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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(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, 1999
[ ] 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 Identification No.)
incorporation or organization)
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
Share, 4%, Noncumulative New York Stock Exchange
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. [X]
Company Stock. The Company's common stock is listed on the New York Stock
Exchange under the symbol "KSU." As of March 31, 2000, 111,399,354 shares of
common stock and 242,170 shares of voting preferred stock were outstanding. On
such date, the aggregate market value of the voting and non-voting common and
preferred stock held by non-affiliates of the Company was $9,577,014,534 (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 Form 10-K as indicated:
Document Part of Form 10-K into
which incorporated
- -------------------------------------------------- ---------------------------
Company's Definitive Proxy Statement for the 2000 Parts I, III
Annual Meeting of Stockholders, which will be filed
no later than 120 days after December 31, 1999
Page 12
KANSAS CITY SOUTHERN INDUSTRIES, INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
Page
PART I
Item 1. Business............................................................ 1
Item 2. Properties.......................................................... 9
Item 3. Legal Proceedings................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 13
Executive Officers of the Company................................... 13
PART II
Item 5. Market for the Company's Common Stock and
Related Stockholder Matters....................................... 15
Item 6. Selected Financial Data............................................. 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 17
Item 7(A)Quantitative and Qualitative Disclosures About Market Risk.......... 72
Item 8. Financial Statements and Supplementary Data......................... 76
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...............................126
PART III
Item 10. Directors and Executive Officers of the Company.....................127
Item 11. Executive Compensation..............................................127
Item 12. Security Ownership of Certain Beneficial Owners and
Management........................................................127
Item 13. Certain Relationships and Related Transactions......................127
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.......................................................128
Signatures..........................................................135
ii
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.
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.
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 82% 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.
2
Separation of Business Segments
The Company intends to separate the Transportation and Financial Services
segments through a pro rata distribution of Stilwell common stock to KCSI
stockholders (the "Separation"). On July 9, 1999, the Company received a tax
ruling from the Internal Revenue Service ("IRS") to the effect that for United
States federal income tax purposes, the planned 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 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 does not intend to effect this reverse stock split until
the Separation is completed. Additionally, effective July 1, 1999, KCSI
transferred to Stilwell KCSI's ownership interests in Janus, Berger, Nelson, DST
and certain other financial services-related assets and Stilwell assumed all of
KCSI's liabilities associated with the assets transferred. Also, as part of the
Separation, the Company re-capitalized its debt structure on January 11, 2000 as
further described under Part II Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of this Form 10-K.
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,
1999 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 14 - 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 comprised of approximately 6,000 miles of main and
branch lines that link key commercial and industrial markets in the United
States and Mexico. Together with its strategic alliance with the Canadian
National Railway Company ("CN") and Illinois Central Corporation ("IC")
(collectively "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 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 shippers in the midwestern and eastern United
States and Canada, including shippers utilizing Chicago and Kansas City -- the
two largest rail centers in the United
3
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, operates a Class I Common Carrier railroad
system in the United States, from the Midwest to the Gulf of Mexico and on an
East-West axis from Meridian, Mississippi, to Dallas, Texas. KCSR offers the
shortest route between Kansas City and major port cities along the Gulf of
Mexico in Louisiana, Mississippi and Texas, with a customer base that includes
electric generating utilities and a wide range of companies in the chemical and
petroleum industries, agricultural and mineral industries, paper and forest
product industries, automotive product and intermodal industries, among others.
KCSR, in cooperation with Norfolk Southern Corporation ("Norfolk Southern"),
operates the most direct rail route, referred to as the "Meridian Speedway,"
linking the Atlanta, Georgia and Dallas, Texas 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, a regional
common carrier system, which links Kansas City with East St. Louis and
Springfield, Illinois and provides key interchanges with the majority of other
Class I railroads. Like KCSR, Gateway Western serves customers in a wide range
of industries.
KCSR and Gateway Western revenues and net income are dependent on providing
reliable service to customers at competitive rates, the general economic
conditions in the geographic region served and the ability to effectively
compete against alternative modes of surface transportation, such as
over-the-road truck transportation. The ability of KCSR and Gateway Western to
construct and maintain the roadway in order to provide safe and efficient
transportation service is important to the ongoing viability as a rail carrier.
Additionally, cost containment is important in maintaining a competitive market
position, particularly with respect to employee costs as approximately 84% of
KCSR and Gateway Western combined employees are covered under various collective
bargaining agreements.
The Transportation segment also includes strategic joint venture interests in
Grupo TFM and Mexrail, which provide direct access to Mexico. Through these
joint ventures, which are operated in partnership with Transportacion Maritima
Mexicana, S.A. de C.V., 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, serves a majority of the Mexican states and Mexico City, which
represent a majority of the country's population and estimated gross domestic
product. Tex Mex connects with KCSR via trackage rights at Beaumont, Texas, with
TFM at Laredo, Texas, (the single largest rail freight transfer point between
the United States and Mexico), as well as with other U.S. Class I railroads at
various locations.
As a result of the 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. This agreement also provides KCSR with access
to the port of Mobile, Alabama through haulage rights. 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.
4
Financial Services (Stilwell)
Stilwell includes Janus, Berger, Nelson and a 32% interest in DST. Janus and
Berger, each headquartered in Denver, Colorado, are investment advisors
registered with the Securities and Exchange Commission ("SEC"). Janus serves as
an investment advisor to the Janus Investment Funds ("Janus Funds"), Janus Aspen
Series ("Janus Aspen") and Janus World Funds Plc ("Janus World"), collectively
the "Janus Advised Funds". Additionally, Janus is the advisor or sub-advisor to
other investment companies and institutional and individual private accounts,
including pension, profit-sharing and other employee benefit plans, trusts,
estates, charitable organizations, endowments and foundations (referred to as
"Janus Sub-Advised Funds and Private Accounts"). Berger is also engaged in the
business of providing financial asset management services and products,
principally through a group of registered investment companies known as the
Berger Advised Funds. Berger also serves as investment advisor or sub-advisor to
other registered investment companies and separate accounts (referred to as
"Berger Sub-Advised Funds and Private Accounts"). Nelson, a United Kingdom
company, provides investment advice and investment management services primarily
to individuals who are retired or contemplating retirement. DST, together with
its subsidiaries and joint ventures, offers information processing and software
services and products through three operating segments: financial services,
output solutions and customer management. Additionally, DST holds certain
investments in equity securities, financial interests and real estate holdings.
JANUS
Janus derives its revenues and net income primarily from advisory services
provided to the Janus Advised Funds and other financial services firms and
private accounts. As of December 31, 1999, Janus had total assets under
management of $249.5 billion, of which $200.0 billion were in the Janus Advised
Funds. Janus primarily offers equity portfolios to investors, which comprised
approximately 95% of total assets under management for Janus at December 31,
1999. At that date, funds advised by Janus had approximately 4.1 million
shareowner accounts.
Pursuant to investment advisory agreements with each of the Janus Advised Funds
and the Janus Sub-Advised Funds and Private Accounts, Janus provides overall
investment management services. These agreements generally provide that Janus
will furnish continuous advice and recommendations concerning investments and
reinvestments in conformity with the investment objectives and restrictions of
the applicable fund or account.
Investment advisory fees are negotiated separately and subject to extreme market
pressures. These fees vary depending on the type of the fund or account and the
size of the assets managed, with fee rates above specified asset levels being
reduced. Fees from Private Accounts are generally computed on the basis of the
market value of the assets managed at the end of the preceding month and paid in
arrears on a monthly basis.
In order to perform its investment advisory functions, Janus conducts
fundamental investment research and valuation analysis. In general, Janus'
investment philosophy tends to focus on the earnings growth of individual
companies relative to their peers or the economy. For this reason, Janus'
proprietary analysis is geared to understanding the earnings potential of the
companies in which it invests. Further, Janus portfolios are constructed one
security at a time rather than in response to preset regional, country, economic
sector or industry diversification guidelines.
5
Emphasizing the proprietary work of Janus' own analysts, most research is
performed in-house. Research activities include, among others, review of
earnings reports, direct contacts with corporate management, analysis of
contracts with competitors and visits to individual companies.
The Janus Advised Funds and the Janus Sub-Advised Funds generally bear the
expenses associated with the operation of each fund and the issuance and
redemption of its securities, except that advertising, promotional and sales
expenses of the Janus Funds are assumed by Janus. Expenses include, among
others, investment advisory fees, shareowner servicing, transfer agent,
custodian fees and expenses, legal and auditing fees, and expenses of preparing,
printing and mailing prospectuses and shareowner reports.
Janus has four operating subsidiaries: Janus Service Corporation ("Janus
Service"), Janus Distributors, Inc. ("Janus Distributors") and Janus Capital
International Ltd. ("Janus International") and its subsidiary Janus
International (UK) Limited ("Janus UK").
o Pursuant to transfer agency agreements, which are subject to renewal
annually, Janus Service provides transfer agent recordkeeping,
administration and shareowner services to the Janus Advised Funds (except
Janus World) and their shareowners. Each fund pays Janus Service fees for
these services. To provide a consistent and reliable level of service,
Janus Service maintains a highly trained group of telephone representatives
and utilizes technology to provide immediate data to support call center
and shareowner processing operations. This approach includes the
utilization of sophisticated telecommunications systems, "intelligent"
workstation applications, document imaging, an automated work distributor
and an automated call management system. Additionally, Janus Service offers
investors access to their accounts, including the ability to perform
certain transactions, using touch tone telephones or via the Internet.
These customer service related enhancements provide Janus Service with
additional capacity to handle the high shareowner volume that can be
experienced during market volatility.
o Pursuant to a distribution agreement, Janus Distributors, a limited
registered broker-dealer with the SEC, serves as the distributor for the
Janus Advised Funds. Janus expends substantial resources in media
advertising and direct mail communications to its existing and potential
Janus Advised Funds' shareowners and in providing personnel and
telecommunications equipment to respond to inquiries via toll-free
telephone lines. Janus funds are also available through mutual fund
supermarkets and other third party distribution channels. Shareowner
accounting and servicing is handled by the mutual fund supermarket or
third party sponsor and Janus pays a fee to the respective sponsor equal to
a percentage of the assets under management acquired through such
distribution channels. Approximately 33%, 30% and 28% of total Janus
assets under management were generated through these third party
distribution channels as of December 31, 1999, 1998 and 1997, respectively.
o Janus International is an investment advisor registered with the SEC. Janus
International also provides marketing and client services for Janus World
outside of Europe.
o Janus UK, an England and Wales company, is an investment advisor for
certain non-U.S. customers, including Janus World, and is registered with
the United Kingdom's Investment Management Regulatory Organization Limited
("IMRO"). Janus UK also conducts securities trading from London and handles
marketing and client servicing for Janus World in Europe.
BERGER
Berger is an investment advisor to the Berger Advised Funds, which includes a
series of Berger mutual funds, as well as to the Berger Sub-Advised Funds and
Private Accounts. Additionally, Berger is a 50% owner in a joint venture with
the Bank of Ireland Asset Management (U.S.) Limited
6
("BIAM"). The joint venture, BBOI Worldwide LLC ("BBOI"), serves as the
investment advisor and sub-administrator to a series of funds, referred to as
the "Berger/BIAM Funds". Berger and BIAM have entered into an agreement to
dissolve BBOI, which is expected to take place prior to June 30, 2000.
Additionally, Berger owns 80% of Berger/Bay Isle LLC, which acts as the
investment advisor to privately managed separate accounts. As of December 31,
1999, Berger had approximately $6.6 billion of assets under management, of which
the Berger Advised Funds comprised $5.7 billion.
Berger derives its revenues and net income from advisory services provided to
the various funds and accounts. Berger's and BBOI's investment advisory fees are
negotiated separately with each fund. The investment advisory fees for these
funds vary depending on the type of fund, generally ranging from 0.70% to 0.90%
of average assets under management. Advisory fees for services provided to the
Berger Sub-Advised Funds and Private Accounts vary depending upon the type of
fund or account and, in some circumstances, size of assets managed, with fee
rates above specified asset levels being reduced.
Berger's principal method of securities evaluation is based on growth-style
investing, using a "bottoms-up" fundamental research and valuation analysis.
This growth-style approach toward equity investing requires the companies in
which Berger invests to have high relative earnings per share growth potential,
to participate in large and growing markets, to have strong management and to
have above average expected total returns. Certain Berger funds, however,
emphasize value-style investing, which focuses on companies that are out of
favor with markets or otherwise are believed to be undervalued (due to low
prices relative to assets, earnings and cash flows or to competitive advantages
not yet recognized by the market). Research is performed by Berger's internal
staff of research analysts, together with the various portfolio managers.
Primary research tools include, among others, financial publications, company
visits, corporate rating services and earnings releases.
Berger and BBOI generally pay most expenses incurred in connection with
providing investment management and advisory services to their respective funds.
All charges and expenses other than those specifically assumed by Berger and
BBOI are paid by the funds. Expenses paid by the funds include, among others,
investment advisory fees, shareowner servicing, transfer agent, custodian fees
and expenses, legal and auditing fees, and expenses of preparing, printing and
mailing prospectuses and shareowner reports.
Berger marketing efforts are balanced between institutional and retail
distribution opportunities. Certain of the Berger funds sold in retail markets
have approved distribution plans ("12b-1 Plans") pursuant to Rule 12b-1 under
the Investment Company Act of 1940. These 12b-1 Plans provide that Berger shall
engage in activities (e.g., advertising, marketing and promotion) that are
intended to result in sales of the shares of the funds.
The Berger Advised Funds and Berger/BIAM Funds have agreements with a trust
company to provide accounting, recordkeeping and pricing services, custody
services, transfer agency and other services. The trust company has engaged DST
as sub-agent to provide transfer agency and other services for the Berger
Advised Funds and Berger/BIAM Funds. Berger performs certain administrative and
recordkeeping services not otherwise performed by the trust company or its
sub-agent. Each Berger Fund pays Berger fees for these services, which are in
addition to the investment advisory fees paid.
Berger Distributors LLC serves as distributor of the Berger Advised Funds and
the Berger/BIAM Funds and is a limited registered broker-dealer. Berger
Distributors LLC continuously offers shares of the Berger funds and solicits
orders to purchase shares. Berger also utilizes mutual fund supermarket and
other third party distribution channels. Shareowner accounting and servicing is
handled by the mutual fund supermarket or third party sponsor and Berger pays a
fee to the respective sponsor equal to a percentage of the assets under
management acquired through
7
such distribution channels. Approximately 28%, 28% and 26% of total Berger
assets under management were generated through these third party distribution
channels as of December 31, 1999, 1998 and 1997, respectively.
NELSON
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 development of a portfolio to meet
those objectives. Recommendations for the design and ongoing maintenance of the
portfolio structure are the responsibility of the investment advisor. The
selection and management of the instruments / securities which constitute the
portfolio are the responsibility of Nelson's investment management team.
Nelson's investment managers utilize a "top down" investment methodology in
structuring investment portfolios, beginning with an analysis of macroeconomic
and capital market conditions. Various analyses are performed by Nelson's
investment research staff to help construct an investment portfolio that adheres
to each client's objectives as well as Nelson's investment strategy. Through
continued investment in technology, Nelson has developed proprietary systems to
allow the investment managers to develop a balanced portfolio from a broad range
of investment instrument alternatives (e.g., fixed interest securities, tax free
corporate bonds, international and domestic securities, etc.).
For providing investment advice, Nelson receives an initial fee calculated as a
percentage of capital invested into each individual investment portfolio. Nelson
earns annual fees for the ongoing management and administration of each
investment portfolio. These fees are based on the type of investments and amount
of assets contained in each investor's portfolio. The fee schedules typically
provide lower incremental fees for assets under management above certain levels.
DST
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 common stock that 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.
DST is organized into three operating segments: financial services, output
solutions and customer management.
DST's financial services segment serves primarily mutual funds, investment
managers, insurance companies, banks, brokers and financial planners. DST has
developed a number of proprietary software systems for use by the financial
services industry. Examples of such software systems include, among others,
mutual fund shareowner and unit trust accounting and recordkeeping systems, a
securities transfer system, a variety of portfolio accounting and investment
management systems and a workflow management system. DST provides full-service
shareowner accounting and recordkeeping to Berger, as well as remote services to
Janus.
DST's output solutions segment provides complete bill and statement processing
services and solutions, including electronic presentment, which include
generation of customized statements that are produced in automated facilities
designed to minimize turnaround time and mailing costs.
8
Output processing services and solutions are provided to customers of DST's
other segments as well as to other industries.
DST's customer management segment provides customer management and open billing
solutions to the video/broadband, direct broadcast satellite, wireless, and
wire-line and Internet-protocol telephony, internet and utility markets
worldwide.
DST also holds investments in equity securities with a market value of
approximately $1.3 billion at December 31, 1999, including investments in
Computer Sciences Corporation and State Street Corporation.
Employees. As of December 31, 1999, the approximate number of employees of KCSI
and its consolidated subsidiaries was as follows:
Transportation (KCSL):
KCSR 2,610
Gateway Western 241
Other 82
-----------
Total 2,933
-----------
Financial Services (Stilwell):
Janus 2,501
SMI 5
Berger LLC 71
Nelson 204
Other 17
-----------
Total 2,798
-----------
Total KCSI 5,731
===========
9
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 2,756 miles of main and branch lines, and 1,179 miles of
other tracks, in a nine-state region that includes 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 these 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 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, the
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 facility in Pittsburg, Kansas that
previously was used as a diesel locomotive repair facility. This facility was
closed during 1999. KCSR also owns 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, which is leased from a subsidiary of the Company. Other facilities
owned by KCSR include a 21,000 square foot freight car repair shop in Kansas
City, Missouri and approximately 15,000 square feet of office space in Baton
Rouge, Louisiana.
KCSR owns and operates six intermodal facilities. These facilities are located
in Dallas and Port Arthur, Texas; Kansas City, Missouri; Shreveport and New
Orleans, Louisiana; and Jackson, Mississippi. The facility in Port Arthur was
closed in first quarter 2000 due to a lower than expected level of traffic. KCSR
is currently in the process of constructing an automotive and intermodal
facility at the former Richards-Gebaur Airbase in Kansas City, Missouri. Certain
automotive operations are expected to begin at this facility in 2000. Full
automotive and intermodal operations at the facility are expected to be complete
in 2001 and will provide KCSR with additional capacity in Kansas City. The
various intermodal facilities include strip tracks, cranes and other equipment
used in facilitating the transfer and movement of trailers and containers.
10
KCSR's fleet of rolling stock consisted of the following at December 31:
1999 1998 1997
--------------------- ---------------------- ----------------------
Leased Owned Leased Owned Leased Owned
Locomotives:
Road Units 323 112 258 108 238 113
Switch Units 52 - 52 - 52 -
Other - 8 8 - 9 -
-------- ------- ------- -------- -------- -------
Total 375 120 318 108 299 113
======== ======= ======= ======== ======== =======
Rolling Stock:
Box Cars 6,289 2,011 6,634 2,023 7,168 2,027
Gondolas 713 66 748 56 819 61
Hopper Cars 2,384 1,357 2,660 1,185 2,680 1,198
Flat Cars (Intermodal
and Other) 1,553 675 1,617 676 1,249 554
Tank Cars 33 55 34 58 35 59
Auto Rack 201 - - - - -
Other Freight Cars - - - - 547 123
-------- ------- ------- -------- -------- -------
Total 11,173 4,164 11,693 3,998 12,498 4,022
======== ======= ======= ======== ======== =======
As of December 31, 1999, KCSR's fleet consisted of 495 diesel locomotives, of
which 120 were owned, 335 leased from affiliates and 40 leased from
non-affiliates. KCSR's fleet of rolling stock consisted of 15,337 freight cars,
of which 4,164 were owned, 3,181 leased from affiliates and 7,992 leased from
non-affiliates. A significant portion of the locomotives and rolling stock
leased from affiliates includes equipment leased through Southern Capital, a
joint venture with GATX Capital Corporation formed in October 1996. KCSR leased
50 new General Electric ("GE") 4400 AC locomotives from Southern Capital during
fourth quarter 1999.
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 $68.6 million at December 31, 1999.
Certain KCSR property statistics follow:
1999 1998 1997
-------- -------- -------
Route miles - main and branch line 2,756 2,756 2,845
Total track miles 3,935 3,931 4,036
Miles of welded rail in service 2,032 2,031 2,030
Main line welded rail (% of total) 64% 64% 63%
Cross ties replaced 275,384 255,591 332,440
Average Age (in years):
Wood ties in service 16.0 15.8 15.1
Rail in main and branch line 26.5 25.5 26.0
Road locomotives 21.7 23.3 22.1
All locomotives 22.5 23.9 22.8
Maintenance expenses for Way and Structure and Equipment (pursuant to regulatory
accounting rules, which include depreciation) for the three years ended December
31, 1999 and as a percent of KCSR revenues are as follows (dollars in millions):
11
KCSR Maintenance
Way and Structure Equipment
Percent of Percent of
Amount Revenue Amount Revenue
1999 $ 85.2 15.6% $ 129.4 23.7%
1998 82.4 14.9 118.3 21.4
1997 122.2* 23.6 112.3 21.7
* 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. Gateway
Western provides interchanges with various eastern rail carriers and access to
the St. Louis rail gateway. The Surface Transportation Board approved the
Company's acquisition of Gateway Western in May 1997.
Certain Gateway Western property statistics follow:
1999 1998 1997
-------- -------- -------
Route miles - main and branch line 402 402 402
Total track miles 564 564 564
Miles of welded rail in service 121 121 109
Main line welded rail (% of total) 40% 40% 39%
Mexrail
Mexrail, a 49% owned 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. 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 UP) totaling
approximately 360 miles between Corpus Christi and Beaumont, Texas.
In early 1999, the Tex Mex completed Phase II of 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 consists of
two new intermodal tracks totaling approximately 2.8 miles. Groundwork for an
additional ten tracks has been completed; however, construction on those ten
tracks has not yet begun. Current capacity of the yard is approximately 800
freight cars. Upon completion of all tracks, expected capacity will be
approximately 2,000 freight cars.
Certain Tex Mex property statistics follow:
1999 1998 1997
-------- -------- -------
Route miles - main and branch line 157 157 157
Total track miles 533 530 521
Miles of welded rail in service 5 5 5
Main line welded rail (% of total) 3% 3% 3%
Locomotives (average years) 25 25 25
12
Grupo TFM
Grupo TFM, an approximate 37% owned affiliate, 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 2,661 miles of main line and an additional 838 miles of sidings and
spur tracks, and main line under trackage rights. TFM has the right to operate
the rail, but does not own the land, roadway or associated structures.
Approximately 91% of TFM's main line consists of continuously welded rail. 416
locomotives are owned by TFM and approximately 6,522 freight cars are either
owned by TFM or leased from affiliates. 98 locomotives and 4,960 freight cars
are leased from non-affiliates. Grupo TFM (through TFM) has office space at
which various operational, administrative, 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.
Panama Canal Railway Company
PCRC, a 50% owned joint venture, holds the concession to reconstruct and operate
a 47-mile railroad that runs parallel to the Panama Canal. Reconstruction of the
railroad commenced in early 2000 and is expected to be completed in mid-2001.
PCRC owns one locomotive and various other infrastructure improvements and
equipment.
Other Transportation
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 and KCSR 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.
Global Terminaling Services, Inc. (formerly 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.
13
FINANCIAL SERVICES (STILWELL)
Janus
Janus leases from non-affiliates 455,400 square feet of office space in three
facilities for investment, administrative, marketing, information technology and
shareowner processing operations, and approximately 52,700 square feet for mail
processing and storage requirements. These corporate offices and mail processing
facilities are located in Denver, Colorado. Janus also has 1,200 square feet of
general office space in Aspen, Colorado. In September 1998, Janus opened an
investor service and data center in Austin, Texas and currently leases
approximately 170,200 square feet at this facility. Janus also leases 4,200
square feet of office space in Westport, Connecticut for development of Janus
World Funds Plc and 2,500 square feet of office space in London, England for
securities research and trading.
Berger
Berger leases approximately 29,800 square feet of office space in Denver,
Colorado from a non-affiliate for its administrative and corporate functions.
Nelson
Nelson leases 10,300 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
six branch marketing offices totaling approximately 13,800 square feet in the
following locations in the United Kingdom: London, Lichfield, Bath, Durham,
Stirling and York.
Stilwell Holding Company
The Stilwell holding company leases approximately 12,500 square feet of office
space in Kansas City, Missouri from a non-affiliate for its corporate functions.
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 12 - 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, 1999.
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, 1999. 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.
14
Name Age Position(s)
- ----------------------------------------------------------------------
L.H. Rowland 62 Chairman, President and
Chief Executive Officer of the Company
M.R. Haverty 55 Executive Vice President, Director
T.H. Bailey 62 Chairman, President and
Chief Executive Officer of
Janus Capital Corporation
P.S. Brown 63 Vice President, Associate General
Counsel and Assistant Secretary
R.P. Bruening 61 Vice President, General Counsel and
Corporate Secretary
D.R. Carpenter 53 Vice President - Finance
W.K. Erdman 41 Vice President - Corporate Affairs
A.P. McCarthy 53 Vice President and Treasurer
J.D. Monello 55 Vice President and Chief Financial Officer
L.G. Van Horn 41 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.
Mr. Brown served as Vice President, Associate General Counsel and Assistant
Secretary from May 1993 to December 31, 1999.
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.
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.
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.
Mr. Van Horn has continuously served as Vice President and Comptroller since May
1996. He was Comptroller from September 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 of KCSI, 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.
15
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 15 - Quarterly Financial Data
(Unaudited) of this Form 10-K is incorporated by reference in partial response
to this Item 5.
Pursuant to a new credit agreement dated January 11, 2000 as described further
in Part II Item 7, Management's Discussion and Analysis of Financial Condition
and Results of Operations of this Form 10-K, the Company is restricted from the
payment of cash dividends on the Company's common stock.
In contemplation of the separation of the Company's Transportation and Financial
Services segments ("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 does not intend to effect this reverse stock split until
the Separation is completed.
As of March 31, 2000, there were 6,012 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
Management's Discussion and Analysis of Financial Condition and Results of
Operations included under Item 7 of this Form 10-K and 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.
1999 (i) 1998 (ii) 1997 (iii) 1996 (iv) 1995 (v)
---------- ----------- ---------- ----------- ----------
Revenues $ 1,813.7 $ 1,284.3 $ 1,058.3 $ 847.3 $ 775.2
Income (loss) from continuing
operations $ 323.3 $ 190.2 $ (14.1) $ 150.9 $ 236.7
Income (loss) from continuing operations per common share:
Basic $ 2.93 $ 1.74 $ (0.13) $ 1.33 $ 1.86
Diluted 2.79 1.66 (0.13) 1.31 1.80
Total assets $ 3,088.9 $ 2,619.7 $ 2,434.2 $ 2,084.1 $ 2,039.6
Long-term obligations $ 750.0 $ 825.6 $ 805.9 $ 637.5 $ 633.8
Cash dividends per
common share $ .16 $ .16 $ .15 $ .13 $ .10
Ratio of earnings to
fixed charges 7.07 4.44 (vi) 1.60 (vii) 3.30 6.14 (viii)
16
(i) Includes unusual costs and expenses of $12.7 million ($7.9 million after-
tax, or $0.07 per basic and diluted share) recorded by the Transportation
segment, reflecting, among others, amounts for facility and project
closures, employee separations, Separation related costs, labor and
personal injury related issues.
(ii) 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").
DST accounted for the merger 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 3 to the
consolidated financial statements in this Form 10-K
(iii)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 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 2 and 4 to the
consolidated financial statements in this Form 10-K.
(iv) 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.
(v) 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%.
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.
(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 (ii)
above. If the ratio were 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 (iii) above.
If the ratio were 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 were 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.
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.
17
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/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-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. 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 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.
On March 26, 1999, Standard and Poors (S&P) Financial Information Services
announced that it would add KCSI to its S&P 500 index. KCSI was added to the S&P
500 Railroads Industry group after the close of trading on April 1, 1999.
Management believes that the Company's addition to this index of leading U.S.
companies will have a positive long-term impact on KCSI stock and help build the
Company's shareholder base.
The Company's business activities by industry segment and principal subsidiary
companies follow:
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;
18
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.
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 82% 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.
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 1998 merger between a
wholly-owned subsidiary of DST and USCS International, Inc. ("USCS"), accounted
for by DST as a pooling of interests, 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
Planned Separation of the Company Business Segments. The Company announced its
intention to separate the Transportation and Financial Services segments through
a proposed dividend of the stock of Stilwell, a holding company for its
Financial Services businesses (the "Separation"). On July 12, 1999, the Company
announced that the Internal Revenue Service ("IRS") issued a favorable tax
ruling permitting the Company to separate its Financial Services segment from
its Transportation segment. 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 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.
19
On March 26, 1999, a number of Janus minority stockholders and employees of
Janus, including members of Janus' management, its chief executive officer, its
chief investment officer, portfolio managers and assistant portfolio managers
who own a material number of Janus shares, five of the six Janus directors and
others (the "Janus Minority Group") proposed that KCSI consider, in addition to
the Separation, a separate spin-off of Janus. Members of the Janus Minority
Group met with KCSI's Board of Directors ("Board") on June 23, 1999 and urged
the Board to consider their separate spin-off proposal.
The Janus Fund Trustees ("Trustees") expressed support on March 26, 1999 for the
proposal of the Janus Minority Group, indicating that, based on their
discussions with members of that group, the Trustees believed the proposal would
provide superior equity ownership opportunities for key Janus employees and
could help assure continuity of management for the Janus Funds. Stilwell
management assured the Trustees of their support for equity incentive
arrangements for key Janus personnel, but believed these incentives could be
achieved without a separate spin-off of Janus. The Trustees have continued to
express their support for equity incentive arrangements for the key Janus
personnel, but have indicated that they intend to remain neutral with respect to
the disagreements between Stilwell and the Janus Minority Group. The Trustees
have strongly encouraged the parties to resolve their disagreements as soon as
possible so that they would not be a distraction to the management of the Janus
Funds.
After considering the information presented by the Janus Minority Group and
information provided by Stilwell management regarding the advantages and
disadvantages of the two methods of achieving the Separation, KCSI's Board
decided that the Separation should go forward on the basis originally
contemplated. In arriving at this decision, KCSI's Board took into consideration
a number of factors, including that: i) a favorable tax ruling on the Separation
had been received from the IRS; ii) the presentation by the Janus Minority Group
was not persuasive, in the Board's view, as to the advantages of the alternative
proposal as compared to the Separation; iii) there was a lack of certainty that
a favorable tax ruling could be obtained in a timely manner, or at all, with
respect to the alternative proposal; and iv) the Separation was more consistent
with the strategic direction of Stilwell.
Stilwell Files a Registration Statement on Form 10 with the Securities and
Exchange Commission ("SEC"). On August 19, 1999, the Company reported that
Stilwell filed a Form 10 with the 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 and Amendment #3 on January 19, 2000. The Stilwell Form 10 has not been
declared effective.
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").
20
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 will report an extraordinary loss on the
extinguishment of the Company's notes and debentures of approximately $5.9
million, net of income taxes.
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 will
initially be $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 (see Grupo TFM below in "Significant Developments").
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 will be amortized over the
respective term of the loans.
21
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. Credit loss from
counterparty non-performance is not anticipated.
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 $15.7 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%.
Litigation Settlement. In January 2000, Stilwell received approximately $44
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 will
recognize an after-tax gain of approximately $26 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
22
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.
Burlington Northern Santa Fe Railway and Canadian National Railway Merger. In
December 1999, The Burlington Northern and Santa Fe Railway Company ("BNSF") and
Canadian National Railway Company ("CN") announced their intention to combine
the two railroad companies. In March 2000, however, the Surface Transportation
Board ("STB") issued a 15-month moratorium on railroad mergers until the STB can
adopt new rules governing merger activities. This decision temporarily delays
the proposed combination of BNSF and CN. BNSF and CN have filed a motion of
appeal in an attempt to force the STB to review the BNSF-CN merger application.
KCSR management believes the STB's decision to suspend merger activities during
this 15-month period will allow the rail industry to focus on improving customer
service and operating efficiency rather than merger concerns. In the long term,
however, management believes a merger of BNSF and CN could have an adverse
impact on revenues through traffic diversions from the KCSR-CN/IC marketing
alliance (see below).
KCSR Purchase of 50 New Locomotives. During 1999, KCSR reached an agreement with
General Electric ("GE") for the purchase of 50 new GE 4400 AC Locomotives with
remote power capability. The addition of these state-of-the-art locomotives is
expected to have a favorable impact on operations as a result of, among other
things: retirement of older locomotives with significant ongoing maintenance
needs; decreased maintenance costs and improved fuel efficiency; better fleet
utilization; increased hauling power eliminating the need for certain helper
service; and higher reliability and efficiency resulting in fewer train delays
and less congestion. Southern Capital, through its existing variable rate credit
lines, financed the purchase of these new locomotives, and leases them to KCSR
under operating leases. Rates on these operating leases vary based on the
Company's credit rating. As a result of this transaction, operating lease
expense is expected to be approximately $7 million higher in 2000 compared to
1999. KCSR expects, however, associated operating cost reductions with these new
and more efficient AC locomotives. Delivery of these locomotives was completed
in December 1999.
Panama Canal Railway Company. In January 1998, the Republic of Panama awarded
KCSR and its joint venture partner, Mi-Jack Products, Inc., the concession to
reconstruct and operate the PCRC. The 47-mile railroad runs parallel to the
Panama Canal and, upon reconstruction, will provide international shippers with
an important complement to the Panama Canal. In November 1999, PCRC completed
the financing arrangements for this project with the International Finance
Corporation ("IFC"), a member of the World Bank Group. The financing is
comprised of a $5 million investment from the IFC and senior loans in the
aggregate amounts of up to $45 million. The investment of $5 million from the
IFC is comprised of non-voting preferred shares, paying a 10% cumulative
dividend. These preferred shares reduce the Company's ownership interest in PCRC
from 50% to 41.67%. The preferred shares are expected to be redeemed at the
option of IFC any year after 2008 at the lower of i) a net cumulative internal
rate of return of 30%, or ii) eight-times earnings before interest, income
taxes, depreciation and amortization (average of two consecutive years)
calculated in proportion to the IFC's percentage ownership in PCRC. Under
certain limited conditions, the Company is a guarantor for up to $15 million of
cash deficiencies associated with project completion. Additionally, if the
Company or its partner terminates the concession contract without the consent of
the IFC, the Company is a guarantor for up to 50% of the outstanding senior
loans. The total cost of the reconstruction project is estimated to be $75
million with an equity commitment from KCSR not to exceed $13 million.
Reconstruction of PCRC's right-of-way is expected to be complete in mid-2001
with commercial operations to begin immediately thereafter.
23
RESULTS OF OPERATIONS
SIGNIFICANT DEVELOPMENTS
In addition to the developments mentioned above, consolidated operating results
from 1997 to 1999 were affected by the following significant developments.
CONSOLIDATED KCSI
Repurchase of Stock. As disclosed in the Current Report on Form 8-K dated
February 25, 1999, the Company repurchased 460,000 shares of its common stock
from The DST Systems, Inc. Employee Stock Ownership Plan (the "DST ESOP") in a
private transaction. The DST ESOP has previously sold to the Company other
shares of KCSI stock, which were part of the DST ESOP's assets as a result of
DST's participation in the Company's employee stock ownership plan prior to
DST's initial public offering in 1995.
The shares were purchased at a price equal to the closing price per share of
KCSI's common stock on the New York Stock Exchange on February 24, 1999. The
shares are held in treasury for use in connection with the Company's various
employee benefit plans.
These repurchases are part of the 33 million share repurchase plan that the
Board authorized through two programs - the 1995 program for 24 million shares
and the 1996 program for 9 million shares. Including this transaction, the
Company has repurchased a total of approximately 28.1 million shares under these
programs.
During 1998, there were no repurchases under these programs. During 1997, the
Company purchased approximately 2.9 million shares at an aggregate cost of
approximately $50 million. A portion of the shares under the 1996 program were
repurchased through a forward stock purchase contract, which was completed
during 1997. See discussion in "Financial Instruments and Purchase Commitments"
below.
Stock Split and 20% Increase in Quarterly Common Stock Dividend. On July 29,
1997, the Board authorized a 3-for-1 split in the Company's common stock
effected in the form of a stock dividend. Amounts reported in this Form 10-K
reflect this stock split. The Board also voted to increase the quarterly
dividend 20% to $0.04 per share (post-split). Both dividends were paid on
September 16, 1997 to stockholders of record as of August 25, 1997. However, see
"Recent Developments" for a discussion of the suspension of dividends.
FINANCIAL SERVICES
Financial Services Companies Contributed to Stilwell Financial, Inc. In
preparation for the Separation, effective July 1, 1999, KCSI contributed to
Stilwell its ownership interests in Janus, Berger, Nelson and DST, as well as
certain other financial services-related assets, and Stilwell assumed all of
KCSI's liabilities associated with the assets transferred. It is contemplated
that Stilwell will be listed on the New York Stock Exchange and, at about the
time of the Separation, will begin trading under the symbol "SV".
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
24
services 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.
Berger LLC Formation and Ownership History. On September 30, 1999, Berger
Associates, Inc. ("BAI") assigned and transferred its operating assets and
business to its subsidiary, Berger LLC, a limited liability company. In
addition, BAI changed its name to Stilwell Management, Inc. ("SMI"). SMI owns
100% of the preferred limited liability company interests and approximately 86%
of the regular limited liability company interests in Berger. The remaining 14%
of regular limited liability company interests were issued to key SMI and Berger
employees, resulting in a non-cash compensation charge. Additionally, in late
1999 Stilwell contributed to SMI the approximate 32% investment in DST.
Prior to the change in corporate form discussed above, the Company owned 100% of
BAI. The Company increased its ownership in BAI to 100% during 1997 as a result
of BAI's purchase, for treasury, of common stock from minority shareholders and
the acquisition by KCSI of additional BAI shares from a minority shareholder
through the issuance of 330,000 shares of KCSI common stock. In connection with
these transactions, BAI granted options to acquire shares of its stock to
certain employees. All of the outstanding options were cancelled upon formation
of Berger. This transaction resulted in approximately $17.8 million of goodwill,
which is being amortized over 15 years. However, the Company recorded a $12.7
million impairment of goodwill associated with the investment in Berger. The
Company determined that a portion of the goodwill recorded in connection with
the Berger investment was not recoverable, primarily due to below-peer
performance and growth of the core Berger funds in 1996 and 1997. See discussion
in Note 4 to the consolidated financial statements.
The Company's 1994 acquisition of a controlling interest in BAI was completed
under a Stock Purchase Agreement ("Agreement") covering a five-year period
ending in October 1999. Pursuant to the Agreement, the Company was required to
make additional purchase price payments based upon BAI attaining certain
incremental levels of assets under management up to $10 billion by October 1999.
The Company paid $3.0 million under this Agreement in 1999. No payments were
made during 1998. In 1997, the Company made additional payments of $3.1 million.
These payments represent adjustments to the purchase price and the resulting
goodwill is being amortized over 15 years.
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 offers planning based asset management services directly to
private clients. Nelson managed approximately $1.3 billion of assets as of
December 31, 1999. 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 was 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.
25
Berger Joint Venture. During 1996, Berger entered into a joint venture agreement
with Bank of Ireland Asset Management (U.S.) Limited ("BIAM"), a subsidiary of
Bank of Ireland, to develop and market a series of international and global
mutual funds, as well as manage various private accounts. The venture, named
BBOI Worldwide LLC ("BBOI"), is headquartered in Denver, Colorado. Berger
accounts for its 50% investment in BBOI under the equity method. Berger and BIAM
have entered into an agreement to dissolve BBOI. Contingent upon trustee and
shareowner approval, when BBOI is dissolved, Berger will become the advisor and
administrator to the series of funds referred to as the Berger/BIAM Funds. BIAM,
provided necessary approvals for assignment of advisory agreements are
completed, will become the advisor to BBOI's private accounts. The Company
expects the dissolution to be completed by June 30, 2000.
TRANSPORTATION
Negotiations to Purchase Mexican Government's Ownership Interest in 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, under the terms of the
preliminary agreement, has expired. However, management of TFM has advised the
Company that negotiations with the Government are continuing and TFM management
expects that the Government will extend the option.
Access to Geismar, Louisiana Industrial Corridor. At a voting conference held on
March 25, 1999, the STB unanimously approved the merger of CN and Illinois
Central ("IC") (collectively referred to as "CN/IC"). The STB issued its written
approval with an effective date of June 24, 1999, at which time the CN was
permitted to exercise control over IC's operations and assets. As part of this
approval, the STB imposed certain restrictions on the merger including a
condition requiring that the CN/IC grant KCSR access to three shippers in the
Geismar, Louisiana industrial area: Rubicon, Inc. ("Rubicon"), Uniroyal Chemical
Company, Inc. ("Uniroyal") and Vulcan Materials Company ("Vulcan"). These are in
addition to the three Geismar shippers (BASF Corporation -"BASF", Shell Chemical
Company -"Shell", and Borden Chemical and Plastics -"Borden") to which KCSR
obtained access as a result of the strategic alliance agreement with CN/IC
discussed below. Access to these six shippers begins October 1, 2000 and
management believes it will provide the Company with additional revenue
opportunities. See further discussion below with respect to the Marketing
Alliance with CN/IC.
Intermodal facility at the former Richards-Gebaur Airbase. During 1999, KCSR
entered into a fifty year lease with the City of Kansas City, Missouri to
establish an automotive and intermodal facility at the former Richards-Gebaur
Airbase, which is located adjacent to KCSR's main rail line. The Federal
Aviation Administration ("FAA") has officially approved the closure of the
existing airport, and improvements have commenced. KCSR expects to relocate its
Kansas City intermodal facility to Richards-Gebaur during 2001.
Management expects that the new facility will provide additional capacity as
well as a strategic opportunity to serve as an international trade facility.
Management plans for this facility to serve as a U.S. customs pre-clearance
processing facility for freight moving along the NAFTA corridor. This is
expected to alleviate some of the congestion at the borders, resulting in more
fluid service to KCSL's customers, as well as customers throughout the rail
industry.
26
KCSR expects to spend approximately $20 million for site improvements and
infrastructure at Richards-Gebaur. Management expects to fund these improvements
using operating cash flows and existing credit facilities. Lease payments are
expected to range between $400,000 and $700,000 per year and will be adjusted
for inflation based on agreed-upon formulas. Management believes that, with the
addition of this facility, KCSR is positioned to increase its automotive and
intermodal revenue base by attracting additional NAFTA traffic.
Transportation 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 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 2 to the consolidated financial statements), $196.4
million of restructuring, asset impairment and other charges were recorded
during fourth quarter 1997 (including approximately $18.4 million recorded by
the Financial Services segment relating to i) a goodwill impairment associated
with the Berger investment; ii) the impairment of a non-core investment; and
iii) a contract reserve). After consideration of related tax effects, the
Transportation segment's charges reduced its net income by $141.9 million, or
$1.32 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. In first quarter 2000
the other branch line was sold for a minimal pretax gain. A potential buyer
has been identified for the non-operating real estate and management is
currently negotiating this transaction.
o Approximately $27.1 million in reserves related to the termination of 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 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. During 1999, approximately $1.1 million of cash payments
were made relating to the union productivity fund and employee separations,
leaving a reserve of approximately $0.4 million at December 31, 1999.
o A $9.2 million impairment of assets at Global Terminaling Services, Inc.
(formerly Pabtex, Inc.) as a result of continued operating losses and a
decline in its customer base.
o Approximately $11.9 million of other charges and reserves related to
leases, contracts 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
1999 and 1998, approximately $2.2 and $6.6 million, respectively, in cash
payments were made leaving approximately $1.8 million accrued at December
31, 1999.
27
Marketing Alliance with Canadian National and Illinois Central. 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 STB approval 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 provides shippers with access to Mexico's rail system through
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, as well as in other key carload
markets, including those for chemical and forest products. Transportation
management expects this alliance to provide opportunities for revenue growth and
position the railway as a key provider of rail service to the NAFTA corridor.
Under a separate access agreement, 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 the 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 October 2000, gain access to 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 to 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.
During 1999, however, the Company wrote-off approximately $3.6 million of costs
related to the Geismar build-in that had previously been capitalized. See
discussion above in "Recent Developments" for the potential adverse impact that
the proposed merger of BNSF and CN could have on KCSR revenues as a result of
traffic diversions away from the KCSR-CN/IC alliance.
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.
Grupo TFM. 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
28
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. Grupo
TFM funded this initial installment of the TFM purchase price 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 first quarter 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. 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. During these periods,
no additional contributions from the Company were requested or made and,
therefore, the Government was not required to contribute any additional capital
to Grupo TFM under this related agreement. The commitment from the Government to
participate in a capital call has expired. The provisions of the Contribution
Agreement requiring a capital call from TMM and the Company expire in June 2000.
If a capital call occurs prior to June 2000, the provisions of the Contribution
Agreement automatically extend to June 2002. As of December 31, 1999 no
additional contributions from the Company have been requested or made.
29
At December 31, 1999, the Company's investment in Grupo TFM was approximately
$286.5 million. The Company's interest in Grupo TFM is approximately 37% (with
TMM and a TMM affiliate owning 38.4% and the Government owning the remaining
24.6%). The Company accounts for its investment in Grupo TFM under the equity
method.
See above for discussion of the Company's option to purchase a portion of the
Government's interest in TFM.
Gateway Western. The Company acquired beneficial ownership of the outstanding
stock of Gateway Western in December 1996. The stock acquired by the Company 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,
BNSF has the option to purchase the assets of Gateway Western (based on a fixed
formula in the agreement) through the year 2004.
Railroad Industry Trends and Competition. The Company's rail operations compete
against other railroads, many of which are much larger and have significantly
greater financial and other resources than KCSL. Since 1994, there has been
significant consolidation among major North American rail carriers, including
the merger of Burlington Northern, Inc. and Santa Fe Pacific Corporation
("BN/SF", collectively "BNSF"), the UP and the Chicago and North Western
Transportation Company ("UP/CNW") and the 1996 merger of UP with SP. Further, in
1997 CSX Corporation ("CSX") and Norfolk Southern completed negotiations to
purchase parts of Conrail, Inc. ("Conrail"), which was approved by the STB in
1998. In February 1998, CN announced its intention to acquire the IC, which
received STB approval effective in June 1999. Most recently, BNSF and CN
announced their intention to merge, subject to various regulatory approvals.
(Note: In March 2000, the STB issued a 15-month moratorium on railroad merger
activities, which has temporarily delayed the merger between BNSF and CN). As a
result of this consolidation, the industry is now dominated by a few
"mega-carriers". 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 Company also believes that KCSR revenues have been
negatively impacted by the congestion resulting from the Norfolk Southern and
CSX takeover of Conrail. KCSR management regards the larger western railroads,
in particular, as significant competitors to the Company's operations and
prospects because of their substantial resources. The ongoing impact to KCSR of
these mergers is uncertain. Management believes, however, that because of its
investments and strategic alliances, KCSL is positioned to attract additional
rail traffic through its "NAFTA Railway."
In addition to competition within the railroad industry, the Company's
Transportation segment is subject to competition from motor carriers, barge
lines and other maritime shipping, which compete with the Company across certain
routes in its operating area. Mississippi and Missouri
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River barge traffic, among others, compete with KCSR in the transportation of
bulk commodities such as grains, steel and petroleum products. Additionally,
truck carriers have eroded the railroad industry's share of total transportation
revenues. Changing regulations, subsidized highway improvement programs and
favorable labor regulations have improved the competitive position of trucks in
the United States as an alternative mode of surface transportation for many
commodities. Low fuel prices disproportionately benefit trucking operations over
railroad companies, since locomotives are more fuel-efficient than trucks.
Conversely, trucking companies are more negatively affected in times of higher
fuel prices. Intermodal traffic and certain other traffic face highly price
sensitive competition, particularly from motor carriers. In the United States,
the truck industry frequently is more cost and transit-time competitive than
railroads, particularly for distances of less than 300 miles. 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.
While deregulation of freight rates has enhanced the ability of railroads to
compete with each other and with alternative modes of transportation, this
increased competition has resulted in downward pressure on freight rates.
Competition with other railroads and other modes of transportation is generally
based on the rates charged, the quality and reliability of the service provided
and the quality of the carrier's equipment for certain commodities.
See "Union Labor Negotiations" below for a discussion of the impact of labor
issues and regulations on competition in the transportation industry.
Union Labor Negotiations. Approximately 83% of KCSR and 88% of Gateway Western
employees, respectively, 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 extended 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 operat