during the second half of 1999 coupled with competitive
pricing issues. The majority of these service issues have been resolved and
management believes the rail operations are well positioned to effectively
manage revenue growth opportunities.
In the Financial Services segment, continued growth in assets under management
has resulted in an increase in revenues, operating income and net income for
first quarter 2000 versus the comparable 1999 period.
A current outlook for the Company's businesses for the remainder of 2000 is as
follows (refer to the first paragraph of "Overview" section of this Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, regarding forward-looking comments):
i) Transportation - Management expects that general commodities, intermodal and
automotive traffic will continue to be largely dependent on economic trends
within certain industries in the geographic region served by the railroads
comprising the NAFTA Railway. Based on anticipated traffic levels, revenues
are expected to increase slightly during the remainder of 2000 compared to
1999. Variable costs and expenses are expected to be at levels proportionate
with revenue activity, except for fuel expenses, which are expected to mirror
market conditions.
The 1999 congestion issues resulted in some strained relationships with
customers. Rebuilding these relationships will require focused management
efforts and consistent and dependable customer service in the future. In the
short-term, competitive pricing issues and weak export markets for grain and
chemicals will present revenue challenges to the rail operations. However, in
the longer term, Transportation management believes that, with the effective
cost controls and utilization improvements noted, the NAFTA Railway continues
to provide an attractive service for shippers and is well-positioned to take
advantage of the growth potential of NAFTA traffic.
Financial Services - The Financial Services segment earnings and cash flows
are heavily dependent on prevailing financial market conditions. Significant
increases or decreases in the various securities markets, particularly the
equity markets, can have a material impact on the Financial Services
segment's results of operations, financial condition and cash flows.
<PAGE>25
Additionally, the Financial Services segment results are affected by the
relative performance of Janus, Berger and Nelson products, introduction and
market reception of new products, as well as other factors, including
increases in the rate of return of alternative investment products,
increasing competition as the number of mutual funds continues to grow, and
changes in marketing and distribution channels.
Based on a higher level of assets under management starting the second
quarter, revenues for the remainder of 2000 are expected to exceed comparable
prior year periods. Management expects ongoing Financial Services margin
pressure challenges as subsidiaries continue efforts to ensure that the
operational and administrative infrastructure consistently meets the high
standards of quality and service historically provided to investors.
ii)Equity Investments - The Company expects to continue to participate in the
earnings/losses from its equity investments in DST, Grupo TFM, Southern
Capital and Mexrail. Management does not make any assurances as to the impact
that a change in the value of the peso or a change in Mexican inflation will
have on the results of Grupo TFM.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as follows (in millions):
<TABLE>
<CAPTION>
Three Months
Ended March 31,
-------------------
2000 1999
------- -------
<S> <C> <C>
Cash flows provided by (used for):
Operating activities $ 186.6 $ 92.8
Investing activities (66.8) (25.0)
Financing activities (67.4) (34.0)
------- -------
Cash and equivalents:
Net increase 52.4 33.8
At beginning of year 336.1 144.1
------- -------
At end of period $ 388.5 $ 177.9
======= =======
</TABLE>
During the three months ended March 31, 2000, the Company's consolidated cash
position increased $52.4 million from December 31, 1999. This increase resulted
primarily from earnings, partially offset by property acquisitions, payments of
deferred commissions on the Janus World Funds Plc B shares and net repayments of
indebtedness.
Net operating cash inflows for the quarter ended March 31, 2000 were $93.8
million higher than comparable 1999. This improvement in operating cash flows
was chiefly attributable to an increase in net income, the impact of which was
partially reduced by the $44.7 million in deferred commission payments and net
changes in other working capital components.
Net investing cash outflows were $66.8 million during the quarter ended March
31, 2000 compared to $25.0 million during first quarter 1999. This difference is
primarily to higher capital expenditures quarter to quarter. In addition, Janus
used approximately $6.8 million for net purchases of investments in advised
funds during first quarter 2000 versus no activity in comparable 1999.
During first quarter 2000, financing cash outflows were used primarily for the
repayment of debt and associated issuance costs, as well as for cash dividends
and distributions to minority stockholders. Net cash flows used for financing
purposes totaled $67.4 million during first quarter 2000 compared with $34.0
million used during the three months ended March 31, 1999. This was due
primarily to the first quarter 2000 net repayment of indebtedness in connection
with the re-capitalization.
<PAGE>26
Cash flows from operations are expected to increase during the remainder of 2000
from positive operating income, which has historically resulted in favorable
operating cash flows. Investing activities will continue to use significant
amounts of cash. Future roadway improvement projects are expected to be funded
by KCSR operating cash flow. Based on anticipated financing arrangements for
Grupo TFM, significant additional operational contributions from the Company to
Grupo TFM are not expected to be necessary. However, there exists a possible
approximate $74 million capital call if certain Grupo TFM benchmarks, as
outlined in Grupo TFM's financing arrangements, are not met. Additionally, if
circumstances develop in which a contribution may be requested by Grupo TFM, the
Company will evaluate the contribution based on the merits of the specific
underlying need. Further, the Company is negotiating for the option to purchase
a portion of the Mexican Government's 20% interest in TFM at a discount.
Management anticipates using working capital and existing lines of credit to
fund this transaction in the event it elects to exercise any option granted as a
result of these negotiations.
In addition to operating cash flows, the Company has financing available through
its various lines of credit with a maximum borrowing amount of $460 million. As
of March 31, 2000, $445 million was available under these lines of credit, $300
million of which is to be used solely by the Financial Services segment.
However, the Financial Services segment elected to not renew its May 1999 $100
million 364-day revolver upon expiration on May 12, 2000, effectively reducing
available credit to the Company by this amount. Because of certain financial
covenants contained in the credit agreements, however, maximum utilization of
the Company's available lines of credit may be restricted.
The Company also has a Universal Shelf Registration Statement ("Registration
Statement") filed in September 1993, as amended in April 1996 for $500 million.
The SEC declared the Registration Statement effective on April 22, 1996;
however, no securities have been issued. The Company has not engaged an
underwriter for these securities. Management expects that any net proceeds from
the sale of securities under the Registration Statement 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.
Additionally, as discussed in "Recent Developments", the Company's debt
restructuring in January 2000 included a $200 million term loan that matures on
January 11, 2001. The Company has the ability and the intent to refinance this
term loan and is currently preparing for the completion of this refinancing in
the second half of 2000.
The Company believes its operating cash flows and available financing resources
are sufficient to fund working capital and other requirements for the remainder
of 2000.
The Company's debt ratio (total debt as a percent of total debt plus equity) at
March 31, 2000 was 31.6% compared to 37.2% at December 31, 1999. Company
consolidated debt declined $61.0 million from December 31, 1999 (to $699.9
million at March 31, 2000) as a result of net repayments in connection with the
re-capitalization discussed in "Recent Developments" above. Consolidated equity
increased $230.8 million from December 31, 1999. This increase was due primarily
to net income and the issuance of common stock under the Employee Stock Purchase
Plan and other plans. This increase in equity coupled with the decline in debt
resulted in a lower debt ratio at March 31, 2000 compared to December 31, 1999.
Management anticipates that the debt ratio will continue to decrease during the
remainder of 2000 as a result of expected net debt repayments and profitable
operations. Note, however, that unrealized gains on "available for sale"
securities 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 accumulated other comprehensive income and
affect the Company's debt ratio.
<PAGE>27
OTHER
Year 2000. KCSI and its subsidiaries experienced no material Year 2000 related
issues when the date moved to January 1, 2000, nor have any issues arisen as of
the date of this Form 10-Q. Although the initial transition to 2000 occurred
without adverse effects, there still exists possible Year 2000 issues for those
applications, systems, processes and system hardware that have yet to be used in
live activities and transactions. The Company continues to evaluate and pursue
discussions with its various customers, partners and vendors with respect to
Year 2000 issues. No assurance can be made that such parties will be Year 2000
ready. While the Company cannot fully determine the impact, the inability of its
computer systems to operate properly in 2000 could result in significant
difficulty 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.
While there have been no material problems during Year 2000 as of the date of
this Form 10-Q, 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 operate properly in the Year 2000. Based on work performed and information
received, the Company believes its key suppliers, customers and other
significant third party relationships were and continue to be prepared for the
Year 2000 in all material respects; however, management of the Company makes no
assurances that all such parties are Year 2000 ready.
The Company and its subsidiaries have identified alternative plans in the event
that the Year 2000 project does not meet anticipated needs. The Company has made
alternative arrangements in the event that critical suppliers, customers,
utility providers and other significant third parties experience Year 2000
difficulties.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company has had no significant changes in its Quantitative and Qualitative
Disclosures About Market Risk from that previously reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 1999.
<PAGE>28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part I, Item 1. Financial Statements, Note 11 to the Consolidated Condensed
Financial Statements of this Form 10-Q is hereby incorporated herein by
reference.
Item 5. Other Information
By letter dated May 4, 2000, Jose F. Serrano submitted his resignation from
the Board of Directors of Kansas City Southern Industries, Inc. to be
effective on the date of such letter.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 27.1 - Financial Data Schedule
b) Reports on Form 8-K
The Company did not file a Current Report on Form 8-K during the three
months ended March 31, 2000.
<PAGE>29
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 May 15, 2000.
Kansas City Southern Industries, Inc.
/s/ Joseph D. Monello
Joseph D. Monello
Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ Louis G. Van Horn
Louis G. Van Horn
Vice President and Comptroller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-Q, CONTAINS SUMMARY
FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND
STATEMENT OF INCOME OF KANSAS CITY SOUTHERN INDUSTRIES, INC., COMMISSION FILE
NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 388,500,000
<SECURITIES> 33,000,000
<RECEIVABLES> 343,700,000
<ALLOWANCES> 0
<INVENTORY> 39,400,000
<CURRENT-ASSETS> 859,600,000
<PP&E> 2,020,000,000
<DEPRECIATION> 642,700,000
<TOTAL-ASSETS> 3,317,400,000
<CURRENT-LIABILITIES> 451,500,000
<BONDS> 688,300,000
0
6,100,000
<COMMON> 1,100,000
<OTHER-SE> 1,506,700,000
<TOTAL-LIABILITY-AND-EQUITY> 3,317,400,000
<SALES> 0
<TOTAL-REVENUES> 694,000,000
<CGS> 0
<TOTAL-COSTS> 431,100,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,100,000
<INCOME-PRETAX> 342,300,000
<INCOME-TAX> 115,900,000
<INCOME-CONTINUING> 199,100,000
<DISCONTINUED> 0
<EXTRAORDINARY> (5,900,000)
<CHANGES> 0
<NET-INCOME> 193,200,000
<EPS-BASIC> 1.74
<EPS-DILUTED> 1.66
</TABLE>
