-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MxQFI9StDiH6Q7DcWwzWgdml7tYVLGr7nuyW4YMkSQmYsPOJXXTOqgjR1e24NMfq RqzSF1d7isEIlBr+cS2dvg== 0000054480-98-000004.txt : 19980318 0000054480-98-000004.hdr.sgml : 19980318 ACCESSION NUMBER: 0000054480-98-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KANSAS CITY SOUTHERN INDUSTRIES INC CENTRAL INDEX KEY: 0000054480 STANDARD INDUSTRIAL CLASSIFICATION: RAILROADS, LINE-HAUL OPERATING [4011] IRS NUMBER: 440663509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-04717 FILM NUMBER: 98566790 BUSINESS ADDRESS: STREET 1: 114 W 11TH ST CITY: KANSAS CITY STATE: MO ZIP: 64105 BUSINESS PHONE: 8165560303 MAIL ADDRESS: STREET 1: 114 WEST 11TH STREET CITY: KANSAS CITY STATE: MO ZIP: 64105 10-K 1 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 (FEE REQUIRED) For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ____ to ____ Commission file number 1-4717 KANSAS CITY SOUTHERN INDUSTRIES, INC. (Exact name of Company as specified in its charter) Delaware 44-0663509 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 114 West 11th Street, Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) Company's telephone number, including area code (816) 983-1303 Securities registered pursuant to Section 12 (b) of the Act: Name of each exchange on Title of each class which registered Preferred Stock, Par Value $25 Per New York Stock Exchange Share, 4%, Noncumulative Common Stock, $.01 Per Share Par Value New York Stock Exchange Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Company's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Company Stock. The Company's common stock is listed on the New York Stock Exchange under the symbol "KSU." As of March 9, 1998, 108,828,011 shares of common stock and 242,170 shares of voting preferred stock were outstanding. On such date, the aggregate market value of the voting and non-voting common and preferred stock was $4,160,168,188 (amount computed based on closing prices of preferred and common stock on New York Stock Exchange). DOCUMENTS INCORPORATED BY REFERENCE: Portions of the following documents are incorporated herein by reference into Part of the Form 10-K as indicated: Document Part of Form 10-K into which incorporated Company's Definitive Proxy Statement for the 1998 Part III Annual Meeting of Stockholders, which will be filed no later than 120 days after December 31, 1997 KANSAS CITY SOUTHERN INDUSTRIES, INC. 1997 FORM 10-K ANNUAL REPORT Table of Contents Page PART I Item 1. Business............................................. 1 Item 2. Properties........................................... 4 Item 3. Legal Proceedings.................................... 8 Item 4. Submission of Matters to a Vote of Security Holders.. 8 Executive Officers of the Company................... 8 PART II Item 5. Market for the Company's Common Stock and Related Stockholder Matters........................ 10 Item 6. Selected Financial Data.............................. 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 13 Item 7(a) Quantitative and Qualitative Disclosures About Market Risk........................................ 47 Item 8. Financial Statements and Supplementary Data.......... 48 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 90 PART III Item 10. Directors and Executive Officers of the Company...... 91 Item 11. Executive Compensation............................... 91 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................... 91 Item 13. Certain Relationships and Related Transactions....... 91 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................................ 92 Signatures........................................... 97 ii 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 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: Financial Asset Management and Transportation. The primary entities comprising the Financial Asset Management segment are Janus Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"), and an equity interest in DST Systems, Inc. ("DST"). During third quarter 1997, the Company formed Kansas City Southern Lines, Inc. ("KCSL") as the holding company for Transportation segment subsidiaries and affiliates, including The Kansas City Southern Railway Company ("KCSR"), the primary Transportation operating subsidiary. In early 1998, the Company formed FAM Holdings, Inc. ("FAM HC") for the purpose of becoming a holding company for Financial Asset Management segment subsidiaries and affiliates. KCSL and FAM HC were organized to provide separate control, management and accountability for all transportation and financial asset management operations and businesses. 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, 1997 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 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, through its principal subsidiaries, strategic alliances and marketing agreements, provides rail freight transportation along a contiguous rail network of approximately 10,000 miles that links markets in the United States and Mexico. KCSL's principal U.S. subsidiary, KCSR, which traces its origins to 1887, has until recent years operated a core network primarily connecting the Midwest with the Louisiana and Texas gulf coasts. During the mid-1990's, while KCSR's major U.S. rail competitors focused on consolidating their east/west systems in the United States, KCSR embarked on a strategy of expanding its core network in order to capitalize on growing north/south trade between the United States, Mexico and Canada created by the North American Free Trade Agreement ("NAFTA"). KCSL has aggressively pursued acquisitions, joint ventures and marketing agreements with other railroads, with the goal of creating the "NAFTA Railway." KCSL's rail network connects midwestern, eastern and Canadian shippers, including shippers in Chicago, Illinois and Kansas City, Missouri-the two largest rail centers in the United States-with the largest industrial centers of Mexico, including Mexico City and Monterrey. KCSL's railroad system is comprised of KCSR, the Gateway Western Railway Company ("Gateway Western") and strategic joint venture interests in Grupo Transportacion Ferroviaria Mexicana, S.A de C.V. (Grupo TFM) (formerly Transportacion Ferroviaria Mexicana, S. de R.L. de C.V.), which owns 80% of the common stock of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.), and the Texas Mexican Railway Company ("Tex-Mex"). In addition, KCSL has a marketing agreement with I&M Rail Link, LLC ("I&M Rail Link") which provides KCSL with access to customers in the upper midwest, as well as access to Chicago and Minneapolis, Minnesota. KCSL's transportation network connects with all major U.S. and Canadian railroads through gateways at Chicago and East St. Louis, Illinois; Kansas City, Missouri; Minneapolis, Minnesota; Meridian and Jackson, Mississippi; Shreveport and New Orleans, Louisiana; and Dallas and Laredo, Texas. KCSL provides shippers with an effective alternative to the congested "mega-carrier" railroads and connects northern and eastern-based railroads to the southwestern U.S. and Mexican markets through less congested interchange hubs. KCSL's network offers the shortest rail route between Kansas City and major port cities along the Gulf of Mexico in Louisiana, Mississippi and Texas. KCSR's east-west corridor, referred to as the "Meridian Speedway" from Meridian, Mississippi to Dallas, Texas, represents the fastest and most direct rail route linking many markets in the southwest and southeast regions of the United States, two regions of substantial economic vitality. This corridor also provides eastern shippers and other railroads with an efficient connection to Mexican markets. KCSL recently established a prominent position in the growing Mexican market through its strategic joint ventures in Grupo TFM and Tex-Mex, operated in partnership with Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), Mexico's largest maritime shipping company. TFM's route network provides the shortest connection to the major industrial and population areas of Mexico from midwestern and eastern points in the United States. TFM, which was privatized by the Mexican government in June 1997, passes through Mexican states comprising approximately 69% of Mexico's population and accounting for over 70% of Mexico's estimated 1996 gross domestic product. Tex-Mex connects with TFM at Laredo, the single largest rail freight transfer point between the United States and Mexico, and with KCSR at Beaumont, Texas, as well as with other U.S. Class I railroads. Financial Asset Management The Financial Asset Management segment, through FAM HC, includes Janus and Berger and a 41% interest in DST. Both Janus and Berger are investment advisors registered with the Securities and Exchange Commission ("SEC"). Janus serves as an investment advisor to Janus Investment Fund and Janus Aspen Series, other investment companies, institutional and individual private accounts, including pension, profit-sharing and other employee benefit plans, trusts, estates, charitable organizations, endowments, foundations, and others. Berger is also engaged in the business of providing financial asset management services and products, principally through sponsorship of a family of mutual funds. Both Janus and Berger are headquartered in Denver, Colorado. Janus derives its revenues and net income primarily from diversified advisory services provided to the Janus Funds and other financial services firms and private accounts. In order to perform its investment advisory functions, Janus conducts fundamental investment research and valuation analysis. Janus' approach tends to focus on companies that are experiencing or expected to experience above average growth relative to their peers or the economy, or that are realizing or expected to realize positive change due to new product development, new management, changing demographics or regulatory developments. This approach utilizes research provided by outside parties as well as in house research. Janus has three wholly-owned subsidiaries: Janus Service Corporation ("Janus Service"), Janus Distributors, Inc. ("Janus Distributors") and Janus Capital International, Ltd. ("Janus International"). Janus Service provides full service administration and shareholder services to the Janus Funds and their shareholders as a registered transfer agent. To provide the high level of service needed to compete in the direct channel, Janus Service maintains a highly trained group of telephone representatives, and utilizes leading edge technology to provide immediate data to support call center and shareholder processing operations. This includes automated phone lines and an Internet web site which is integrated into the shareholder services system. These customer service related enhancements provide Janus Service with additional capacity to handle the high shareholder volume that can be experienced during market volatility. Janus Distributors serves as the distributor of the Janus Funds and is a registered broker-dealer. Janus International is an investment advisor registered with the SEC that performs analysis of foreign securities and executes trades in Europe. DST, included as an equity investment reported in the Financial Asset Management segment, is engaged in the business of designing and operating proprietary on-line shareholder servicing systems for the mutual fund, insurance, banking and real estate industries. DST operates throughout the United States, with its base of operations in the Midwest and through certain of its subsidiaries and affiliates, internationally in Canada, Europe, Africa and the Pacific Rim. DST has a single class of stock, its common stock, which is publicly traded on the New York Stock Exchange. 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%. KCSI reflects the earnings of DST as an equity investment in the consolidated financial statements.
Employees. As of December 31, 1997, the approximate number of employees of KCSI and its majority owned subsidiaries was as follows: Transportation: KCSR 2,570 Gateway Western 240 Other 120 Total 2,930 Financial Asset Management: Janus 1,050 Berger 80 Other 20 Total 1,150 Total KCSI 4,080
Item 2. Properties In the opinion of management, the various facilities, office space and other properties owned and/or leased by the Company (and its subsidiaries and affiliates) are adequate for existing operating needs. TRANSPORTATION (KCSL) KCSR KCSR owns and operates approximately 2,630 miles of main and branch lines, and approximately 1,106 miles of other tracks, in a nine state region, including Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas. In addition, 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 com- panies and jointly owns certain other facilities with such railroads. KCSR and the Union Pacific Railroad ("UP") have a haulage and trackage rights agreement, which gives KCSR access to Nebraska and Iowa, and additional routes in Kansas, Missouri and Texas. The haulage rights require the UP to move KCSR traffic in UP trains; the trackage rights allow KCSR to operate its trains over UP tracks. KCSR owns and operates repair shops, depots and office buildings along its right-of-way in support of its transportation operations. A major facility, Deramus Yard, is located in Shreveport, Louisiana and includes a general office building, locomotive repair shop, car repair shops, customer service center, material warehouses and fueling facilities totaling approximately 227,000 square feet. KCSR owns a 107,800 square foot major diesel locomotive repair facility in Pittsburg, Kansas. KCSR 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 and are leased from a subsidiary of the Company. Other facilities owned by KCSR include a 21,000 square foot car repair shop in Kansas City, Missouri and approxi- mately 15,000 square feet of office space in Baton Rouge, Louisiana. KCSR owns and operates six intermodal facilities. These facilities are located in Dallas, Texas; Kansas City, Missouri; Sallisaw, Oklahoma; Shreveport and New Orleans, Louisiana; and Jackson, Mississippi. The facility in Jackson was completed in December 1996. The various locations include strip tracks, cranes and other equipment used in facilitating the transfer and movement of trailers and containers.
KCSR's fleet of rolling stock consisted of: 1997 1996 1995 Leased Owned Leased Owned Leased Owned Locomotives: Road Units 238 113 213 160 101 258 Switch Units 52 - 52 - - 52 Other 9 - 10 - - 1 Total 299 113 275 160 101 311 Rolling Stock: Box Cars 7,168 2,027 6,366 1,558 5,664 2,190 Gondolas 819 61 819 65 473 439 Hopper Cars 2,680 1,198 2,588 1,213 2,119 1,857 Flat Cars (Intermodal and Other) 1,249 554 1,249 551 1,128 611 Tank Cars 35 59 40 60 20 61 Other Freight Cars 547 123 554 164 690 168 Total 12,498 4,022 11,616 3,611 10,094 5,326
At December 31, 1997, KCSR's fleet of locomotives and rolling stock consisted of 412 diesel locomotives, of which 113 are owned and 299 are leased from affiliates, and 16,520 freight cars, of which 4,022 are owned, 3,124 are leased from affiliates and 9,374 are leased from non-affiliates. A significant portion of the locomotives and rolling stock which are indicated as leased from affiliates include equipment leased through Southern Capital Corporation, LLC ("Southern Capital") is a joint venture with GATX Capital Corporation, which was formed in October 1996. Some of this 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 $88.9 million at December 31, 1997.
Certain KCSR property statistics follow: 1997 1996 1995 Route miles - main and branch line 2,845 2,954 2,931 Total track miles 4,036 4,147 4,131 Miles of welded rail in service 2,030 1,981 1,938 Main Line Welded Rail (% of total) 63% 58% 59% Cross ties replaced 332,440 438,170 341,761 Average Age (in years): Wood ties in service 15.1 15.5 15.3 Rail in main and branch line 26.0 27.0 26.7 Road locomotives 22.1 21.9 20.8 All locomotives 22.8 22.5 21.4
Maintenance expenses for Way and Structure and Equipment (pursuant to regulatory accounting rules, which include depreciation) for the three years ended December 31, 1997 and as a percent of KCSR revenues are as follows (dollars in millions): KCSR Maintenance Way and Structure Equipment Percent of Percent of Amount Revenue Amount Revenue 1997* $122.2 23.6% $112.3 21.7% 1996 92.6 18.8 99.8 20.3 1995 88.0 17.5 108.8 21.7
*Way and structure expenses include $33.5 million related to asset impairments. See "Results of Operations" 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 from the Southern Pacific Rail Corporation. Gateway Western connects with various eastern rail carriers at East St. Louis. The Surface Transportation Board approved the Company's acquisition of Gateway Western in May 1997.
Certain Gateway Western property statistics follow: 1997 1996 1995 Route miles - main and branch line 402 402 402 Total track miles 564 564 564 Miles of welded rail in service 109 109 107 Main Line Welded Rail (% of total) 39% 39% 38%
Mexrail Mexrail, Inc., a 49% owned KCSI affiliate, owns 100% of The Texas Mexican Railway Company ("Tex-Mex") and certain other assets, including the northern U.S. half of a rail traffic bridge at Laredo, Texas spanning the Rio Grande river. Grupo TFM, discussed below, operates the southern half of the bridge. This bridge is a significant entry point for rail traffic between Mexico and the U.S. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas, and also has trackage rights (from Union Pacific Railroad) totaling approximately 360 miles between Corpus Christi and Beaumont, Texas.
Certain Tex-Mex property statistics follow: 1997 1996 1995 Route miles - main and branch line 157 157 157 Total track miles 521 521 238 Miles of welded rail in service 5 5 - Main Line Welded Rail (% of total) 3% 3% - Locomotives (average years) 25 24 23
Grupo TFM Grupo TFM (formerly Transportacion Ferroviaria Mexicana, S. de R.L. de C.V.) owns 80% of the common stock of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.). TFM holds the concession to operate Mexico's "Northeast Rail Lines" for 50 years, with the option of a 50 year extension (subject to certain conditions). TFM operates approximately 2,661 miles of main line and an additional 838 miles of sidings and spur tracks, and main line under trackage rights. Approximately 80% of TFM's main line consists of welded rail. TFM has the exclusive right to operate the rail, but does not own the land, roadway or associated structures. However, certain rail equipment, including approximately 371 locomotives and 10,665 freight cars, is owned by TFM. In addition to the railway, Grupo TFM (through TFM) also has office space at which various operational, accounting, managerial and other activities are performed. The primary facilities are located in Mexico City and Monterrey, Mexico. Grupo TFM was a 37% owned KCSI affiliate at December 31, 1997. See additional information in Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-K. Other Transportation Southern Group, Inc. leases approximately 4,150 square feet of office space in downtown Kansas City, Missouri from an affiliate of DST. The Company is an 80% owner of Wyandotte Garage Corporation, which owns a parking facility in downtown Kansas City, Missouri. The facility is located adjacent to the Company's and KCSR's executive offices, and consists of 1,147 parking spaces which are utilized by the employees of the Company and its affiliates, as well as the 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 approxi- mately 12,000 square feet. Pabtex, Inc. ("Pabtex") owns a 70 acre coal and petroleum coke bulk handling facility in Port Arthur, Texas. Mid-South Microwave, Inc. owns and operates a microwave system, which extends essentially along the right-of-way of KCSR from Kansas City, Missouri to Dallas, Beaumont and Port Arthur, Texas and New Orleans, Louisiana. This system is leased to KCSR. Other subsidiaries of the Company own approximately 8,000 acres of land at various points adjacent to the KCSR right-of-way. Other properties also include a 354,000 square foot warehouse at Shreveport, Louisiana, a bulk handling facility at Port Arthur, Texas, and several former railway buildings now being rented to non-affiliated companies, primarily as warehouse space. The Company owns 1,025 acres of property located on the waterfront in the Port Arthur, Texas area, which includes 22,000 linear feet of deep water frontage and three docks. Port Arthur is an uncongested port with direct access to the Gulf of Mexico. Approximately 75% of this property is available for development. FINANCIAL ASSET MANAGEMENT Janus Janus leases from non-affiliates 327,000 square feet of office space in three facilities for administrative, marketing, investment, and shareowner processing operations, and approximately 33,500 square feet for mail processing and storage requirements. These corporate offices and mail processing facilities are located in Denver, Colorado. Janus also leases 5,500 square feet for a customer service and telephone center in Kansas City, Missouri and 1,400 square feet of office space in London, England for securities research and trading. Berger Berger leases from a non-affiliate approximately 29,800 square feet of office space in Denver, Colorado for its administrative and corporate functions. DST DST, an approximate 41% owned unconsolidated affiliate, owns a Data Center located in Kansas City, Missouri, commonly known as its Winchester Data Center. DST's shareholder operations, systems development and other support functions are located in downtown Kansas City. In addition, DST subsidiaries own or lease facilities in Kansas City and various other locations throughout the United States. DST also leases international properties. DST owns or leases mainframe computers and significant amounts of auxiliary computer support equipment (such as disk and tape drives, CRT terminals, etc.), all of which are necessary for its computer and communications operations. 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, 1997. 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, 1997. All executive officers are elected annually and serve at the discretion of the Board of Directors. Certain of the executive officers have employment agreements with the Company. Name Age Position(s) L.H. Rowland 60 Chairman, President and Chief Executive Officer of the Company M.R. Haverty 52 Executive Vice President, Director T.H. Bailey 60 Chairman, President and Chief Executive Officer of Janus Capital Corporation P.S. Brown 61 Vice President, Associate General Counsel and Assistant Secretary R.P. Bruening 58 Vice President, General Counsel and Corporate Secretary D.R. Carpenter 51 Vice President - Finance W.K. Erdman 39 Vice President - Corporate Affairs A.P. McCarthy 51 Vice President and Treasurer J.D. Monello 53 Vice President and Chief Financial Officer L.G. Van Horn 39 Vice President and Comptroller The information set forth in the Company's Definitive Proxy Statement in Proposal 1 "Election of Directors" with respect to Mr. Rowland and in the description of the Board of Directors with respect to 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 has continuously served as Vice President, Associate General Counsel and Assistant Secretary since July 1992. From 1981 to July 1992, he served as Vice President - Governmental Affairs. Mr. Bruening has continuously served as Vice President, General Counsel and Corporate Secretary since July 1995. From May 1982 to July 1995, he served as Vice President and General Counsel. He also serves as Senior Vice President and General Counsel of KCSR. Mr. Carpenter has continuously served as Vice President - Finance since November 1996. He was Vice President - Finance and Tax from May 1995 to November 1996. He was Vice President - Tax from June 1993 to May 1995. From 1978 to June 1993, he was a member in the law firm of Watson & Marshall L.C., Kansas City, Missouri. Mr. Erdman has continuously served as Vice President - Corporate Affairs since April 1997. From January 1997 to April 1997 he served as Director - Corporate Affairs. From 1987 to January 1997 he served as Chief of Staff for United States Senator from Missouri, Christopher ("Kit") Bond. Mr. McCarthy has continuously served as Vice President and Treasurer since May 1996. He was Treasurer from December 1989 to May 1996. Mr. Monello has continuously served as Vice President and Chief Financial Officer since March 1994. From October 1992 to March 1994, he served as Vice President - Finance. From January 1992 to October 1992, he served as Vice President - Finance and Comptroller. From May 1989 to January 1992, he served as Vice President and Assistant Comptroller. Mr. Van Horn has continuously served as Vice President and Comptroller since May 1996. He was Comptroller from October 1992 to May 1996. From January 1992 to October 1992, he served as Assistant Comptroller. He also serves as Vice President and Comptroller of KCSR. There are no arrangements or understandings between the executive officers and any other person pursuant to which the executive officer was or is to be selected as an officer, except with respect to the executive officers who have entered into employment agreements, which agreements designate the position(s) to be held by the executive officer. None of the above officers are related to one another by family. 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. The Company's Board of Directors ("Board") authorized a 20% increase in its common stock dividend in July 1997. The payment and amount of dividends will be reviewed periodically and adjustments considered that are consistent with growth in real earnings and prevailing business conditions. Also in July 1997, the Board authorized a 3-for-1 split in the Company's common stock. Unrestricted retained earnings of the Company at December 31, 1997 were $204.7 million. At March 9, 1998, there were 6,239 holders of the Company's common stock based upon an accumulation of the registered stockholder listing. Recent Sales of Unregistered Securities On December 11, 1997 the Company issued 330,000 shares of its Common Stock under an exchange agreement dated as of December 3, 1997 by and among the Company and Louis P. Bansbach, III, the Louis P. Bansbach, IV, Trust 1, and the Brooke Allison Bansbach, Trust 1 (collectively, the "Bansbachs"). The Company issued the shares of Common Stock to the Bansbachs in exchange for all the shares of stock of Berger held by the Bansbachs, consisting of an aggregate of 7,673 shares of Berger non-voting common stock and 7,673 shares of Berger voting common stock. The Company relied upon an exemption from registration under Section 4(2) of the Securities Act based on, among other things (i) the fact that the offering was extended to only three offerees who are related to each other and (ii) representations by the Bansbachs as to their net worth, sophistication and experience with evaluating, managing and holding investments and as to their intent to hold the securities for investment. In addition, prior to the exchange of shares, the Company made available to the Bansbachs, among other information, the most recent public filings of the Company under the Exchange Act. Item 6. Selected Financial Data (in millions, except per share and ratio data)
The selected financial data below should be read in conjunction with the consolidated financial statements and the related notes thereto, and the Report of Independent Accountants thereon, included under Item 8 of this Form 10-K, and such data is qualified by reference thereto. 1997 (i) 1996 (ii) 1995 (iii) 1994 1993 Revenues $1,058.3 $ 847.3 $ 775.2 $1,088.4 $ 946.0 Income (loss) from continuing operations $ (14.1) $ 150.9 $ 236.7 $ 104.9 $ 97.0 Income (loss) from continuing operations per common share: Basic $ (0.13) $ 1.33 $ 1.86 $ 0.80 $ 0.77 Diluted $ (0.13) $ 1.31 $ 1.80 $ 0.77 $ 0.72 Total assets $2,434.2 $2,084.1 $2,039.6 $2,230.8 $1,917.0 Long-term obligations $ 805.9 $ 637.5 $ 633.8 $ 928.8 $ 776.2 Cash dividends per common share $ .15 $ .13 $ .10 $ .10 $ .10 Ratio of earnings to fixed charges 1.57 (iv) 3.30 6.14 (v) 3.28 3.68
(i) 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 by the Company 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 1 and 3 to the consolidated financial statements in this Form 10-K. (ii) Includes a one time after-tax gain of $47.7 million (or $0.42 per basic share, $0.41 per diluted share), representing the Company's proportionate share of the one-time gain recognized by DST in connection with the merger of The Continuum Company, Inc., formerly a DST unconsolidated equity affiliate, with Computer Sciences Corporation in a tax-free share exchange (see Note 2 to the consolidated financial statements in this Form 10-K). (iii) Reflects DST as an unconsolidated affiliate as of January 1, 1995 due to the DST public offering and associated transactions completed in November 1995, which reduced the Company's ownership of DST to approximately 41% and resulted in deconsolidation of DST from the Company's consolidated financial statements. The public offering and associated transactions resulted in a $144.6 million after-tax gain - $1.14 per basic share, $1.10 per diluted share - to the Company (see Note 2 to the consolidated financial statements included in this Form 10-K). (iv) 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 (i) above. If the ratio was computed to exclude these charges, the 1997 ratio of earnings to fixed charges would have been 3.47. (v) Financial information from which the ratio of earnings to fixed charges was computed for the year ended December 31, 1995 reflects DST as a majority owned unconsolidated subsidiary through October 31, 1995, and an unconsolidated 41% owned affiliate thereafter, in accordance with applicable U.S. Securities and Exchange Commission rules and regulations. If the ratio was computed to exclude the one- time pretax gain of $296.3 million associated with the November 1995 public offering and associated transactions, the 1995 ratio of earnings to fixed charges would have been 3.04. All years reflect the 3-for-1 common stock split to shareholders of record on August 25, 1997, paid September 16, 1997. All years reflect the reclassification of certain income/expense items from "Revenues" and "Costs and Expenses" to a separate "Other, net" line item in the Consolidated Statements of Operations. The information set forth in response to Item 301 of Regulation S-K under Part II Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K is incorporated by reference in partial response to this Item 6. 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 their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. The actual results of operations of Kansas City Southern Industries, Inc. ("KCSI" or "Company") could materially differ from those indicated in forward-looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company's Current Report on Form 8-K dated November 12, 1996 and its Amendment, Form 8-K/A dated June 3, 1997, which have been filed with the U.S. Securities and Exchange Commission (Files No. 1-4717) and are hereby incorporated by reference herein. Readers are strongly encouraged to consider these factors when evaluating any such forward-looking comments. The discussion herein is intended to clarify and focus on the Company's results of operations, certain changes in its financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 8 of this Form 10-K. This discussion should be read in conjunction with these consolidated financial statements, the related notes and the Report of Independent Accountants thereon, and is qualified by reference thereto. KCSI, a Delaware corporation organized in 1962, is a diversified holding company with principal operations in rail transportation, through its subsidiaries, Kansas City Southern Lines, Inc. ("KCSL"), The Kansas City Southern Railway Company ("KCSR"), Gateway Western Railway Company ("Gateway Western") and various equity investments, and Financial Asset Management, through its subsidiaries Janus Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"), and KCSI's equity investment in DST Systems, Inc. ("DST"). The Company supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other "non-operating" and more passive investments. Effective January 1, 1997, the Company realigned its industry segments to more clearly reflect the Company's core businesses. The various components which formerly comprised the Corporate & Other segment were assigned to either the Transportation or Financial Asset Management segment. During third quarter 1997, the Company formed Kansas City Southern Lines, Inc. ("KCSL") as a holding company for KCSR and all other transportation- related subsidiaries and affiliates. KCSL was organized to provide separate control, management and accountability for all transportation operations and businesses. Additionally, on January 23, 1998, the Company formed FAM Holdings, Inc. ("FAMHC") for the purpose of becoming a holding company for Janus, Berger, the approximate 41% equity interest in DST and all other financial asset management related subsidiaries and affiliates. Similar to KCSL, FAMHC was organized to provide separate control, management and accountability for all financial asset management opera- tions and businesses. The Company's business activities by industry segment and principal subsidiary companies are: Transportation. The Transportation segment (i.e., KCSL) consists of all transportation-related subsidiaries and investments, including: *KCSR, a wholly-owned subsidiary of the Company, operating a Class I Common Carrier railroad system; *Gateway Western, a wholly-owned subsidiary of KCS Transportation Company ("KCSTC," a wholly-owned subsidiary of the Company), operating a regional railroad system; *Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning 100% of Carland, Inc. and managing the loan portfolio for Southern Capital Corporation, LLC ("Southern Capital," a 50% owned joint venture); *Equity investments in Southern Capital, Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM" - formerly Transportacion Ferroviaria Mexicana, S. de R.L. de C.V. ), a 37% owned affiliate, and Mexrail, Inc. ("Mexrail") a 49% owned affiliate along with its wholly owned subsidiary, The Texas Mexican Railway Company ("Tex-Mex"); *Various other consolidated subsidiaries; *KCSL Holding Company amounts. Financial Asset Management. This segment (i.e. FAMHC) consists of all subsidiaries engaged in the management of investments for mutual funds, private and other accounts, as well as any Financial Asset Management- related investments. Included are: *Janus, an 83% owned subsidiary; *Berger, a wholly-owned subsidiary; *DST, an approximate 41% owned equity investment; *KCSI Holding Company amounts. As discussed below, the Company and DST completed a public offering of DST common stock and associated transactions in November 1995, which reduced the Company's ownership of DST to approximately 41%. Accordingly, the Company's investment in DST was accounted for under the equity method for the year ended December 31, 1995 retroactive to January 1, 1995. All per share information included in this Item 7 is presented on a diluted basis, unless specifically identified otherwise. RECENT DEVELOPMENTS Planned Separation of Company Business Segments. In September 1997, the Company announced the planned separation of its Transportation and Financial Asset Management segments. Initially, the Company contemplated an initial public offering of its Transportation segment (KCSL). On February 3, 1998, however, the Company announced its intention to pursue a spin-off of its Financial Asset Management businesses. The spin-off would be subject to obtaining a favorable tax ruling from the Internal Revenue Service ("IRS") and other key factors. A tax ruling request was filed with the IRS on February 27, 1998. The Company expects to complete the spin-off by third quarter 1998, subject to receipt of a favorable tax ruling. A public offering of KCSI stock (i.e., the Transportation businesses) in some form is anticipated to occur subsequent to the spin-off. Panama Railroad Concession. The Government of Panama has granted a concession to the Panama Canal Railway Company ("PCRC"), a joint venture of KCSI and Mi-Jack Products, Inc., to operate a railroad between Panama City and Colon. Upon completion of certain infrastructure improvements, the PCRC will operate an approximate 47-mile railroad running parallel to the Panama Canal and connecting the Atlantic and Pacific Oceans. The PCRC has committed to making at least $30 million in capital improvements and investments in Panama over the next five year period. The Company expects its contribution related to the PCRC project to be less than $10 million. PCRC is in the process of evaluating the overall needs and requirements of the project and alternative financing opportunities. RESULTS OF OPERATIONS Consolidated operating results from 1995 to 1997 were affected by the following significant developments. Restructuring, Asset Impairment and Other Charges. In connection with the Company's review of its accounts in accordance with its established accounting policies, as well as a change in the Company's methodology for evaluating the recoverability of goodwill (as set forth in Note 1 to the consolidated financial statements), $196.4 million of restructuring, asset impairment and other charges were recorded during fourth quarter 1997. After consideration of related tax effects, these charges reduced consolidated earnings by $158.1 million, or $1.47 per share. The charges include: * A $91.3 million impairment of goodwill associated with KCSR's acquisition of MidSouth Corporation ("MidSouth") in 1993. In response to the changing competitive and business environment in the rail industry, 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. * 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 have been designated for sale, and efforts have been initiated by management to procure bids. * Approximately $27.1 million in reserves related to termination of a union productivity fund and employee separations. The union productivity fund was established in connection with prior collective bargaining agreements and required KCSR to pay employees when reduced crew levels were used. * A $12.7 million impairment of goodwill associated with the Company's investment in Berger. In connection with the Company's review of the carrying value of its various assets, management determined that a portion of the intangibles recorded in connection with the Berger investment were not recoverable, primarily due to below-peer performance and growth of the core Berger funds. * A $9.2 million impairment of assets at Pabtex (a subsidiary of the Company) as a result of continued operating losses and a decline in its customer base. * Approximately $17.6 million of other reserves for leases, contracts, impaired investments and other reorganization costs. Based on the Company's review of its assets and liabilities, certain charges were recorded to reflect recoverability and/or obligation as of December 31, 1997. Operating Difficulties of the Union Pacific Railroad. As has been reported in the press, the Union Pacific Railroad ("UP") has experienced recent difficulties with its railroad operations, reportedly linked to its recent acquisition of the Southern Pacific Railroad. UP is one of KCSR's largest interchange partners. The UP's difficulties have resulted in overall traffic congestion of the U.S. railroad system and have impacted KCSR's ability to interchange traffic with UP, both for domestic and international traffic (i.e., to and from Mexico). This system congestion has resulted in certain equipment shortages due to KCSR's rolling stock being retained within the UP system for unusually extended periods of time, for which UP remits car hire amounts. KCSR agreed to accept certain UP trains in diverted traffic to assist in the easing of the UP's system congestion, resulting in revenues of approximately $3.9 million during 1997, which largely offset traffic lost due to congestion on UP's line. The Surface Transportation Board ("STB") issued an emergency service order on October 31, 1997, addressing the deteriorating quality of rail service in the Western United States. Key measures in the STB order included granting the Tex-Mex access to Houston shippers, access to trackage rights over the more direct Algoa Route south of Houston, and a connection with the Burlington Northern Santa Fe Railroad at Flatonia, Texas. The order took effect on November 5, 1997 and extended for 30 days initially. The STB extended this order through August 2, 1998. As a result of this emergency service order, Tex-Mex revenues increased during fourth quarter 1997. However, expenses associated with accommodating the increase in traffic and congestion related problems of the UP system substantially offset this revenue increase. Grupo TFM. As disclosed previously, Grupo TFM, a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM"), was awarded the right to purchase 80% of the common stock of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.) for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM holds the concession to operate over Mexico's Northeast Rail Lines for 50 years, with the option of a 50 year extension (subject to certain conditions). As previously disclosed, the remaining 20% of TFM was retained by the Mexican Government ("Government"). The Government has the option of selling its 20% interest through a public offering, or selling it to Grupo TFM after October 31, 2003 at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that Grupo TFM does not purchase the Government's 20% interest in TFM, the Government may require TMM and KCSI to purchase the Government's holdings in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Government's interest in Grupo TFM - see below). On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $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 U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and senior discount debentures ($400 million U.S.); (iii) proceeds from the sale of 24.5% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM, which includes a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Government has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. As of December 31, 1997 no additional contributions from the Company have been requested or made. At December 31, 1997, the Company's investment in Grupo TFM was approximately $288 million. With the sale of 24.5% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.5%). The Company accounts for its investment in Grupo TFM under the equity method. I&M Rail Link. During 1997, KCSR entered into a marketing agreement with I&M Rail Link, LLC, which provides KCSR with access to customers (primarily new grain origins) in the upper Midwest, as well as Chicago and Minneapolis. This agreement is similar to a haulage rights agreement, but without the restrictions on traffic. The Company believes this agreement provides KCSR with the ability to increase its traffic, particularly with respect to agricultural and mineral products. Berger Ownership Interest. As a result of certain transactions during 1997, the Company increased its ownership in Berger to 100%. In January and December 1997, Berger purchased, for treasury, the common stock of minority shareholders. Also in December 1997, the Company acquired additional Berger shares from a minority shareholder through the issuance of KCSI common stock. These transactions resulted in approximately $17.8 million of intangibles, which will be amortized over their estimated economic life of 15 years. However, see discussion of impairment of certain of these intangibles in "Restructuring, Asset Impairment and Other Charges" heading above. In connection with the Company's acquisition of a controlling interest of Berger in 1994 under a Stock Purchase Agreement ("Agreement"), the Company may be required to make additional purchase price payments up to approximately $62.4 million (of which $39.7 million remains unpaid), contingent upon Berger attaining certain levels (up to $10 billion) of assets under management, as defined in the Agreement, over a five year period. In 1997, 1996 and 1995, additional payments were made totaling $3.1, $23.9 and $3.1 million, respectively, resulting in adjustment to the purchase price. The intangible amounts are being amortized over their estimated economic life of 15 years. Stock Split and 20% Increase in Quarterly Common Stock Dividend. On July 29, 1997, the Company's Board of Directors ("Board") authorized a 3-for-1 split in the Company's common stock effected in the form of a stock dividend. The Board also voted to increase the quarterly dividend 20% to $0.04 per share (post-split). Both dividends were paid on September 16, 1997 to stockholders of record as of August 25, 1997. Amounts reported in this Form 10-K have been restated to reflect the stock split. Common Stock Repurchases. The Company's Board has authorized management to repurchase a total of 33 million shares of KCSI common stock under two programs - the 1995 program for 24 million shares and the 1996 program for nine million shares. During 1997, the Company purchased approximately 2.9 million shares (post-split) at an aggregate cost of approximately $50 million. With these transactions, the Company has repurchased approximately 27.6 million shares of its common shares, completing the 1995 program and part of the 1996 program. In connection with these programs, the Company entered into a forward stock purchase contract in 1995 for the repurchase of shares, which was completed during 1997. See discussion in "Financial Instruments and Purchase Commitments" below. Gateway Western. KCSTC acquired beneficial ownership of the outstanding stock of Gateway Western in December 1996. The stock acquired by KCSTC was held in an independent voting trust until the Company received approval from the STB on the Company's proposed acquisition of Gateway Western. The STB issued its approval of the transaction 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 Transporta- tion segment. Additionally, the Company restated first quarter 1997 to include Gateway Western as a consolidated subsidiary as of January 1, 1997, and results of operations for the year ended December 31, 1997 reflect this restatement. Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company, Burlington Northern Santa Fe Corporation has the option of purchasing the assets of Gateway Western (based on a fixed formula in the agreement) through the year 2004. Southern Capital Joint Venture. In October 1996, the Company and GATX Capital Corporation ("GATX") completed the formation and financing of a joint venture to perform certain leasing and financing activities. The venture, Southern Capital, was formed through a GATX contribution of $25 million in cash, and a Company contribution (through its subsidiaries KCSR and Carland) of $25 million in net assets, comprising a negotiated fair value of locomotives and rolling stock and long-term indebtedness owed to KCSI and its subsidiaries. In an associated transaction, Southern Leasing Corporation (an indirect wholly-owned subsidiary of the Company prior to dissolution in October 1996), sold to Southern Capital approximately $75 million of loan portfolio assets and rail equipment. As a result of these transactions and subsequent repayment by Southern Capital of indebtedness owed to KCSI and its subsidiaries, the Company received cash which exceeded the net book value of its assets by approximately $44.1 million. Concurrent with the formation of the joint venture, KCSR entered into operating leases with Southern Capital for the majority of the rail equipment acquired by or contributed to Southern Capital. Accordingly, this excess fair value over book value is being recognized over the terms of the leases (approximately $4.9 million in 1997). The cash received by the Company was used to reduce outstanding indebtedness by approximately $217 million, after consideration of applicable income taxes, through repayments on various lines of credit and subsidiary indebtedness. The Company reports its 50% ownership interest in Southern Capital under the equity method of accounting. 1997 net income was positively impacted as a result of the Southern Capital transaction. Reduced depreciation and interest expense, together with equity earnings from Southern Capital, more than offset the increase in fixed lease expense. Note that the reduced depreciation in 1997 resulting from this transaction was substantially offset by depreciation associated with capital expenditures during 1996 and 1997. DST's Investment in Continuum. On August 1, 1996, The Continuum Company, Inc. ("Continuum"), formerly an approximate 23% owned DST unconsolidated equity affiliate, merged with Computer Sciences Corporation ("CSC," a publicly traded company) in a tax-free share exchange. In exchange for its ownership interest in Continuum, DST received approximately 4.3 million shares (representing an approximate 6% interest) of CSC common stock. As a result of the transaction, the Company's 1996 earnings include approximately $47.7 million (after-tax), or $0.41 per share, representing the Company's proportionate share of the one-time gain recognized by DST in connection with the merger. Continuum ceased to be an equity affiliate of DST, thereby eliminating any future Continuum equity affiliate earnings or losses. DST recognized equity losses in Continuum of $4.9 million for the first six months of 1996 and $1.1 million for the year ended December 31, 1995. Railroad Industry Trends and Competition. During the period from 1995 to 1997, the railroad industry has experienced ongoing consolidation. Specifically, Burlington Northern, Inc. and Santa Fe Pacific Corporation ("BN/SF") merged in 1995, as did the UP and the Chicago and North Western Transportation Company ("UP/CNW"). In 1996, the UP merged with SP ("UP/SP"). In 1997, CSX Corporation and Norfolk Southern Corporation completed negotiations to purchase parts of Conrail, Inc., and the STB is currently reviewing the proposed transaction. Finally, in February 1998, the Canadian National Railway announced its intention to acquire the Illinois Central Corporation. As these transactions are not completed or have only recently been completed, the Company cannot predict their ultimate outcome or effect on KCSR. However, the Company believes that KCSR revenues have been and may be negatively affected by increased competition from these consolidations as a result of diversions of rail traffic away from KCSR lines. In addition to competition within the railroad industry, highway carriers compete with KCSR throughout its operating area. Since deregulation of the railroad industry, competition has resulted in extensive downward pressure on freight rates. Truck carriers have eroded the railroad industry's share of total transportation revenues. However, rail carriers, including KCSR, have placed an emphasis on competing in the intermodal marketplace, working together to provide end-to-end transportation of products. Mississippi and Missouri River barge traffic, among others, also competes with KCSR in the transportation of bulk commodities such as grains, steel, and petroleum products. In response to the changing competitive and business environment in the rail industry, the Company revised its accounting methodology for evaluating the recoverability of intangibles from a business unit approach to analyzing each of the Company's significant investment components. Based on this analysis, $91.3 million of the remaining purchase price in excess of fair value of the MidSouth Corporation assets acquired was not recoverable. See "Union Labor Negotiations" below for a discussion of the impact of labor issues and regulations on competition in the transportation industry. Berger Joint Venture. During 1996, Berger entered into a joint venture agreement with Bank of Ireland Asset Management (U.S.) Limited, a subsidiary of Bank of Ireland, to develop and market a series of international and global mutual funds. The new venture, named BBOI Worldwide LLC ("BBOI"), is headquartered in Denver, Colorado. Regulatory approvals were received in October 1996, and the first no-load mutual fund product - the Berger/BIAM International Fund ("BIAM Fund") - was introduced in fourth quarter 1996. Assets under management for the BIAM Fund totaled $161 million at December 31, 1997. Berger accounts for its 50% investment in BBOI under the equity method. Union Labor Negotiations. Approximately 85% of KCSR's and Gateway Western's combined employees are covered under various collective bargaining agreements. In 1996, with the exception of employees of the former MidSouth, the Company effectively settled labor contract disputes with all major railroad unions, including the United Transportation Union, the Brotherhood of Locomotive Engineers, the Transportation Communications International Union, the Brotherhood of Maintenance of Way Employees, and the International Association of Machinists and Aerospace Workers. The provisions of the various labor agreements, which extend to December 31, 1999, generally include periodic general wage increases, lump-sum payments to workers, and greater work rule flexibility, among other provisions. Settlement of these labor issues effectively mitigates the possibility of a work stoppage and did not have a material effect on the Company's consolidated results of operations or financial position. Labor agreements related to employees of the former MidSouth covered by collective bargaining agreements reopened for negotiations in 1997. These agreements entail nineteen separate groups of employees. KCSR management is currently in the process of meeting with these unions representing its employees. While these discussions are ongoing, the Company does not anticipate that this process or the resultant labor agreements will have a material impact on its operations or financial conditions. As a result of these labor agreements completed in 1996, which will result in operating efficiencies, management believes the Company is better positioned to compete effectively with alternative forms of transportation, as well as other railroads. However, railroads remain restricted by certain remaining antiquated operating rules and are thus prevented from achieving optimum productivity with existing technology and systems. KCSR, Gateway and other railroads continue to be affected by labor regulations which are more burdensome than those governing non-rail industries, such as trucking competitors. The Railroad Retirement Act requires up to a 23.75% contribution by railroad employers on eligible wages, while the Social Security and Medicare Acts only require a 7.65% employer contribution on similar wage bases. Other programs, such as The Federal Employees Liability Act (FELA), when compared to worker's compensation laws, vividly illustrate the competitive disadvantage placed upon the rail industry by federal labor regulations. DST Public Offering. In October and November 1995, DST and the Company completed an initial public offering of DST common stock. In conjunction with the offering, the Company completed an exchange of DST shares for shares of KCSI common stock held by The Employee Stock Ownership Plan ("ESOP"). The Company recorded an after-tax gain of approximately $144.6 million during fourth quarter 1995 from this transaction, representing $1.15 per share in fourth quarter 1995 and $1.10 per share for the year ended December 31, 1995. As a result of the offering and associated transactions, the Company's ownership in DST decreased to approximately 41%, and the DST investment was accounted for under the equity method retroactive to January 1, 1995. The purpose of the offering was to achieve market recognition of DST's performance as a stand-alone entity and to obtain proceeds for the retirement of debt, repurchase of Company common stock and general corporate purposes. The net proceeds to the Company from the offering and repayment of indebtedness by DST totaled approximately $200 million, after applicable income taxes. Mexrail Investment. In November 1995, the Company purchased 49% of the common stock of Mexrail from TMM. Mexrail owns 100% of the Tex-Mex, as well as certain other assets. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas. The purchase price of $23 million was financed through existing lines of credit. Upon completion of purchase price allocations in 1996, approximately $9.8 million of intangibles were recorded as the purchase price exceeded the fair value of the underlying net assets. The intangible amounts are being amortized over a period of 40 years. The investment is accounted for under the equity method. As a result of efforts by the Company in connection with the UP/SP merger, the STB, as a condition for approval of the merger, granted the Tex-Mex trackage rights to operate over UP lines between Corpus Christi and Beaumont, Texas. In Beaumont, the Tex-Mex interchanges with KCSR, effectively extending the KCSR rail network to the Mexican border, where it connects with TFM. As noted earlier, this interchange, together with KCSR's connections with major rail carriers at various other points in the United States and the Company's partial ownership of TFM, positions KCSL to be an integral component of the economic integration of the North American marketplace. KCSR Unusual Costs. During the first and second quarters of 1995, KCSR recorded approximately $19.2 million (after-tax), or approximately $0.15 per share, of unusual costs and expenses related to employee separations and other personnel related activities, unusual system operational related expenses, and reserves for contracts, leases and property. Safety and Quality Programs. KCSR continued the implementation of important safety and quality programs during 1997, including an extensive, cross-functional "Pro-Formance" initiative focusing on continuous improvements in all aspects of the organization. As a result of these programs, KCSR has experienced a decline in accident related statistics in recent years. For the period 1995 to 1997, safety and quality programs resulted in a 7% decline in Federal Railroad Administration reportable injuries, a 33% decline in employee lost work days and a 15% decline in total derailments. Related benefits are expected to be recurring in nature and realizable over future years. "Safety" and "Quality" programs comprise two important ongoing elements of KCSR management's goal of reducing employee injuries. Associated program expenses are not anticipated to have a material impact on operating results in future years. INDUSTRY SEGMENT RESULTS
The Company's major business activities are classified as follows (in millions): 1997(i) 1996(ii) 1995 Revenues Transportation $ 573.2 $ 517.7 $ 538.5 Financial Asset Management 485.1 329.6 236.7 Total $1,058.3 $ 847.3 $ 775.2 Operating Income (Loss) Transportation $ (92.7) $ 72.1 $ 79.0 Financial Asset Management 199.2 131.8 80.2 Total $ 106.5 $ 203.9 $ 159.2 Net Income (Loss) Transportation $ (132.1) $ 16.3 $ 18.7 Financial Asset Management 118.0 134.6 218.0 Total $ (14.1) $ 150.9 $ 236.7
(i) Includes $196.4 million ($158.1 million after-tax) of restructuring, asset impairment and other charges recorded by the Company during fourth quarter 1997. The charges reflect impairment of goodwill associated with KCSR's acquisition of MidSouth in 1993 and the Company's investment in Berger, long-lived assets held for disposal, impaired long-lived assets, reserves related to termination of a union productivity fund and employee separations, and other reserves for leases, contracts and reorganization costs. See Notes 1 and 3 to the consolidated financial statements in this Form 10-K. Additionally, Transportation results for the year ended 1997 include revenues and expenses from Gateway Western. (ii) Includes a one-time after-tax gain of $47.7 million representing the Company's proportionate share of the one-time gain recognized by DST in connection with the merger of Continuum with Computer Sciences Corporation (see Note 2). Consolidated 1997 revenues increased $211.0 million over 1996, reflecting improvements in both the Transportation and Financial Asset Management segments year to year. While 1997 total operating income decreased from 1996 by 48%, operating income exclusive of the restructuring, asset impairment and other charges increased nearly $100 million, indicative of a higher rate of revenue growth compared to expenses. The consolidated loss of $14.1 million for the year ended December 31, 1997 includes $196.4 million ($158.1 million after tax) in restructuring, asset impairment and other charges. Consolidated net income of $150.9 million for the year ended 1996 includes a one-time gain of $47.7 million resulting from the Continuum transaction. Exclusive of these amounts, consolidated net income in 1997 was $144.0 million, or 40%, higher than 1996. This increase reflects improvement in ongoing operations for both the Transportation and the Financial Asset Management segments, primarily from higher revenues and improved operating margins. Consolidated 1996 revenues increased $72.1 million over 1995 due to growth in Financial Asset Management assets under management during 1996, partially offset by a 4% decline in Transportation revenues. Operating income increased 28% from higher revenues and improved margins in the Financial Asset Management segment. While 1996 consolidated net income decreased by $85.8 million from 1995, exclusive of the Continuum gain in 1996 and the gain from the DST public offering in 1995, net income increased $11.1 million, or 12%. TRANSPORTATION (KCSL)
The following schedule summarizes Transportation earnings, providing a reconciliation to ongoing domestic Transportation earnings: 1997 1996 1995 Transportation net income (loss) $(132.1) $ 16.3 $ 18.7 1997 Restructuring, asset impairment and other charges 141.9 - - 1997 Grupo TFM losses and interest 17.6 - - 1995 unusual costs - - 19.2 Ongoing domestic Transportation earnings $ 27.4 $ 16.3 $ 37.9
Ongoing domestic Transportation segment earnings of $27.4 million for the year ended December 31, 1997 were compared to $16.3 million for the prior year, an increase of $11.1 million or 68%. This increase was driven by revenue growth from $517.7 million to $573.2 million, chiefly due to higher KCSR revenues and the addition of the Gateway Western, partially offset by the loss of revenues from Southern Leasing Corporation, which was dissolved in the fourth quarter of 1996. In addition, cost containment initiatives by management in the second half of 1997 helped to increase operating margins and contributed to higher earnings. Transportation expenses, exclusive of the restructuring, asset impairment and other charges, increased $42.3 million, or 9.5% to $487.9 million for 1997 compared with $445.6 million for 1996. The increase is attributable to operating lease expenses resulting from the Southern Capital transaction and the inclusion of Gateway Western expenses in 1997 (variable operating expenses were essentially unchanged year to year). Depreciation and amortization expenses for the Transportation segment decreased $1.1 million (1.7%) from 1997 to 1996 due to the transfer of assets to Southern Capital during the fourth quarter of 1996, offset by the inclusion of Gateway Western. The 1% increase in 1997 Transportation interest expense (to $53.3 million) is due to interest associated with the investment in Grupo TFM, together with interest on Gateway Western indebtedness, offset by debt repayments associated with the Southern Capital transaction. Capitalized interest related to the Company's Grupo TFM investment totaled $7.4 million for the year ended December 31, 1997, which ceased upon gaining operational control of TFM on June 23, 1997. The Transportation segment's contribution to the Company's consolidated earnings declined $2.4 million, or 12.8%, to $16.3 million for the year ended December 31, 1996 compared to $18.7 million (exclusive of 1995 unusual costs of $19.2 million) for the year ended December 31, 1995. The portion of net income attributable to KCSR improved in 1996 primarily because of these unusual costs and expenses incurred in 1995 which offset revenue declines related to the effect of industry consolidation. Revenues declined $20.8 million, or 3.9%, primarily as a result of a decrease in KCSR revenues attributable to lower carloadings related to the competitive pressures from the various rail carrier mergers, a decline in Southern Leasing revenues and reduced Pabtex revenues. Operating expenses, exclusive of depreciation and amortization, declined $16.6 million, or 4.1%, to $382.7 million for the year ended December 31, 1996 from $399.3 million for the year ended December 31, 1995. However, if $19.2 million (after-tax) of certain 1995 unusual costs and expenses had been excluded, total operating expenses for 1996 would have increased over 1995. This increase in 1996 is attributable to adverse winter weather in first quarter 1996, train derailment expenses and expenditures associated with KCSR's emphasis on providing improved and reliable customer service. Depreciation and amortization expenses for the Transportation segment increased $2.7 million (4.5%) from 1995 to 1996 due primarily to capital expenditures. Following is a detailed discussion of the primary subsidiaries comprising the Transportation segment. Results of subsidiaries immaterial to the Company have been omitted. THE KANSAS CITY SOUTHERN RAILWAY COMPANY KCSR operates in a nine state region, including Missouri, Kansas, Arkansas, Oklahoma, Mississippi, Alabama, Tennessee, Louisiana, and Texas. KCSR has the shortest rail route between Kansas City and the Gulf of Mexico, serving the ports of Beaumont and Port Arthur, Texas; and New Orleans, Baton Rouge, Reserve and West Lake Charles, Louisiana. Through haulage rights, KCSR accesses the states of Nebraska and Iowa, and serves the ports of Houston and Galveston, Texas. Kansas City, Missouri, as the second largest rail center in the United States, represents an important interchange gateway for KCSR. KCSR also has interchange gateways in New Orleans and Shreveport, Louisiana; Dallas and Beaumont, Texas; and Jackson and Meridian, Mississippi. Major commodities moved by KCSR include coal, grain and farm products, petroleum, chemicals, paper and forest products, as well as other general commodities. KCSR competes in the intermodal traffic market, including an East/West line running from Dallas, Texas to Meridian, Mississippi, which has allowed KCSR to be more competitive in transcontinental intermodal transportation. Additionally, in November 1994, KCSR began dedicated through train service between Dallas, Texas and Meridian, Mississippi for intermodal traffic, which competes directly with truck carriers along the Interstate 20 corridor, offering service times which are competitive with both truck and other rail carriers. Exclusive of the restructuring, asset impairment and other charges recorded in fourth quarter 1997 discussed in "Results of Operation" above, KCSR contributed $27.4 million to the Company's consolidated earnings compared to $17.1 million in 1996. This increase is primarily due to a $25.3 million increase in KCSR revenues offset by a lesser increase in variable and fixed operating costs. In 1996, KCSR net income totaled $17.1 million compared to $11.4 million in 1995. This increase was primarily attributable to the 1995 unusual costs and expenses discussed in "Results of Operations" above, which reduced KCSR net income by approximately $19.2 million in 1995. Exclusive of the 1995 unusual costs and expenses, KCSR 1996 earnings were lower than 1995, mainly due to reduced revenues and higher operating costs attributable to adverse winter weather (in first quarter 1996), train derailment expenses (primarily in second quarter 1996), and expenditures associated with KCSR's emphasis on providing improved and reliable customer service. Revenues
The following summarizes revenues, carloads and net ton miles of KCSR by commodity mix: Carloads and Revenues Intermodal Units Net Ton Miles (in millions) (in thousands) (in millions) 1997 1996 1995 1997 1996 1995 1997 1996 1995 General commodities: Chemical and petroleum $133.1 $129.0 $129.3 162.9 165.9 176.3 4,199 4,070 3,915 Paper and forest 106.4 103.5 107.3 175.8 177.3 188.1 3,072 2,910 2,973 Agricultural and mineral 85.0 75.0 85.9 119.6 113.2 133.8 4,002 3,306 4,094 Other 21.7 19.8 17.3 24.4 22.6 21.6 913 1,007 1,070 Total general commodities 346.2 327.3 339.8 482.7 479.0 519.8 12,186 11,293 12,052 Intermodal units 43.2 40.3 39.0 161.6 149.4 133.8 1,240 1,402 1,299 Coal 101.4 101.4 102.6 177.1 179.6 169.8 6,249 5,735 5,709 Subtotal 490.8 469.0 481.4 821.4 808.0 823.4 19,675 18,430 19,060 Other 27.0 23.5 20.7 - - - - - Total $517.8 $492.5 $502.1 821.4 808.0 823.4 19,675 18,430 19,060
1997 KCSR revenues were $25.3 million, or 5.1%, higher than 1996 due to a 5.8% increase in general commodities and a 7.2% increase in intermodal revenues. Agricultural and mineral products led general commodities with a 13.3% increase over 1996 comprised primarily of domestic and export grain and food products. 1996 KCSR revenues were $9.6 million, or 1.9% lower than 1995 due to a 4% reduction in general commodities revenues, offset by an increase in intermodal and other revenues. In particular, revenues decreased in grain traffic (26%), bulk commodities (such as non-metallic minerals and petroleum coke - 9%), and paper/forest products (4%). These lower general commodities revenues were primarily due to a 7.8% decrease in carloading volumes resulting from competitive pressures from the various rail mergers, offset partially by slightly improved average revenue per carload as a result of changes in the mix of general commodities traffic (e.g., fewer carloadings of paper/forest products compared to chemical and petroleum products in 1996 versus 1995). The following is a discussion of KCSR's major commodity groups. Coal KCSR delivers coal to seven electric generating plants, located at Amsterdam, Missouri; Flint Creek, Arkansas; Welsh, Texas; Mossville, Louisiana; Kansas City, Missouri; Pittsburg, Kansas; and Hugo, Oklahoma. Two coal customers, Southwestern Electric Power Company ("SWEPCO") and Entergy Gulf States (formerly Gulf States Utility Company), comprised approximately 82% and 83% of total coal revenues generated by KCSR in 1997 and 1996, respectively. KCSR also delivers lignite to an electric generating plant at Monticello, Texas ("TUMCO"). KCSR's contract with SWEPCO, its largest customer, extends through the year ended 2006. Coal revenues for the periods presented reflect the historical tendencies of unit coal revenues to equalize on an annual basis. Coal continues to be the largest single commodity handled by KCSR, generating $101.4 million of revenue in 1997, unchanged from 1996. Coal traffic comprised 20.7% of carload revenues and 21.6% of carloads in 1997 compared with 21.6% and 22.2%, respectively, in 1996 indicating the growth realized in other commodities. Coal revenues decreased $1.2 million or 1.2% to $101.4 for the year ended December 31, 1996 from $102.6 million for the year ended December 31, 1995, as a result of an overall decrease in unit coal traffic. Coal accounted for 21.6% of carload revenues in 1996 compared with 21.3% in 1995. Chemicals and Petroleum Chemical and petroleum products, serviced via tank and hopper cars primarily to markets in the Southeast and Northeast through interchange with other rail carriers, as a combined group represent the largest commodity to KCSR in terms of revenue. ($133.1 million in 1997 versus $129 million in 1996). This $4.1 million increase, or 3.2% increase, results primarily from increased revenues in plastics, miscellaneous chemical, soda ash and petroleum shipments offset by reduced petroleum coke shipments. Chemical and petroleum products accounted for 27.1% of total 1997 carload revenues compared with 27.5% for 1996. These revenues could grow in future years as a result of KCSR's petition seeking approval from the STB for construction of a nine mile rail line connecting the manufacturing facilities of BASF Corporation, Shell Chemical Company and Borden Chemical and Plastics in Geismar, Louisiana, a large industrial corridor with several other companies engaged in the petrochemical industry, with KCSR's main line just north of Sorrento, Louisiana. Chemical and petroleum revenues were essentially unchanged at $129 million in 1996 compared with $129.3 million for 1995 as increases in miscellaneous petroleum and soda ash traffic were offset by lower petroleum coke volumes. Chemical and petroleum products accounted for 27.5% of total 1996 carload revenues compared with 26.9% for 1995. Paper and Forest KCSR, whose rail line runs through the heart of the southeastern U.S. timber producing region, serves eleven paper mills directly (including International Paper Co. and Georgia Pacific, among others) and six others indirectly through short-line connections, and transports pulpwood, woodchips and raw fiber used in the production of paper, pulp and paperboard. Paper and forest products revenues increased $2.9 million, or 2.8%, to $106.4 million for the year ended December 31, 1997 from $103.5 million from the year ended December 31, 1996 as a result of increased carloads for lumber/plywood and higher revenues per carload for pulpwood and woodchips offset by decreased pulpwood and woodchips carloads. Paper and forest traffic comprised 21.7% of carload revenues in 1997 as compared to 22.1% in 1996. In 1996, paper and forest products revenues decreased $3.8 million, or 3.5%, from 1995 due to a decline in pulpwood and woodchips carloads. Paper and forest products accounted for 22.1% of total 1996 carload revenues compared with 22.3% in 1995. Agricultural and Mineral Agricultural and mineral products revenues for 1997 increased $10 million, or 13.3%, compared to 1996 primarily as a result of higher carloads of grain, especially corn, due to a strong harvest. Additionally, carloads of nonmetallic minerals increased approximately 18% over 1996 volume. Agricultural and mineral products accounted for 17.3% of carload revenues in 1997 compared with 16% in 1996. During 1996, revenues from agricultural and mineral products declined $10.9 million, or 12.7%, compared to 1995, largely from significantly re- duced domestic and export grain traffic. This decline is attributable to traffic diversions resulting from the various rail mergers and the impact of weaker grain movements in early 1996. Intermodal The intermodal freight business consists of hauling freight containers or truck trailers by a combination of water, rail and motor carriers, with rail carriers serving as the links between motor carriers and ports. In 1994, KCSR increased its share of the U.S. intermodal traffic primarily through the acquisition of the MidSouth, which extended the Company's east/west line running from Dallas, Texas to Shreveport, Louisiana to Meridian, Mississippi. Intermodal revenues for 1997 of $43.2 million increased $2.9 million, or 7.2% from 1996 revenues of $40.3 million primarily as a result of in- creased carloads, offset by a slight decrease in revenue per carload. Revenues from United Parcel Service of America, one of KCSR's largest customers, declined slightly due to the International Brotherhood of Teamsters strike in August 1997; however, the strike's overall impact on KCSR's operating results and financial condition was not material. During 1997, the Company committed to a plan to pursue intermodal business based on operating margin versus growth through carload volume. Intermodal traffic accounted for 8.8% of carload revenues in 1997 compared with 8.6% in 1996. KCSR's 1996 intermodal carload volume continued the growth trend experienced in 1995, increasing revenues 3.3%, due to KCSR's continued marketing efforts to expand east/west intermodal traffic, despite a flat intermodal market in general. Certain segments of KCSR's freight traffic, especially intermodal, face highly price and service sensitive competition from trucks, although improvements in railroad operating efficiencies are believed to be lessening the truckers' cost advantages. Trucks are not obligated to provide or to maintain rights of way and do not have to pay real estate taxes on their routes. In recent years, the trucking industry diverted a substantial amount of freight from the railroads as truck operators' efficiency over long distances increased. Because fuel costs constitute a larger percentage of the trucking industry's costs, declining fuel prices disproportionately benefit trucking operations as compared to railroad operations. Changing regulations, subsidized highway improve- ment programs and favorable labor regulations have improved the competitive position of trucks as an alternative mode of surface transportation for many commodities. In recent years, railroad industry management has sought avenues for improving its competitive positions, and forged alliances with truck companies in order to move more traffic by rail and provide faster, safer and more efficient service to its customers. KCSR has streamlined its intermodal operations in the last few years, making its service competitive both in price and service with trucking, and has entered into agreements with several truck companies for through train intermodal service between Dallas, Texas and Meridian, Mississippi. KCSR has increased its intermodal traffic through its connections with eastern railroads. Other KCSR's remaining freight business consists of scrap and slab steel, waste, military equipment and automobiles. Other revenues accounted for 4.4% of carload revenues during 1997, 4.2% in 1996 and 3.6% in 1995 with no material variances. Costs and Expenses
The following table summarizes KCSR's operating expenses (dollars in millions): 1997 1996 1995 Salaries, wages and benefits $ 173.6 $ 173.2 $ 178.3 Fuel 34.7 32.3 31.1 Material and supplies 30.9 29.6 29.9 Car hire 3.6 7.4 21.3 Purchased services 35.5 33.8 32.2 Casualties and insurance 21.4 23.1 26.6 Operating leases 56.8 40.1 31.9 Depreciation and amortization 54.7 59.1 55.3 Restructuring, asset impairment and other charges 163.8 - - Other 26.5 19.8 28.9 Total $ 601.5 $ 418.4 $ 435.5
General KCSR's costs and expenses, excluding depreciation and amortization, increased $187.5 million, or 52%, to $546.8 million for the year ended December 31, 1997 from $359.3 million in 1996. However, if the restructuring, asset impairment and other charges of $163.8 million ($132.9 million after-tax) in 1997 had been excluded, total costs and expenses would have increased only $23.7 million, or 6.6% over 1996, primarily as a result of increased fuel costs and operating lease expenses. Diesel fuel usage increased as expected due to both an increase in ton miles and carloads, while fuel prices were essentially unchanged. Costs related to fixed equipment operating leases increased as a result of the Southern Capital transaction (note, however, that the Company records equity earnings from Southern Capital which partially mitigates this increase). Overall, KCSR variable operating expenses, exclusive of restructuring, asset impairment and other charges, declined 2.9% as a percentage of revenues from 1996 indicative of a higher rate of growth for KCSR revenues than costs. The improved cost structure results from cost containment initiatives implemented by management. Improvements in variable expenses were somewhat offset by increases in fixed expenses, primarily related to lease expenses associated with Southern Capital in the fourth quarter of 1996, as discussed above. As discussed in "Results of Operations" above, KCSR recorded restructuring, asset impairment and other charges during fourth quarter 1997. As a result, salaries and wages expense and depreciation and amortization are expected to decline in 1998. Despite the decrease in total KCSR revenues in 1996 versus 1995, KCSR 1996 operating income increased $7.5 million as a result of a 5.5% decrease in costs and expenses (to $359.3 million) compared to 1995. This decrease is attributable to the 1995 unusual costs and expenses. Exclusive of the 1995 unusual items, 1996 costs and expenses were higher than 1995 primarily due to adverse winter weather (in first quarter 1996), train derailment ex- penses, and KCSR's continuing emphasis on providing improved and reliable customer service. Increased costs were evident in salaries and wages, material and supplies and casualties/insurance. KCSR management implemented various cost containment measures during third quarter, which stabilized expenses somewhat in the second half of 1996, particularly in salaries and wages and car hire costs. Fuel KCSR locomotive fuel usage represented 5.8% of KCSR operating costs in 1997 (7.7% in 1996). Exclusive of restructuring, asset impairment and other charges, locomotive fuel usage represented 7.9% of operating costs, consistent with 1996. Fuel costs are affected by traffic levels, efficiency of operations and equipment, and petroleum market conditions. Control of fuel expenses is a constant concern of management, and fuel savings remains a top priority. To control fuel costs, based on favorable market conditions at the end of 1995, the Company entered into purchase commitments for approximately 50% of expected 1996 diesel fuel usage. As a result of increasing fuel prices during 1996, these commitments saved KCSR approximately $3.7 million. Due to higher fuel prices, minimal commitments were made for 1997. Roadway Maintenance Portions of roadway maintenance costs are capitalized and other portions expensed (as components of material and supplies, purchased services and other), as appropriate. Expenses aggregated $47, $51 and $49 million for 1997, 1996 and 1995, respectively. Maintenance and capital improvement programs are in conformity with the Federal Railroad Administration's track standards and are accounted for in accordance with the regulatory accounting rules. Management expects to continue to fund roadway maintenance expenditures with internally generated cash flows. Car Hire Expenses for car hire payable, net of receivables declined $3.8 million, or 51.3% for the year ended December 31, 1997 compared to 1996. This reduction in net expense results from several factors including better fleet utilization and increased amounts of car hire receivable related to KCSR owned equipment utilization on foreign railroads. This was particularly evident as a result of the congestion difficulties of the UP where KCSR equipment was held on UP lines for longer than normal periods. Costs related to car hire in 1996 declined to $7.4 million versus $21.3 million in 1995, principally resulting from unusual costs and expenses experienced during 1995, discussed elsewhere. However, these costs also declined in 1996 from better fleet utilization and KCSR owned intermodal trailers off-line earning car hire. Casualties and Insurance Casualties and insurance expense declined $1.7 million, or 7.4% to $21.4 million for the year ended December 31, 1997 compared to $23.1 million in 1996. The reduction in casualties and insurance costs from 1996 resulted from a reduction in derailment costs and reduced injuries, in part, caused by KCSR ongoing safety initiatives. Excluding the unusual costs and expenses in 1995, costs actually rose for the year ended December 31, 1996 compared to 1995. This increase was the direct result of increased derailment related costs, while employee injuries declined. Depreciation and amortization KCSR depreciation and amortization expense declined $4.4 million, or 7.4% to $54.7 million for the year ended December 31, 1997 from $59.1 million from the year ended December 31, 1996, primarily due to the transfer of assets to Southern Capital during the fourth quarter of 1996, offset by 1997 capital expenditures. KCSR depreciation and amortization expense increased 6.9% to $59.1 million in 1996 (versus $55.3 million in 1995) due to capital expenditures. The depreciation savings associated with KCSR's October 1996 contribution of locomotives and rolling stock to Southern Capital was minimal in 1996, but, as discussed above was greater in 1997 due to a full year of savings. Operating Ratio The operating ratio is a common efficiency measurement among Class I railroads. Exclusive of the restructuring, asset impairment and other charges, the impact of KCSR's increased revenues and reduced costs resulted in an improved KCSR operating ratio of 83.4% for the year ended December 31, 1997, which is below the 84.5% operating ratio for 1996. This reflects the marked improvement made during the last six months of 1997 in which the average operating ratio was 79.3%, as a result of increased margins arising primarily from cost containment initiatives by management. Further, the operating ratio for 1997 would have been 81.4% except for the shifting of interest costs to lease expense as a result of the Southern Capital transaction. KCSR's operating ratio decreased to 84.5% for the year ended December 31, 1996 versus 84.8% for 1995. Excluding unusual costs and expenses, the 1995 operating ratio would have been 78.9%, with the increase in 1996 largely due to lower revenues and higher costs and expenses as discussed above. Additionally, the Southern Capital joint venture transaction, while slightly increasing KCSR's overall net income in 1996, raised the operating ratio by approximately one-half percent for the year ended 1996 as a result of higher equipment lease expense. The operating ratio for 1997 and thereafter has been or will be affected by higher equipment lease expense resulting from the operating leases entered into by KCSR with Southern Capital. KCSR Interest Interest expense decreased $11.5 million, or 23.3%, to $37.9 million in 1997 from $49.4 million in 1996 due to a full year's impact of the debt reduction associated with the Southern Capital transaction. Interest expense was 3% lower in 1996 compared to 1995 due to a reduction in debt during the fourth quarter 1996 resulting from the Southern Capital joint venture formation and associated transactions. GATEWAY WESTERN During the year ended December 31, 1997, Gateway Western contributed $3.0 million to the Company's net income arising from freight revenues of $42.7 million, offset by operating expenses of $35.2 million and other expenses of $4.5 million. At December 31, 1996, while the Company awaited approval from the Surface Transportation Board of KCSI's purchase, Gateway Western was accounted for under the equity method as a majority-owned unconsolidated subsidiary. UNCONSOLIDATED AFFILIATES During 1997, the Transportation segment's unconsolidated affiliates were comprised primarily of Grupo TFM, Mexrail, and Southern Capital. During 1996, the two primary unconsolidated affiliates were Mexrail and Southern Capital. During 1995, unconsolidated affiliates were immaterial to the Transportation segment's operations. For the year ended December 31, 1997, the Transportation segment recorded a loss of $9.7 million from unconsolidated affiliates compared to income of $1.5 million for 1996. In 1997, estimated losses of $12.9 million (from June 23, 1997, excluding interest) related to Grupo TFM were partially offset by equity in earnings from Southern Capital and Mexrail. Grupo TFM experienced higher than expected revenues during 1997 based on increased carloads, offset by higher operating expenses necessary to maintain expected customer service levels. Also affecting Grupo TFM's results was a write-off of a bridge loan commitment fee during 1997 (of which the Company recorded $2.6 million as its proportionate share). Equity earnings increased to $1.5 million for 1996 from 1995 primarily as a result of the inclusion of a full year of equity earnings from Mexrail and two months of equity earnings from Southern Capital. OTHER TRANSPORTATION-RELATED AFFILIATES AND HOLDING COMPANY COMPONENTS Other subsidiaries in the Transportation segment include: * Trans-Serve, Inc., an owner of a railroad wood tie treating facility; * Pabtex (located in Port Arthur, Texas with deep water access to the Gulf of Mexico), an owner and operator of a bulk materials handling facility which stores and transfers coal and petroleum coke from trucks and rail cars to ships and barges primarily for export; * Mid-South Microwave, Inc., which owns and leases a 1,600 mile industrial frequency microwave transmission system that is the primary communications facility used by KCSR; * Rice-Carden Corporation and Tolmak, Inc., both owning and operating various industrial real estate and spur rail trackage contiguous to the KCSR right-of-way; * Southern Development Company, the owner of the executive office building in downtown Kansas City, Missouri used by KCSI and KCSR; and * Wyandotte Garage, an owner and operator of a parking facility located in downtown Kansas City, Missouri used by KCSI and KCSR. During 1997, contributions to net income from other Transportation-related affiliates decreased $12.4 million, primarily as a result of $14.2 million of asset impairment charges recorded during fourth quarter 1997 relating to Pabtex and certain real estate. In addition, Pabtex continued to experience decreased revenues resulting from the loss of petroleum coke customers. There were no material changes in these subsidiaries during 1996 compared with 1995 except for a $2.2 million decrease in Pabtex earnings as a result of the loss of a major customer in December 1995. KCSL HOLDING COMPANY 1997 KCSL Holding company costs did not materially change from 1996 levels (based on amounts attributed to the Transportation segment by the KCSI Holding Company). During 1996, higher allocated holding company costs, primarily due to the Company's activities related to the UP/SP merger ($2.9 million after-tax) and business development costs related to the investment in Mexico contributed to a decrease in net income in 1996 compared with 1995. TRANSPORTATION SEGMENT TRENDS and OUTLOOK Since 1994, there has been significant consolidation among major U.S. Class I rail carriers. Management believes these recent mergers have negatively impacted revenues, primarily as a result of rail traffic diverted away from KCSR's lines and correspondingly lower carloadings. While KCSR has begun to show positive revenue growth across most commodity groups, these rail mergers could still have a negative impact on future revenues as a result of increased competition. Assuming no major economic deterioration occurs in the region serviced by the Company's Transportation segment, management expects 1998 revenues and carloads to increase over 1997. Additionally, KCSR cost containment initiatives are expected to continue into 1998. Although revenues have been higher than expected during the first year of TFM's operations (since June 23, 1997), management expects to continue to record losses from its investment in Grupo TFM during 1998; however, these losses are expected to be partially offset by equity earnings from the Southern Capital and Mexrail investments. FINANCIAL ASSET MANAGEMENT The Financial Asset Management segment contributed $118.0 million to the Company's consolidated results in 1997, a $16.6 million decline from 1996. Exclusive of certain items in both years as discussed in the "Results of Operations" section above, however, earnings improved 54%. Revenues increased $155.5 million over 1996, leading to higher operating income and improved operating margins. Operating margins increased from 40% for the year ended December 31, 1996 to 45% for 1997. Assets under management increased 42% during 1997, reaching $71.6 billion at December 31, 1997. Further, shareowner accounts exceeded 2,850,000 as of December 31, 1997, a 6% increase over 1996. Financial Asset Management contributed $134.6 million to 1996 consolidated earnings. Exclusive of the 1996 Continuum gain and the 1995 gain from the DST public offering, Financial Asset Management earnings increased 18% year to year. Assets under management at December 31, 1996 were 46% higher than year end 1995, fueling a 38% growth in 1996 revenues. Although variable operating expenses increased in 1996, the increase was at a lower proportionate rate than revenues, resulting in a 64% improvement in operating income over 1995 ($131.8 million in 1996 versus $80.2 million in 1995). The increase in variable operating expenses was associated with higher business volumes, as well as higher Janus performance-based compensation.
The following table highlights key information: 1997 1996 1995 Assets Under Management (in billions): Janus No-Load Funds $ 51.3 $ 35.7 $ 24.2 Janus Aspen Series (i) 3.3 1.4 0.4 IDEX Load Funds (ii) 1.6 1.4 1.1 Institutional and Separately Managed Accounts 11.6 8.2 5.4 Total Janus 67.8 46.7 31.1 Berger Funds 3.8 3.6 3.4 Total $ 71.6 $ 50.3 $ 34.5
(i) The Janus Aspen Series currently consists of eleven portfolios offered through variable annuity and variable life insurance contracts, and certain qualified pension plans (ii) Janus serves as subadvisor to five of the IDEX Funds, whose assets are included herein
(in millions) Revenues: Janus $ 450.1 $ 295.3 $ 207.8 Berger $ 34.9 $ 34.6 $ 32.0 Operating Income (loss): Janus $ 224.4 $ 136.6 $ 85.8 Berger $ (14.3) $ 5.7 $ 6.9 Net Income (loss): Janus $ 117.7 $ 70.3 $ 43.3 Berger $ (17.8) $ (1.2) $ 0.5
Financial Asset Management revenue and operating income increases are a direct result of increases in assets under management. Assets under management and shareholder accounts have grown in recent years from a combination of new money investments (i.e., fund sales) and market appreciation. Fund sales have risen in response to marketing efforts, favorable fund performance, introduction and market reception of new products, and the current popularity of no-load mutual funds. Market appreciation has resulted from increases in investment values. JANUS CAPITAL CORPORATION Janus assets under management increased 45% during 1997, resulting in a 52% increase in revenues and a 64% increase in operating income. This increase in assets under management (to $67.8 billion as of December 31, 1997) was a result of fund sales (net of redemptions) of $10.7 billion and market appreciation of $10.4 billion. Total Janus shareowner accounts grew 10% during 1997 to 2.5 million. As a result of a slower rate of growth in expenses compared to revenues during 1997, operating margins improved to 50% for 1997 versus 46% in comparable 1996. Janus experienced an increase in salaries and wages expense, primarily from a higher number of employees in 1997 and variable compensation tied to investment and financial performance. Additionally, alliance fees increased due to a greater amount of assets being distributed through these channels. Approximately 43% of Janus' operating expenses consist of variable costs that generally increase or decrease in association with revenue generated from assets under management. An additional 15% of operating expenses (principally marketing, pension plan contributions and temporary help) are discretionary. Janus 1996 revenues, operating income and net income increased significantly over 1995, largely due to 50% growth in assets under management since December 31, 1995. Fund sales (net of redemptions) of $9.3 billion, coupled with market appreciation, raised total assets under management to $46.7 billion at December 31, 1996. The value of net assets in the Janus Funds increased 51% to $37.1 billion at December 31, 1996 versus $24.6 billion at December 31, 1995. Shareowner accounts grew to 2.3 million, a 9% increase over 1995. Operating expenses increased as a result of higher business volumes, together with increases in incentive and variable compensation as a result of strong investment and financial performance. However, operating expenses declined as a percent of revenue due to successful cost containment efforts, including a $5.1 million decrease in promotional and marketing expenses from 1995 due to a more focused marketing approach. Additionally, depreciation and amortization costs declined approximately $1.9 million due to the disposal of equipment during 1996. General Increases in assets under management in 1997 and 1996 are attributable to several factors including, among others: (i) strong securities markets, particularly equities; (ii) favorable investment performance, particularly among Janus' global and international investment products; (iii) effective marketing and public relations; (iv) effective use of third party distribution for both retail and sub-advised products; and (v) a strong brand awareness in the direct channel. The Janus Funds are marketed to pension plan sponsors through alliance arrangements with record keeping organizations and by participating in mutual fund "supermarkets". At December 31, 1997 and 1996, approximately 28% and 23%, respectively, of Janus' total assets under management were generated through such alliance arrangements and mutual fund "supermarkets". Janus also markets advisory services directly to insurance companies, banks and brokerage firms for their proprietary investment products, and directly with private individuals, foundations, defined benefit pension plans and other organizations. These areas accounted for $14.9, $9.6 and $6.5 billion in assets under management at December 31, 1997, 1996 and 1995, respectively. Janus introduced the following funds during the three year period ended December 31, 1997: 1997 - Janus Aspen Capital Appreciation Portfolio; Janus Aspen Equity Income Portfolio 1996 - Janus Aspen High Yield Portfolio; Janus Equity Income Fund; Janus Special Situations Fund 1995 - Janus Olympus Fund; Janus High Yield Fund; Janus Money Market Funds BERGER ASSOCIATES, INC. Berger reported a net loss of $17.8 million in 1997. Excluding the charges associated with the impairment of goodwill associated with the Company's investment in Berger and reserves for certain contracts (as discussed in "Results of Operations" above), Berger reported a net loss of $3.5 million in 1997 compared to a loss of $1.2 million in 1996. Assets under management increased to $3.8 billion at December 31, 1997 from $3.6 billion at December 31, 1996, resulting in a slight increase in revenues year to year. Operating costs, however, increased more than revenues thereby resulting in a higher net loss than prior year. Higher expenses were evident in consulting fees, advertising and amortization of intangibles. Shareholder accounts declined 16% from 1996, totaling 317,400 at December 31, 1997. As discussed in the "Results of Operations," in 1997, the Company increased its ownership in Berger to 100% through several transactions by Berger and the Company. The Company recorded approximately $17.8 million of intangibles as a result of these transactions. In connection with the Company's review of the recoverability of its assets, the Company determined that $12.7 million of goodwill associated with Berger was not recoverable as of December 31, 1997, primarily due to below-peer performance and growth of the core Berger funds. Accordingly, a portion of the goodwill recorded in connection with the repurchase of Berger minority interest was charged to expense. Berger contributed a net loss of $1.2 million to consolidated earnings in 1996. Assets under management increased 6% to $3.6 billion at December 31, 1996 (compared to $3.4 billion at December 31, 1995), leading to an 8% increase in revenues. However, increased operating costs, partially due to amortization associated with intangibles, more than offset this increase in revenues. Amortization increased as a result of the $23.9 million payment made in May 1996 pursuant to the Berger Stock Purchase Agreement (as discussed in "Results of Operations" above). Additionally, 1996 interest expense was higher than 1995 due to indebtedness incurred to fund the May 1996 contingency payment. Shareholder accounts totaled 379,500 at December 31, 1996, a slight decrease from year end 1995. General During 1997, Berger introduced four new funds: the Berger Small Cap Value Fund; the Berger Balanced Fund; the Berger Mid Cap Fund; and the Berger Select Fund. These funds held approximately $155 million of assets under management at December 31, 1997. While the Berger 100 Fund ("100 Fund") experienced a 14% decline in assets under management during 1997 (primarily related to below-peer performance) all other Berger Funds reported growth in assets. Berger made certain changes in the portfolio management of the 100 Fund during 1997. Management believes these changes will improve Berger's opportunity for growth in the future. Both the Berger Small Company Growth Fund and The Berger New Generation Fund reported steady growth in assets under management throughout 1996 (cumulatively increasing 55% from year end 1995). However, the Berger 100 Fund and the Berger Growth and Income Fund, together representing over 64% of total Berger assets under management, performed below their respective peer groups, and their total assets under management decreased 7% since December 31, 1995. As discussed in "Results of Operations" above, Berger entered into a joint venture (BBOI) to introduce a series of international and global mutual funds. The first no-load mutual fund product, an international equity fund, was introduced in fourth quarter 1996. Total BBOI assets under management at December 31, 1997 were $161 million. Berger accounts for its 50% investment in BBOI under the equity method. At December 31, 1997 and 1996, approximately 26% and 27%, respectively, of Berger's total assets under management were generated through mutual fund "supermarkets." OTHER FINANCIAL ASSET MANAGEMENT-RELATED AFFILIATES AND HOLDING COMPANY COMPONENTS Equity in Earnings of DST Equity in net earnings of DST for the year ended December 31, 1997 totaled $24.3 million. Exclusive of the one-time gain on the Continuum merger discussed in "Results of Operations" above, equity earnings from DST increased 48% year to year. This increase in DST earnings reflects an increase in 1997 DST revenues compared to 1996 (improvements in both domestic and international revenues) and improved operating margins in 1997 (14.2% versus 9.8% in 1996). Equity in net earnings of DST totaled $68.1 million for the year ended December 31, 1996. This total includes KCSI's proportionate share of the DST one-time gain on the Continuum merger discussed in "Results of Operations" above. Exclusive of this non-recurring item, equity earnings from DST of $16.4 million decreased approximately 33% from the $24.6 million in 1995. This decrease is attributable to a lower percentage ownership of DST in 1996 versus 1995 as discussed earlier. In addition to the gain on the Continuum merger, comparisons of DST earnings in 1996 versus 1995 were affected by several factors, including: i) a 1995 after- tax gain of $4.7 million associated with DST's sale of an equity investment, Investors Fiduciary Trust Company Holdings, Inc.; ii) lower fourth quarter 1995 equity earnings due to an estimated $8.4 million loss recorded by DST in connection with acquisition related expenses of DST's Continuum investment; iii) the first quarter 1996 effect of a $4.1 million non-recurring charge related to Continuum; iv) a 20% increase in revenues over 1995; and v) a $15.0 million decline in interest costs from 1995. KCSI HOLDING COMPANY 1997 KCSI Holding company results did not materially change from 1995 through 1997 (based on amounts that were not attributed to the Transportation segment by the KCSI Holding Company). Fluctuations year to year in costs and expenses and interest expense have been essentially offset by changes in interest income and other income. 1997 results include a $3.1 million reserve related to a non-core investment entity of the Company. FINANCIAL ASSET MANAGEMENT TRENDS and OUTLOOK Future growth of the Company's Financial Asset Management revenues and operating income will be largely dependent on prevailing financial market conditions, relative performance of Janus' and Berger's products, introduction and market reception of new products, as well as other factors, including changes in the stock and bond markets, increases in the rate of return of alternative investments, increasing competition as the number of mutual funds continues to grow, and changes in marketing and distribution channels. Costs and expenses should continue at operating levels consistent with the rate of growth, if any, in revenues. INTEREST EXPENSE Consolidated interest expense increased 7% in 1997 to $63.7 million compared to $59.6 million in 1996. This increase is attributable to higher average debt balances throughout 1997, primarily resulting from borrowings incurred to fund the Company's investment in Grupo TFM and first quarter 1997 common stock repurchases. Interest expense related to the indebtedness incurred in connection with the Company's investment in Grupo TFM was capitalized until the final installment of the TFM purchase price was made (June 23, 1997). Capitalized interest totaled $7.4 million for the year ended December 31, 1997. Consolidated interest expense decreased 9% in 1996 to $59.6 million versus $65.5 million in 1995. This decrease resulted from lower average debt balances throughout 1996, largely due to lower year end 1995 debt balances as a result of the repayment of indebtedness using the proceeds received in connection with the DST public offering and associated transactions. Additionally, interest savings from the October 1996 Southern Capital joint venture formation and associated transactions substantially offset interest associated with borrowings throughout 1996 used to repurchase Company common stock. Management expects interest expense to be higher in 1998 compared to 1997 because the Company will not capitalize any interest in 1998 associated with the borrowings in connection with the Company's investment in Grupo TFM. However, as a significant portion of the Company's debt at December 31, 1997 represents fixed rate debt instruments, the Company's risk to increasing interest rates is somewhat mitigated. OTHER, NET Generally, modest fluctuations have occurred within this component from 1995 to 1997. The 7% decrease in 1997 from 1996 is partially attributable to the 1996 one-time gain of approximately $2.9 million recorded by KCSR in connection with the sale of real estate. The increase in 1996 from 1995 is largely due to this one-time gain, partially offset by higher 1995 interest income from advances to DST throughout the first nine months of 1995. LIQUIDITY Operating Cash Flows. The Company's cash flow from operations has historically been positive and sufficient to fund operations, KCSR roadway capital improvements and debt service. External sources of cash - principally negotiated bank debt, public debt and sales of investments - have typically been used to fund acquisitions, new investments, equipment additions and Company stock repurchases. The following table summarizes consolidated operating cash flow information. Financial information for the year ended December 31, 1995 was restated to reflect 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 in DST to approximately 41%. Certain reclassifications have been made to prior years' information to conform to current year presentation. (in millions): 1997 1996 1995 Net income (loss) $ (14.1) $ 150.9 $ 236.7 Depreciation and amortization 75.2 76.1 75.0 Equity in undistributed earnings (15.0) (66.4) (29.8) Gain on sale of equity investment, net (144.6)(i) Restructuring, asset impairment and other charges 196.4 Dividend from DST Systems, Inc. 150.0 Change in working capital items (7.4) (74.2) 20.2 (ii) Deferred income taxes (16.6) 18.6 25.9 (ii) Other 15.3 16.0 18.5 Net operating cash flow $ 233.8 $ 121.0 $ 351.9
(i) Gain associated with DST public offering (ii)Exclusive of the tax components related to the gain on sale of equity investment Operating cash flows for the year ended December 31, 1997 nearly doubled when compared to the prior year, primarily because of the 1996 payment of approximately $74 million in federal and state income taxes resulting from the taxable gains associated with the DST public stock offering completed in November 1995. Also, exclusive of the restructuring, asset impairment and other charges recorded in fourth quarter 1997, the one-time Continuum gain in 1997 and equity earnings from unconsolidated affiliates for both years, earnings were approximately $44.0 million higher in 1997 than 1996. 1996 operating cash flows decreased by $230.9 million from 1995, largely attributable to the $150 million dividend paid by DST to the Company in 1995, together with a significant decrease in accrued liabilities as a result of the payment (in 1996) of approximately $74 million in federal and state income taxes associated with the taxable gains from the DST stock offering in November 1995.
Summary cash flow data is as follows (in millions): 1997 1996 1995 Cash flows provided by (used for): Operating activities $ 233.8 $ 121.0 $ 351.9 Investing activities (409.3) 20.9 69.3 Financing activities 186.1 (150.8) (402.1) Net increase (decrease) in cash and equivalents 10.6 (8.9) 19.1 Cash and equivalents at beginning of year 22.9 31.8 12.7 Cash and equivalents at end of year $ 33.5 $ 22.9 $ 31.8
In early 1998, KCSR satisfied its obligation with respect to the productivity fund termination liability, which is reflected in the Company's balance sheet as of December 31, 1997. This amount was funded with existing lines of credit. Investing Cash Flows. Cash was used for the following investing activities: i) property acquisitions of $83, $144 and $121 million in 1997, 1996 and 1995, respectively; and ii) investments in and loans with affiliates of $304, $42 and $95 million in 1997, 1996 and 1995, respectively. Included in the 1997 investments in affiliates total was the Company's approximate $298 million capital contribution to Grupo TFM. Due to growth throughout 1997 and 1996, Janus had invested an additional $32 and $39 million in short-term investments representing invested cash at December 31, 1997 and 1996, respectively. Also, cash received during 1996 in connection with the Southern Capital joint venture formation and associated transactions (approximately $217 million, after consideration of related income taxes) is included as proceeds from disposal of property and from disposal of other investments based on the underlying assets contributed/sold to Southern Capital. In 1995, the DST stock offering and debt repayment to KCSI resulted in $276 million of proceeds to the Company (prior to payment of income taxes, which occurred in 1996). Generally, operating cash flows and borrowings under lines of credit have been used to finance property acquisitions and investments in and loans with affiliates during the period from 1995 to 1997. Financing Cash Flows. Financing cash flows include: (i) borrowings of $340, $234 and $98 million in 1997, 1996 and 1995, respectively; (ii) repayment of indebtedness in the amounts of $110, $233 and $371 million in 1997, 1996 and 1995, respectively; and (iii) cash dividends of $15, $15 and $10 million in 1997, 1996 and 1995, respectively. 1997 debt proceeds were used to fund the $298 million Grupo TFM capital contribution, repurchase Company common stock ($39 million) and for additional investment in Berger ($3 million). Proceeds from the issuance of debt in 1996 were used for stock repurchases ($151 million), additional investment in Berger ($24 million), and for working capital purposes ($59 million, including payments of federal and state income taxes associated with the DST public offering). Debt proceeds in 1995 were used for stock repurchases ($12 million) and subsidiary refinancing and working capital ($86 million). Repayment of indebtedness includes scheduled maturities and reductions of outstanding lines of credit. In 1997, operating cash flows were used to reduce amounts outstanding under the Company's lines of credit. In 1996, proceeds (approximately $217 million, after consideration of income taxes) received in connection with the Southern Capital joint venture formation and associated transactions were used to repay outstanding amounts under the Company's lines of credit. In 1995, proceeds received from the DST public offering and repayment by DST of indebtedness to KCSI were used to repay outstanding amounts under existing lines of credit. Repurchases of Company common stock during the three year period ended December 31, 1997 were funded with borrowings under existing lines of credit (as noted above), proceeds received from the DST public offering and repayment by DST of indebtedness to KCSI, and the $150 million dividend from DST in 1995. See discussion under "Financial Instruments and Purchase Commitments" for information relative to certain anticipated 1998 cash expenditures. CAPITAL STRUCTURE Capital Requirements. The Company has traditionally funded KCSR capital expenditures using Equipment Trust Certificates for major purchases of locomotive and rolling stock, while using internally generated cash flows or leasing for other equipment. Capital improvements for KCSR roadway track structure have historically been funded with cash flows from operations. Capital requirements for Janus, Berger, KCSI Holding Company and other subsidiaries have been funded with cash flows from operations and negotiated term financing. With the formation of Southern Capital, the Company has the ability to finance railroad equipment through the joint venture. Capital programs from 1995 to 1997 were primarily financed through internally generated cash flows. These sources were used to finance KCSR capital expenditures in 1997 ($68 million), 1996 ($135 million) and 1995 ($110 million). The same sources used in funding 1997 capital programs are expected to be used in funding 1998 capital programs, currently estimated at $66 million. In the last several years, Janus has upgraded its customer service capabilities through new equipment and technology enhancements, generally funded with existing cash flows and negotiated indebtedness, when necessary. Overall, however, the Company's Financial Asset Management businesses require minimal capital for operations.
Capital. Components of capital are shown as follows (in millions): 1997 1996 1995 Debt due within one year $ 110.7 $ 7.6 $ 10.4 Long-term debt 805.9 637.5 633.8 Total debt 916.6 645.1 644.2 Stockholders' equity 698.3 715.7 695.2 Total debt plus equity $1,614.9 $1,360.8 $1,339.4 Total debt as a percent of total debt plus equity 56.8% 47.4% 48.1%
The Company's consolidated debt ratio (total debt as a percent of total debt plus equity) increased by 9.4% from December 31, 1996 to December 31, 1997. Total debt increased $271.5 million during 1997, primarily as a result of borrowings to fund the Company's investment in Grupo TFM and common stock repurchases, partially offset by repayments on outstanding lines of credit. Stockholders' equity decreased by $17.4 million, reflecting the Company's net loss for 1997 and essentially offsetting capital stock transactions (e.g., issuances of common stock, common stock repurchases, non-cash equity adjustments related to unrealized gains (net of tax) on "available-for-sale" securities, etc.). The combination of increased debt and reduced equity resulted in a higher consolidated debt ratio in 1997 than 1996. The Company's consolidated debt ratio decreased slightly as of December 31, 1996 to 47.4% versus 48.1% at December 31, 1995. Total debt at December 31, 1996 of $645.1 million was $0.9 million higher than 1995. Significant repurchases of Company common stock ($151 million) using borrowings under the Company's lines of credit were essentially offset by the reduction in debt resulting from the Southern Capital joint venture formation and associated transactions. Equity increased as a result of net income, issuance of common stock from option exercises and other stock plans, and a positive non-cash equity adjustment related to unrealized gains (net of tax) on "available-for-sale" securities held by affiliates, primarily DST. These increases were largely offset by the Company's common stock repurchases and dividends. The decrease in the debt ratio as of December 31, 1996 compared to 1995 was due to this increase in equity, together with essentially unchanged debt levels. Debt Securities Registration and Offerings. The U.S. Securities and Exchange Commission declared the Company's Registration Statement on Form S-3 (File No. 33-69648, originally filed on September 29, 1993) effective April 22, 1996, registering $500 million in securities. However, no securities have been issued. The securities may be offered in the form of Common Stock, New Series Preferred Stock $1 par value, Convertible Debt Securities, or other Debt Securities (collectively, "the Securities"). Net proceeds from the sale of the Securities would be added to the general funds of the Company and used principally for general corporate purposes, including working capital, capital expenditures, and acquisitions of or investments in businesses and assets. On December 18, 1995, the Company issued $100 million of 7% Debentures due 2025. The Debentures are redeemable at the option of the Company at any time, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of such Debentures or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis at the Treasury Rate (as defined in the Debentures agreement) plus 20 basis points, and in each case accrued interest thereon to the date of redemption. The net proceeds of this transaction were used to repay indebtedness on the Company's existing lines of credit and for acquisition of KCSI common stock. KCSI Credit Agreements. On May 5, 1995, the Company established a credit agreement in the amount of $400 million. The credit agreement replaced approximately $420 million of then existing Company credit agreements which had been in place for varying periods since 1992. Proceeds of the facility have been and are anticipated to be used for general corporate purposes. The agreement contains a facility fee ranging from .07-.25% per annum, interest rates below prime and terms ranging from one to five years. The Company also has various other lines of credit totaling $160 million. These additional lines, which are available for general corporate purposes, have interest rates below prime and terms of less than one year. At December 31, 1997, the Company had $313 million outstanding under its various lines of credit. As discussed earlier, the Company funded its proportionate amount (approximately $297 million) of the initial TFM purchase price payment made by Grupo TFM to the Mexican Government using borrowings under its lines of credit. Minority Purchase Agreements. Agreements between KCSI and certain Janus minority owners contain, among other provisions, mandatory stock purchase provisions whereby under certain circumstances, KCSI would be required to purchase the minority interest of Janus. The purchase prices of these mandatory stock purchase provisions are based upon a multiple of earnings and/or fair market value determinations depending upon specific agreement terms. If all of the provisions of the Janus minority owner agreements became effective, KCSI would be required to purchase the respective minority interests at a cost currently estimated at approximately $337 million. Overall Liquidity. During the 1995 to 1997 period, the Company continued to strengthen its strategic positions in the Transportation and Financial Asset Management businesses. Completion of the DST stock offering improved the Company's financial position. Based on DST's stated dividend policy, the Company does not anticipate receiving any dividends from DST in the foreseeable future. Additionally, the Southern Capital joint venture transactions, which resulted in repayment of the majority of borrowings then outstanding under the Company's lines of credit, provided the Company with flexibility as to future financing requirements (e.g., the 1997 investment in Grupo TFM). The Company's credit agreements contain, among other provisions, various financial covenants. The Company was in compliance with these various provisions, including the financial covenants, as of December 31, 1997. Because of certain financial covenants contained in the credit agreements, however, maximum utilization of the Company's available lines of credit may be restricted. The Company believes it has adequate resources available - including sufficient lines of credit (within the financial covenants referred to above), businesses which have historically been positive cash flow generators, and the $500 million Shelf Registration Statement - to meet anticipated operating, capital and debt service requirements, as well as for other potential business opportunities that the Company is currently pursuing. As discussed earlier, there exists a possible capital call ($74 million) if certain Grupo TFM benchmarks are not met. As discussed in the "Results of Operations" section above, TMM and the Company could be required to purchase the Mexican Government's interest in TFM in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Mexican Government's interest in Grupo TFM); however, this provision is not exercisable prior to October 31, 2003. Also, the Mexican Government's interest in Grupo TFM may be called by TMM and the Company, exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. As previously discussed in the "Recent Developments" section above, the Company announced a planned separation of its Transportation and Financial Asset Management businesses. The Company is pursuing this separation as a spin-off of the Financial Asset Management businesses subject to receipt of a favorable tax ruling from the IRS. This transaction may affect the liquidity and capital structure of the Company. The Company is working on addressing the liquidity and capital structure issues that may result from the completion of the proposed transaction, but has not reached any definitive plans. Nonetheless, any such separation may have a material effect on the liquidity and capital of the Company. OTHER Year 2000 Costs. Many existing computer programs and microprocessors that use only two digits (rather than four) to identify a year could fail or create erroneous results if not corrected to reflect "00" as the year 2000. This computer program flaw is expected to affect all companies and organizations, either directly (through a company's own programs) or indirectly (through customers/vendors of the company). The Company is currently in the process of implementing Year 2000 plans, and is analyzing and remediating the millions of lines of code throughout the Company's system. The Company is also evaluating all enhanced systems- from the mainframe to the desktop. In addition, the Company is reviewing the legal, audit, and regulatory concerns surrounding the Year 2000. Comprehensive corporate tracking, coordination and monitoring is provided by a central project office. These Year 2000 related issues are of particular importance to the Company. The Company depends upon its computer and other systems and the computer and the other systems of third parties to conduct and manage the Company's business. Additionally, the Company's products and services are heavily dependent upon using accurate dates in order to function properly. These Year 2000 related issues may also adversely affect the operations and financial performance of one or more of the Company's customers or suppliers. As a result, the failure of the Company's computer and other systems, products or services, the computer systems and other systems upon which the Company depends, or the Company's customers or suppliers to be Year 2000 ready could have a material adverse impact on the Company's results of operations, financial position and cash flows. In early 1997, the Company redirected a number of its employees who were working on developing new products and services for the Company to address the Year 2000 issue. In addition, the Company contracted with third party consultants to assist in the project. These employees and contractors are supervised by a member of the Company's senior management, and the progress is regularly reported to management and the board of directors. The Company's Year 2000 project includes identifying, evaluating and resolving potential Year 2000 related issues in the Company's computer systems, products, services, other systems and third-party systems. As part of resolving any potential Year 2000 issues, the Company expects to: identify all computer systems, products, services and other systems (including systems provided by third parties) that must be modified; evaluate the alternatives available to make any identified systems, products or services Year 2000 ready (including modification, replace- ment or abandonment); and conduct adequate testing of the systems, products and services, including interoperability testing with clients and key organizations in the financial services industry. The Company is also in the process of identifying alternative plans in the event that the Year 2000 project is not completed on a timely basis or otherwise does not meet the Company's anticipated needs. The Company has already begun remediating certain systems and initiated testing and anticipates to have finalized much of the pro- cedures relative to the Year 2000 project by the end of the calendar year 1998. Based on current estimates of potential costs, the Company anticipates spending approximately $15 million in connection with ensuring that all Company and subsidiary computer programs are compatible with Year 2000 requirements. Current accounting principles require all costs associated with Year 2000 issues to be expensed as incurred. A portion of these costs will not result in an increase in expense to the Company because it will be using existing employees and equipment. While the Company is currently pursuing discussions with its various customers, partners and vendors with respect to their preparedness for Year 2000 issues, no assurance can be made that all such parties will be Year 2000 ready. While the Company cannot fully determine its impact, the inability to complete Year 2000 readiness for its computer systems could result in significant difficulties in processing and completing fundamental transactions. In such an event, the Company's results of operations, financial position and cash flows could be materially adversely affected. However, the Company does not anticipate that business operations will be disrupted or that its customers will experience interruption in the service of its Transportation or Financial Asset Management businesses. Financial Instruments and Purchase Commitments. During 1995, the Company entered into a forward stock purchase contract as a means of securing a potentially favorable price for the repurchase of six million shares of its common stock. During 1997 and 1996, the Company purchased (post- split) 2.4 and 3.6 million shares, respectively, under this contract at an aggregate cost of $39 and $56 million (including transaction premium), respectively. In 1995, the Company entered into forward purchase commitments for diesel fuel as a means of securing volumes and reducing overall cost. The contracts required the Company to purchase certain quantities of diesel fuel at defined prices established at the origination of the contract. As noted earlier, these commitments saved KCSR approximately $3.7 million in operating expenses in 1996. Based on higher fuel prices in 1996, minimal commitments were negotiated for 1997. However, beginning in 1998, KCSR initiated a fuel hedging program for approximately two million gallons of fuel each month through the end of 1998 for approximately 37% of anticipated 1998 fuel usage. Additionally, KCSR has entered into purchase commitments for fuel aggregating approximately 27% of total expected usage. These transactions are intended to mitigate the impact of rising fuel prices and will be recorded using hedge accounting as set forth in Note 1 to the consolidated financial statements of this Form 10-K. In general, the Company enters into transactions such as those discussed above in limited situations based on management's assessment of current market conditions and perceived risks. Historically, the Company has engaged in very few such transactions and their impact has been insignificant. However, the Company intends to respond to evolving business and market conditions in order to manage risks and exposures associated with the Company's various operations, and in doing so, may enter into transactions similar to those discussed above. Foreign Exchange Matters. In connection with the Company's investment in Grupo TFM, a Mexican company, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements from Mexican pesos into U.S. dollars. The Company follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. The purchase price paid by Grupo TFM for 80% of the common stock of TFM was fixed in Mexican pesos; accordingly, Grupo TFM was exposed to fluctuations in the U.S. dollar/Mexican peso exchange rate. In the event that the proceeds from the various financing arrangements did not provide funds sufficient for Grupo TFM to complete the purchase of TFM, the Company may have been required to make additional capital contributions to Grupo TFM. Accordingly, in order to hedge a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar, the Company entered into two separate forward contracts to purchase Mexican pesos - $98 million in February 1997 and $100 million in March 1997. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Mexico's economy is currently classified as "highly inflationary" as defined in SFAS 52. Accordingly, the U.S. dollar is assumed to be Grupo TFM's functional currency, and any gains or losses from translating Grupo TFM's financial statements into U.S. dollars will be included in the determination of its net income. Any equity earnings or losses from Grupo TFM included in the Company's results of operations will reflect the Company's share of such translation gains and losses. The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At December 31, 1997, the Company had no outstanding foreign currency hedging instruments. New Accounting Pronouncements. In June 1997, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") were issued. SFAS 130 establishes standards for reporting and disclosure of comprehensive income and its components in the financial statements. SFAS 131 establishes standards for reporting information about operating segments in the financial statements. The reporting and disclosure required by these statements must be included in the Company's financial statements beginning in 1998. The Company is reviewing SFAS 130 and SFAS 131 and expects to adopt them by the required dates, which are December 31, 1998. The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") in 1997. The statement specifies the computation, presentation and disclosure requirements for earnings per share. The statement requires the computation of earnings per share under two methods: "basic" and "diluted." Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued). The Company has presented basic and diluted per share amounts for income from continuing operations and for net income on the face of the income statement and restated all prior period earnings per share data pursuant to SFAS 128. In Issue No. 96-16, the Emerging Issues Task Force, ("EITF 96-16") of the Financial Accounting Standards Board, reached a consensus that substantive minority rights which provide the minority shareholder with the right to effectively control significant decisions in the ordinary course of an investee's business could impact whether the majority shareholder should consolidate the investee. Management is currently evaluating the rights of the minority shareholders of certain consolidated subsidiaries to determine the impact, if any, that application of EITF 96-16 will have on the Company's consolidated financial statements in 1998. The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") effective January 1, 1996. The statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill, as well as for long-lived assets and certain identifiable intangibles which are to be disposed. If events or changes in circumstances of a long-lived asset indicate that the carrying amount of an asset may not be recoverable, the Company must estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest) is lower than the carrying amount of the asset, an impairment loss must be recognized to the extent that the carrying amount of the asset exceeds its fair value. The adoption of SFAS 121 did not have a material impact on the Company's 1996 results of operations or financial position. See, however, "Results of Operations" section above with respect to certain KCSR assets held for disposal as of December 31, 1997. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. This statement allows companies to continue under the approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the fair value method of accounting for employee stock options. The Company has elected to retain its current accounting approach under APB 25, and has presented the applicable pro forma disclosures pursuant to the requirements of SFAS 123 in Note 9, Stockholders' Equity, to the consolidated financial statements included under Item 8 of this Form 10-K. Had compensation cost for the Company's stock-based compensation plans been determined in accordance with SFAS 123 for options issued after December 31, 1994, the Company's net income and earnings per share, on a pro forma basis, would have been $(21.1) million and $(0.20) per share, respectively, for 1997, $146.5 million and $1.26 per share, respectively, for 1996, and $231.8 million and $1.77 per share, respectively, for 1995. Litigation. The Company and its subsidiaries are involved as plaintiff or defendant in various legal actions arising in the normal course of business. While the ultimate outcome of the various legal proceedings involving the Company and its subsidiaries cannot be predicted with certainty, it is the opinion of management (after consultation with legal counsel) that the Company's litigation reserves are adequate and that these legal actions currently are not material to the Company's consolidated results of operations or financial position. Bogalusa Cases In July 1996, the Company was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi have asserted claims to recover damages allegedly caused by exposure to the chemicals. The Company neither owned nor leased the rail car or the rails on which it was located at the time of the explosion in Bogalusa. The Company did, however, move the rail car from Jackson to Vicksburg, Mississippi, where it was loaded with chemicals, and back to Jackson where the car was tendered to the Illinois Central Railroad Company ("IC"). The explosion occurred more than 15 days after the Company last transported the rail car. The car was loaded by the shipper in excess of its standard weight when it was transported by the Company to interchange with the IC. The lawsuits arising from the chemical release have been scheduled for trial in the fall of 1998. The Company sought dismissal of these suits in the trial courts, which was denied in each case. Appeals are pending in the appellate courts of Louisiana and Mississippi. The Company believes that its exposure to liability in these cases is remote. If the Company were to be found liable for punitive damages in these cases, such a judgment could have a material adverse effect on the financial condition of the Company. Environmental Matters. The Company and certain of its subsidiaries are subject to extensive regulation under environmental protection laws concerning, among other things, discharges to waters and the generation, handling, storage, transportation and disposal of waste and other materials where environmental risks are inherent. In particular, the Company is subject to various laws and certain legislation including, among others, the Federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA," also known as the Superfund law), the Toxic Substances Control Act, the Federal Water Pollution Control Act, and the Hazardous Materials Transportation Act. This legislation generally imposes joint and several liability for clean up and enforcement costs, without regard to fault or legality of the original conduct, on current and predecessor owners and operators of a site. The Company does not foresee that compliance with the requirements imposed by the environmental legislation will impair its competitive capability or result in any material additional capital expenditures, operating or maintenance costs. As part of serving the petroleum and chemicals industry, KCSR transports hazardous materials and has a Shreveport, Louisiana-based hazardous materials emergency team available to handle environmental issues which might occur in the transport of such materials. Additionally, the Company performs ongoing review and evaluation of the various environmental issues that arise in the Company's operations, and, as necessary, takes actions to limit the Company's exposure to potential liability. In November 1997, representatives of KCSR met with representatives of the United States Environmental Protection Agency ("EPA") at the site of two, contiguous pieces of property in North Baton Rouge, Louisiana, abandoned leaseholds of Western Petrochemicals and Export Drum. These properties had been the subjects of voluntary clean up prior to EPA's involvement. The site visit prompted KCSR to obtain from EPA, through the Freedom of Information Act, a "preliminary Assessment Report" concerning the properties, dated January, 1995, and directing a "Site Investigation". EPA's November 1997, visit to the site was the start of that "Site Investigation". During the November 1997 site visit, EPA indicated it intended to recover, through litigation, all of its investigation and remediation costs. At KCSR's request, EPA has agreed informally to suspend its investigation pending an exchange of information and negotiation of KCSR's participation in the "Site Investigation". Based upon recent oral advise subsequently received form the Abandoned Sites Division of the Louisiana Department of Environmental Quality ("LADEQ"), KCSR reasonably expects that it will be allowed to undertake the investigation and remediation of the site, pursuant to the LADEQ's guidelines and oversight. EPA's involvement and the investigation and remediation of the sites pursuant to LADEQ's oversight and guidelines will increase the ultimate costs to KCSR beyond those anticipated. However, those additional costs are not expected to have a material impact on the Company's consolidated results of operations or financial position. As previously reported, KCSR has been named as a "potentially responsible party" by the Louisiana Department of Environmental Quality in a state environmental proceeding, Louisiana Department of Environmental Quality, Docket No. IAS 88-0001-A, involving a location near Bossier City, Louisiana, which was the site of a wood preservative treatment plant (Lincoln Creosoting). KCSR is a former owner of part of the land in question. This matter was the subject of a trial in the U.S. District Court in Shreveport, Louisiana which was concluded in July 1993. The court found that Joslyn Manufacturing Company ("Joslyn"), an operator of the plant, was and is required to indemnify KCSR for damages arising out of plant operations. (KCSR's potential liability is as a property owner rather than as a generator or transporter of contaminants.) The case was appealed to the U.S. Court of Appeals for the Fifth Circuit, which Court affirmed the U.S. District Court ruling in favor of KCSR. In early 1994, the EPA added the Lincoln Creosoting site to its CERCLA national priority list. Since major remedial work has been performed at this site by Joslyn, and KCSR has been held by the Federal District and Appeals Courts to be entitled to indemnity for such costs, it would appear that KCSR should not incur significant remedial liability. At this time, it is not possible to evaluate the potential consequences of further remediation at the site. The Louisiana Department of Transportation ("LDOT") has sued KCSR and a number of other defendants in Louisiana state court to recover clean up costs incurred by LDOT while constructing Interstate Highway 20 at Shreveport, Louisiana (Louisiana Department of Transportation v. The Kansas City Southern Railway Company, et al., Case No. 417190-B in the First Judicial District Court, Caddo Parish, Louisiana). The clean up was associated with an old oil refinery site, operated by the other named defendants. KCSR's main line was adjacent to that site, and KCSR was included in the suit because LDOT claims that a 1966 derailment on the adjacent track released hazardous substances onto the site. However, there is evidence that the derailment occurred on the side of the track opposite from the refinery site. Furthermore, there appears to be no relationship between the lading on the derailed train and any contaminants identified at the site. Therefore, management believes that the Company's exposure is limited. In another proceeding, Louisiana Department of Environmental Quality, Docket No. IE-0-91-0001, KCSR was named as a party in the alleged contamination of Capitol Lake in Baton Rouge, Louisiana. During 1994, the list of potentially responsible parties was significantly expanded to include the State of Louisiana, and the City and Parish of Baton Rouge, among others. Studies commissioned by KCSR indicate that contaminants contained in the lake were not generated by KCSR. Management and counsel do not believe this proceeding will have a material effect on the Company. In the Ilada Superfund Site located in East Cape Girardeau, Ill., KCSR was cited for furnishing one carload of used oil to this petroleum recycling facility. Counsel advises that KCSR's liability, if any, should fall within the "de minimus" provisions of the Superfund law, representing minimal exposure. The Mississippi Department of Environmental Quality ("MDEQ") initiated a demand on all railroads operating in Mississippi to clean up their refueling facilities and investigate any soil and groundwater impacts resulting from past refueling activities. KCSR has six facilities located in Mississippi. KCSR has developed a plan, together with the State of Mississippi, that will satisfy the MDEQ's initiative. Estimated costs to complete the studies and expected remediation have been provided for in the Company's consolidated financial statements and the resolution is not expected to have a material impact on the Company's consolidated results of operations or financial position. The Company has recorded liabilities with respect to various environmental issues, which represent its best estimates of remediation and restoration costs that may be required to comply with present laws and regulations. At December 31, 1997, these recorded liabilities were not material. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition. Regulatory Influence. In addition to the environmental agencies mentioned above, KCSR operations are regulated by the STB, various state regulatory agencies, and the Occupational Safety and Health Administration ("OSHA"). Prior to January 1, 1996, the Interstate Commerce Commission ("ICC") had jurisdiction over interstate rates charged, routes, service, issuance or guarantee of securities, extension or abandonment of rail lines, and consolidation, merger or acquisition of control of rail common carriers. As of January 1, 1996, Congress abolished the ICC and transferred regulatory responsibility to the STB. State agencies regulate some aspects of rail operations with respect to health and safety and in some instances, intrastate freight rates. OSHA has jurisdiction over certain health and safety features of railroad operations. KCSR expects its railroad operations to be subject to future requirements regulating exhaust emissions from diesel locomotives that may increase its operating costs. During 1995 the EPA issued proposed regulations applicable to locomotive engines. These regulations, which were issued as final in early 1998, will be effective in stages for new or remanufactured locomotive engines installed after year 2000. KCSR is reviewing these new regulations. However, management does not expect that compliance with these new regulations will have a material impact on the Company's results of operations. Financial Asset Management businesses are subject to a variety of regulatory requirements including, but not limited to, the rules and regulations of the U.S. Securities and Exchange Commission, and the guidelines set forth by the National Association of Securities Dealers. The Company does not foresee that compliance with the requirements imposed by these agencies' standards under present statutes will impair its competitive capability or result in any material effect on results of operations. Inflation. Inflation has not had a significant impact on the Company's operations in the past three years. Generally accepted accounting principles require the use of historical costs. Replacement cost and related depreciation expense of the Company's property would be substantially higher than the historical costs reported. Any increase in expenses from these fixed costs, coupled with variable cost increases due to significant inflation, would be difficult to recover through price increases given the competitive environments of the Company's principal subsidiaries. See "Foreign Exchange Matters" above with respect to inflation in Mexico. Strategic Review. KCSI, as a holding company, is responsible for the management of its primary assets - investments in its subsidiaries. Accordingly, KCSI management continually evaluates how to utilize the strength of the Company's business lines and capabilities, provide for future growth opportunities, and achieve the Company's financial objectives. This process has resulted in many significant actions, including: the Company's investment and involvement in the Mexican rail privatization; the December 1996 Gateway Western acquisition; the October 1996 Southern Capital joint venture transactions; the current common stock repurchase program; a continuing commitment to the mutual fund industry; and the October 1995 DST public offering. The Company's recent announcement to separate its Transportation and Financial Asset Management segments continues this process. A separation of the two segments through a spin-off of the Financial Asset Management businesses would allow management of each segment to focus on achieving their full potential as stand-alone entities. 1995 through 1997 have been, and future years will be, affected by these strategic activities. KCSI management's analysis and evaluation of the Company's strategic alternatives are expected to continue to present growth opportunities in future years. Item 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable Item 8. Financial Statements and Supplementary Data Index to Financial Statements Page Management Report on Responsibility for Financial Reporting 49 Financial Statements: Report of Independent Accountants...................... 49 Consolidated Statements of Operations for the three years ended December 31, 1997......................... 50 Consolidated Balance Sheets at December 31, 1997, 1996 and 1995......................................... 51 Consolidated Statements of Cash Flows for the three years ended December 31, 1997......................... 52 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 1997.... 53 Notes to Consolidated Financial Statements............. 54 Financial Statement Schedules: All schedules are omitted because they are not applicable, insignificant or the required information is shown in the consolidated financial statements or notes thereto. The consolidated financial statements and related notes, together with the Report of Independent Accountants, of DST Systems, Inc. (an approximate 41% owned affiliate of the Company accounted for under the equity method) for the years ended December 31, 1997, which are included in the DST Systems, Inc. Form 10-K for the year ended December 31, 1997 (Commission File No. 1-14036) and have been incorporated by reference in this Form 10-K as Exhibit 99.1. Management Report on Responsibility for Financial Reporting The accompanying consolidated financial statements and related notes of Kansas City Southern Industries, Inc. and its subsidiaries were prepared by management in conformity with generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management has made judgments and estimates based on currently available information. Management is responsible for not only the financial information, but also all other information in this Annual Report on Form 10-K. Representations contained elsewhere in this Annual Report on Form 10-K are consistent with the consolidated financial statements and related notes thereto. The Company has a formalized system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that its financial records are reliable. Management monitors the system for compliance, and the Company's internal auditors measure its effectiveness and recommend possible improvements thereto. In addition, as part of their audit of the consolidated financial statements, the Company's independent accountants, who are selected by the stockholders, review and test the internal accounting controls on a selective basis to establish the extent of their reliance thereon in determining the nature, extent and timing of audit tests to be applied. The Board of Directors pursues its oversight role in the area of financial reporting and internal accounting control through its Audit Committee. This committee, composed solely of non-management directors, meets regularly with the independent accountants, management and internal auditors to monitor the proper discharge of responsibilities relative to internal accounting controls and to evaluate the quality of external financial reporting. Report of Independent Accountants To the Board of Directors and Stockholders of Kansas City Southern Industries, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Kansas City Southern Industries, Inc. and its subsidiaries at December 31, 1997, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial state- ments are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, effective December 31, 1997 the Company changed its method of evaluating the recoverability of goodwill. We concur with the change in accounting. /s/Price Waterhouse Kansas City, Missouri February 26, 1998 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31 Dollars in Millions, Except per Share Amounts 1997 1996 1995 Revenues $1,058.3 $ 847.3 $ 775.2 Costs and expenses 680.2 567.3 541.0 Depreciation and amortization 75.2 76.1 75.0 Restructuring, asset impairment and other charges 196.4 Operating income 106.5 203.9 159.2 Gain on sale of equity investment (Note 2) 296.3 Equity in net earnings (losses) of unconsolidated affiliates (Notes 5, 14): DST Systems, Inc. 24.3 68.1 24.6 Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (12.9) Other 3.8 2.0 5.2 Interest expense (63.7) (59.6) (65.5) Other, net 21.2 22.9 20.3 Pretax income 79.2 237.3 440.1 Income tax provision (Note 8) 68.4 70.6 192.9 Minority interest in consolidated earnings (Note 10) 24.9 15.8 10.5 Net income (loss) $ (14.1) $ 150.9 $ 236.7 Less: Dividends on preferred stock 0.2 0.2 0.2 Net income (loss) applicable to common stockholders $ (14.3) $ 150.7 $ 236.5 Per Share Data: Basic earnings (loss) per share $ (0.13) $ 1.33 $ 1.86 Diluted earnings (loss) per share $ (0.13) $ 1.31 $ 1.80 Weighted average common shares outstanding (in thousands): Basic 107,602 113,169 127,167 Diluted 107,602 115,281 131,211 Dividends per share Preferred $ 1.00 $ 1.00 $ 1.00 Common $ .15 $ .13 $ .10
See accompanying notes to consolidated financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS at December 31 Dollars in Millions, Except per Share Amounts 1997 1996 1995 ASSETS Current Assets: Cash and equivalents $ 33.5 $ 22.9 $ 31.8 Accounts receivable, net (Note 6) 177.0 138.1 135.6 Inventories 38.4 39.3 39.8 Other current assets (Note 6) 124.2 91.8 74.0 Total current assets 373.1 292.1 281.2 Investments held for operating purposes (Notes 2, 5) 683.5 335.2 272.1 Properties, net (Notes 3, 6) 1,227.2 1,219.3 1,281.9 Intangibles and Other Assets, net (Notes 2, 3, 6) 150.4 237.5 204.4 Total assets $2,434.2 $2,084.1 $2,039.6 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Debt due within one year (Note 7) $ 110.7 $ 7.6 $ 10.4 Accounts and wages payable 109.0 102.6 96.9 Accrued liabilities (Notes 3, 6) 217.8 134.4 213.1 Total current liabilities 437.5 244.6 320.4 Other Liabilities: Long-term debt (Note 7) 805.9 637.5 633.8 Deferred income taxes (Note 8) 332.2 337.7 303.6 Other deferred credits (Note 2) 132.1 129.8 73.1 Commitments and contingencies (Notes 2, 7, 8, 9, 10, 12, 13) Total other liabilities 1,270.2 1,105.0 1,010.5 Minority Interest in consolidated subsidiaries (Note 10) 28.2 18.8 13.5 Stockholders' Equity: $25 par, 4% noncumulative, Preferred stock 6.1 6.1 6.1 $1 par, Series B convertible, Preferred stock (Note 9) 1.0 1.0 1.0 $.01 par, Common stock (Notes 1, 9) 1.1 0.4 0.4 Capital surplus 127.5 Retained earnings 839.3 883.3 753.8 Net unrealized gain on investments 50.8 24.9 6.4 Shares held in trust (Note 9) (200.0) (200.0) (200.0) Total stockholders' equity (Notes 1, 7, 9) 698.3 715.7 695.2 Total liabilities and stockholders' equity $2,434.2 $2,084.1 $2,039.6
See accompanying notes to consolidated financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 Dollars in Millions
CASH FLOWS PROVIDED BY (USED FOR): 1997 1996 1995 Operating Activities: Net income (loss) $(14.1) $ 150.9 $ 236.7 Adjustments to net income (loss): Depreciation and amortization 75.2 76.1 75.0 Deferred income taxes (16.6) 18.6 99.0 Equity in undistributed earnings (15.0) (66.4) (29.8) Dividend from DST Systems, Inc. 150.0 Gain on sale of equity investment (296.3) Restructuring, asset impairment and other charges 196.4 Employee benefit and deferred compensation expenses not requiring operating cash 8.7 18.3 8.4 Changes in working capital items: Accounts receivable (29.0) (2.5) (2.4) Inventories 2.5 0.5 1.3 Accounts and wages payable (3.1) 7.2 (5.5) Accrued liabilities 24.4 (73.4) 106.7 Other current assets (2.2) (6.0) (1.3) Other, net 6.6 (2.3) 10.1 Net 233.8 121.0 351.9 Investing Activities: Property acquisitions (82.6) (144.0) (121.1) Proceeds from disposal of property 7.4 187.0 9.9 Investments in and loans with affiliates (303.5) (41.9) (94.5) Net proceeds from DST Systems, Inc. public offering 112.1 DST Systems, Inc. loan repayments 164.1 Purchase of short-term investments (34.9) (39.2) (0.8) Proceeds from disposal of other investments 55.7 Other, net 4.3 3.3 (0.4) Net (409.3) 20.9 69.3 Financing Activities: Proceeds from issuance of long-term debt 339.5 233.7 97.8 Repayment of long-term debt (110.1) (233.1) (370.9) Proceeds from stock plans 26.6 14.6 7.1 Stock repurchased (50.2) (151.3) (127.0) Cash dividends paid (15.2) (14.8) (9.9) Other, net (4.5) 0.1 0.8 Net 186.1 (150.8) (402.1) Cash and Equivalents: Net increase (decrease) 10.6 (8.9) 19.1 At beginning of year 22.9 31.8 12.7 At end of year (Note 4) $ 33.5 $ 22.9 $ 31.8
See accompanying notes to consolidated financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Dollars in Millions, Except per Share Amounts $1 Par Net un- Series realized $25 Par B $.01 Par gain on Shares ESOP Pre- Pre- Com- Re- held deferred ferred ferred mon Capital tainedinvest- in compen- stock stock stocksurplusearningsments trust sation Total Balance at December 31, 1994 $6.1 $1.0 $0.4 $339.8 $530.1 $(1.8) $(200.0)$(8.4) $667.2 Net income 236.7 236.7 Dividends (13.0) (13.0) Stock repurchased (138.9) (138.9) Options exercised and stock subscribed 11.9 11.9 Exchange of DST stock for KCSI stock held by ESOP (Notes 2, 4) (84.8) (84.8) Contribution accruals 8.4 8.4 Unrealized gains on investments, net 8.2 8.2 Other (0.5) (0.5) Balance at December 31, 1995 6.1 1.0 0.4 127.5 753.8 6.4 (200.0) - 695.2 Net income 150.9 150.9 Dividends (15.3) (15.3) Stock repurchased (145.2) (6.1) (151.3) Stock plan shares issued from treasury 5.9 5.9 Options exercised and stock subscribed 11.8 11.8 Unrealized gains on investments, net 18.5 18.5 Balance at December 31, 1996 6.1 1.0 0.4 - 883.3 24.9 (200.0) - 715.7 Net loss (14.1) (14.1) Dividends (16.0) (16.0) Stock repurchased (50.2) (50.2) 3-for-1 stock split 0.7 (0.7) - Stock plan shares issued from treasury 3.1 3.1 Stock issued in acquisition (Notes 2, 4) 10.1 10.1 Options exercised and stock subscribed 23.8 23.8 Unrealized gains on investments, net 25.9 25.9 Balance at December 31, 1997 $6.1 $1.0 $1.1 $ - $839.3 $50.8 $(200.0) $ - $698.3
See accompanying notes to consolidated financial statements. KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1. Significant Accounting Policies Kansas City Southern Industries, Inc. ("Company" or "KCSI") is a diversified holding company, comprising businesses engaged in railroad transportation, through The Kansas City Southern Railway Company ("KCSR") and Gateway Western Railway Company ("Gateway Western") and Financial Asset Management, through Janus Capital Corporation ("Janus") and Berger Associates, Inc. ("Berger"). Additionally, the Company has significant equity investments. Note 14 further describes the operations of the Company. The accounting and financial reporting policies of the Company conform with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Use of the term "Company" as described in these Notes to Consolidated Financial Statements means Kansas City Southern Industries, Inc. as a holding company and all of its consolidated subsidiary companies. Significant accounting and reporting policies are described below. Effective January 1, 1997, the Company realigned its business segments to better define the core industries in which it operates. The various components comprising the segment formerly known as Corporate & Other have been assigned to either the Transportation or Financial Asset Management segment. * Transportation includes: KCSR; Gateway Western; Transportation-related Holding Company amounts (Kansas City Southern Lines, Inc. - "KCSL"); and Transportation-related subsidiaries and equity investments, including Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana, S. de R.L. de C.V.), Southern Capital Corporation, LLC ("Southern Capital"), and Mexrail, Inc. ("Mexrail"). * Financial Asset Management includes: Janus; Berger; the Company's approximate 41% interest in DST Systems, Inc. ("DST"); and Financial Asset Management-related KCSI Holding Company amounts. Prior year information has been realigned to reflect the new segment approach. During third quarter 1997, the Company formed KCSL as a holding company for KCSR and all other transportation-related subsidiaries and affiliates. KCSL was organized to provide separate control, management and accountability for all transportation operations and businesses. As a result of the public offering of DST, formerly a wholly-owned and consolidated subsidiary of the Company, and associated transactions completed in November 1995, the Company reduced its ownership in DST to approximately 41% (see Note 2). Accordingly, the Company accounted for its investment in DST under the equity method for the year ended December 31, 1995 retroactive to January 1, 1995. Principles of Consolidation. The consolidated financial statements generally include all majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The equity method of accounting is used for all entities in which the Company or its subsidiaries have significant influence, but not more than 50% voting control interest; the cost method of accounting is generally used for investments of less than 20% voting control interest. In December 1996 and the first four months of 1997, Gateway Western was accounted for under the equity method as a majority-owned unconsolidated subsidiary while the Company awaited approval from the Surface Transportation Board ("STB") for the acquisition of Gateway Western. The STB approved the Company's acquisition of Gateway Western effective May 5, 1997. Subsequently, Gateway Western was included as a consolidated subsidiary of the Company effective January 1, 1997. See Note 2 for additional information on the Gateway Western acquisition. Cash Equivalents. Short-term liquid investments with an initial maturity of generally three months or less are considered cash equivalents. Carrying value approximates market value due to the short-term nature of these investments. Inventories. Materials and supplies inventories for transportation operations are valued at average cost. Properties and Depreciation. Properties are stated at cost. Additions and renewals constituting a unit of property are capitalized and all properties are depreciated over the estimated remaining life of such assets. Ordinary maintenance and repairs are charged to expense as incurred. The cost of transportation equipment and road property normally retired, less salvage value, is charged to accumulated depreciation. Conversely, the cost of industrial and other property retired, and the cost of transportation property abnormally retired, together with accumulated depreciation thereon, are eliminated from the property accounts and the related gains or losses are reflected in earnings. Depreciation for transportation operations is computed using composite straight-line rates for financial statement purposes. The STB approves the depreciation rates used by KCSR. KCSR evaluates depreciation rates for properties and equipment and implements approved rates. Periodic revisions of rates have not had a material effect on operating results. Unit depreciation methods, employing both accelerated and straight-line rates, are employed in other business segments. Accelerated depreciation is used for income tax purposes. The ranges of annual depreciation rates for financial statement purposes are: Transportation Road and structures 1% - 20% Rolling stock and equipment 1% - 24% Other equipment 1% - 33% Capitalized leases 3% - 20%
The Company adopted Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121") effective January 1, 1996. The new statement establishes accounting standards for the impairment of long- lived assets, certain identifiable intangibles, and goodwill, as well as for long-lived assets and certain identifiable intangibles which are to be disposed. If events or changes in circumstances of a long-lived asset indicate that the carrying amount of an asset may not be recoverable, the Company must estimate the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest) is lower than the carrying amount of the asset, an impairment loss must be recognized to the extent that the carrying amount of the asset exceeds its fair value. The adoption of SFAS 121 did not have a material effect on the Company's financial position or results of operations. However, see Note 3 below with respect to certain KCSR assets held for disposal at December 31, 1997. Revenue Recognition. Revenue is recognized by the Company's consolidated railroad operations based upon the percentage of completion of a commodity movement. Revenue is recognized by Janus and Berger primarily as a percentage of the assets under management. Other subsidiaries, in general, recognize revenue when the product is shipped or as services are performed. Advertising. The Company expenses all advertising as incurred. Direct response advertising for which future economic benefits are probable and specifically attributable to the advertising is not material. Intangibles. Intangibles principally represent the excess of cost over the fair value of net underlying assets of acquired companies using purchase accounting and are amortized using the straight-line method over periods ranging from 5 to 40 years. On an annual basis, the Company reviews the recoverability of goodwill. In response to changes in the competitive and business environment in the rail industry, the Company revised its methodology for evaluating goodwill recoverability effective December 31, 1997. The change in this method of measurement relates to the level at which assets are grouped from the business unit level to the investment component level. At the same time, there were changes in the estimates of future cash flows used to measure goodwill recoverability. The effect of the change in method of applying the accounting principle is inseparable from the changes in estimate. Accordingly, the combined effects have been reported in the accompanying consolidated financial statements as a change in estimate. The Company believes that the new methodology represents a preferable method of accounting because it more closely links the fair value estimates to the asset whose recoverability is being evaluated. The policy change did not impact the Company's Financial Asset Management businesses as their goodwill has always been evaluated on an investment component basis. As a result of the changes discussed above, the Company determined that the aggregate carrying value of the goodwill and other intangible assets associated with the 1993 MidSouth purchase exceeded their fair value. Accordingly, the Company recorded an impairment loss of $91.3 million in the fourth quarter of 1997. Due to the fact that the change in accounting is inseparable from the changes in estimates, the pro forma effects of retroactive application cannot be determined. Derivative Financial Instruments. In 1996, the Company entered into foreign currency contracts in order to reduce the impact of fluctuations in the value of the Mexican peso on its investment in Grupo TFM. The Company follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. Accordingly, gains and losses related to hedges of the Company's investment in Grupo TFM were deferred and recognized as adjustments to the carrying amount of the investment when the hedged transaction occurred. Any gains and losses qualifying as hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Any gains or losses on derivative contracts that do not qualify as hedges are recognized currently as other income. See Note 12 for additional information with respect to derivative financial instruments and purchase commitments. Income Taxes. Deferred income tax effects of transactions reported in different periods for financial reporting and income tax return purposes are recorded under the liability method of accounting for income taxes. This method gives consideration to the future tax consequences of the deferred income tax items and immediately recognizes changes in income tax laws upon enactment. The income statement effect is generally derived from changes in deferred income taxes on the balance sheet. Treasury Stock. The excess of par over cost of the Preferred shares held in Treasury is credited to capital surplus. Common shares held in Treasury are accounted for as if they were retired and the excess of cost over par value of such shares is charged to capital surplus, if available, and then to retained earnings. Stock Plans. Proceeds received from the exercise of stock options or subscriptions are credited to the appropriate capital accounts in the year they are exercised. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") in October 1995. This statement allows companies to continue under the approach set forth in Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"), for recognizing stock-based compensation expense in the financial statements, but encourages companies to adopt the fair value method of accounting for employee stock options. The Company has elected to retain its accounting approach under APB 25, and has presented the applicable pro forma disclosures in Note 9 to the consolidated financial statements pursuant to the requirements of SFAS 123. Indebtedness with respect to the leveraged Employee Stock Ownership Plan ("ESOP") was retired in full during 1995. All shares held in the ESOP are treated as outstanding for purposes of computing the Company's earnings per share. Earnings Per Share. The Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") in 1997. The statement specifies the computation, presentation and disclosure requirements for earnings per share. The statement requires the computation of earnings per share under two methods: "basic" and "diluted." Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential shares had been issued). SFAS 128 requires the Company to present basic and diluted per share amounts for income (loss) from continuing operations and for net income (loss) on the face of the statements of operations. All prior period earnings per share data have been restated. Stock options to employees represent the only difference between the weighted average shares used for the basic computation compared to the diluted computation. Because of the net loss in 1997, all options were anti-dilutive for the year ended December 31, 1997. The weighted average of options to purchase 3,502,290 and 1,604,925 shares of the Company's common stock were outstanding during 1996 and 1995 but were not included in the respective years' computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares.
Stockholders' Equity. Information regarding the Company's capital stock at December 31, 1997 follows: Shares Shares Authorized Issued $25 Par, 4% noncumulative, Preferred stock 840,000 649,736 $1 Par, Preferred stock 2,000,000 None $1 Par, Series A, Preferred stock 150,000 None $1 Par, Series B convertible, Preferred stock 1,000,000 1,000,000 $.01 Par, Common stock 400,000,000 145,206,576
The Company's Series B Preferred stock, issued in 1993, has a $200 per share liquidation preference and is convertible to common stock at a ratio of twelve to one (see Note 9). On July 29, 1997, the Company's Board of Directors authorized a 3-for-1 split in the Company's common stock effected in the form of a stock dividend. All share and per share data has been restated to reflect this split.
Shares outstanding are as follows at December 31, (in thousands): 1997 1996 1995 $25 Par, 4% noncumulative, Preferred stock 242 242 242 $.01 Par, Common stock 108,084 108,918 117,189
Retained earnings include equity in unremitted earnings of unconsolidated affiliates of $111.9, $99.2 and $34.7 million at December 31, 1997, 1996 and 1995, respectively. New Accounting Pronouncements. In June 1997, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") were issued. SFAS 130 establishes standards for reporting and disclosure of comprehensive income and its components in the financial statements. SFAS 131 establishes standards for reporting information about operating segments in the financial statements. The reporting and disclosure required by these statements must be included in the Company's financial statements beginning in 1998. The Company is reviewing SFAS 130 and SFAS 131 and expects to adopt them by the required dates, which are December 31, 1998. In Issue No. 96-16, the Emerging Issues Task Force, ("EITF 96-16") of the Financial Accounting Standards Board, reached a consensus that substantive minority rights which provide the minority shareholder with the right to effectively control significant decisions in the ordinary course of an investee's business could impact whether the majority shareholder should consolidate the investee. Management is currently evaluating the rights of the minority shareholders of certain consolidated subsidiaries to determine the impact, if any, that application of EITF 96-16 will have on the Company's consolidated financial statements in 1998. Note 2. Acquisitions and Dispositions Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. In June 1996, the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") formed Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana, S. de R.L. de C.V.). Grupo TFM was formed to participate in the privatization of the Mexican rail industry. On December 6, 1996, Grupo TFM, TMM and the Company announced that the Mexican Government had awarded to Grupo TFM the right to purchase 80% of the common stock of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.) for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on the award date). TFM holds the concession to operate Mexico's "Northeast Rail Lines" for 50 years, with the option of a 50 year extension (subject to certain conditions). The Northeast Rail Lines are a strategically important rail link to Mexico and the North American Free Trade Agreement ("NAFTA") corridor. The lines are estimated to transport approximately 40% of Mexico's rail cargo and are located next to primary north/south truck routes. The Northeast Rail Lines directly link Mexico City and Monterrey, as well as Guadalajara (through trackage rights), with the ports of Lazaro Cardenas, Veracruz, Tampico, and the cities of Matamoros and Nuevo Laredo. Nuevo Laredo is a primary transportation gateway between Mexico and the United States. The Northeast Rail Lines connect in Laredo, Texas to the Union Pacific Railroad and the Texas Mexican Railway Company ("Tex- Mex"). The Tex-Mex is a wholly-owned subsidiary of Mexrail, a 49% owned equity investment of the Company. The Tex-Mex links to KCSR at Beaumont, Texas through trackage rights. With the KCSR and Tex-Mex interchange at Beaumont, and through KCSR's connections with major rail carriers at various other points, KCSR has developed a NAFTA rail system which is expected to facilitate the economic integration of the North American marketplace. On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $297 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. The Company financed this contribution using borrowings under existing lines of credit. On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through the payment of the remaining $835 million U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and senior discount debentures ($400 million U.S.);(iii) proceeds from the sale of 24.5% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM, which includes a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Government has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. As of December 31, 1997, no additional contributions from the Company have been requested or made. At December 31, 1997, the Company's investment in Grupo TFM was approximately $288 million. With the sale of 24.5% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.5%). The Company accounts for its investment in Grupo TFM under the equity method. Gateway Western Acquisition. In May 1997, the Surface Transportation Board ("STB") approved the Company's acquisition of Gateway Western, a regional rail carrier with operations from Kansas City, Missouri to East St. Louis and Springfield, Illinois and haulage rights between Springfield and Chicago, from the Southern Pacific Rail Corporation. Prior to the STB approval from acquisition in December 1996, the Company's investment in Gateway Western was treated as a majority-owned unconsolidated subsidiary accounted for under the equity method. Upon approval from the STB, the assets, liabilities, revenues and expenses were included in the Company's consolidated financial statements. The consideration paid for Gateway Western (including various acquisition costs and liabilities) was approximately $12.2 million, which exceeded the fair value of the underlying net assets by approximately $12.1 million. The resulting intangible is being amortized over a period of 40 years. Under a prior agreement with The Atchison, Topeka & Santa Fe Railway Company, Burlington Northern Santa Fe Corporation has the option of purchasing the assets of Gateway Western (based on a fixed formula in the agreement) through the year 2004. Assuming the transaction had been completed January 1, 1996, inclusion of Gateway Western results on a pro forma basis, as of and for the year ended December 31, 1996, would not have been material to the Company's consolidated results of operations. Berger Ownership Interest. As a result of certain transactions during 1997, the Company increased its ownership in Berger to 100%. In January and December 1997, Berger purchased, for treasury, the common stock of minority shareholders. Also in December 1997, the Company acquired additional Berger shares from a minority shareholder through the issuance of 330,000 shares of KCSI common stock. These transactions resulted in approximately $17.8 million of intangibles, which will be amortized over their estimated economic life of 15 years. However, see discussion of impairment of certain of these intangibles in Note 3. Pursuant to a Stock Purchase Agreement (the "Agreement") in connection with the acquisition of a controlling interest in Berger in 1994, additional purchase price payments - totaling approximately $62.4 million (of which $39.7 million remains unpaid) - may be required of the Company upon Berger attaining certain levels (up to $10 billion) of assets under management, as defined in the Agreement, over a five year period. In 1997, 1996 and 1995, contingent payments were made totaling $3.1, $23.9 and $3.1 million, respectively, resulting in adjustment to the purchase price recorded, and therefore, an increase in intangibles. The intangible amounts are being amortized over their estimated economic life of 15 years. Southern Capital Corporation, LLC Joint Venture. In October 1996, the Company and GATX Capital Corporation ("GATX") completed the transactions for the formation and financing of a joint venture to perform certain leasing and financing activities. The venture, Southern Capital Corporation, LLC ("Southern Capital"), was formed through a GATX contribution of $25 million in cash, and a Company contribution (through its subsidiaries KCSR and Carland, Inc.) of $25 million in net assets, comprising a negotiated fair value of locomotives and rolling stock and long-term indebtedness owed to KCSI and its subsidiaries. In an associated transaction, Southern Leasing Corporation (an indirect wholly-owned subsidiary of the Company prior to dissolution in October 1996), sold to Southern Capital approximately $75 million of loan portfolio assets and rail equipment at fair value which approximated historical cost. As a result of these transactions and subsequent repayment by Southern Capital of indebtedness owed to KCSI and its subsidiaries, the Company received cash which exceeded the net book value of its assets by approximately $44.1 million. Concurrent with the formation of the joint venture, KCSR entered into operating leases with Southern Capital for the majority of the rail equipment acquired by or contributed to Southern Capital. Accordingly, this excess fair value over book value is being recognized over the terms of the leases (approximately $4.9 million in 1997). The cash received by the Company was used to reduce outstanding indebtedness by approximately $217 million, after consideration of applicable income taxes, through repayments on various lines of credit and subsidiary indebtedness. The Company reports its 50% ownership interest in Southern Capital under the equity method of accounting. See Notes 4 and 5 for additional information. DST Public Offering. On October 31, 1995, DST and the Company effected an initial public offering for a total of 22 million shares of DST common stock. The initial offering price was $21 per share. Of the 22 million shares, 19,450,000 and 2,550,000 were offered by DST and the Company, respectively. On November 6, 1995, an over-allotment option, granted by the Company to the underwriters, for an additional 3,300,000 DST shares owned by the Company was exercised, effectively completing the DST offering. The approximate $384.0 million net proceeds received by DST were used to reduce outstanding indebtedness to the Company, borrowings on bank credit lines, and for working capital. The approximate $276 million in proceeds received by the Company from sale of DST stock and repayment of indebtedness by DST were used for repayment of debt, repurchase of Company common stock and general corporate purposes. In conjunction with the offering, the Company completed an exchange of 4,253,508 shares of DST common stock for 5,460,000 shares of Company common stock held by the DST portion of the ESOP. The 5,460,000 shares received in the exchange have been accounted for as treasury shares by the Company. With the completion of all associated transactions, the Company's ownership in DST was reduced to approximately 41%, and a pretax gain of approximately $296.3 million was recognized during fourth quarter 1995. The Company recorded approxi- mately $78.6 million in income taxes currently payable and $73.1 million in deferred income taxes in connection with the public offering and associated transactions, resulting in an after-tax gain of approximately $144.6 million. Upon completion of the public offering, DST was no longer included in the Company's consolidation, and was accounted for as an equity investment (in accordance with the Company's accounting policy described more fully in Note 1) in the Consolidated Statements of Operations for the year ended December 31, 1995 as if it was an unconsolidated subsidiary as of January 1, 1995. Mexrail Investment. In November 1995, the Company purchased 49% of the common stock of Mexrail from TMM. Mexrail owns 100% of the Tex-Mex, as well as certain other assets. The Tex-Mex operates a 157 mile rail line extending from Corpus Christi to Laredo, Texas, with trackage rights to Beaumont, Texas. The purchase price of $23 million was financed through the Company's existing lines of credit. The investment is accounted for under the equity method. The transaction resulted in the recording of intangibles (approximately $9.8 million) as the purchase price exceeded the fair value of underlying net assets. The intangible amounts are being amortized over a period of 40 years. Assuming the transaction had been completed January 1, 1995, inclusion of Mexrail results on a pro forma basis, as of and for the year ended December 31, 1995, would not have been material to the Company's consolidated results of operations. DST Transactions. On August 1, 1996, The Continuum Company, Inc. ("Continuum"), formerly an approximate 23% owned DST equity affiliate, merged with Computer Sciences Corporation ("CSC," a publicly traded company) in a tax-free share exchange. In exchange for its ownership interest in Continuum, DST received approximately 4.3 million shares (representing an approximate 6% interest) of CSC common stock. As a result of the transaction, the Company's earnings for the year ended December 31, 1996 include approximately $47.7 million (after-tax), or $0.41 per diluted share, representing the Company's proportionate share of the one-time gain recognized by DST in connection with the merger. Continuum ceased to be an equity affiliate of DST, thereby eliminating any future Continuum equity affiliate earnings or losses. DST recognized equity losses in Continuum of $4.9 million for the first six months of 1996 and $1.1 million for the year ended December 31, 1995. On January 31, 1995, DST completed the sale of its 50% interest in Investors Fiduciary Trust Company Holdings, Inc. ("IFTC"), which wholly-owns Investors Fiduciary Trust Company, to State Street Corporation ("State Street"). At closing, DST received 2,986,111 shares of State Street common stock in a tax-free exchange (representing an approximate 4% ownership interest in State Street). As a result of this transaction, equity earnings from DST in 1995 include a net gain of $4.7 million, after consideration of appropriate tax effects. With the closing of the transaction, IFTC ceased to be an unconsolidated affiliate of DST and no further equity in earnings of IFTC have been recorded by DST. Note 3. Restructuring, Asset Impairment and Other Charges As discussed in Note 1 to the consolidated financial statements, in re- sponse to changes in the competitive and business environment in the rail industry, the Company revised its methodology for evaluating goodwill recoverability effective December 31, 1997. As a result of this revised methodology (as well as certain changes in estimate), the Company determined that the aggregate carrying value of the goodwill and other in- tangible assets associated with the 1993 MidSouth purchase exceeded their fair value (measured by reference to the net present value of future cash flows). Accordingly, the Company recorded an impairment loss of $91.3 million. In connection with the review of its intangible assets, the Company determined that the carrying value of the goodwill associated with Berger exceeded its fair value (measured by reference to various valuation techniques commonly used in the investment management industry) as a result of below-peer performance and growth of the core Berger funds. Accordingly, the Company recorded an impairment loss of $12.7 million. During the fourth quarter of 1997, Transportation management committed to dispose, as soon as practicable, certain under-performing branch lines acquired in connection with the 1993 MidSouth purchase, as well as certain of the Company's non-operating real estate. Accordingly, in accordance with SFAS 121, the Company recognized losses aggregating $38.5 million which represents the excess of carrying value over fair value less cost to sell. Results of operations related to these assets included in the accompanying consolidated financial statements cannot be separately identified. In accordance with SFAS 121, the Company periodically evaluates the recoverability of its operating properties. As a result of continuing operating losses and a further decline in the customer base of the Transportation segment's bulk coke handling facility (Pabtex) the Company determined that the long-lived assets related thereto may not be fully recoverable. Accordingly, the Company recognized an impairment loss of $9.2 million representing the excess of carrying value over fair value. Additionally, the Company recorded expenses aggregating $44.7 million related to restructuring and other costs. This amount includes approximately $27.1 related to the termination of a union productivity fund (which required KCSR to pay certain employees when reduced crew levels were used) and employee separations, as well as, $17.6 million of other costs related to reserves for leases, contracts, impaired invest- ments and other reorganization costs. Note 4. Supplemental Cash Flow Disclosures Supplemental Disclosures of Cash Flow Information. 1997 1996 1995 Cash payments (in millions): Interest $ 64.5 $ 56.0 $ 72.0 Income taxes 65.3 121.0 20.0
Supplemental Schedule of Noncash Investing and Financing Activities. As discussed in Note 2, the Company purchased a portion of the Berger minority interest. The Company issued 330,000 shares of its common stock, valued at $10.1 million, in exchange for the increased investment in Berger. In connection with the Southern Capital joint venture formation, the Company (through its subsidiaries KCSR, Carland, Inc. and Southern Leasing Corporation) contributed/sold to Southern Capital rail equipment, current and non-current loan portfolio assets, and long-term indebtedness owed to KCSI and its subsidiaries (see Note 2). Southern Capital repaid the indebtedness owed KCSI and its subsidiaries with borrowings under Southern Capital's credit facility. Cash received by KCSI from Southern Capital of approximately $224 million is reflected in the Consolidated Statement of Cash Flows for the year ended December 31, 1996 as proceeds from disposal of property ($184 million) and proceeds from disposal of other investments ($40 million). The Company accrued for expected income taxes on the transaction and, as described in Note 2, deferred the excess cash received over the book value of the assets contributed and sold. The Company accrued a liability for the donation of 300,000 shares of DST common stock to a charitable trust in December 1995. These shares were delivered to the charitable trust in January 1996, resulting in a reduction in the Company's investment in DST and associated liabilities. Company subsidiaries and affiliates hold various investments which are accounted for as "available for sale" securities as defined in Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company records its proportionate share of any unrealized gains or losses related to these investments, net of deferred taxes, in stockholders' equity. Stockholders' equity increased $25.9, $18.5 and $8.2 million in 1997, 1996 and 1995, respectively, as a result of unrealized gains related to these investments. During 1997, 1996 and 1995, the Company issued 245,550, 305,400 and 161,850 shares of KCSI Common stock, respectively, under various offerings of the Employee Stock purchase Plan ("ESOP"). These shares, totaling a purchase price of $3.1, $3.8 and $2.1 million in 1997, 1996 and 1995, respectively, were subscribed and paid for through employee payroll deduc- tions in years preceding the issuance of stock. In connection with the DST public offering in fourth quarter 1995, the Company exchanged DST shares for 5,460,000 shares of KCSI common stock owned by the ESOP with a value of approximately $84.8 million. No cash was exchanged in connection with this transaction. At December 31, 1995, the Company had repurchased $11.9 million of its common stock for which cash had not been exchanged prior to year end. The Company recorded a liability for these repurchases, with an offsetting reduction of stockholders' equity. As described in greater detail in Note 7, the Company issued $100 million in Debentures in 1995. As part of this transaction, the Company incurred $2.2 million in discount and underwriting fees which were transferred directly to the underwriter. The discount and underwriting fees represent non-cash amounts, which are being amortized over the term of the Debentures. Note 5. Investments
Investments held for operating purposes include investments in unconsolidated affiliates as follows (in millions): Percentage Ownership Company Name December 31, 1997 Carrying Value 1997 1996 1995 DST (a) 41% $ 345.3 $ 283.5 $ 189.9 Southern Capital 50% 27.6 25.5 Mexrail (b) 49% 14.9 14.1 22.4 Grupo TFM (c) 37% 288.2 2.7 Midland (d) 10.2 Equipment finance receivables 41.8 Other 13.6 11.3 10.8 Market valuation allowances (6.1) (1.9) (3.0) Total (e) $ 683.5 $ 335.2 $ 272.1
(a) As a result of the DST public offering and associated transactions completed in November 1995 (discussed in Note 2), the Company's investment in DST was reduced to approximately 41%. Fair market value at December 31, 1997 (based on the New York Stock Exchange closing market price) was approximately $865.0 million (b) During 1996, purchase price allocations were completed, and resulted in reclassification of $9.1 million from investments to intangibles, representing excess purchase price over fair value of underlying net assets (c) In June 1997, the Mexican Government purchased approximately 24.5% of Grupo TFM, reducing the Company's ownership in Grupo TFM from 49% to approximately 37% (see Note 2) (d) Midland, comprising Midland Data Systems, Inc. and Midland Loan Services, L.P., both formerly 45% owned KCSI affiliates, was sold in April 1996 (e) Fair market value is not readily determinable for investments other than noted above, and in the opinion of management, market value approximates carrying value Additionally, DST holds investments in the common stock of State Street and CSC, among others, which are accounted for as "available for sale" securities as defined by SFAS 115. The Company records its proportionate share of any unrealized DST gains or losses related to these investments, net of deferred taxes, in stockholders' equity. Transactions With and Between Unconsolidated Affiliates. The Company and its subsidiary, KCSR, paid certain expenses on behalf of Grupo TFM during 1997. In addition, the Company has a management services agreement with Grupo TFM to provide certain consulting and management services. The total amount, $2.6 million, is reflected as an accounts receivable in the Company's consolidated balance sheet. In connection with the October 1996 formation of the Southern Capital joint venture, KCSR entered into operating leases with Southern Capital for locomotives and rolling stock at rental rates management believes re- flect market. KCSR paid Southern Capital $23.5 and 4.5 million under these operating leases in 1997 and 1996, respectively. Additionally, Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, entered into a contract with Southern Capital to manage the loan portfolio assets held by Southern Capital, as well as to perform general administrative and accounting functions for the venture. Payments under this contract were approximately $1.7 million in 1997 and $.3 million in 1996. Throughout 1996, the Company repurchased KCSI common stock owned by DST's portion of the ESOP. In total, 1,605,000 shares were repurchased for approximately $24.2 million. Together, Janus and Berger recognized approximately $5.3, $5.4 and $4.5 million in 1997, 1996 and 1995, respectively, in expenses associated with various services provided by DST and its subsidiaries and affiliates. Janus recorded $7.1, $5.9 and $4.8 million in revenues for the years ended December 31, 1997, 1996 and 1995, respectively, representing management fees earned from IDEX. DST had loans outstanding to the Company throughout the first ten months of 1995, which were repaid in connection with the public offering. The Company recognized approximately $8.8 million in interest income related to this indebtedness during 1995. Additionally, DST paid a special dividend of $150 million to the Company in May 1995.
Financial Information. Combined financial information of all unconsolidated affiliates, which the Company and its subsidiaries account for under the equity method, is as follows (in millions): DECEMBER 31, 1997 Grupo DST TFM Other Total Investment in unconsolidated affiliates $ 345.3 $ 288.2 $ 44.6 $ 678.1 Equity in net assets of unconsolidated affiliates 345.3 285.1 39.6 670.0 Dividends and distributions received from unconsolidated affiliates - - 0.2 0.2 Financial Condition: Current assets $ 231.3 $ 114.7 $ 199.1 $ 545.1 Non-current assets 1,124.1 1,990.4 85.9 3,200.4 Assets $1,355.4 $2,105.1 $ 285.0 $3,745.5 Current liabilities $ 141.0 $ 158.5 $ 13.2 $ 312.7 Non-current liabilities 378.7 830.6 191.7 1,401.0 Minority interest 345.4 345.4 Equity of stockholders and partners 835.7 770.6 80.1 1,686.4 Liabilities and equity $1,355.4 $2,105.1 $ 285.0 $3,745.5 Operating results: Revenues $ 650.7 $ 206.4 $ 83.2 $ 940.3 Costs and expenses $ 558.4 $ 190.5 $ 61.4 $ 810.3 Net Income (loss) $ 59.0 $ (36.5) $ 5.9 $ 28.4
DECEMBER 31, 1996 Grupo DST TFM Other Total Investment in unconsolidated affiliates $ 283.5 $ 2.7 $ 39.7 $ 325.9 Equity in net assets of unconsolidated affiliates 283.1 2.1 35.2 320.4 Dividends and distributions received from unconsolidated affiliates - - 3.7 3.7 Financial Condition: Current assets $ 201.3 $ 1.2 $ 34.4 $ 236.9 Non-current assets 920.3 4.2 331.7 1,256.2 Assets $1,121.6 $ 5.4 $ 366.1 $1,493.1 Current liabilities $ 129.3 $ 1.2 $ 27.2 $ 157.7 Non-current liabilities 297.1 - 267.7 564.8 Equity of stockholders and partners 695.2 4.2 71.2 770.6 Liabilities and equity $1,121.6 $ 5.4 $ 366.1 $1,493.1 Operating results: Revenues $ 580.8 $ - $ 76.4 $ 657.2 Costs and expenses $ 523.8 $ - $ 62.0 $ 585.8 Net Income $ 167.2(i)$ - $ 4.9 $ 172.1
(i)Significant increase in 1996 over 1995 is attributable to the one-time gain recorded by DST as a result of the merger of its Continuum investment in third quarter 1996 (see Note 2) DECEMBER 31, 1995 DST Other Total Investment in unconsolidated affiliates $ 189.9 $ 31.4 $ 221.3 Equity in net assets of unconsolidated affiliates 190.7 18.8 209.5 Dividends and distributions received from unconsolidated affiliates 150.0 - 150.0 Financial Condition: Current assets $ 188.5 $ 61.8 $ 250.3 Non-current assets 561.0 8.9 569.9 Assets $ 749.5 $ 70.7 $ 820.2 Current liabilities $ 133.2 $ 45.2 $ 178.4 Non-current liabilities 150.0 12.6 162.6 Equity of stockholders and partners 466.3 12.9 479.2 Liabilities and equity $ 749.5 $ 70.7 $ 820.2 Operating results: Revenues $ 484.1 $ 57.9 $ 542.0 Costs and expenses $ 443.3 $ 33.8 $ 477.1 Net Income $ 27.7 $ 13.3 $ 41.0
Generally, the difference between the carrying amount of the Company's investment in unconsolidated affiliates and the underlying equity in net assets is attributable to certain equity investments whose carrying amounts have been reduced to zero, and report a net deficit. In addition, with respect to the Company's investment in Grupo TFM, the effects of foreign currency transactions and capitalized interest prior to June 23, 1997, which are not recorded on the investees books, also result in these differences. However, in 1995, the larger difference between the carrying amount and the underlying equity in net assets of unconsolidated affiliates was a result of initial purchase price allocations related to the Mexrail acquisition. Upon completion of the purchase price allocation in 1996, $9.1 million was reclassified from investments to intangibles, representing excess purchase price over fair value of underlying net assets (see Note 2). Other. Interest income on cash and equivalents and short-term investments was $3.8, $4.9 and $2.8 million in 1997, 1996 and 1995, respectively. Note 6. Other Balance Sheet Captions
Accounts Receivable. Accounts receivable include the following allowances (in millions): 1997 1996 1995 Accounts receivable $ 181.9 $ 141.4 $ 140.2 Allowance for doubtful accounts (4.9) (3.3) (4.6) Accounts receivable, net $ 177.0 $ 138.1 $ 135.6 Doubtful accounts expense $ 1.6 $ 1.4 $ 1.8
Other Current Assets. Other current assets include the following items (in millions): 1997 1996 1995 Marketable investments (cost approximates market) $ 93.5 $ 67.8 $ 26.8 Maturities of equipment finance receivables (Southern Leasing Corporation) - - 27.0 Deferred income taxes 10.1 8.6 10.6 Other 20.6 15.4 9.6 Total $ 124.2 $ 91.8 $ 74.0
Properties. Properties and related accumulated depreciation and amortization are summarized below (in millions): 1997 1996 1995 Properties, at cost Transportation Road properties $ 1,306.4 $ 1,308.2 $ 1,234.9 Equipment, including $15.4 financed under capital leases 294.6 289.2 473.1 Other 106.2 76.8 76.2 Financial Asset Management, including $1.4 equipment financed under capital leases 38.6 36.4 35.8 Total $ 1,745.8 $ 1,710.6 $ 1,820.0 Accumulated depreciation and amortization Transportation Road properties $ 346.2 $ 330.3 $ 299.8 Equipment, including $10.8, $10.2 and $9.5 for capital leases 116.8 109.3 193.0 Other 26.4 24.1 22.8 Financial Asset Management including $1.4, $1.4 and $1.0 for equipment capital leases 29.2 27.6 22.5 Total $ 518.6 $ 491.3 $ 538.1 Net Properties $ 1,227.2 $ 1,219.3 $ 1,281.9
As discussed in Note 3, in accordance with SFAS 121, the Company recorded a charge representing long-lived assets held for disposal and impairment of assets.
Intangibles and Other Assets. Intangibles and other assets include the following items (in millions): 1997 1996 1995 Intangibles $ 141.2 $ 250.3 $ 202.9 Accumulated amortization (18.1) (40.6) (29.2) Net 123.1 209.7 173.7 Other assets 27.3 27.8 30.7 Total $ 150.4 $ 237.5 $ 204.4
As discussed in Note 1, effective December 31, 1997, the Company changed its method of evaluating the recoverability of goodwill. Also, see Note 3 for discussion of goodwill impairment recorded during fourth quarter 1997.
Accrued Liabilities. Accrued liabilities include the following items (in millions): 1997 1996 1995 Prepaid freight charges due other railroads $ 38.6 $ 26.1 $ 36.8 Current interest payable on indebtedness 17.2 15.2 16.3 Federal income taxes currently payable 2.5 0.8 66.4 Contract allowances 20.2 14.0 5.1 Productivity Fund liability 24.2 - - Other 115.1 78.3 88.5 Total $ 217.8 $ 134.4 $ 213.1
See Note 3 for discussion of reserves established for restructuring and other charges. Note 7. Long-Term Debt
Indebtedness Outstanding. Long-term debt and pertinent provisions follow (in millions): 1997 1996 1995 KCSI Competitive Advance & Revolving Credit Facilities, through May 2000 $ 282.0 $ 40.0 $ - Rates: Below Prime Notes and Debentures, due July 1998 to December 2025 500.0 500.0 500.0 Unamortized discount (2.7) (3.0) (3.4) Rates: 5.75% to 8.80% KCSR Equipment trust indebtedness, due serially to June 2009 88.9 96.1 104.7 Rates: 7.15% to 15.00% Other Short-term renewable lease financing and other working capital lines 31.0 - 30.6 Rates: Below Prime Subordinated and senior notes, secured term loans and industrial revenue bonds, due December 1999 to December 2012 17.4 12.0 12.3 Rates: 3.0% to 7.89% Total 916.6 645.1 644.2 Less: debt due within one year 110.7 7.6 10.4 Long-term debt $ 805.9 $ 637.5 $ 633.8
KCSI Credit Agreements. The Company's lines of credit at December 31, 1997 follow (in millions): Facility Lines of Credit Fee Total Unused KCSI .07 to .25% $ 515.0 $ 233.0 KCSR .1875% 5.0 5.0 Gateway Western .1875% 40.0 9.0 Total $ 560.0 $ 247.0
On May 5, 1995, the Company established a new credit agreement in the amount of $400 million. The credit agreement replaced approximately $420 million of then existing Company credit agreements which had been in place for varying periods since 1992. Proceeds of the facility have been and are anticipated to be used for general corporate purposes. The agreement contains a facility fee ranging from .07 - .25% per annum, interest rates below prime and terms ranging from one to five years. The Company also has various other lines of credit lines totaling $160 million. These additional lines, which are available for general corporate purposes, have interest rates below prime and terms of less than one year. At December 31, 1997, the Company had $313.0 million outstanding under its various lines of credit. Among other provisions, the agreements limit subsidiary indebtedness and sale of assets, and require certain coverage ratios to be maintained. As discussed in Note 2, in January 1997, the Company made an approximate $297 million capital contribution to Grupo TFM, of which approximately $277 million was used by Grupo TFM for the purchase of TFM. This payment was funded using borrowings under the Company's lines of credit. Public Debt Transactions. On December 18, 1995, the Company issued $100 million of 7% Debentures due 2025. The Debentures are redeemable at the option of the Company at any time, in whole or in part, at a redemption price equal to the greater of (a) 100% of the principal amount of such Debentures or (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis at the Treasury Rate (as defined in the Debentures agreement) plus 20 basis points, and in each case accrued interest thereon to the date of redemption. The net proceeds of this transaction were used to repay indebtedness on the Company's existing lines of credit and for the repurchase of KCSI common stock. Other Company public indebtedness includes $100 million of 5.75% Notes due in 1998; $100 million of 6.625% Notes due in 2005; $100 million of 7.875% Notes due 2002; and $100 million of 8.8% Debentures due 2022. The various Notes are not redeemable prior to their respective maturities. The 8.8% Debentures are redeemable on or after July 1, 2002 at a premium of 104.04%, which declines to par on or after July 1, 2012. These various debt transactions were issued at a total discount of $4.1 million. This discount is being amortized over the respective debt maturities on a straight-line basis, which is not materially different from the interest method. Deferred debt issue costs incurred in connection with these various transactions (totaling approximately $4.8 million) are also being amortized on a straight-line basis over the respective debt maturities. KCSI ESOP. In 1988, the Company established a $39 million leveraged ESOP (see Note 9). Related indebtedness was guaranteed by the Company. In 1995, the Company retired the remaining ESOP indebtedness through contributions totaling $13.2 million, which included $9.0 million in accelerated payments. KCSR Indebtedness. KCSR has purchased rolling stock under conditional sales agreements, equipment trust certificates and capitalized lease obligations, which equipment has been pledged as collateral for the related indebtedness. Other Agreements, Guarantees, Provisions and Restrictions. As previously noted, the Company has debt agreements containing restrictions on subsidiary indebtedness, advances and transfers of assets, and sale and leaseback transactions, as well as requiring compliance with various financial covenants. At December 31, 1997, the Company was in compliance with the provisions and restrictions of these agreements. Because of certain financial covenants contained in the credit agreements, however, maximum utilization of the Company's available lines of credit may be restricted. Unrestricted retained earnings at December 31, 1997 were $204.7 million. Leases and Debt Maturities. The Company and its subsidiaries lease transportation equipment, and office and other operating facilities under various capital and operating leases. Rental expenses under operating leases were $64, $42 and $30 million for the years 1997, 1996 and 1995, respectively. As more fully described in Note 2, in connection with the Southern Capital joint venture transactions completed in October 1996, KCSR entered into operating leases with Southern Capital for locomotives and railroad rolling stock. Accordingly, 1997 rental expense under operating leases was higher than previous years.
Minimum annual payments and present value thereof under existing capital leases, other debt maturities, and minimum annual rental commitments under noncancellable operating leases, are as follows (in millions): Capital Leases Operating Leases Minimum Net Lease Less Present Other Total Affili- Third PaymentsInterest Value Debt Debt ates Party Total 1998 $ 0.9 $ 0.4 $ 0.5 $110.2 $110.7 $ 25.1 $ 37.9 $ 63.0 1999 0.8 0.4 0.4 10.3 10.7 25.1 28.5 53.6 2000 0.8 0.4 0.4 10.6 11.0 25.1 22.8 47.9 2001 0.8 0.3 0.5 12.3 12.8 25.1 16.3 41.4 2002 0.8 0.3 0.5 12.2 12.7 25.1 10.5 35.6 Later years 3.6 1.1 2.5 756.2 758.7 105.7 18.8 124.5 Total $ 7.7 $ 2.9 $ 4.8 $911.8 $916.6 $231.2 $134.8 $366.0
Fair Value of Long-Term Debt. Based upon the borrowing rates currently available to the Company and its subsidiaries for indebtedness with similar terms and average maturities, the fair value of long-term debt was approximately $947, $663 and $679 million at December 31, 1997, 1996 and 1995, respectively. Note 8. Income Taxes Under the liability method of accounting for income taxes specified by Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes," the deferred tax liability is determined based on the difference between the financial statement and tax basis of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. Generally, deferred tax expense is the result of changes in the liability for deferred taxes.
The following summarizes pretax income (loss) for the years ended December 31, (in millions): 1997 1996 1995 Domestic $ 92.1 $ 237.3 $ 440.1 International (12.9) - - Total $ 79.2 $ 237.3 $ 440.1
Tax Expense. Income tax expense (benefit) attributable to continuing operations consists of the following components (in millions): 1997 1996 1995 Current Federal $ 73.4 $ 45.6 $ 78.7 State and local 11.6 6.4 15.2 Total current 85.0 52.0 93.9 Deferred Federal (14.1) 15.7 86.2 State and local (2.5) 2.9 12.8 Total deferred (16.6) 18.6 99.0 Total income tax provision $ 68.4 $ 70.6 $ 192.9
Deferred Taxes. Deferred taxes are recorded based upon differences between the financial statement and tax basis of assets and liabilities, and available tax credit carryovers. Temporary differences which give rise to a significant portion of federal deferred tax expense (benefit) applicable to continuing operations are as follows (in millions): 1997 1996 1995 Depreciation $ 19.5 $ 5.4 $ 19.8 Asset impairment (33.5) DST investment 56.3 Employee plan accruals (4.5) (4.8) 2.5 Alternative Minimum Tax ("AMT") credit and Net Operating Loss ("NOL") carryovers 8.8 9.9 6.6 Other, net (4.4) 5.2 1.0 Total $ (14.1) $ 15.7 $ 86.2
The federal and state deferred tax liabilities (assets) recorded on the Consolidated Balance Sheets at December 31, 1996, 1995 and 1994, respectively, follow (in millions): 1997 1996 1995 Liabilities: Depreciation $ 306.6 $ 302.7 $ 281.1 Equity, unconsolidated affiliates 106.8 93.4 74.0 Other, net 0.4 0.5 Gross deferred tax liabilities 413.8 396.1 355.6 Assets: NOL and AMT credit carryovers (11.2) (14.6) (26.5) Book reserves not currently deductible for tax (57.8) (34.7) (26.4) Deferred compensation and other employee benefits (13.3) (7.7) (2.5) Deferred revenue (2.9) (4.2) (4.6) Vacation accrual (3.3) (2.7) (2.6) Other, net (3.2) (3.1) Gross deferred tax assets (91.7) (67.0) (62.6) Net deferred tax liability $ 322.1 $ 329.1 $ 293.0
Based upon the Company's history of operating earnings and its expecta- tions for the future, management has determined that operating income of the Company will, more likely than not, be sufficient to recognize fully the above gross deferred tax assets.
Tax Rates. Differences between the Company's effective income tax rates applicable to continuing operations and the U.S. federal income tax statutory rates of 35% in 1997, 1996 and 1995, are as follows (in millions): 1997 1996 1995 Income tax expense using the statutory rate in effect $ 27.7 $ 83.0 $ 154.1 Tax effect of: Earnings of equity investees (7.0) (19.5) (1.4) Goodwill Impairment 35.0 1995 DST transactions 20.5 Charitable contributions of appreciated property (3.2) Other, net 3.6 (2.2) (5.1) Federal income tax expense 59.3 61.3 164.9 State and local income tax expense 9.1 9.3 28.0 Total $ 68.4 $ 70.6 $ 192.9 Effective tax rate 86.4% 29.7% 43.8%
Tax Carryovers. At December 31, 1997, the Company had $4.0 million of alternative minimum tax credit carryover generated by MidSouth and Gateway Western prior to acquisition by the Company. These credits can be carried forward indefinitely and are available on a "tax return basis" to reduce future federal income taxes payable. The amount of federal NOL carryover generated by MidSouth and Gateway Western prior to acquisition was $67.8 million. The Company utilized approximately $24.1 and $31.9 million of these NOL's in 1997 and 1996, respectively, leaving approximately $11.8 million of carryover available, with expiration dates beginning in the year 2005. The use of preacquisition net operating losses and tax credit carryovers is subject to limitations imposed by the Internal Revenue Code. The Company does not anticipate that these limitations will affect utilization of the carryovers prior to their expiration. Tax Examinations. Examinations of the consolidated federal income tax returns by the Internal Revenue Service ("IRS") have been completed for the years 1990-1992 and the IRS has proposed certain tax assessments for these years. For years prior to 1988, the statute of limitations has closed, and for 1988-1989, all issues raised by the IRS examinations have been resolved. In addition, other taxing authorities have also completed examinations principally through 1992, and have proposed additional tax assessments for which the Company believes it has recorded adequate reserves. Since most of these asserted tax deficiencies represent temporary differences, subsequent payments of taxes will not require additional charges to income tax expense. In addition, accruals have been made for interest (net of tax benefit) for estimated settlement of the proposed tax assessments. Thus, management believes that final settlement of these matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition. Note 9. Stockholders' Equity
Pro Forma Fair Value Information for Stock-Based Compensation Plans. At December 31, 1997, the Company had several stock-based compensation plans, which are described separately below. The Company applies APB 25, and related interpretations, in accounting for its plans. No compensation cost has been recognized for its fixed stock option plans and its ESPP. Had compensation cost for the Company's stock-based compensation plans been determined in accordance with the fair value accounting method prescribed by SFAS 123 for options issued after December 31, 1994, the Company's net income (loss) and earnings (loss) per share would have been reduced (increased) to the pro forma amounts indicated below: 1997 1996 1995 Net income (loss) (in millions): As reported $ (14.1) $ 150.9 $ 236.7 Pro Forma (21.1) 146.5 231.8 Earnings (loss) per Basic share: As reported $ (0.13) $ 1.33 $ 1.86 Pro Forma (0.20) 1.29 1.82 Earnings (loss) per Diluted share: As reported $ (0.13) $ 1.31 $ 1.80 Pro Forma (0.20) 1.26 1.77
Stock Option Plans. Employee Stock Option Plans established in 1978, 1983, 1987 and 1991, as amended, provide for the granting of options to purchase up to 58.8 million shares (after stock splits) of the Company's common stock by officers and other designated employees. In addition, the Company established a 1993 Directors' Stock Option Plan with a maximum of 360,000 shares for grant. Such options have been granted at 100% of the average market price of the Company's stock on the date of grant and generally may not be exercised sooner than one year, nor longer than ten years following the date of the grant, except that options outstanding for six months or more, with limited rights, become immediately exercisable upon certain defined circumstances constituting a change in control of the Company. The Plans include provisions for stock appreciation rights and limited rights ("LRs"). All outstanding options include LRs, except for options granted to non-employee Directors.
For purposes of computing the pro forma effects of option grants under the fair value accounting method prescribed by SFAS 123, the fair value of each option grant is estimated on the date of grant using a version of the Black-Scholes option pricing model. The following assumptions were used for the various grants depending on the date of grant, nature of vesting and term of option: 1997 1996 1995 Dividend Yield .47% to .82% .81% to .93% .87% to 1.19% Expected Volatility 24% to 31% 30% to 32% 31% to 33% Risk-free Interest Rate 5.73% to 6.57% 5.27% to 6.42% 5.65% to 7.69% Expected Life 3 years 3 years 3 years
A summary of the status of the Company's stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years then ended, is presented below: 1997 1996 1995 Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at January 1 10,384,149 $10.83 11,026,116 $ 9.68 9,841,545 $ 6.04 Exercised (1,874,639) 10.33 (1,554,567) 5.48 (1,993,629) 4.49 Canceled/ Expired (401,634) 15.40 (33,570) 14.57 (1,117,800) 5.60 Granted 1,784,705 18.51 946,170 15.57 4,296,000 14.54 Outstanding at December 31 9,892,581 12.12 10,384,149 10.83 11,026,116 9.68 Exercisable at December 31 8,028,475 5,754,549 6,439,116 Weighted-Average Fair Value of options granted during the year $ 4.72 $ 4.10 $ 3.98
The following table summarizes the information about stock options outstanding at December 31, 1997: OUTSTANDING EXERCISABLE Weighted- Weighted- Weighted- Range of Number Average Average Number Average Exercise Outstanding Remaining Exercise Exercisable Exercise Prices at 12/31/97 Contractual Life Price at 12/31/97 Price $ 2 - 7 2,639,034 3.8 years $4.15 2,639,034 $4.15 7 - 14 2,115,923 6.4 11.47 2,115,923 11.47 14 - 34 5,137,624 8.3 16.48 3,273,518 15.47 2 - 34 9,892,581 6.7 12.12 8,028,475 10.69
Shares available for future grants at December 31, 1997 aggregated 10,483,867. Stock Purchase Plan. The ESPP, established in 1977, provides to substantially all full-time employees of the Company, certain subsidiaries and certain other affiliated entities, the right to subscribe to an aggregate of 22.8 million shares of common stock. The purchase price for shares under any stock offering is to be 85% of the average market price on either the exercise date or the offering date, whichever is lower, but in no event less than the par value of the shares. At December 31, 1997, there were approximately 11.8 million shares available for future offerings.
The following table summarizes activity related to the various ESPP offerings: Date Shares Shares Date Initiated Subscribed Price Issued Issued Tenth Offering 1996 251,079 $13.35 233,133 1997/1998 Ninth Offering 1995 291,411 12.73 247,729 1996/1997 Eighth Offering 1993 661,728 12.73 481,929 1994 to 1996
For purposes of computing the pro forma effects of employees' purchase rights under the fair value accounting method prescribed by SFAS 123, the fair value of the Tenth and Ninth Offerings, in 1996 and 1995, under the ESPP are estimated on the date of grant using a version of the Black- Scholes option pricing model. The following weighted-average assumptions were used: 1996 1995 Dividend Yield .85% .88% Expected Volatility 30% 32% Risk-free Interest Rate 5.50% 5.45% Expected Life 1 year 1 year
The weighted-average fair value of purchase rights granted under the Tenth and Ninth Offerings of the ESPP were $3.56 and $3.49, respectively. There were no offerings in 1997. Forward Stock Purchase Contract. During 1995, the Company entered into a forward stock purchase contract ("the contract") as a means of securing a potentially favorable price for the repurchase of six million shares of its common stock in connection with the stock repurchase program authorized by the Company's Board of Directors on April 24, 1995. During 1997 and 1996, the Company purchased (post-split) 2.4 and 3.6 million shares, respectively, under this arrangement at an aggregate price of $39 and $56 million (including transaction premium), respectively. The contract contained provisions which allowed the Company to elect a net cash or net share settlement in lieu of physical settlement of the shares; however, all shares were physically settled. The transaction was recorded in the Company's financial statements upon settlement of the contract in accordance with the Company's accounting policies described in Note 1. Employee Stock Ownership Plan. In 1987 and 1988, KCSI and DST established leveraged ESOPs for employees not covered by collective bargaining agree- ments by collectively purchasing $69 million of KCSI common stock from Treasury at a then current market price of $49 per share ($4.08 per share effected for stock splits). During 1990, the two plans were merged into one plan known as the KCSI ESOP. The indebtedness was retired in full during 1995. In October 1995, the ESOP became a multiple employer plan covering both KCSI employees and DST employees, and was renamed The Employee Stock Ownership Plan. KCSI contributions to its portion of the ESOP are based on a percentage (determined by the Compensation Committee of the Board of Directors) of wages earned by eligible employees. The Company's employee benefit expense for the ESOP aggregated $2.9, $2.4 and $5.7 million in 1997, 1996 and 1995, respectively. Interest incurred on the indebtedness was $0.8 million in 1995. Dividends used to service the ESOP indebtedness were $1.6 million in 1995. Employee Plan Funding Trust. On October 1, 1993, KCSI transferred one million shares of KCSI Series B Convertible Preferred Stock (the "Series B Preferred Stock") to the Kansas City Southern Industries, Inc. Employee Plan Funding Trust ("the Trust"), a grantor trust established by KCSI. The purchase price of the stock (based upon an independent valuation) was $200 million, which the Trust financed through KCSI. The indebtedness of the Trust to KCSI is repayable over 27 years with interest at 6% per year, with no principal payments in the first three years. The Trust, which is administered by an independent bank trustee and consolidated into the Company's financial statements, will repay the indebtedness to KCSI utilizing dividends and other investment income, as well as other cash obtained from KCSI. As the debt is reduced, shares of the Series B Preferred Stock, or shares of common stock acquired on conversion, may be released and available for distribution to various KCSI employee benefit plans, including its ESOP, Stock Option Plan and Stock Purchase Plans. Principal payments totaling $21.1 million have been made since inception; however, no shares have been released or are available for distribution to these plans. Only shares that have been released and allocated to employees are considered for purposes of computing diluted earnings per share. The Series B Preferred Stock, which has a $10 per share (5%) annual dividend and a $200 per share liquidation preference, is convertible into common stock at an initial ratio of twelve shares of common stock for each share of Series B Preferred Stock. The Series B Preferred Stock is redeemable after April 1, 1995 at a specified premium and under certain other circumstances. The Series B Preferred Stock can be held only by the Trust or its beneficiaries - the employee benefit plans of KCSI. The full terms of the Series B Convertible Preferred Stock are set forth in a Certificate of Designations approved by the Board of Directors and filed in Delaware. Treasury Stock. The Company issued shares of common stock from Treasury - 2,031,162 in 1997, 1,557,804 in 1996 and 1,569,960 in 1995 - to fund the exercise of options and subscriptions under various employee stock option and purchase plans. Treasury stock previously acquired had been accounted for as if retired. The Company purchased shares as follows: 2,863,983 in 1997, 9,829,599 in 1996 and 14,935,371 in 1995 . Note 10. Minority Interest Purchase Agreements. Agreements between KCSI and Janus minority owners contain, among other provisions, mandatory stock purchase provisions whereby under certain circumstances, KCSI would be required to purchase the minority interest of Janus. In late 1994, the Company was notified that certain Janus minority owners made effective the mandatory purchase provisions for a certain percentage of their ownership. In the aggregate, the value of the shares made effective for mandatory purchase totaled $59 million. Concurrent with the notification of these mandatory purchase provisions, the Company negotiated the early termination of certain Janus compensation arrange- ments, which began in 1991. These compensation arrangements, which were scheduled to be fully vested at the end of 1996, permitted individuals to earn units (which vested over time) based upon Janus earnings, and would have continued to accrue benefits in subsequent years. The negotiated termination resulted in payments of $48 million in cash by Janus, of which approximately $21 million had been accrued. In early 1995, the Janus employees whose compensation arrangements were terminated used their after-tax net proceeds to purchase certain portions of the shares made available due to the mandatory purchase notification discussed above. In addition, the Janus minority group was restructured to allow for minority ownership by other key Janus employees. These employees also purchased portions of the minority shares (available as a result of the mandatory purchase notification) through payment of $10.5 million in cash and recourse loans financed by KCSI. The remaining minority shares made effective for mandatory purchase were purchased by Janus ($6.1 million, as treasury stock) and KCSI ($12.7 million). As a result of KCSI's acquisition of additional Janus shares and the reduction of total outstanding Janus shares (from Janus' treasury purchase), KCSI increased its ownership in Janus from approximately 81% to 83% in January 1995. Additional purchases were made by minority holders during 1995, partially financed through recourse loans by KCSI in the original amount of $8.8 million. The Company also purchased shares, thereby maintaining its respective ownership percentage. The KCSI share purchases resulted in the recording of intangibles as the purchase price exceeded the value of underlying tangible assets. The intangibles are being amortized over their estimated economic lives. The purchase prices of these mandatory stock purchase provisions are based upon a multiple of earnings and/or fair market value determinations depending upon specific agreement terms. If all of the provisions of the Janus minority owner agreements became effective, KCSI would be required to purchase the respective minority interests at a cost currently estimated at approximately $337 million. Note 11. Profit Sharing and Other Postretirement Benefits Profit Sharing. Qualified profit sharing plans are maintained for most employees not included in collective bargaining agreements. Contributions for the Company and its subsidiaries are made at the discretion of the Boards of Directors in amounts not to exceed the maximum allowable for federal income tax purposes. Profit sharing expense was $2.1 and $1.8 million in 1997 and 1996, respectively. There was no profit sharing expense for the year ended December 31, 1995. 401(k) Plan. Effective January 1, 1996, the Company transferred its participating employees from the DST 401(k) Employee Savings Plan into the Kansas City Southern Industries, Inc. 401(k) Plan and Trust Agreement ("401(k) plan"). The Company's 401(k) plan permits participants to make contributions by salary reduction pursuant to section 401(k) of the Internal Revenue Code. The Company matches contributions up to a maximum of 3% of compensation. In connection with the required match, the Company's contribution to the plan was $1.3 and $1.2 million in 1997 and 1996, respectively. Other Postretirement Benefits. The Company adopted Statement of Financial Accounting Standards No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS 106"), effective January 1, 1993. The Company and several of its subsidiaries provide certain medical, life and other postretirement benefits other than pensions to its retirees. With the exception of the Gateway Western plans, which we discussed below, the medical and life plans are available to employees not covered under collective bargaining arrangements, who have attained age 60 and rendered ten years of service. Individuals employed as of December 31, 1992 were excluded from a specific service requirement. The medical plan is contributory and provides benefits for retirees, their covered dependents and beneficiaries. Benefit expense begins to accrue at age 40. The medical plan was amended effective January 1, 1993 to provide for annual adjustment of retiree contributions, and also contains, depending on the plan coverage selected, certain deductibles, copayments, coinsurance and coordination with Medicare. The life insurance plan is non-contributory and covers retirees only. The Company's policy, in most cases, is to fund benefits payable under these plans as the obligations become due. However, certain plan assets (e.g., money market funds) do exist with respect to life insurance benefits.
The following table displays a reconciliation of the associated obligations and assets at December 31 (in millions): 1997 1996 1995 Accumulated postretirement benefit obligation: Retirees $ 8.9 $ 8.1 $ 7.7 Fully eligible active plan participants 0.5 0.6 0.9 Other active plan participants 4.3 2.2 1.9 Plan assets (1.3) (1.3) (1.7) Accrued postretirement benefit obligation $ 12.4 $ 9.6 $ 8.8
Net periodic postretirement benefit cost included the following components (in millions): 1997 1996 1995 Service cost $ 0.7 $ 0.2 $ 0.3 Interest cost 0.8 0.7 0.7 Return on plan assets (0.1) (0.1) (0.1) Net periodic postretirement benefit cost $ 1.4 $ 0.8 $ 0.9
The Company's health care costs, excluding Gateway Western, are limited to the increase in the Consumer Price Index ("CPI") with a maximum annual increase of 5%. Accordingly, health care costs in excess of the CPI limit will be borne by the plan participants, and therefore assumptions regarding health care cost trend rates are not applicable.
The following assumptions were used to determine the postretirement obligations and costs for the years ended December 31: 1997 1996 1995 Annual increase in the CPI 3.00% 3.00% 3.00% Expected rate of return on life insurance plan assets 6.50 6.50 6.50 Discount rate 7.25 7.75 7.25 Salary increase 4.00 4.00 4.00
Gateway Western's benefit plans are slightly different from those of the Company and other subsidiaries. Gateway Western provides contributory health, dental and life insurance benefits to substantially all of its active and retired employees, including those covered by collective bargaining agreements. Effective January 1, 1998, existing Gateway Western management employees converted to the Company's benefit plans. For 1997, the assumed annual rate of increase in health care costs for Gateway Western employees choosing a preferred provider organization was 8% and 7% for those choosing the health maintenance organization option, decreasing over five years to 6% and 5%, respectively, to remain level thereafter. The health care cost trend rate assumption has a significant effect on the Gateway Western amounts represented. An increase in the assumed health care cost trend rates by one percent in each year would increase the accumulated postretirement benefit obligation by $.4 million. The effect of this change on the aggregate of the service and interest cost components of the net periodic postretirement benefit is immaterial. Note 12. Commitments and Contingencies Litigation Reserves. In the opinion of management, claims or lawsuits incidental to the business of the Company and its subsidiaries have been adequately provided for in the consolidated financial statements. Bogalusa Cases In July 1996, the Company was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi have asserted claims to recover damages allegedly caused by exposure to the chemicals. The Company neither owned nor leased the rail car or the rails on which it was located at the time of the explosion in Bogalusa. The Company did, however, move the rail car from Jackson to Vicksburg, Mississippi, where it was loaded with chemicals, and back to Jackson where the car was tendered to the Illinois Central Railroad Company ("IC"). The explosion occurred more than 15 days after the Company last transported the rail car. The car was loaded by the shipper in excess of its standard weight when it was transported by the Company to interchange with the IC. The lawsuits arising from the chemical release have been scheduled for trial in the fall of 1998. The Company sought dismissal of these suits in the trial courts, which was denied in each case. Appeals are pending in the appellate courts of Louisiana and Mississippi. The Company believes that its exposure to liability in these cases is remote. If the Company were to be found liable for punitive damages in these cases, such a judgment could have a material adverse effect on the financial condition of the Company. Diesel Fuel Commitments. KCSR has a program to hedge against fluctuations in the price of its diesel fuel purchases. Any gains or losses associated with changes in market value of these hedges are deferred and recognized in the period in which they occur as a component of fuel cost in the period in which the hedged fuel is purchase and used. To the extent KCSR hedges portions of its fuel purchases, it may not fully benefit from decreases in fuel prices. Beginning in 1998, KCSR hedged approximately 37% of its anticipated 1998 fuel requirements. The hedge transactions represent fuel swaps for approximately two million gallons per month. These contracts have expiration dates through February 28, 1999 and are correlated to market benchmarks. Hedge positions are monitored to ensure that they will not exceed actual fuel requirements in any period. Additionally, KCSR entered into purchase commitments for fuel aggregating approximately 27% of total 1998 anticipated fuel usage. As of December 31, 1995, the Company had commitments to purchase approximately $14 million of diesel fuel over the subsequent twelve month period, representing approximately 50% of projected fuel requirements for 1996. The Company entered into minimal commitments for 1997. Foreign Exchange Matters. As discussed in Note 1, in connection with the Company's investment in Grupo TFM, a Mexican company, the Company follows the requirements outlined in SFAS 52 (and related authoritative guidance) with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements from Mexican pesos into U.S. dollars. The purchase price paid by Grupo TFM for 80% of the common stock of TFM was fixed in Mexican pesos; accordingly, the U.S. dollar equivalent fluctuated as the U.S. dollar/Mexican peso exchange rate changed. The Company's capital contribution (approximately $298 million U.S.) to Grupo TFM in connection with the initial installment of the TFM purchase price was made based on the U.S. dollar/Mexican peso exchange rate on January 31, 1997. Grupo TFM paid the remaining 60% of the purchase price in Mexican pesos on June 23, 1997. As discussed above, the final installment was funded using proceeds from Grupo TFM debt financing and the sale of 24.5% of Grupo TFM to the Mexican Government. In the event that the proceeds from these arrangements would not have provided funds sufficient for Grupo TFM to make the final installment of the purchase price, the Company may have been required to make additional capital contributions. Accordingly, in order to hedge a portion of the Company's exposure to a fluctuations in the value of the Mexican peso versus the U.S. dollar, the Company entered into two separate forward contracts to purchase Mexican pesos - $98 million in February 1997 and $100 million in March 1997. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred until the final installment of the TFM purchase price was made in June 1997, at which time, it was accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Mexico's economy is currently classified as "highly inflationary" as defined in SFAS 52. Accordingly, the U.S. dollar is assumed to be Grupo TFM's functional currency, and any gains or losses from translating Grupo TFM's financial statements into U.S. dollars will be included in the determination of its net income. Any equity earnings or losses from Grupo TFM included in the Company's results of operations will reflect the Company's share of such translation gains and losses. The Company continues to evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. At December 31, 1997, the Company had no outstanding foreign currency hedging instruments. Environmental Liabilities. The Company's transportation operations are subject to extensive regulation under environmental protection laws and its land holdings have been used for transportation purposes or leased to third-parties for commercial and industrial purposes. The Company records liabilities for remediation and restoration costs related to past activities when the Company's obligation is probable and the costs can be reasonably estimated. Costs of ongoing compliance activities to current operations are expensed as incurred. The Company's recorded liabilities for these issues represent its best estimates (on an undiscounted basis) of remediation and restoration costs that may be required to comply with present laws and regulations. At December 31, 1997, these recorded liabilities were not material. Although these costs cannot be predicted with certainty, management believes that the ultimate outcome of identified matters will not have a material adverse effect on the Company's consolidated results of operations or financial condition. Panama Railroad Concession. The Government of Panama has granted a concession to the Panama Canal Railway Company ("PCRC"), a joint venture of KCSI and Mi-Jack Products, Inc., to operate a railroad between Panama City and Colon. Upon completion of certain infrastructure improvements, the PCRC will operate an approximate 47-mile railroad running parallel to the Panama Canal and connecting the Atlantic and Pacific Oceans. The PCRC has committed to making at least $30 million in capital improvements and investments in Panama over the next five year period. The Company expects its contribution related to the PCRC project to be less than $10 million. PCRC is in the process of evaluating the overall needs and requirements of the project and alternative financing opportunities. Note 13. Control Subsidiaries and Affiliates. In connection with its acquisition of an interest in Janus, the Company entered into an agreement which provides for preservation of a measure of management autonomy at the subsidiary level and for rights of first refusal on the part of minority stockholders, Janus and the Company with respect to certain sales of Janus stock by the minority stockholders. The agreement also requires the Company to purchase the shares of minority stockholders in certain circumstances. In addition, in the event of a "change of ownership" of the Company, as defined in the agreement, the Company may be required to sell its stock of Janus to the minority stockholders or to purchase such holders' Janus stock. Purchase and sales transactions under the agreements are to be made based upon a multiple of the net earnings of Janus and/or fair market value determinations, as defined therein. See Note 10 for further details. Under the Investment Company Act of 1940, certain changes in ownership of Janus or Berger may result in termination of its investment advisory agreements with the mutual funds and other accounts it manages, requiring approval of fund shareholders and other account holders to obtain new agreements. DST, an approximate 41% owned unconsolidated affiliate of the Company, has a Stockholders' Rights Agreement. Under certain circumstances following a "change in control" of KCSI, as defined in DST's Stockholders' Rights Agreement, substantial dilution of the Company's interest in DST could result. The Company is party to certain agreements with TMM covering the Grupo TFM and Mexrail ventures, which contain "change of control" provisions, provisions intended to preserve Company's and TMM's proportionate ownership of the ventures, and super majority provisions with respect to voting on certain significant transactions. Such agree- ments also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates. Employees. The Company and certain of its subsidiaries have entered into agreements with employees whereby, upon defined circumstances constituting a change in control of the Company or subsidiary, certain stock options become exercisable, certain benefit entitlements are automatically funded and such employees are entitled to specified cash payments upon termina- tion of employment. Assets. The Company and certain of its subsidiaries have established trusts to provide for the funding of corporate commitments and entitlements of officers, directors, employees and others in the event of a specified change in control of the Company or subsidiary. Assets held in such trusts at December 31, 1997 were not material. Depending upon the circumstances at the time of any such change in control, the most significant factor of which would be the highest price paid for KCSI common stock by a party seeking to control the Company, funding of the Company's trusts could be very substantial. Debt. Certain loan agreements and debt instruments entered into or guaranteed by the Company and its subsidiaries provide for default in the event of a specified change in control of the Company or particular subsidiaries of the Company. Stockholder Rights Plan. On September 19, 1995, the Board of Directors of the Company declared a dividend distribution of one Right for each outstanding share of the Company's common stock, $.01 par value per share (the "Common Stock"), to the stockholders of record on October 12, 1995. Each Right entitles the registered holder to purchase from the Company 1/1,000th of a share of Series A Preferred Stock (the "Preferred Stock") or in some circumstances, Common Stock, other securities, cash or other assets as the case may be, at a price of $210 per share, subject to adjustment. The Rights, which are automatically attached to the Common Stock, are not exercisable or transferable apart from the Common Stock until the tenth calendar day following the earlier to occur of (unless extended by the Board of Directors and subject to the earlier redemption or expiration of the Rights): (i) the date of a public announcement that an acquiring person acquired, or obtained the right to acquire, beneficial ownership of 20 percent or more of the outstanding shares of the Common Stock of the Company (or 15 percent in the case that such person is considered an "adverse person"), or (ii) the commencement or announcement of an intention to make a tender offer or exchange offer that would result in an acquiring person beneficially owning 20 percent or more of such outstanding shares of Common Stock of the Company (or 15 percent in the case that such person is considered an "adverse person"). Until exercised, the Right will have no rights as a stockholder of the Company, including, without limitation, the right to vote or to receive dividends. In connection with certain business combinations resulting in the acquisition of the Company or dispositions of more than 50% of Company assets or earnings power, each Right shall thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of the highest priority voting securities of the acquiring company (or certain of its affiliates) that at the time of such transaction would have a market value of two times the exercise price of the Right. The Rights expire on October 12, 2005, unless earlier redeemed by the Company as described below. At any time prior to the tenth calendar day after the first date after the public announcement that an acquiring person has acquired beneficial ownership of 20 percent (or 15 percent in some instances) or more of the outstanding shares of the Common Stock of the Company, the Company may redeem the Rights in whole, but not in part, at a price of $0.005 per Right. In addition, the Company's right of redemption may be reinstated following an inadvertent trigger of the Rights (as determined by the Board) if an acquiring person reduces its beneficial ownership to 10 percent or less of the outstanding shares of Common Stock of the Company in a transaction or series of transactions not involving the Company. The Series A Preferred shares purchasable upon exercise of the Rights will have a cumulative quarterly dividend rate set by the Board of Directors or equal to 1,000 times the dividend declared on the Common Stock for such quarter. Each share will have the voting rights of one vote on all matters voted at a meeting of the stockholders for each 1/1,000th share of preferred stock held by such stockholder. In the event of any merger, consolidation or other transaction in which the common shares are exchanged, each Series A Preferred share will be entitled to receive an amount equal to 1,000 times the amount to be received per common share. In the event of a liquidation, the holders of Series A Preferred shares will be entitled to receive $1,000 per share or an amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of Common Stock. The shares will not be redeemable. The vote of holders of a majority of the Series A Preferred shares, voting together as a class, will be required for any amendment to the Company's Certificate of Incorporation which would materially and adversely alter or change the powers, preferences or special rights of such shares. Note 14. Industry Segments The Company's two segments, aligned to reflect the Company's current operations, are as follows: Transportation. The Company operates a Class I Common Carrier railroad system through its wholly-owned subsidiary, KCSR. As a common carrier, KCSR's customer base includes utilities and a wide range of companies in the petroleum/chemical, agricultural and paper processing industries, among others. The railroad system operates primarily in the United States, from the Midwest to the Gulf of Mexico and on an East-West axis from Dallas, Texas to Meridian, Mississippi. In addition, the Company's wholly-owned subsidiary Gateway Western, operates a regional common carrier rail system primarily on an East-West axis from East St. Louis, Illinois to Kansas City, Missouri. Like KCSR, Gateway Western serves customers in a wide range of industries. KCSR and Gateway Western's revenues and earnings are dependent on provid- ing reliable service to its customers at competitive rates, the general economic conditions in the geographic region it serves, and its ability to effectively compete against alternative forms of surface transportation, such as over-the-road truck transportation. KCSR and Gateway Western's ability to construct and maintain its roadway in order to provide safe and efficient transportation service is important to its ongoing viability as a rail carrier. Additionally, the containment of costs and expenses is important in maintaining a competitive market position, particularly with respect to employee costs as approximately 85% of KCSR and Gateway Western's combined employees are covered under various collective bargaining agreements. The Transportation segment also includes the Company's equity investment in Grupo TFM, a Mexican entity. Grupo TFM has certain risks associated with operating in Mexico, including, among others, foreign currency exchange, cultural differences, varying labor and operating practices, and differences between the U.S. and Mexican economies. Also included in the Transportation segment are several less material subsidiaries (most of which provide support and/or services for KCSR), as well as equity earnings from investments in certain unconsolidated affiliates other than Grupo TFM (including Southern Capital and Mexrail), holding company expenses, intercompany eliminations, and miscellaneous investment activities. Financial Asset Management. Janus (an 83% owned subsidiary) and Berger (a wholly-owned subsidiary) manage investments for mutual funds and private accounts. Both companies operate throughout the United States, as well as in parts of Europe, with headquarters in Denver, Colorado. Janus assets under management at December 31, 1997, 1996 and 1995 were $67.8, $46.7 and $31.1 billion, respectively. Berger assets under management at December 31, 1997, 1996 and 1995 were $3.8, $3.6 and $3.4 billion, respectively. Financial Asset Management revenues and operating income are driven primarily by growth in assets under management, and a decline in the stock and bond markets and/or an increase in the rate of return of alternative investments could negatively impact results. In addition, the mutual fund market, in general, faces increasing competition as the number of mutual funds continues to increase, marketing and distribution channels become more creative and complex, and investors place greater emphasis on published fund recommendations and investment category rankings. DST is included as an equity investment reported in the Financial Asset Management segment. DST provides sophisticated information processing and computer software services and products, primarily to mutual funds, insurance providers, banks and other financial services organizations. DST operates throughout the United States, with its base of operations in the Midwest and, through certain of its subsidiaries and affiliates, internationally in Canada, Europe, Africa and the Pacific Rim. The earn- ings of DST are dependent in part upon the further growth of the mutual fund industry in the United States, DST's ability to continue to adapt its technology to meet increasingly complex and rapidly changing requirements and various other factors including, but not limited to: reliance on a centralized processing facility; further development of international businesses; continued equity in earnings from joint ventures; and competition from other third party providers of similar services and products as well as from in-house providers. Segment Financial Information. Sales between segments were not material in 1997, 1996 or 1995. The year ended December 31, 1995 reflects DST as an unconsolidated affiliate as of January 1, 1995 as a result of the DST public offering and associated transactions completed in November 1995, as discussed in Note 2. Certain amounts in prior years' segment information have been reclassified to conform to the current year presentation.
Segment Financial Information, dollars in millions, years ended December 31, Holding Holding Company Consol- Janus Company Consol- and idated and and idated KCSI KCSR Other Transportation Berger Other FAM Consolidated 1997 Revenues $ 517.8 $ 55.4 $ 573.2 $ 485.0 $ 0.1 $ 485.1 $1,058.3 Costs and expenses 383.0 43.1 426.1 247.0 7.1 254.1 680.2 Depreciation and amortization 54.7 7.1 61.8 12.6 0.8 13.4 75.2 Restructuring, asset impair- ment and other charges 163.8 14.2 178.0 15.3 3.1 18.4 196.4 Operating income (loss) (83.7) (9.0) (92.7) 210.1 (10.9) 199.2 106.5 Equity in net earnings (losses) of unconsolidated affiliates 2.1 (11.8) (9.7) 0.6 24.3 24.9 15.2 Interest expense (37.9) (15.4) (53.3) (6.4) (4.0) (10.4) (63.7) Other, net 4.5 0.5 5.0 10.1 6.1 16.2 21.2 Pretax income (loss) (115.0) (35.7) (150.7) 214.4 15.5 229.9 79.2 Income taxes (benefit) (9.5) (9.1) (18.6) 89.6 (2.6) 87.0 68.4 Minority interest - - - 24.9 - 24.9 24.9 Net income (loss) $(105.5) $(26.6) $(132.1) $ 99.9 $ 18.1 $ 118.0 $(14.1) Capital expenditures $ 67.6 $ 9.2 $ 76.8 $ 5.7 $ 0.1 $ 5.8 $ 82.6 1996 Revenues $ 492.5 $ 25.2 $ 517.7 $ 329.9 $ (0.3) $ 329.6 $ 847.3 Costs and expenses 359.3 23.4 382.7 175.2 9.4 184.6 567.3 Depreciation and amortization 59.1 3.8 62.9 12.4 0.8 13.2 76.1 Operating income (loss) 74.1 (2.0) 72.1 142.3 (10.5) 131.8 203.9 Equity in net earnings (losses) of unconsolidated affiliates 0.4 1.1 1.5 (0.1) 68.7 68.6 70.1 Interest expense (49.4) (3.4) (52.8) (5.7) (1.1) (6.8) (59.6) Other, net 6.1 1.8 7.9 5.9 9.1 15.0 22.9 Pretax income (loss) 31.2 (2.5) 28.7 142.4 66.2 208.6 237.3 Income taxes (benefit) 14.1 (1.7) 12.4 57.5 0.7 58.2 70.6 Minority interest - - - 15.8 - 15.8 15.8 Net income (loss) $ 17.1 $ (0.8) $ 16.3 $ 69.1 $ 65.5 $134.6 $ 150.9 Capital expenditures $135.1 $ 7.5 $142.6 $ 1.4 $ - $ 1.4 $ 144.0 1995 Revenues $502.1 $ 36.4 $538.5 $ 239.8 $ (3.1) $236.7 $ 775.2 Costs and expenses 380.2 19.1 399.3 133.9 7.8 141.7 541.0 Depreciation and amortization 55.3 4.9 60.2 13.2 1.6 14.8 75.0 Operating income (loss) 66.6 12.4 79.0 92.7 (12.5) 80.2 159.2 Gain on sale of equity investment 296.3 296.3 296.3 Equity in net earnings of unconsolidated affiliates 0.2 0.2 29.6 29.6 29.8 Interest expense (50.7) (1.2) (51.9) (4.9) (8.7) (13.6) (65.5) Other, net 3.4 (0.4) 3.0 4.3 13.0 17.3 20.3 Pretax income 19.3 11.0 30.3 92.1 317.7 409.8 440.1 Income taxes 7.9 3.7 11.6 37.8 143.5 181.3 192.9 Minority interest - - - 10.5 - 10.5 10.5 Net income $ 11.4 $ 7.3 $ 18.7 $ 43.8 $174.2 $218.0 $ 236.7 Capital expenditures $110.2 $ 5.3 $115.5 $ 5.6 $ - $ 5.6 $ 121.1
Segment Financial Information, dollars in millions, at December 31, Holding Holding Company Consol- Janus Company Consol- and idated and and idated KCSI KCSR Other Transportation Berger Other FAM Consolidated 1997 ASSETS Current assets $ 159.7 $ 24.3 $ 184.0 $ 234.7 $ (45.6) $ 189.1 $ 373.1 Investments 31.1 307.2 338.3 2.6 342.6 345.2 683.5 Properties, net 1,123.9 93.9 1,217.8 9.3 0.1 9.4 1,227.2 Intangible assets, net 6.5 23.0 29.5 104.5 16.4 120.9 150.4 Total $1,321.2 $ 448.4 $1,769.6 $ 351.1 $ 313.5 $ 664.6 $2,434.2 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities$ 254.0 $ 15.7 $ 283.5 $ 77.5 $ 76.5 $ 154.0 $ 437.5 Long-term debt 442.4 377.3 805.9 73.3 (73.3) - 805.9 Deferred income taxes 232.8 4.1 236.9 - 94.3 94.3 332.2 Other 76.6 13.7 90.3 27.3 42.7 70.0 160.3 Net worth 315.4 37.6 353.0 173.0 173.3 346.3 698.3 Total $1,321.2 $ 448.4 $1,769.6 $ 351.1 $ 313.5 $ 664.6 $2,434.2 1996 ASSETS Current assets $ 149.3 $ 7.4 $ 156.7 $ 162.7 $ (27.3) $ 135.4 $ 292.1 Investments 29.2 18.1 47.3 2.0 285.9 287.9 335.2 Properties, net 1,148.2 62.5 1,210.7 8.5 0.1 8.6 1,219.3 Intangible assets, net 153.1 (31.9) 121.2 99.2 17.1 116.3 237.5 Total $1,479.8 $ 56.1 $1,535.9 $ 272.4 $ 275.8 $ 548.2 $2,084.1 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities$ 200.2 $ (6.8) $ 193.4 $ 41.7 $ 9.5 $ 51.2 $ 244.6 Long-term debt 484.8 36.4 521.2 72.2 44.1 116.3 637.5 Deferred income taxes 281.5 (32.3) 249.2 0.5 88.0 88.5 337.7 Other 85.2 6.0 91.2 25.0 32.4 57.4 148.6 Net worth 428.1 52.8 480.9 133.0 101.8 234.8 715.7 Total $1,479.8 $ 56.1 $1,535.9 $ 272.4 $ 275.8 $ 548.2 $2,084.1 1995 ASSETS Current assets $ 155.2 $ 36.4 $ 191.5 $ 93.5 $ (3.8) $ 89.7 $ 281.2 Investments 8.9 61.1 70.1 0.9 201.1 202.0 272.1 Properties, net 1,198.8 69.8 1,268.6 13.2 0.1 13.3 1,281.9 Intangible assets, net 103.0 1.5 104.5 78.4 21.5 99.9 204.4 Total $1,465.9 $ 168.8 $1,634.7 $ 186.0 $ 218.9 $ 404.9 $2,039.6 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities$ 201.1 $ 10.5 $ 211.6 $ 25.5 $ 83.3 $ 108.8 $ 320.4 Long-term debt 604.2 99.6 633.8 51.0 (51.0) - 633.8 Deferred income taxes 226.2 6.6 232.8 0.5 70.3 70.8 303.6 Other 35.8 5.9 41.7 12.6 32.3 44.9 86.6 Net worth 398.6 46.2 514.8 96.4 84.0 180.4 695.2 Total $1,465.9 $ 168.8 $1,634.7 $ 186.0 $ 218.9 $ 404.9 $2,039.6
Note 15. Quarterly Financial Data (Unaudited) Quarterly financial data follows. Certain amounts in the quarterly financial data have been reclassified to conform to the current year presentation. Fourth Quarter 1997 includes an after-tax charge of $158.1 million, ($1.47 per basic and diluted share) representing restructuring, asset impairment and other charges. See detailed discussion in Notes 1, 3 and 6.
(in millions, except per share amounts): 1997 Fourth Third Second First Quarter Quarter Quarter Quarter (i) Revenues $ 294.3 $ 273.6 $ 252.6 $ 237.8 Costs and expenses 179.9 169.8 166.8 163.7 Depreciation and amortization 19.0 19.3 18.4 18.5 Restructuring, asset impairment and other charges 196.4 - - - Operating income (loss) (101.0) 84.5 67.4 55.6 Equity in net earnings (losses) of unconsolidated affiliates: DST 6.9 5.6 5.7 6.1 Grupo TFM (7.6) (2.3) (3.0) - Other 1.0 1.0 1.2 0.6 Interest expense (17.1) (19.3) (13.6) (13.7) Other, net 6.5 4.4 4.3 6.0 Pretax income (loss) (111.3) 73.9 62.0 54.6 Income taxes (benefit) (2.7) 25.4 24.3 21.4 Minority interest 7.6 6.7 5.9 4.7 Net income (loss) $(116.2) $ 41.8 $ 31.8 $ 28.5 Earnings (loss) per share (ii): Basic $ (1.08) $ 0.39 $ 0.29 $ 0.26 Diluted $ (1.08) $ 0.38 $ 0.29 $ 0.26 Dividends per share: Preferred $ .25 $ .25 $ .25 $ .25 Common $ .040 $ .040 $ .033 $ .033 Stock Price Ranges: Preferred - High $18.000 $19.000 $17.500 $17.000 - Low 17.000 15.500 15.500 16.000 Common - High 34.875 34.438 21.583 18.958 - Low 27.125 21.292 16.625 14.583
(i) The various components of the Statement of Operations have been restated from those reported in the Company's Form 10-Q for the three months ended March 31, 1997. This restatement is attributable to the inclusion of Gateway Western as an unconsolidated wholly-owned subsidiary during first quarter 1997 pending approval of the Company's acquisition of Gateway Western from the STB. Upon receiving STB approval in May 1997, Gateway Western was included in the Company's consolidated financial statements retroactive to January 1, 1997. (ii) The accumulation of 1997's four quarters for Basic and Diluted earnings (loss) per share does not total the Basic and Diluted loss per share, respectively, for the year ended December 31, 1997 due to the repurchase and issuance of Company's common stock throughout the year as well as the anti-dilutive nature of options in the year ended December 31, 1997 EPS calculation. Third Quarter 1996 includes a one-time after-tax gain of $47.7 million (or $.42 per basic share, $.41 per diluted share), representing the Company's proportionate share of the one-time gain recognized by DST in connection with the merger of Continuum, formerly a DST unconsolidated equity affiliate, with Computer Sciences Corporation in a tax-free share exchange (see Note 2).
(in millions, except per share amounts): 1996 Fourth Third Second First Quarter Quarter Quarter Quarter Revenues $ 220.9 $ 218.2 $ 206.9 $ 201.3 Costs and expenses 145.2 138.3 142.0 141.8 Depreciation and amortization 18.2 19.7 19.2 19.0 Operating income 57.5 60.2 45.7 40.5 Equity in net earnings of unconsolidated affiliates: DST 4.9 56.3 5.0 1.9 Other 0.3 0.2 0.2 1.3 Interest expense (16.4) (16.1) (14.2) (12.9) Other, net 10.6 2.4 5.3 4.6 Pretax income 56.9 103.0 42.0 35.4 Income taxes 19.9 22.5 15.7 12.5 Minority interest 4.5 4.4 3.9 3.0 Net income $ 32.5 $ 76.1 $ 22.4 $ 19.9 Earnings per share (i): Basic $ 0.30 $ 0.68 $ 0.19 $ 0.17 Diluted $ 0.29 $ 0.67 $ 0.19 $ 0.17 Dividends per share: Preferred $ .25 $ .25 $ .25 $ .25 Common $ .033 $ .033 $ .033 $ .033 Stock Price Ranges: Preferred - High $17.000 $18.750 $19.250 $18.000 - Low 15.750 15.375 17.250 15.500 Common - High 17.000 14.708 16.625 15.917 - Low 14.083 12.833 14.083 14.083
(i) The accumulation of 1996's four quarters for Basic and Diluted earnings per share is greater than the Basic and Diluted earnings per share, respectively, for the year ended December 31, 1996 due to significant repurchases of Company common stock throughout the year. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Part III The Company has incorporated by reference certain responses to the Items of this Part III pursuant to Rule 12b-23 under the Exchange Act and General Instruction G(3) to Form 10-K. The Company's definitive proxy statement for the annual meeting of stockholders scheduled for April 30, 1998 ("Proxy Statement") will be filed no later than 120 days after December 31, 1997. Item 10. Directors and Executive Officers of the Company (a) Directors of the Company The information set forth in response to Item 401 of Regulation S-K under the heading "Proposal 1 - Election of Four Directors" and "The Board of Directors" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10. (b) Executive Officers of the Company The information set forth in response to Item 401 of Regulation S-K under "Executive Officers of the Company," an unnumbered Item in Part I (immediately following Item 4, Submission of Matters to a Vote of Security Holders), of this Form 10-K is incorporated herein by reference in partial response to this Item 10. The information set forth in response to Item 405 of Regulation S-K under the heading "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's Proxy Statement is incorporated herein by reference in partial response to this Item 10. Item 11. Executive Compensation The information set forth in response to Item 402 of Regulation S-K under "Management Compensation and Compensation of Directors" in the Company's Proxy Statement, (other than The Compensation and Organization Committee Report on Executive Compensation and the Stock Performance Graph), is incorporated by reference in response to this Item 11. Item 12. Security Ownership of Certain Beneficial Owners and Management The information set forth in response to Item 403 of Regulation S-K under the heading "Principal Stockholders and Stock Owned Beneficially by Directors and Certain Executive Officers" in the Company's Proxy Statement is hereby incorporated by reference in response to this Item 12. The Company has no knowledge of any arrangement the operation of which may at a subsequent date result in a change of control of the Company. Item 13. Certain Relationships and Related Transactions The information set forth in response to Item 404 of Regulation S-K under the heading "Transactions with Management" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 13. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) List of Documents filed as part of this Report (1) Financial Statements The financial statements and related notes, together with the report of Price Waterhouse LLP dated February 26, 1998, appear in Part II Item 8, Financial Statements and Supplementary Data, of this Form 10-K. (2) Financial Statement Schedules The schedules and exhibits for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission appear in Part II Item 8, Financial Statements and Supplementary Data, under the Index to Financial Statements of this Form 10-K. (3) List of Exhibits (a) Exhibits The Company has incorporated by reference herein certain exhibits as specified below pursuant to Rule 12b-32 under the Exchange Act. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession (Inapplicable) (3) Articles of Incorporation and Bylaws Articles of Incorporation 3.1 Exhibit 4 to Company's Registration Statement on Form S-8 originally filed September 19, 1986 (Commission File No. 33-8880), Certificate of Incorporation as amended through May 14, 1985, is hereby incorporated by reference as Exhibit 3.1 3.2 Exhibit 4.1 to Company's Current Report on Form 8-K dated October 1, 1993 (Commission File No. 1-4717), Certificate of Designation dated September 29, 1993 Establishing Series B Convertible Preferred Stock, par value $1.00, is hereby incorporated by reference as Exhibit 3.2 3.3 Exhibit 3.1 to Company's Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 1-4717), Amendment to Company's Certificate of Incorporation to set par value for common stock and increase the number of authorized common shares dated May 6, 1994, is hereby incorporated by reference as Exhibit 3.3 3.4 Exhibit 3.4 to Company's Form 10-K for the fiscal year ended December 31, 1996 (Commission File No. 1-4717), Amended Certificate of Designation Establishing the New Series A Preferred Stock, par value $1.00, dated November 7, 1995, is hereby incorporated by reference as Exhibit 3.4 3.5 The Certificate of Amendment dated May 12, 1987 of the Company's Certificate of Incorporation adding the Sixteenth paragraph, is attached to this Form 10-K as Exhibit 3.5 Bylaws 3.6 Exhibit 3.1 to Company's Form 10-Q for the period ended September 30, 1997 (Commission File No. 1-4717), Company's By-Laws, as amended and restated May 1, 1997, is hereby incorporated by reference as Exhibit 3.6 (4) Instruments Defining the Right of Security Holders, Including Indentures 4.1 The Fourth, Seventh, Eighth, Twelfth, Thirteenth, Fifteenth and Sixteenth paragraphs of Exhibit 3.1 hereto are incorporated by reference as Exhibit 4.1 4.2 Article I, Sections 1,3 and 11 of Article II, Article V and Article VIII of Exhibit 3.6 hereto are incorporated by reference as Exhibit 4.2 4.3 The Certificate of Designation dated September 29, 1993 establishing Series B Convertible Preferred Stock, par value $1.00, which is attached hereto as Exhibit 3.2, is incorporated by reference as Exhibit 4.3 4.4 The Amended Certificate of Designation dated November 7, 1995 establishing the New Series A Preferred Stock, par value $1.00, which is attached hereto as Exhibit 3.4, is incorporated by reference as Exhibit 4.4 4.5 Exhibit 4 to Company's Form S-3 filed June 19, 1992 (Commission File No. 33-47198), the Indenture to a $300 million Shelf Registration of Debt Securities dated July 1, 1992, is hereby incorporated by reference as Exhibit 4.5 4.6 Exhibit 4(a) to Company's Form S-3 filed March 29, 1993 (Commission File No. 33-60192), the Indenture to a $200 million Medium Term Notes Registration of Debt Securities dated July 1, 1992, is hereby incorporated by reference as Exhibit 4.6 4.7 Exhibit 99 to Company's Form 8-A dated October 24, 1995 (Commission File No. 1-4717), which is the Stockholder Rights Agreement by and between the Company and Harris Trust and Savings Bank dated as of September 19, 1995, is hereby incorporated by reference as Exhibit 4.7 (9) Voting Trust Agreement (Inapplicable) (10)Material Contracts 10.1 Exhibit I to Company's Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 1-4717), The Director Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.1 10.2 Exhibit B to Company's Definitive Proxy Statement for 1987 Annual Stockholder Meeting dated April 6, 1987, The Director Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.2 10.3 The Indenture dated July 1, 1992 to a $300 million Shelf Registration of Debt Securities, which is incorporated by reference as Exhibit 4.5 hereto, is hereby incorporated by reference as Exhibit 10.3 10.4 Exhibit H to Company's Form 10-K for the fiscal year ended December 31, 1987 (Commission File No. 1-4717), The Officer Indemnification Agreement, is hereby incorporated by reference as Exhibit 10.4 10.5 Exhibit 10.1 to Company's Form 10-Q for the period ended March 31, 1997 (Commission File No. 1-4717), The Kansas City Southern Railway Company Directors' Deferred Fee Plan as adopted August 20, 1982 and the amendment thereto effective March 19, 1997 to such plan, is hereby incorporated by reference as Exhibit 10.5 10.6 Exhibit 10.4 to Company's Form 10-K for the fiscal year ended December 31, 1990 (Commission File No. 1-4717), Description of the Company's 1991 incentive compensation plan, is hereby incorporated by reference as Exhibit 10.6 10.7 The Indenture dated July 1, 1992 to a $200 million Medium Term Notes Registration of Debt Securities, which is incorporated as Exhibit 4.6 hereto, is hereby incorporated by reference as Exhibit 10.7 10.8 Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended June 30, 1997 (Commission File No. 1-4717), Five-Year Competitive Advance and Revolving Credit Facility Agreement dated May 2, 1997, by and between the Company and the lenders named therein, is hereby incorporated by reference as Exhibit 10.8 10.9 Exhibit 10.4 in the DST Systems, Inc. Registration Statement on Form S-1 dated October 30, 1995, as amended (Registration No. 33-96526), Tax Disaffiliation Agreement, dated October 23, 1995, by and between the Company and DST Systems, Inc., is hereby incorporated by reference as Exhibit 10.9 10.10 Exhibit 10.6 to the DST Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 1- 14036), the 1995 Restatement of The Employee Stock Ownership Plan and Trust Agreement, is hereby incorporated by reference as Exhibit 10.10 10.11 Exhibit 4.1 to the DST Systems, Inc. Registration Statement on Form S-1 dated October 30, 1995, as amended (Registration No.33- 96526), The Registration Rights Agreement dated October 24, 1995 by and between DST Systems, Inc. and the Company, is hereby incorporated by reference as Exhibit 10.11 10.12 Exhibit 10.1 to Company's Form 10-K for the year ended December 31, 1995 (Commission File No. 1-4717), Employment Agreement, as amended and restated January 1, 1996, by and between the Company, The Kansas City Southern Railway Company and Michael R. Haverty, is hereby incorporated by reference as Exhibit 10.12 10.13 Exhibit 10.14 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), 1983 Employee Stock Option Plan, as amended and restated September 26, 1996, is hereby incorporated by reference as Exhibit 10.13 10.14 Exhibit 10.15 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), 1987 Employee Stock Option Plan, as amended and restated September 26, 1996, is hereby incorporated by reference as Exhibit 10.14 10.15 Exhibit 10.18 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), Directors Deferred Fee Plan, adopted August 20, 1982, amended and restated February 1, 1997, is hereby incorporated by reference as Exhibit 10.15 10.16 Exhibit 10.19 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), The Kansas City Southern Industries, Inc. Executive Plan (amended and restated), as restated January 1, 1992, is hereby incorporated by reference as Exhibit 10.16 10.17 Exhibit 10.20 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), Amendment No. 1 as of May 15, 1995, to the Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992, is hereby incorporated by reference as Exhibit 10.17 10.18 Exhibit 10.21 to Company's Form 10-K for the year ended December 31, 1996 (Commission File No. 1-4717), Amendment No. 2 dated January 23, 1997, to the Kansas City Southern Industries, Inc. Executive Plan (restated), as restated January 1, 1992, is hereby incorporated by reference as Exhibit 10.18 10.19 1991 Stock Option and Performance Award Plan, as amended and restated September 18, 1997, is attached to this Form 10-K as Exhibit 10.19 10.20 Employment Agreement, as amended and restated September 18, 1997, by and between the Company and Landon H. Rowland is attached to this Form 10-K as Exhibit 10.20 10.21 Employment Agreement, as amended and restated September 18, 1997, by and between the Company and Joseph D. Monello is attached to this Form 10-K as Exhibit 10.21 10.22 Employment Agreement, as amended and restated September 18, 1997, by an between the company and Danny R. Carpenter is attached to this Form 10-K as Exhibit 10.22 (11) Statement Re Computation of Per Share Earnings (Inapplicable) (12) Statements Re Computation of Ratios 12.1 The Computation of Ratio of Earnings to Fixed Charges prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 12.1 (13) Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders (Inapplicable) (16) Letter Re Change in Certifying Accountant (Inapplicable) (18) Letter Re Change in Accounting Principles 18.1 A letter from the Company's independent accountant, Price Waterhouse LLP, discussing the change in methodology for evaluating the recoverability of goodwill to a preferable alternative method is attached to this Form 10-K at Exhibit 18.1 (21) Subsidiaries of the Company 21.1 The list of the Subsidiaries of the Company prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 21.1 (22) Published Report Regarding Matters Submitted to Vote of Security Holders (Inapplicable) (23) Consents of Experts and Counsel 23.1 The Consent of Independent Accountants prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 23.1 (24) Power of Attorney (Inapplicable) (27) Financial Data Schedule 27.1 The Financial Data Schedule prepared pursuant to Rule 14(a)(3) under the Exchange Act is attached to this Form 10-K as Exhibit 27.1 (28) Information from Reports Furnished to State Insurance Regulatory Authorities (Inapplicable) (99) Additional Exhibits 99.1 The consolidated financial statements of DST Systems, Inc. (including the notes thereto and the Report of Independent Accountants thereon) set forth under Item 8 of the DST Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 (Commission File No. 1-14036), as listed under Item 14(a)(2) herein, are hereby incorporated by reference as Exhibit 99.1 (b) Reports on Form 8-K The Company did not file any Form 8-K's during the three months ended December 31, 1997. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Kansas City Southern Industries, Inc. March 13, 1998 By: / s / L.H. Rowland L.H. Rowland, Chairman, President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on March 13, 1998. Signature Capacity /s/ L.H. Rowland Chairman, President, Chief Executive L.H. Rowland Officer and Director /s/ M.R. Haverty Executive Vice President and Director M.R. Haverty /s/J.D. Monello Vice President and Chief Financial Officer J.D. Monello (Principal Financial Officer) /s/ L.G. Van Horn Vice President and Comptroller L.G. Van Horn (Principal Accounting Officer) /s/ A.E. Allinson Director A.E. Allinson /s/ P.F. Balser Director P.F. Balser /s/ J.E. Barnes Director J.E. Barnes /s/ M.G. Fitt Director M.G. Fitt /s/ J.R. Jones Director J.R. Jones /s/ J.F. Serrano Director J.F. Serrano /s/ M.I. Sosland Director M.I. Sosland KANSAS CITY SOUTHERN INDUSTRIES, INC. 1997 FORM 10-K ANNUAL REPORT INDEX TO EXHIBITS Regulation S-K Exhibit Item 14(a)(3) No. Document Exhibit No. 10.19 1991 Stock Option and Performance Award Plan, as amended and restated September 18, 1997 10 10.20 Employment Agreement as amended and restated September 18, 1997, by and between the Company and Landon H. Rowland 10 10.21 Employment Agreement as amended and restated September 18, 1997, by and between the Company and Joseph D. Monello 10 10.22 Employment Agreement as amended and restated September 18, 1997, by and between the Company and Danny R. Carpenter 10 12.1 Computation of Ratio of Earnings to Fixed Charges 12 18.1 Letter of Preferability from Independent Accountants regarding revision in method of evaluating the recoverability of goodwill 18 21.1 Subsidiaries of the Company 21 23.1 Consent of Independent Accountants 23 27.1 Financial Data Schedule 27 _____________________________ EX-10.19 2 KANSAS CITY SOUTHERN INDUSTRIES, INC. 1991 AMENDED AND RESTATED STOCK OPTION AND PERFORMANCE AWARD PLAN (as amended and restated September 18, 1997) Section 1. Purpose. The purposes of the Kansas City Southern Industries, Inc. 1991 Stock Option and Performance Award Plan (the "Plan") are to generate an increased incentive for Employees of the Company to contribute to the Company's future success, to secure for the Company and its stockholders the benefits inherent in equity ownership by Employees of the Company and to enhance the ability of the Company and its Affiliates to attract and retain exceptionally qualified Employees upon whom, in large measure, the sustained progress, growth and profitability of the Company depend. By encouraging Employees of the Company and its Affiliates to acquire a proprietary interest in the Company's growth and performance, the Company intends to more closely align the interests of the Company's Employees, management and stockholders and motivate Employees to enhance the value of the Company for the benefit of all stockholders. Section 2. Definitions. As used in the Plan, the following terms shall have the meanings set forth below: (a) "Affiliate" means (i) any Person that directly, or through one (1) or more intermediaries, controls, or is controlled by, or is under common control with, the Company, (ii) any entity in which the Company has an equity interest of at least fifty percent (50%), and (iii) any entity in which the Company has any other significant equity interest, as determined by the Committee. (b) "Award" means any Option, Stock Appreciation Right, Limited Right, Performance Share, Performance Unit, Dividend Equivalent, or any other right, interest, or option relating to Shares granted pursuant to the provisions of the Plan. (c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing any Award granted hereunder and signed by both the Company and the Participant or by both the Company and an Outside Director. (d) "Board" means the Board of Directors of the Company. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" means the Compensation and Organization Committee of the Board, or such other committee designated by the Board, authorized to administer the Plan under Section 3 hereof. The Committee shall consist of at least that number of directors required by Rule 16b-3 and/or Code Section 162(m), each of whom is a non-employee director within the meaning of Rule 16b-3 and an outside director within the meaning of Code Section 162(m). (g) "Company" means Kansas City Southern Industries, Inc., a Delaware corporation. (h) "Dividend Equivalent" means any right granted pursuant to Section 13(f) hereof. (i) "Employee" means any non-union employee of the Company or of any Affiliate, as determined by the Committee, regularly employed for more than twenty (20) hours per week and more than five (5) months per year. (j) "Exchange Act" means the Securities Exchange Act of 1934, or any successors thereto, and the rules and regulations promulgated thereunder, all as shall be amended from time to time. (k) "Fair Market Value" means, with respect to any property, the market value of such property determined by such methods or procedures as shall be established from time to time by the Committee. (l) "Incentive Stock Option" means an Option granted under Section 6 hereof that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. (m) "Limited Right" means any right granted to a Participant pursuant to Section 7(b) hereof. (n) "Non-Qualified Stock Option" means an Option granted under Section 6 hereof that is not intended to be an Incentive Stock Option, and an Option granted to an Outside Director pursuant to Section 9 hereof. (o) "Option" means an Incentive Stock Option or Non-Qualified Stock Option. (p) "Outside Director" means a member of the Board who is not an Employee of the Company or of any Affiliate. (q) "Participant" means an Employee who is selected to receive an Award under the Plan. (r) "Performance Award" means any Award of Performance Shares or Performance Units pursuant to Section 8 hereof. (s) "Performance Period" means that period established by the Committee at the time any Performance Award is granted or at any time thereafter during which any performance goals specified by the Committee with respect to such Award are to be measured. (t) "Performance Share" means any grant pursuant to Section 8 hereof of Shares or any unit valued by reference to a designated number of Shares. (u) "Performance Unit" means any grant pursuant to Section 8 hereof of a unit valued by reference to a designated amount of property other than Shares. (v) "Person" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, or government or political subdivision thereof. (w) "Rule 16b-3" means Rule 16b-3 promulgated by the Securities and Exchange Commission under the Exchange Act or any successor rule or regulation thereto. (x) "Shares" means shares of the common stock of the Company, one cent ($.01) par value. (y) "Stock Appreciation Right" means any right granted to a Participant pursuant to Section 7(a) hereof. (z) "Stockholders Meeting" means the annual meeting of stockholders of the Company in each year. Section 3. Administration. The Plan shall be administered by the Committee. Subject to applicable law and the terms of the Plan, the Committee shall have full power and authority to: (i) designate Participants; (ii) determine the type or types of Awards to be granted to each Participant hereunder; (iii) determine the number of Shares to be covered by (or with respect to which payments, rights, or other matters are to be calculated in connection with) each Award; (iv) determine the terms and conditions of any Award and to amend, waive or otherwise change such terms and conditions; (v) determine whether, to what extent, and under what circumstances Awards may be settled or exercised in cash, Shares, other securities, other Awards, or other property, or canceled, forfeited, or suspended, and the method or methods by which Awards may be settled, exercised, canceled, forfeited, or suspended; (vi) determine whether, to what extent and under what circumstances cash, Shares, other securities, other Awards, other property and other amounts payable with respect to an Award under this Plan shall be deferred either automatically or at the election of the Participant or the Committee; (vii) interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the Plan; (viii) establish, amend, suspend or waive such rules and regulations and appoint such agents as it shall deem appropriate for the proper administra- tion of the Plan; and (ix) make any other determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. Subject to the terms of the Plan (including without limitation Section 11 hereof), the Committee shall also have the authority to grant Awards in replacement of Awards previously granted under this Plan or any other compensation plan of the Company or an Affiliate. Unless otherwise expressly provided in the Plan, all determinations, designations, interpretations, and other decisions of the Committee shall be final, conclusive and binding upon all Persons, including the Company, any Participant, any stockholder, and any Employee of the Company or of any Affiliate. All determinations of the Committee shall be made by a majority of its members. The Committee, in its discretion, may delegate its authority and duties under the Plan to the Chief Executive Officer and/or to other officers of the Company under such conditions and/or limitations as the Committee may establish; provided, however, that only the Committee may select and grant Awards, or otherwise take any action with respect to Awards, to Participants who are (i) officers or directors of the Company for purposes of Section 16 of the Exchange Act; or (ii) Participants who are "covered employees" under Section 162(m) of the Code. Notwithstanding the above, the Committee shall not have any discretion with respect to the Options granted to Outside Directors pursuant to Section 9 hereof. Section 4. Shares Subject to the Plan. (a) Subject to adjustment as provided in Section 4(c), a total of Tewnty-five Million Two Hundred Thousand (25,200,000) Shares shall be available for the grant of Awards under the Plan. Any Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares or treasury shares. If any Shares subject to any Award granted hereunder are forfeited or such Award otherwise terminates without the issuance of such Shares or of other consideration in lieu of such Shares, the Shares subject to such Award, to the extent of any such forfeiture or termination, shall again be available for grant under the Plan. In addition, to the extent permitted by Section 422 of the Code, any Shares issued by, and any Awards granted by or that become obligations of, the Company through or as the result of the assumption of outstanding grants or the substitution of Shares under outstanding grants of an acquired company shall not reduce the Shares available for grants under the Plan (except in the case of Awards granted to Participants who are officers or directors of the Company to the extent required by Section 16 of the Exchange Act). (b) For purposes of this Section 4, (i) If an Award (other than a Dividend Equivalent) is denominated in Shares, the number of Shares covered by such Award, or to which such Award relates, shall be counted on the date of grant of such Award against the aggregate number of Shares available for granting Awards under the Plan; (ii) Dividend Equivalents and Awards not denominated in Shares shall be counted against the aggregate number of Shares available for granting Awards under the Plan in such amount and at such time as the Committee shall determine under procedures adopted by the Committee consistent with the purposes of the Plan; and (iii) Awards that operate in tandem with (whether granted simultaneously with or at a different time from), or that are substituted for, other Awards or awards under other Company plans may be counted or not counted under procedures adopted by the Committee in order to avoid double counting. (c) In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Shares, or other securities or property), stock split, reverse stock split, merger, reorganization, consolidation, recapitalization, split-up, spin-off, repurchase, exchange of shares, issuance of warrants or other rights to purchase Shares or other securities of the Company, or other transaction or event affects the Shares such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under the Plan, then the Committee may: (i) make adjustments in the aggregate number and class of shares or property which may be delivered under the Plan and may substitute other shares or property for delivery under the Plan, including shares of another entity which is a party to any such merger, reorganization, consolidation or exchange of shares; and (ii) make adjustments in the number, class and option price of shares or property subject to outstanding Awards and Options granted under the Plan, and may substitute other shares or property for delivery under outstanding Awards and Options, including shares of another entity which is a party to any such merger, reorganization, consolidation or exchange of shares, as may be determined to be appropriate by the Committee in its sole discretion, provided that the number of Shares subject to any Award or Option shall always be a whole number. The preceding sentence shall not limit the actions which may be taken by the Committee under Section 10 of the Plan. No adjustment shall be made with respect to Awards of Incentive Stock Options that would cause the Plan to violate Section 422 of the Code, and the number and price of shares subject to outstanding Options granted to Outside Directors pursuant to Section 9 hereof shall be subject to adjustment only as set forth in Section 9. Section 5. Eligibility. Any Employee shall be eligible to be selected as a Participant. Notwith- standing any other provision of the Plan to the contrary, no Participant may be granted an Option, Limited Right or Stock Appreciation Right in any one (1) calendar year, which, when added to any other Option, Limited Right or Stock Appreciation Right granted hereunder in the same year, shall exceed Five Hundred Thousand (500,000) Shares. If an Option, Limited Right or Stock Appreciation Right is canceled, the canceled Option, Limited Right or Stock Appreciation Right continues to count against the maximum number of Shares for which an Option, Limited Right or Stock Appreciation Right may be granted to a Participant in any year. All Shares specified in this Section 5 shall be adjusted to the extent necessary to reflect adjustments to Shares required by Section 4(c) hereof. Section 6. Stock Options. Options may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan. Options may be Incentive Stock Options within the meaning of Section 422 of the Code or Non-Qualified Stock Options (i.e., stock options which are not Incentive Stock Options), or a combination thereof. Any Option granted to a Participant under the Plan shall be evidenced by an Award Agreement in such form as the Committee may from time to time approve. Any such Option shall be subject to the following terms and conditions and to such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall deem desirable: (a) Option Price. The purchase price per Share purchasable under an Option shall be determined by the Committee; provided, however, that such purchase price shall not be less than one hundred percent (100%) of the Fair Market Value of the Share on the effective date of the grant of the Option (or, if the Committee so determines, in the case of any Option retroactively granted in tandem with or in substitution for another Award or any outstanding Award granted under any other plan of the Company, on the effective date of grant of such other Award or award under another Company plan). (b) Option Term. The term of each Option shall be fixed by the Committee in its sole discretion, except as provided below for Incentive Stock Options. (c) Exercisability. Except as otherwise provided in Section 10(a), Options shall be exercisable at such time or times as determined by the Committee at or subsequent to grant. (d) Method of Exercise. Subject to the other provisions of the Plan and any applicable Award Agreement, any Option may be exercised by the Participant in whole or in part at such time or times, and the Participant may make payment of the option price in such form or forms as the Committee shall determine, including, without limitation, payment by delivery of cash, Shares or other consideration (including, where permitted by law and the Committee, Awards) having a Fair Market Value on the exercise date equal to the total option price, or by any combination of cash, Shares and other consideration as the Committee may specify in the applicable Award Agreement. (e) Incentive Stock Options. In accordance with rules and procedures established by the Committee, the aggregate Fair Market Value (determined as of the time of rant) of the Shares with respect to which Incentive Stock Options held by any Participant are exercisable for the first time by such Participant during any calendar year under the Plan (and under any other benefit plans of the Company or of any parent or subsidiary corporation of the Company as defined in Section 424 of the Code) shall not exceed One Hundred Thousand Dollars ($100,000) or, if different, the maximum limitation in effect at the time of grant under Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. The option price per Share purchasable under an Incentive Stock Option shall not be less than one hundred percent (100%) of the Fair Market Value of the Share on the date of grant of the Option. No incentive stock option may be granted after ten (10) years from the date of adoption of this plan, and each Incentive Stock Option shall expire not later than ten (10) years from its date of grant. No Incentive Stock Option shall be granted to any Participant if at the time the Option is granted such Participant owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company, its parent or its subsidiaries unless (i) the option price per Share is at least one hundred and ten percent (110%) of the Fair Market Value of the Share on the date of grant, and (ii) such Option by its terms is not exercisable after the expiration of five (5) years from the date such Option is granted. The terms of any Incentive Stock Option granted hereunder shall comply in all respects with the provisions of Section 422 of the Code, or any successor provision, and any regulations promulgated thereunder. (f) Form of Settlement. In its sole discretion, the Committee may provide at the time of grant that the Shares to be issued upon an Option's exercise shall be in the form of Shares subject to restrictions as the Committee may determine, or other similar securities, or may reserve the right so to provide after the time of grant. Section 7. Stock Appreciation and Limited Rights. (a) Stock Appreciation Rights may be granted hereunder to Participants either alone or in addition to other Awards granted under the Plan and may, but need not, relate to a specific Option granted under Section 6. The provisions of Stock Appreciation Rights need not be the same with respect to each recipient. Any Stock Appreciation Right related to a Non-Qualified Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Stock Appreciation Right related to an Incentive Stock Option must be granted at the same time such Option is granted and must have a grant price equal to the option price of such Option. In the case of any Stock Appreciation Right related to any Option, the Stock Appreciation Right or applicable portion thereof shall terminate and no longer be exercisable upon the termination or exercise of the related Option, except that a Stock Appreciation Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Stock Appreciation Right. Any Option related to any Stock Appreciation Right shall no longer be exercisable to the extent the related Stock Appreciation Right has been exercised. Any Stock Appreciation Right related to an Option shall be exercisable to the extent, and only to the extent, that the related Option is exercisable. The Committee may impose such other conditions or restrictions on the exercise of any Stock Appreciation Right as it shall deem appropriate. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of one (1) Share on the date of exercise or with respect to any right related to an Option other than an Incentive Stock Option, at any time during a specified period before or after the date of exercise as determined by the Committee over (ii) the grant price of the right as specified by the Committee, which shall not be less than the Fair Market Value of one (1) Share on the date of grant of the Stock Appreciation Right (or, if the Committee so determines, in the case of any Stock Appreciation Right retroactively granted in tandem with or in substitution for another Award or any outstanding award granted under any other plan of the Company, on the date of grant of such other Award or award), multiplied by the number of Shares as to which the holder is exercising the Stock Appreciation Right. Subject to the terms of the Plan and any applicable Award Agreement, the terms and conditions of any Stock Appreciation Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Stock Appreciation Right as it may deem appropriate. (b) Limited Rights may be granted hereunder to Participants only with respect to an Option granted under Section 6 hereof or a stock option granted under another plan of the Company. The provisions of Limited Rights need not be the same with respect to each recipient. Any Limited Right related to a Non-Qualified Stock Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. Any Limited Right related to an Incentive Stock Option must be granted at the same time such Option is granted. A Limited Right shall terminate and no longer be exercisable upon termination or exercise of the related Option, except that a Limited Right granted with respect to less than the full number of Shares covered by a related Option shall not be reduced until the exercise or termination of the related Option exceeds the number of Shares not covered by the Limited Right. Any Option related to any Limited Right shall no longer be exercisable to the extent the related Limited Right has been exercised. Any Limited Right shall be exercisable to the extent, and only to the extent, the related Option is exercisable and only during the three (3) month period immediately following a Change in Control of the Company (as defined in Section 10 hereof). The Committee may impose such other conditions or restrictions on the exercise of any Limited Right as it shall deem appropriate. Subject to the terms of the Plan and any applicable Award Agreement, a Limited Right granted under the Plan shall confer on the holder thereof a right to receive, upon exercise thereof, an amount equal to the excess of (i) the Fair Market Value of one (1) Share on the date of exercise or if greater and only with respect to any Limited Right related to an Option other than an Incentive Stock Option, the highest price per Share paid in connection with any Change in Control of the Company, over (ii) the option price of the related Option, multiplied by the number of Shares as to which the holder is exercising the Limited Right. The amount payable to the holder shall be paid by the Company in cash. Subject to the terms of the Plan and any applicable Award Agreement, the terms and conditions of any Limited Right shall be as determined by the Committee. The Committee may impose such conditions or restrictions on the exercise of any Limited Right as it may deem appropriate. Section 8. Performance Awards. Performance Awards may be issued hereunder to Participants in the form of Performance Shares or Performance Units, for no cash consideration or for such minimum consideration as may be required by applicable law, either alone or in addition to other Awards granted under the Plan. The value represented by a Performance Share or Unit shall be payable to, or upon the exercise by, the Participant holding such Award, in whole or in part, following achievement of such performance goals during such Performance Period as determined by the Committee. Except as provided in Section 10, Performance Awards will be paid only after the end of the relevant Performance Period. Performance Awards may be paid in cash, Shares, other property or any combination thereof, in the sole discretion of the Committee at the time of payment. The length of the Performance Period, the performance criteria or levels to be achieved for each Performance Period, and the amount of the Award to be distributed shall be conclusively determined by the Committee. Performance Awards may be paid in a lump sum or in installments following the close of the Performance Period or, in accordance with procedures established by the Committee, on a deferred basis. An Award of Performance Shares may consist of or include a grant of Shares which may be subject to such restrictions, conditions and contingencies as determined by the Committee. As to any such grant of Shares, the value represented by the Award and the payment of the Award may consist solely of the value of any right to the Shares or such other form of value and payment as determined by the Committee. To the greatest extent possible when making Performance Awards the Committee shall adopt performance goals, certify completion of such goals and comply with any other Code requirements necessary to be in compliance with the performance-based compensation requirements of Code Section 162(m). Section 9. Outside Directors' Options. (a) Grant of Options. At the time an outside Director first becomes a member of the Board after February 26, 1996, the Outside Director shall automatically be granted an option to purchase 6,000 Shares. On the date each Stockholders Meeting is actually held in each of the years beginning with 1996 and through 2005, each Outside Director shall automatically be granted an Option to purchase 3,000 Shares; provided, however, that an Outside Director shall not be entitled to receive and shall not be granted any such Option on the date of any particular Stockholders Meeting if he will not continue to serve as an Outside Director immediately following such Stockholders Meeting. An Outside Director who first takes a position on the Board at the Annual Stockholders Meeting, shall be entitled to receive the 6,000 Share initial service option plus the 3,000 Share Option granted at that Stockholders Meeting to each Outside Director. All such Options shall be Non-Qualified Stock Options. The price at which each Share covered by such Options may be purchased shall be one hundred percent (100%) of the fair market value of a share on the date the Option is granted. Fair market value for the purposes of this Section 9 shall be deemed to be the average of the high and low prices of the Shares as reported on the New York Stock Exchange Composite Transactions tape for the date the Option is granted or, if no sale of Shares shall have been made on that date, the next preceding date on which there was a sale of Shares. (b) Exercise of Options. Except as set forth in this Section 9, an Option granted to an Outside Director shall become exercisable only after one year from the date of grant of the Option. No Option shall be exercisable more than ten (10) years after the date of grant. Options may be exercised by an Outside Director during the period he remains an Outside Director and for a period of five (5) years after ceasing to be a member of the Board by reason of death or retirement, or for a period of one (1) year after ceasing to be a member of the Board for reasons other than retirement or death; however, only those Options exercisable at the date the Outside Director ceases to be a member of the Board shall remain exercisable and in no event shall the Options be exercisable more than ten (10) years after the date of grant. For purposes of this Section 9, "retirement" shall mean discontinuance of service as a director after the director has reached age fifty-five (55) and has at least five (5) years or more of service on the Board. All Options shall immediately become exercisable in the event of a Change in Control, as hereinafter defined, except that Options shall not be exercisable earlier than six (6) months from the date of grant to the extent required by Section 16 of the Exchange Act. If a former Outside Director shall die holding an Option that has not expired and has not been fully exercised, the Option shall remain exercisable until the later of one (1) year after the date of death or the end of the period in which the former Outside Director could have exercised the Option had he not died, but in no event shall the Option be exercisable more than ten (10) years after the date of grant. In the event of the death of an Outside Director or former Outside Director, his Options shall be exercisable only to the extent that they were exercisable at his date of death and only by the executor or administrator of the Outside Director's estate, by the person or persons to whom the Outside Director's rights under the Option shall pass under the Outside Director's will or the laws of descent and distribution, or by a beneficiary designated in writing in accordance with Section 13(a) hereof. (c) Payment. An Option granted to an Outside Director shall be exercisable upon payment to the Company of the full purchase price of the Shares with respect to which the Option is being exercised. Payment for the Shares shall be in United States dollars, payable in cash or by check, or by delivery of Shares having a Fair Market Value on the exercise date equal to the total Option price, or by any combination of cash and Shares. (d) Adjustment of Options. In the event there shall be a merger, re- organization, consolidation, recapitalization, stock split, reverse stock split, stock dividend or other change in corporate structure such that the Shares of the Company are changed into or become exchangeable for a larger or smaller number of Shares or shares of a different class of stock, thereafter the number of Shares subject to outstanding Options and the number of Shares available for the grant of Options under this Plan shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of Shares of the Company by reason of such change in corporate structure; and the shares of any such other class of stock shall be treated as Shares for purposes of this Plan; provided, that the number of Shares shall always be a whole number, and the purchase price per share of any outstanding Options shall, in the case of an in- crease in the number of Shares, be proportionately reduced, and in the case of a decrease in the number of Shares, shall be proportionately increased. (e) No Obligation. Nothing in this Plan shall be deemed to create an obligation on the part of the Board or a committee thereof to nominate any Outside Director for reelection by the Company's Stockholders, nor confer upon any Outside Director the right to remain a member of the Board for any period of time, or at any particular rate of compensation. Section 10. Change in Control. (a) In order to maintain the Participants' rights in the event of any Change in Control of the Company, as hereinafter defined, the Committee, as constituted before such Change in Control, may, in its sole discretion, as to any Award (except Options granted pursuant to Section 9), either at the time an Award is made hereunder or any time thereafter, take any one (1) or more of the following actions: (i) provide for the purchase by the Company of any such Award, upon the Participant's request, for an amount of cash equal to the amount that could have been attained upon the exercise of such Award or realization of the Participant's rights had such Award been currently exercisable or payable; (ii) make such adjustment to any such Award then outstanding as the Committee deems appropriate to reflect such Change in Control; or (iii) cause any such Award then outstanding to be assumed, or new rights substituted therefor, by the acquiring or surviving corporation after such Change in Control. In the event of a Change of Control, there shall be an automatic acceleration of any time periods relating to the exercise or realization of any such Award and all performance award standards shall be deemed satisfactorily completed without any action required by the Committee so that such Award may be exercised or realized in full on or before a date fixed by the Committee, except no Award shall be exercisable earlier than six (6) months after the date of grant to the extent required by Section 16 of the Exchange Act. The Committee may, in its discretion, include such further provisions and limitations in any agreement documenting such Awards as it may deem equitable and in the best interests of the Company. (b) For purposes of this Plan, a "Change in Control" shall be deemed to have occurred if (i) for any reason at any time less than seventy-five percent (75%) of the members of the Board shall be individuals who fall into any of the following categories: (A) individuals who were members of such Board on February 26, 1996; or (B) individuals whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were members of such Board on February 26, 1996; or (c) individuals whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were elected in the manner described in (A) or (B) above, or (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Exchange Act) shall have become, according to a public announcement or filing, without the prior approval of the Board of Directors of the Company, the "beneficial owner" (as defined in Rule 13(d)-3 under the Exchange Act) directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more (calculated in accordance with Rule 13(d)-3) of the combined voting power of the Company's then outstanding voting securities (such "person" hereafter referred to as a "Major Stockholder"); or (iii) the stockholders of the Company shall have approved a merger, consolidation or dissolution of the Company or a sale, lease, exchange or disposition of all or substantially all of the Company's assets, or a Major Stockholder shall have proposed any such transaction, unless such merger, consolidation, dissolution, sale, lease, exchange or disposition shall have been approved by at least seventy-five percent (75%) of the members of the Board of Directors of the Company who are individuals falling into any combination of the following categories: (A) individuals who were members of such Board of Directors on February 26, 1996, or (B) individuals whose election or nomination for election by the Company's stockholders was approved by at least seventy-five percent (75%) of the members of the Board of Directors then still in office who are members of the Board of Directors on February 26, 1996, or (C) individuals whose election, or nomination for election by the Company's stockholders was approved by a vote of at least seventy-five percent (75%) of the members of the Board then still in office who were elected in manner described in (A) or (B) above. Section 11. Amendments and Termination. The Board or the committee may amend, alter, suspend, discontinue, or terminate the Plan, but no amendment, alteration, suspension, discontinuation, or termination shall be made that would impair the rights of an Optionee or Participant under an Award theretofore granted, without the Optionee's or Participant's consent. In addition, no amendment shall be effective without the approval of stockholders as may be required by Section 16 of the Exchange Act or Section 162(m) of the Code as the case may be, including to: (a) materially increase the total number of Shares available for Awards under the Plan, except as is provided in Section 4(c) of the Plan; (b) materially increase benefits accruing to Participants under the Plan; (c) materially modify the requirements as to eligibility for participa- tion in the Plan; (d) change in any way the Options provided for in Section 9 of the Plan (other than reduce the number of shares for which an Option that is to be automatically granted is exercisable); or (e) cause the Plan not to comply with Section 162(m) of the Code. However, in no event, shall the provisions relating to the timing, amount, exercise price or designated recipients of Options provided for in Section 9 of the Plan be amended more than once every six (6) months, other than to comport with changes in the Code, the Employee Retirement Income Security Act of 1974, as amended, or the rules thereunder. The Committee may amend the terms of any Award theretofore granted (except Options granted pursuant to Section 9 hereof), prospectively or retroactively, and may also substitute new Awards for Awards previously granted under this Plan or for awards granted under any other compensation plan of the Company or an Affiliate to Participants, including without limitation previously granted Options having higher option prices, but no such amendment or substitution shall impair the rights of any Participant without his consent. The Committee shall be authorized, without the Participant's consent, to make adjustments in Performance Award criteria or in the terms and conditions of other Awards in recognition of events that it deems in its sole discretion to be unusual or nonrecurring that affect the Company or any Affiliate or the financial statements of the Company or any Affiliate, or in recognition of changes in applicable laws, regulations or accounting principles, whenever the Committee determines that such adjustments are appropriate in order to prevent the dilution or enlargement of benefits or potential benefits under the Plan. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award in the manner and to the extent it shall deem desirable to carry it into effect. In the event the Company shall assume outstanding employee benefit awards or the right or obligation to make future such awards in connection with the acquisition of another corporation or business entity, the Committee may, in its discretion, make such adjustments in the terms of Awards under the Plan as it shall deem appropriate. Notwithstanding the above, the Committee shall not have the right to make any adjustments in the terms or conditions of outstanding Options granted pursuant to Section 9. Section 12. Termination of Employment and Noncompetition. The Committee shall have full power and authority to determine whether, to what extent and under what circumstances any Award (other than an Option granted pursuant to Section 9) shall be canceled or suspended and shall promulgate rules and regulations to (i) determine what events constitute disability, retirement, termination for an approved reason and termination for cause for purposes of the Plan, and (ii) determine the treat- ment of a Participant under the Plan in the event of his death, disability, retirement, or termination for an approved reason. If a Participant's employment with the Company or an Affiliate is terminated for cause, all unexercised, unearned, and/or unpaid Awards, including, but not by way of limitation, Awards earned, but not yet paid, all unpaid dividends and dividend equivalents, and all interest accrued on the foregoing shall be canceled or forfeited, as the case may be, unless the Participant's Award Agree- ment provides otherwise. In addition, but without limitation, all outstanding Awards to any Participant shall be canceled if the Participant, without the consent of the Committee, while employed by the Company or after termination of such employment, becomes associated with, employed by, renders services to, or owns any interest in (other than any nonsubstantial interest, as determined by the Committee), any business that is in competition with the Company or any Affiliate, or with any business in which the Company or any Affiliate has a substantial interest as determined by the Committee or such officers or committee of senior officers to whom the authority to make such determination is delegated by the Committee. Section 13. General Provisions. (a) Nonassignability. No Award shall be assignable or transferable by a Participant or an Outside Director otherwise than by will or by the laws of descent and distribution; provided, however, that a Participant or Outside Director may, pursuant to a written designation of beneficiary filed with the Committee prior to his death, designate a beneficiary to exercise the rights of the Participant with respect to any Award upon the death of the Participant or Outside Director. Each Award shall be exercisable during the lifetime of the Participant or the Outside Director, only by the Participant or the Outside Director or, if permissible under applicable law, by the guardian or legal representative of the Participant or Outside Director. (b) Terms. Except for Options granted pursuant to Section 9, the term of each Award shall be for such period of months or years from the date of its grant as may be determined by the Committee; provided, however, that in no event shall the term of any Incentive Stock Option or any Stock Appreciation or Limited Right related to any Incentive Stock Option exceed a period of ten (10) years from the date of its grant. (c) Rights to Awards. No Employee, Participant or other Person shall have any claim to be granted any Award under the Plan, and there is no obliga- tion for uniformity of treatment of Employees, Participants, or holders or beneficiaries of Awards under the Plan. (d) No Cash Consideration for Awards. Awards shall be granted for no cash consideration or for such minimal cash consideration as may be required by applicable law. (e) Restrictions. All certificates for Shares delivered under the Plan pursuant to any Award shall be subject to such stock-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Shares are then listed, and any applicable Federal or state securities law, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. (f) Dividend Equivalents. Subject to the provisions of this Plan and any Award Agreement, the recipient of an Award (including, without limitation, any deferred Award, but excluding Options granted pursuant to Section 9) may, if so determined by the Committee, be entitled to receive, currently or on a deferred basis, interest or dividends, or interest or dividend equivalents, with respect to the number of Shares covered by the Award, as determined by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional Shares or otherwise reinvested. (g) Withholding. The Company shall be authorized to withhold from any Award granted, payment due or shares or other property transferred under the Plan the amount of income, withholding and payroll taxes due and payable in respect of an Award, payment or shares or other property transferred hereunder and to take such other action as may be necessary in the opinion of the Company to satisfy all obligations for the payment of such taxes. The Company may require the Participant or Outside Director to pay to it such tax prior to and as a condition of the making of such payment or transfer of Shares or property under the Plan. In accordance with any applicable administrative guidelines it establishes, the Committee may allow or may require participants to pay the amount of taxes due or payable in respect of an Award by withholding from any payment of Shares due as a result of such Award, or by permitting the Participant to deliver to the Company, Shares having a fair market value, as determined by the Committee, equal to the amount of such taxes. (h) Deferral of Awards. At the discretion of the Committee, payment of a Performance Dividend Equivalent or any portion thereof may be deferred by a Participant until such time as the Committee may establish. All such deferrals shall be accomplished by the delivery on a form provided by the Company of a written, irrevocable election by the Participant prior to such time payment would otherwise be made. Further, all deferrals shall be made in accordance with administrative guidelines established by the Committee to ensure that such deferrals comply with all applicable requirements of the Code and its regulations. Deferred payments shall be paid in a lump sum or installments, as determined by the Committee. The Committee may also credit interest, at such rates to be determined by the Committee, on cash payments that are deferred and credit Dividend Equivalents on deferred payments denominated in the form of Shares. (i) No Limit on Other Compensation Arrangements. Nothing contained in this Plan shall prevent the Company or any Affiliate from adopting other or additional compensation arrangements, subject to stockholder approval if such approval is required, and such arrangements may be either generally applicable or applicable only in specific cases. (j) Governing Law. The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan shall be determined in accordance with the laws of the State of Delaware and applicable federal law. (k) Severability. If any provision of this Plan or any Award is or be- comes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person or Award, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, it shall be stricken and the remainder of the Plan and any such Award shall remain in full force and effect. (l) No Right to Employment. The grant of an Award shall not be construed as giving a Participant the right to be retained in the employ of the Company or any Affiliate. Further, the Company or an Affiliate may at any time terminate the employment of a Participant, free from any liability, or any claim under the Plan, unless otherwise expressly provided in the Plan or in any Award Agreement. (m) No Trust or Fund Created. Neither the Plan nor any Award shall create or be construed to create a trust or separate fund of any kind or a fiduciary relationship between the Company or any Affiliate and a Participant or any other Person. To the extent that any Person acquires a right to receive payments from the Company or any Affiliate pursuant to an Award, such right shall be no greater than the right of any unsecured general creditor of the Company or any Affiliate. (n) No Fractional Shares. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award, and the Committee shall determine whether cash, other securities, or other property shall be paid or transferred in lieu of any fractional Shares, or whether such fractional Shares or any rights thereto shall be canceled, terminated, or otherwise eliminated. (o) Headings. Headings are given to the Sections and subsections of the Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. (p) With respect to persons subject to Section 16 of the Exchange Act, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of this Plan or action by the Committee fails to so comply, the Committee may deem, for such persons, such provision or action null and void to the extent permitted by law. Should any provision of this Plan be unnecessary to comply with the requirements of Section 16 of the Exchange Act, the Committee may waive such provision. Section 14. Effective Date of Plan. The Plan shall be effective as of May 7, 1991, subject to approval of the Plan by the Company's stockholders. Section 15. Term of Plan. No Award shall be granted pursuant to the Plan after February 25, 2006, but any Award theretofore granted may extend beyond that date. EX-10.20 3 EMPLOYMENT AGREEMENT Amended and Restated September 18, 1997 THIS AGREEMENT, made and entered into as of this 1st day of January, 1997, by and between Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Landon H. Rowland, an individual ("Executive"). WHEREAS, Executive is now employed by KCSI, and KCSI and Executive desire for KCSI to continue to employ Executive on the terms and conditions set forth in this Agreement and to provide an incentive to Executive to remain in the employ of KCSI hereafter, particularly in the event of any change in control (as herein defined) of KCSI, Kansas City Southern Lines, Inc. ("KCSL") or The Kansas City Southern Railway Company ("Railway"), thereby establishing and preserving continuity of management of KCSI. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between KCSI and Executive as follows: 1. Employment. KCSI hereby continues the employment of Executive as its President and Chief Executive Officer to serve at the pleasure of the Board of Directors of KCSI (the "KCSI Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the KCSI Board, subject to the powers vested in the KCSI Board and in the stockholders of KCSI. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of KCSI and its affiliates. 2. Compensation. (a) Base Compensation. KCSI shall pay Executive as compensation for his services hereunder an annual base salary of $750,000. Such rate shall not be increased prior to January 1, 2000 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by KCSI and applicable to all officers of KCSI. (b) Incentive Compensation. For the years 1997, 1998 and 1999, Executive shall not be entitled to participate in any KCSI incentive compensation plan. 3. Benefits and Stock Ownership. (a) Benefits. During the period of his employment hereunder, KCSI shall provide Executive with coverage under such benefit plans and programs as are made generally available to similarly situated employees of KCSI, except that KCSI shall provide Executive with life insurance and disability insurance comparable to that provided under Executive's previous employment agreement dated January 1, 1992, provided (i) KCSI shall have no obligation with respect to any plan or program if Executive is not eligible for coverage thereunder, and (ii) Executive acknowledges that stock options and other stock and equity participation awards are granted in the discretion of the KCSI Board or the Compensation Committee of the KCSI Board and that Executive has no right to receive stock options or other equity participation awards or any particular number or level of stock options or other awards. In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by KCSI, it shall be assumed that the value of Executive s annual compensation, pursuant to this Agreement, is $875,000. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each such plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent this Agreement expressly modifies such benefit plans or programs) and that KCSI is not is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof. KCSI also shall reimburse Executive for ordinary and necessary travel and other business expenses in accordance with policies and procedures established by KCSI. (b) Stock Ownership. During the period of his employment hereunder, Executive shall retain ownership in himself or in members of his immediate family of at least a majority of the number of shares of (i) KCSI Restricted Stock awarded to Executive on or after January 1, 1992, and (ii) shares of KCSI stock acquired upon the exercise of stock options granted on or after December 12, 1991, but excluding from such number of shares any such shares transferred to KCSI to pay the purchase price upon the exercise of stock options or to meet withholding tax requirements. 4. Termination. (a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to KCSI, except that in the event of any material breach of this Agreement by KCSI, Executive may terminate this Agreement and his employment hereunder immediately upon notice to KCSI. (b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under KCSI's disabil- ity plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under KCSI's long-term disability plan. (c) Termination by KCSI For Cause. KCSI may terminate this Agreement and Executive s employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following: (i) Any material breach of this Agreement by Executive; (ii) Executive's dishonesty involving KCSI or any subsidiary of KCSI; (iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the KCSI Board; (iv) Willful failure by Executive to follow reasonable instructions of the KCSI Board concerning the operations or business of KCSI or any subsidiary of KCSI; (v) Executive's fraud or criminal activity; or (vi) Embezzlement or misappropriation by Executive. (d) Termination by KCSI Other Than For Cause. (i) KCSI may terminate this Agreement and Executive s employment other than for cause immediately upon notice to Executive, and in such event, KCSI shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below. (ii) Unless the provisions of Paragraph 7 of this Agreement are applicable, if Executive s employment is terminated under Paragraph 4(d)(i), KCSI shall continue, for a period of two (2) years following such termination, (A) to pay to Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a) above, at the rate in effect immediately prior to termination, and, (B) to reimburse Executive for the cost (including state and federal income taxes payable with respect to this reimbursement) of continuing the health insurance coverage provided pursuant to this Agreement or obtaining health insurance coverage comparable to the health insurance provided pursuant to this Agreement, and obtaining coverage comparable to the life insurance provided pursuant to this Agreement, unless Executive is provided comparable health or life insurance coverage in connection with other employment. The foregoing obligations of KCSI shall continue until the end of such two (2) year period notwithstanding the death or disability of Executive during said period (except, in the event of death, the obligation to reimburse Executive for the cost of life insurance shall not continue). In the year in which termination of employment occurs, Executive shall be eligible to receive benefits under the KCSI Incentive Compensation Plan and the KCSI Executive Plan (if such Plans then are in existence and Executive was entitled to participate immediately prior to termination) in accordance with the provisions of such plans then applicable, and severance pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the KCSI Incentive Compensation Plan but not under the KCSI Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the KCSI Incentive Compensation Plan or the KCSI Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of KCSI. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section 401(k) Plan in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year. 5. Non-Disclosure and Non-Compete. (a) During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any KCSI trade secret, except to the extent necessary for Executive to perform his duties for KCSI while an employee. For purposes of this Agreement, the term "KCSI trade secret" shall mean any information regarding the business or activities of KCSI or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (i) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts of KCSI or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, KCSI shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) dand shall be entitled to pursue such other legal and equitable remedies as may be available. (b) Non-Compete. Following termination of this agreement, except termination pursuant to Paragraph 4(d) or any termination after a Change in Control of KCSI (as hereinafter defined), for a period ending three (3) years after the last payment of salary or severance pay to Executive, Executive shall not, directly or indirectly, as an individual, consultant, employer, employee, officer, director, advisory director, principal, agent, partner, member, stockholder (except non-controlling holdings of stock of not more than 2% of a publicly traded company) or otherwise, (i) engage in a business in competition with any business conducted by KCSI or any subsidiary of KCSI at any time within five (5) years preceding the commencement of the period of non-compete provided herein or any business which KCSI or any of its subsidiaries was actively considering for ownership or conduct during the aforesaid five (5) year period, or (ii) participate in management of any holding company owning, directly or indirectly, more than 5% of any such business. Executive acknowledges that certain subsidiaries of KCSI now conduct business throughout the United States and in foreign countries, and agrees that this non-compete shall apply in all countries and jurisdictions in which KCSI or any of its subsidiaries conduct business or was actively considering for the conduct of business during the aforesaid five (5) year period. (c) Remedies. In the event of any breach of this Paragraph 5 by Executive, KCSI shall be entitled to pursue such other legal and equitable remedies as may be available. Executive expressly acknowledges and agrees that the restrictions set forth in Paragraphs 5(a) and (b) of this Agreement are necessary for the protection of KCSI against irreparable harm and loss of goodwill and business and, therefore, Executive intends and agrees, that upon failure or refusal of Executive to comply with the provisions of either such Paragraph, KCSI would be irreparably harmed and shall be entitled to specifically enforce such provisions in a court of proper jurisdiction by an injunction or such other relief as may be available to require performance in accordance with this Agreement. Executive hereby consents to the entry of an injunction or other appropriate order or decree in any and all countries and jurisdictions in which such a breach or violation may occur and agrees that such relief shall be in addition to other legal rights and remedies available to KCSI. 6. Duties Upon Termination; Survival. (a) Duties. Upon termination of this Agreement by KCSI or Executive for any reason, Executive shall immediately return to KCSI all KCSI trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of KCSI and all direct and indirect subsidiaries and affiliates of KCSI as may be requested by KCSI and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as KCSI may reasonably request. (b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by KCSI or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termina- tion of this Agreement by KCSI under Paragraph 4(d)(i). 7. Continuation of Employment Upon Change in Control of KCSI. (a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of KCSI for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). KCSI agrees to continue to employ Executive for the Three- Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive s services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, KCSI shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by KCSI in respect of the 12- month period immediately before the Control Change Date. (b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date: (i) any benefit plan, and trust fund associated therewith, related to (A) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (B) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (C) retirement or pension benefits, (D) ERISA excess benefits and similar plans and (E) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and (ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of KCSI generally. In addition, KCSI shall use its best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI in accordance with the terms thereof at the Control Change Date; provided that if under KCSI programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date. If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan. (c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of KCSI which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder. (d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the KCSI Board on the date of the Agreement; or (B) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (C) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were elected in the manner described in (A) or (B) above, or (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI (as to KCSL and Railway securities) shall have become, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCSI, KCSL or Railway representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCSI's, KCSL's or Railway's then outstanding voting securities; or (iii) the stockholders of KCSI, KCSL or Railway shall have approved a merger, consolidation or dissolution of KCSI, KCSL or Railway or a sale, lease, exchange or disposition of all or substantially all of KCSI's, KCSL's or Railway's assets, if persons who were the beneficial owners of the combined voting power of KCSI's, KCSL's or Railway's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction. Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary, the sale of shares of stock of Kansas City Southern Lines, Inc. ("KCSL") pursuant to an initial public offering of shares of stock of KCSL shall not constitute a Change in Control. (e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, KCSI may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination KCSI shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 175% his annual base salary specified in Paragraph 7(a) multiplied by (ii) three; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then KCSI shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive has been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI) and a continuing participant in such plan to the end of the Benefits Period. (f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days written notice (the "Notice of Resignation") to the Secretary of KCSI and effective at the end of such notice period, resign his employment with KCSI (the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay to Executive his full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein). For purposes of this Agreement, "good reason" means any of the following: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive s position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by KCSI which results in a diminution or other material adverse change in such position, authority or duties; (ii) any failure by KCSI to comply with any of the provisions of Paragraph 7; (iii) KCSI s requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii); (iv) any other material adverse change to the terms and conditions of the Executives employment; or (v) any purported termination by KCSI of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement). A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement. (g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by KCSI "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive s employment; except that Cause shall not mean: (i) bad judgment or negligence; (ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of KCSI (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled); (iii) any act or omission with respect to which a determination could properly have been made by the KCSI Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under KCSI s by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or (iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the KCSI Board, not a party to the act or omission, knew or should have known of such act or omission. Any Termination of the Executive s employment by KCSI for Cause shall be communicated to the Executive by Notice of Termination. (h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of KCSI s independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from KCSI pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then KCSI shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of: (i) the amount of such Excise Taxes; multiplied by (ii) the Gross-up Multiple (as defined in Paragraph 7(k). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment. KCSI shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. KCSI shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis. (i) Determination by the Executive. (i) If KCSI shall fail (A) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to KCSI of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive s Determination"). Within 14 days after delivery of the Executive s Determination to KCSI, KCSI shall either (A) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by KCSI) or (B) deliver to the Executive a Certificate specifying the Gross-up Payment determined by KCSI's independent auditors, together with an opinion of KCSI's counsel ("KCSI Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason KCSI fails to comply with clause (B) of the preceding sentence, the Gross-up Payment specified in the Executive s Determination shall be controlling for all prposes. (ii) If the Executive does not make a request for, and KCSI does not deliver to the Executive, a Certificate, KCSI shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due. (j) Additional Gross-up Amounts. If, despite the initial conclusion of KCSI and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or KCSI's independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of: (i) the sum of (A) such additional Excise Taxes and (B) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by (ii) the Gross-up Multiple. (k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.) (l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of KCSI s independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive. (m) Amount Increased or Contested. The Executive shall notify KCSI in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by KCSI of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect KCSI's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to KCSI. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to KCSI (or, if sooner, the date on which payment of such claim is due). If KCSI notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall: (i) give KCSI any information that it reasonably requests relating to such claim; (ii) take such action in connection with contesting such claim as KCSI reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by KCSI; (iii) cooperate with KCSI in good faith to contest such claim; and (iv) permit KCSI to participate in any proceedings relating to such claim; provided, however, that KCSI shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, KCSI shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as KCSI shall determine; provided, however, that if KCSI directs the Executive to pay such claim and sue for a refund, KCSI shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The KCSI s control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority. (n) Refunds. If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to KCSI's complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and KCSI does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m). (o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay KCSI any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge KCSI s obligations set forth in the preceding sentence, KCSI has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the KCSI Board shall have determined is reasonably sufficient for such purpose. (p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7. 8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive s employment has been terminated. 9. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 12717 Mt. Olivet Road, Kansas City, Missouri 64166, or to such other address as a party shall designate by notice to the other party. 10. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in a writing signed by Executive and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 11. Successors in Interest. The rights and obligations of KCSI under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI, regardless of the manner in which such successors or assigns shall succeed to the interest of KCSI hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI, KCSL or Railway or by any merger or consolidation or acquisition involving KCSI, KCSL or Railway, or upon any transfer of all or substantially all of KCSI's, KCSL's or Railway's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of KCSI. 12. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 13. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and terminates and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements. IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the 18th day of September, 1997. KANSAS CITY SOUTHERN INDUSTRIES, INC. By /s/ Joseph D. Monello Joseph D. Monello Vice President and Chief Financial Officer /s/ Landon H. Rowland Landon H. Rowland EX-10.21 4 EMPLOYMENT AGREEMENT Amended and Restated September 18, 1997 THIS AGREEMENT, made and entered into as of this 1st day of January, 1996, by and between Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Joseph D. Monello, an individual ("Executive"). WHEREAS, Executive is now employed by KCSI, and KCSI and Executive desire for KCSI to continue to employ Executive on the terms and conditions set forth in this Agreement and to provide an incentive to Executive to remain in the employ of KCSI hereafter, particularly in the event of any change in control (as herein defined) of KCSI, Kansas City Southern Lines, Inc. ("KCSL") or The Kansas City Southern Railway Company ("Railway"), thereby establishing and preserving continuity of management of KCSI. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between KCSI and Executive as follows: 1. Employment. KCSI hereby continues the employment of Executive as its Vice President and Chief Financial Officer to serve at the pleasure of the Board of Directors of KCSI (the "KCSI Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the KCSI Board and in the stockholders of KCSI. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of KCSI and its affiliates. 2. Compensation. (a) Base Compensation. KCSI shall pay Executive as compensation for his services hereunder an annual base salary at the rate in effect on the date of this Agreement. Such rate shall not be increased prior to January 1, 1999 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by KCSI and applicable to all officers of KCSI. (b) Incentive Compensation. For the years 1996, 1997 and 1998, Executive shall not be entitled to participate in any KCSI incentive compensation plan. 3. Benefits. During the period of his employment hereunder, KCSI shall provide Executive with coverage under such benefit plans and programs as are made generally available to similarly situated employees of KCSI, provided (a) KCSI shall have no obligation with respect to any plan or program if Executive is not eligible for coverage thereunder, and (b) Executive acknowledges that stock options and other stock and equity participation awards are granted in the discretion of the KCSI Board or the Compensation Committee of the KCSI Board and that Executive has no right to receive stock options or other equity participation awards or any particular number or level of stock options or other awards. In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by KCSI, it shall be assumed that the value of Executive's annual compensation, pursuant to this Agreement, is 175% of Executive s annual base salary. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each such plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent this Agreement expressly modifies such benefit plans or programs) and that KCSI is not is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof. KCSI also shall reimburse Executive for ordinary and necessary travel and other business expenses in accordance with policies and procedures established by KCSI. 4. Termination. (a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to KCSI, except that in the event of any material breach of this Agreement by KCSI, Executive may terminate this Agreement and his employment hereunder immediately upon notice to KCSI. (b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under KCSI's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under KCSI's long-term disability plan. (c) Termination by KCSI For Cause. KCSI may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following: (i) Any material breach of this Agreement by Executive; (ii) Executive's dishonesty involving KCSI or any subsidiary of KCSI; (iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the KCSI Board; (iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports concerning the operations or business of KCSI or any subsidiary of KCSI; (v) Executive's fraud or criminal activity; or (vi) Embezzlement or misappropriation by Executive. (d) Termination by KCSI Other Than For Cause. (i) KCSI may terminate this Agreement and Executive's employment other than for cause immediately upon notice to Executive, and in such event, KCSI shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below. (ii) Unless the provisions of Paragraph 7 of this Agreement are applicable, if Executive s employment is terminated under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1) year following such termination, (A) to pay to Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a) above, at the rate in effect immediately prior to termination, and, (B) to reimburse Executive for the cost (including state and federal income taxes payable with respect to this reimbursement) of continuing the health insurance coverage provided pursuant to this Agreement or obtaining health insurance coverage comparable to the health insurance provided pursuant to this Agreement, and obtaining coverage comparable to the life insurance provided pursuant to this Agreement, unless Executive is provided comparable health or life insurance coverage in connection with other employment. The foregoing obligations of KCSI shall continue until the end of such one (1) year period notwithstanding the death or disability of Executive during said period (except, in the event of death, the obligation to reimburse Executive for the cost of life insurance shall not continue). In the year in which termination of employment occurs, Executive shall be eligible to receive benefits under the KCSI Incentive Compensation Plan and the KCSI Executive Plan (if such Plans then are in existence and Executive was entitled to participate immediately prior to termination) in accordance with the provisions of such plans then applicable, and severance pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the KCSI Incentive Compensation Plan but not under the KCSI Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the KCSI Incentive Compensation Plan or the KCSI Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of KCSI. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section 401(k) Plan in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year. 5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any KCSI trade secret, except to the extent necessary for Executive to perform his duties for KCSI while an employee. For purposes of this Agreement, the term "KCSI trade secret" shall mean any information regarding the business or activities of KCSI or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of KCSI or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, KCSI shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) dand shall be entitled to pursue such other legal and equitable remedies as may be available. 6. Duties Upon Termination; Survival. (a) Duties. Upon termination of this Agreement by KCSI or Executive for any reason, Executive shall immediately return to KCSI all KCSI trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of KCSI and all direct and indirect subsidiaries and affiliates of KCSI as may be requested by KCSI and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as KCSI may reasonably request. (b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by KCSI or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termination of this Agreement by KCSI under Paragraph 4(d)(i). 7. Continuation of Employment Upon Change in Control of KCSI. (a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of KCSI for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). KCSI agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive s services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, KCSI shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by KCSI in respect of the 12-month period immediately before the Control Change Date. (b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date: (i) any benefit plan, and trust fund associated therewith, related to (A) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (B) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (C) retirement or pension benefits, (D) ERISA excess benefits and similar plans and (E) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and (ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of KCSI generally. In addition, KCSI shall use its best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI in accordance with the terms thereof at the Control Change Date; provided that if under KCSI programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date. If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan. (c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of KCSI which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder. (d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the KCSI Board on the date of the Agreement; or (B) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (C) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were elected in the manner described in (A) or (B) above, or (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI (as to KCSL and Railway securities) shall have become, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCSI, KCSL or Railway representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCSI's, KCSL's or Railway's then outstanding voting securities; or (iii) the stockholders of KCSI, KCSL or Railway shall have approved a merger, consolidation or dissolution of KCSI, KCSL or Railway or a sale, lease, exchange or disposition of all or substantially all of KCSI's, KCSL's or Railway's assets, if persons who were the beneficial owners of the combined voting power of KCSI's, KCSL's or Railway's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction. Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary, the sale of shares of stock of Kansas City Southern Lines, Inc. ("KCSL") pursuant to an initial public offering of shares of stock of KCSL shall not constitute a Change in Control. (e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, KCSI may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination KCSI shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 175% his annual base salary specified in Paragraph 7(a) multiplied by (ii) three; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then KCSI shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI) and a continuing participant in such plan to the end of the Benefits Period. (f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days written notice (the "Notice of Resignation") to the Secretary of KCSI and effective at the end of such notice period, resign his employment with KCSI (the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay to Executive his full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein). For purposes of this Agreement, "good reason" means any of the following: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive s position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by KCSI which results in a diminution or other material adverse change in such position, authority or duties; (ii) any failure by KCSI to comply with any of the provisions of Paragraph 7; (iii) KCSI's requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii); (iv) any other material adverse change to the terms and conditions of the Executives employment; or (v) any purported termination by KCSI of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement). A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement. (g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by KCSI "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean: (i) bad judgment or negligence; (ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of KCSI (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled); (iii) any act or omission with respect to which a determination could properly have been made by the KCSI Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under KCSI's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or (iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the KCSI Board, not a party to the act or omission, knew or should have known of such act or omission. Any Termination of the Executive s employment by KCSI for Cause shall be communicated to the Executive by Notice of Termination. (h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of KCSI s independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from KCSI pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then KCSI shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of: (i) the amount of such Excise Taxes; multiplied by (ii) the Gross-up Multiple (as defined in Paragraph 7(k). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment. KCSI shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. KCSI shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis. (i) Determination by the Executive. (i) If KCSI shall fail (A) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to KCSI of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive s Determination"). Within 14 days after delivery of the Executive's Determination to KCSI, KCSI shall either (A) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by KCSI) or (B) deliver to the Executive a Certificate specifying the Gross-up Payment determined by KCSI's independent auditors, together with an opinion of KCSI s counsel ("KCSI Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason KCSI fails to comply with clause (B) of the preceding sentence, the Gross-up Payment specified in the Executive s Determination shall be controlling for all prposes. (ii) If the Executive does not make a request for, and KCSI does not deliver to the Executive, a Certificate, KCSI shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due. (j) Additional Gross-up Amounts. If, despite the initial conclusion of KCSI and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or KCSI's independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of: (i) the sum of (A) such additional Excise Taxes and (B) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by (ii) the Gross-up Multiple. (k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.) (l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of KCSI's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive. (m) Amount Increased or Contested. The Executive shall notify KCSI in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by KCSI of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect KCSI's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to KCSI. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to KCSI (or, if sooner, the date on which payment of such claim is due). If KCSI notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall: (i) give KCSI any information that it reasonably requests relating to such claim; (ii) take such action in connection with contesting such claim as KCSI reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by KCSI; (iii) cooperate with KCSI in good faith to contest such claim; and (iv) permit KCSI to participate in any proceedings relating to such claim; provided, however, that KCSI shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, KCSI shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as KCSI shall determine; provided, however, that if KCSI directs the Executive to pay such claim and sue for a refund, KCSI shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The KCSI's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority. (n) Refunds. If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to KCSI's complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and KCSI does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m). (o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay KCSI any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge KCSI s obligations set forth in the preceding sentence, KCSI has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the KCSI Board shall have determined is reasonably sufficient for such purpose. (p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7. 8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive s employment has been terminated. 9. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 10051 Hardy Drive, Overland Park, Kansas 66212, or to such other address as a party shall designate by notice to the other party. 10. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in a writing signed by Executive and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 11. Successors in Interest. The rights and obligations of KCSI under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI, regardless of the manner in which such successors or assigns shall succeed to the interest of KCSI hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI, KCSL or Railway or by any merger or consolidation or acquisition involving KCSI, KCSL or Railway, or upon any transfer of all or substantially all of KCSI's, KCSL's or Railway's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of KCSI. 12. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 13. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and terminates and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements. IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the 18th day of September, 1997. KANSAS CITY SOUTHERN INDUSTRIES, INC. By /s/ Landon H. Rowland Landon H. Rowland, President /s/ Joseph D. Monello Joseph D. Monello EX-10.22 5 EMPLOYMENT AGREEMENT Amended and Restated September 18, 1997 THIS AGREEMENT, made and entered into as of this 1st day of January, 1996, by and between Kansas City Southern Industries, Inc., a Delaware corporation ("KCSI") and Danny R. Carpenter, an individual ("Executive"). WHEREAS, Executive is now employed by KCSI, and KCSI and Executive desire for KCSI to continue to employ Executive on the terms and conditions set forth in this Agreement and to provide an incentive to Executive to remain in the employ of KCSI hereafter, particularly in the event of any change in control (as herein defined) of KCSI, Kansas City Southern Lines, Inc. ("KCSL") or The Kansas City Southern Railway Company ("Railway"), thereby establishing and preserving continuity of management of KCSI. NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, it is agreed by and between KCSI and Executive as follows: 1. Employment. KCSI hereby continues the employment of Executive as its Vice President Finance to serve at the pleasure of the Board of Directors of KCSI (the "KCSI Board") and to have such duties, powers and responsibilities as may be prescribed or delegated from time to time by the President or other officer to whom Executive reports, subject to the powers vested in the KCSI Board and in the stockholders of KCSI. Executive shall faithfully perform his duties under this Agreement to the best of his ability and shall devote substantially all of his working time and efforts to the business and affairs of KCSI and its affiliates. 2. Compensation. (a) Base Compensation. KCSI shall pay Executive as compensation for his services hereunder an annual base salary at the rate in effect on the date of this Agreement. Such rate shall not be increased prior to January 1, 1999 and shall not be reduced except as agreed by the parties or except as part of a general salary reduction program imposed by KCSI and applicable to all officers of KCSI. (b) Incentive Compensation. For the years 1996, 1997 and 1998, Executive shall not be entitled to participate in any KCSI incentive compensation plan. 3. Benefits. During the period of his employment hereunder, KCSI shall provide Executive with coverage under such benefit plans and programs as are made generally available to similarly situated employees of KCSI, provided (a) KCSI shall have no obligation with respect to any plan or program if Executive is not eligible for coverage thereunder, and (b) Executive acknowledges that stock options and other stock and equity participation awards are granted in the discretion of the KCSI Board or the Compensation Committee of the KCSI Board and that Executive has no right to receive stock options or other equity participation awards or any particular number or level of stock options or other awards. In determining contributions, coverage and benefits under any disability insurance policy and under any cash compensation-based plan provided to Executive by KCSI, it shall be assumed that the value of Executive s annual compensation, pursuant to this Agreement, is 175% of Executive's annual base salary. Executive acknowledges that all rights and benefits under benefit plans and programs shall be governed by the official text of each such plan or program and not by any summary or description thereof or any provision of this Agreement (except to the extent this Agreement expressly modifies such benefit plans or programs) and that KCSI is not is under any obligation to continue in effect or to fund any such plan or program, except as provided in Paragraph 7 hereof. KCSI also shall reimburse Executive for ordinary and necessary travel and other business expenses in accordance with policies and procedures established by KCSI. 4. Termination. (a) Termination by Executive. Executive may terminate this Agreement and his employment hereunder by at least thirty (30) days advance written notice to KCSI, except that in the event of any material breach of this Agreement by KCSI, Executive may terminate this Agreement and his employment hereunder immediately upon notice to KCSI. (b) Death or Disability. This Agreement and Executive's employment hereunder shall terminate automatically on the death or disability of Executive, except to the extent employment is continued under KCSI's disability plan. For purposes of this Agreement, Executive shall be deemed to be disabled if he qualifies for disability benefits under KCSI's long-term disability plan. (c) Termination by KCSI For Cause. KCSI may terminate this Agreement and Executive's employment "for cause" immediately upon notice to Executive. For purposes of this Agreement (except for Paragraph 7), termination "for cause" shall mean termination based upon any one or more of the following: (i) Any material breach of this Agreement by Executive; (ii) Executive's dishonesty involving KCSI or any subsidiary of KCSI; (iii) Gross negligence or willful misconduct in the performance of Executive's duties as determined in good faith by the KCSI Board; (iv) Willful failure by Executive to follow reasonable instructions of the President or other officer to whom Executive reports concerning the operations or business of KCSI or any subsidiary of KCSI; (v) Executive's fraud or criminal activity; or (vi) Embezzlement or misappropriation by Executive. (d) Termination by KCSI Other Than For Cause. (i) KCSI may terminate this Agreement and Executive s employment other than for cause immediately upon notice to Executive, and in such event, KCSI shall provide severance benefits to Executive in accordance with Paragraph 4(d)(ii) below. (ii) Unless the provisions of Paragraph 7 of this Agreement are applicable, if Executive s employment is terminated under Paragraph 4(d)(i), KCSI shall continue, for a period of one (1) year following such termination, (A) to pay to Executive as severance pay a monthly amount equal to one-twelfth (1/12th) of the annual base salary referenced in Paragraph 2(a) above, at the rate in effect immediately prior to termination, and, (B) to reimburse Executive for the cost (including state and federal income taxes payable with respect to this reimbursement) of continuing the health insurance coverage provided pursuant to this Agreement or obtaining health insurance coverage comparable to the health insurance provided pursuant to this Agreement, and obtaining coverage comparable to the life insurance provided pursuant to this Agreement, unless Executive is provided comparable health or life insurance coverage in connection with other employment. The foregoing obligations of KCSI shall continue until the end of such one (1) year period notwithstanding the death or disability of Executive during said period (except, in the event of death, the obligation to reimburse Executive for the cost of life insurance shall not continue). In the year in which termination of employment occurs, Executive shall be eligible to receive benefits under the KCSI Incentive Compensation Plan and the KCSI Executive Plan (if such Plans then are in existence and Executive was entitled to participate immediately prior to termination) in accordance with the provisions of such plans then applicable, and severance pay received in such year shall be taken into account for the purpose of determining benefits, if any, under the KCSI Incentive Compensation Plan but not under the KCSI Executive Plan. After the year in which termination occurs, Executive shall not be entitled to accrue or receive benefits under the KCSI Incentive Compensation Plan or the KCSI Executive Plan with respect to the severance pay provided herein, notwithstanding that benefits under such plan then are still generally available to executive employees of KCSI. After termination of employment, Executive shall not be entitled to accrue or receive benefits under any other employee benefit plan or program, except that Executive shall be entitled to participate in the KCSI Profit Sharing Plan, the KCSI Employee Stock Ownership Plan and the KCSI Section 401(k) Plan in the year of termination of employment only if Executive meets all requirements of such plans for participation in such year. 5. Non-Disclosure. During the term of this Agreement and at all times after any termination of this Agreement, Executive shall not, either directly or indirectly, use or disclose any KCSI trade secret, except to the extent necessary for Executive to perform his duties for KCSI while an employee. For purposes of this Agreement, the term "KCSI trade secret" shall mean any information regarding the business or activities of KCSI or any subsidiary or affiliate, including any formula, pattern, compilation, program, device, method, technique, process, customer list, technical information or other confidential or proprietary information, that (a) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (b) is the subject of efforts of KCSI or its subsidiary or affiliate that are reasonable under the circumstance to maintain its secrecy. In the event of any breach of this Paragraph 5 by Executive, KCSI shall be entitled to terminate any and all remaining severance benefits under Paragraph 4(d)(ii) dand shall be entitled to pursue such other legal and equitable remedies as may be available. 6. Duties Upon Termination; Survival. (a) Duties. Upon termination of this Agreement by KCSI or Executive for any reason, Executive shall immediately return to KCSI all KCSI trade secrets which exist in tangible form and shall sign such written resignations from all positions as an officer, director or member of any committee or board of KCSI and all direct and indirect subsidiaries and affiliates of KCSI as may be requested by KCSI and shall sign such other documents and papers relating to Executive's employment, benefits and benefit plans as KCSI may reasonably request. (b) Survival. The provisions of Paragraphs 5, 6(a) and 7 of this Agreement shall survive any termination of this Agreement by KCSI or Executive, and the provisions of Paragraph 4(d)(ii) shall survive any termination of this Agreement by KCSI under Paragraph 4(d)(i). 7. Continuation of Employment Upon Change in Control of KCSI. (a) Continuation of Employment. Subject to the terms and conditions of this Paragraph 7, in the event of a Change in Control (as defined in Paragraph 7(d)) at any time during the term of this Agreement, Executive agrees to remain in the employ of KCSI for a period of three years (the "Three-Year Period") from the date of such Change in Control (the "Control Change Date"). KCSI agrees to continue to employ Executive for the Three-Year Period. During the Three-Year Period, (i) the Executive's position (including offices, titles, reporting requirements and responsibilities), authority and duties shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 12 month period immediately before the Control Change Date and (ii) the Executive s services shall be performed at the location where Executive was employed immediately before the Control Change Date or at any other location less than 40 miles from such former location. During the Three-Year Period, KCSI shall continue to pay to Executive an annual base salary on the same basis and at the same intervals as in effect prior to the Control Change Date at a rate not less than 12 times the highest monthly base salary paid or payable to the Executive by KCSI in respect of the 12-month period immediately before the Control Change Date. (b) Benefits. During the Three-Year Period, Executive shall be entitled to participate, on the basis of his executive position, in each of the following KCSI plans (together, the "Specified Benefits") in existence, and in accordance with the terms thereof, at the Control Change Date: (i) any benefit plan, and trust fund associated therewith, related to (A) life, health, dental, disability, accidental death and dismemberment insurance or accrued but unpaid vacation time, (B) profit sharing, thrift or deferred savings (including deferred compensation, such as under Sec. 401(k) plans), (C) retirement or pension benefits, (D) ERISA excess benefits and similar plans and (E) tax favored employee stock ownership (such as under ESOP, and Employee Stock Purchase programs); and (ii) any other benefit plans hereafter made generally available to executives of Executive's level or to the employees of KCSI generally. In addition, KCSI shall use its best efforts to cause all outstanding options held by Executive under any stock option plan of KCSI or its affiliates to become immediately exercisable on the Control Change Date and to the extent that such options are not vested and are subsequently forfeited, the Executive shall receive a lump-sum cash payment within 5 days after the options are forfeited equal to the difference between the fair market value of the shares of stock subject to the non-vested, forfeited options determined as of the date such options are forfeited and the exercise price for such options. During the Three-Year Period Executive shall be entitled to participate, on the basis of his executive position, in any incentive compensation plan of KCSI in accordance with the terms thereof at the Control Change Date; provided that if under KCSI programs or Executive's Employment Agreement in existence immediately prior to the Control Change Date, there are written limitations on participation for a designated time period in any incentive compensation plan, such limitations shall continue after the Control Change Date to the extent so provided for prior to the Control Change Date. If the amount of contributions or benefits with respect to the Specified Benefits or any incentive compensation is determined on a discretionary basis under the terms of the Specified Benefits or any incentive compensation plan immediately prior to the Control Change Date, the amount of such contributions or benefits during the Three-Year Period for each of the Specified Benefits shall not be less than the average annual contributions or benefits for each Specified Benefit for the three plan years ending prior to the Control Change Date and, in the case of any incentive compensation plan, the amount of the incentive compensation during the Three-Year Period shall not be less than 75% of the maximum that could have been paid to the Executive under the terms of the incentive compensation plan. (c) Payment. With respect to any plan or agreement under which Executive would be entitled at the Control Change Date to receive Specified Benefits or incentive compensation as a general obligation of KCSI which has not been separately funded (including specifically, but not limited to, those referred to under Paragraph 7(b)(i)(d) above), Executive shall receive within five (5) days after such date full payment in cash (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of all amounts to which he is then entitled thereunder. (d) Change in Control. Except as provided in the last sentence of this Paragraph 7(d), for purposes of this Agreement, a "Change in Control" shall be deemed to have occurred if: (i) for any reason at any time less than seventy-five percent (75%) of the members of the KCSI Board shall be individuals who fall into any of the following categories: (A) individuals who were members of the KCSI Board on the date of the Agreement; or (B) individuals whose election, or nomination for election by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were members of the KCSI Board on the date of the Agreement; or (C) individuals whose election, or nomination for election, by KCSI's stockholders, was approved by a vote of at least seventy-five percent (75%) of the members of the KCSI Board then still in office who were elected in the manner described in (A) or (B) above, or (ii) any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act")) other than KCSI (as to KCSL and Railway securities) shall have become, according to a public announcement or filing, the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of KCSI, KCSL or Railway representing thirty percent (30%) (or, with respect to Paragraph 7(c) hereof, 40%) or more (calculated in accordance with Rule 13d-3) of the combined voting power of KCSI's, KCSL's or Railway's then outstanding voting securities; or (iii) the stockholders of KCSI, KCSL or Railway shall have approved a merger, consolidation or dissolution of KCSI, KCSL or Railway or a sale, lease, exchange or disposition of all or substantially all of KCSI's, KCSL's or Railway's assets, if persons who were the beneficial owners of the combined voting power of KCSI's, KCSL's or Railway's voting securities immediately before any such merger, consolidation, dissolution, sale, lease, exchange or disposition do not immediately thereafter, beneficially own, directly or indirectly, in substantially the same proportions, more than 60% of the combined voting power of any corporation or other entity resulting from any such transaction. Notwithstanding the foregoing provisions of this Paragraph 7(d) to the contrary, the sale of shares of stock of Kansas City Southern Lines, Inc. ("KCSL") pursuant to an initial public offering of shares of stock of KCSL shall not constitute a Change in Control. (e) Termination After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, KCSI may terminate the employment of Executive (the "Termination"), but unless such Termination is for Cause as defined in subparagraph (g) or for disability, within five (5) days of the Termination KCSI shall pay to Executive his full base salary through the Termination, to the extent not theretofore paid, plus a lump sum amount (the "Special Severance Payment") equal to the product (discounted to the then present value on the basis of a rate of seven percent (7%) per annum) of (i) 175% his annual base salary specified in Paragraph 7(a) multiplied by (ii) three; and Specified Benefits (excluding any incentive compensation) to which Executive was entitled immediately prior to Termination shall continue until the end of the 3-year period ("Benefits Period") beginning on the date of Termination. If any plan pursuant to which Specified Benefits are provided immediately prior to Termination would not permit continued participation by Executive after Termination, then KCSI shall pay to Executive within five (5) days after Termination a lump sum payment equal to the amount of Specified Benefits Executive would have received under such plan if Executive had been fully vested in the average annual contributions or benefits in effect for the three plan years ending prior to the Control Change Date (regardless of any limitations based on the earnings or performance of KCSI) and a continuing participant in such plan to the end of the Benefits Period. (f) Resignation After Control Change Date. In the event of a Change in Control as defined in Paragraph 7(d), thereafter, upon good reason (as defined below), Executive may, at any time during the 3-year period following the Change in Control, in his sole discretion, on not less than thirty (30) days written notice (the "Notice of Resignation") to the Secretary of KCSI and effective at the end of such notice period, resign his employment with KCSI (the "Resignation"). Within five (5) days of such a Resignation, KCSI shall pay to Executive his full base salary through the effective date of such Resignation, to the extent not theretofore paid, plus a lump sum amount equal to the Special Severance Payment (computed as provided in the first sentence of Paragraph 7(e), except that for purposes of such computation all references to "Termination" shall be deemed to be references to "Resignation"). Upon Resignation of Executive, Specified Benefits to which Executive was entitled immediately prior to Resignation shall continue on the same terms and conditions as provided in Paragraph 7(e) in the case of Termination (including equivalent payments provided for therein). For purposes of this Agreement, "good reason" means any of the following: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive s position (including offices, titles, reporting requirements or responsibilities), authority or duties as contemplated by Section 7(a)(i), or any other action by KCSI which results in a diminution or other material adverse change in such position, authority or duties; (ii) any failure by KCSI to comply with any of the provisions of Paragraph 7; (iii) KCSI s requiring the Executive to be based at any office or location other than the location described in Section 7(a)(ii); (iv) any other material adverse change to the terms and conditions of the Executives employment; or (v) any purported termination by KCSI of the Executive's employment other than as expressly permitted by this Agreement (any such purported termination shall not be effective for any other purpose under this Agreement). A passage of time prior to delivery of the Notice of Resignation or a failure by the Executive to include in the Notice of Resignation any fact or circumstance which contributes to a showing of Good Reason shall not waive any right of the Executive under this Agreement or preclude the Executive from asserting such fact or circumstance in enforcing rights under this Agreement. (g) Termination for Cause After Control Change Date. Notwithstanding any other provision of this Paragraph 7, at any time after the Control Change Date, Executive may be terminated by KCSI "for cause." Cause means commission by the Executive of any felony or willful breach of duty by the Executive in the course of the Executive's employment; except that Cause shall not mean: (i) bad judgment or negligence; (ii) any act or omission believed by the Executive in good faith to have been in or not opposed to the interest of KCSI (without intent of the Executive to gain, directly or indirectly, a profit to which the Executive was not legally entitled); (iii) any act or omission with respect to which a determination could properly have been made by the KCSI Board that the Executive met the applicable standard of conduct for indemnification or reimbursement under KCSI's by-laws, any applicable indemnification agreement, or applicable law, in each case in effect at the time of such act or omission; or (iv) any act or omission with respect to which Notice of Termination of the Executive is given more than 12 months after the earliest date on which any member of the KCSI Board, not a party to the act or omission, knew or should have known of such act or omission. Any Termination of the Executive s employment by KCSI for Cause shall be communicated to the Executive by Notice of Termination. (h) Gross-up for Certain Taxes. If it is determined (by the reasonable computation of KCSI s independent auditors, which determinations shall be certified to by such auditors and set forth in a written certificate ("Certificate") delivered to the Executive) that any benefit received or deemed received by the Executive from KCSI pursuant to this Agreement or otherwise (collectively, the "Payments") is or will become subject to any excise tax under Section 4999 of the Code or any similar tax payable under any United States federal, state, local or other law (such excise tax and all such similar taxes collectively, "Excise Taxes"), then KCSI shall, immediately after such determination, pay the Executive an amount (the "Gross-up Payment") equal to the product of: (i) the amount of such Excise Taxes; multiplied by (ii) the Gross-up Multiple (as defined in Paragraph 7(k). The Gross-up Payment is intended to compensate the Executive for the Excise Taxes and any federal, state, local or other income or excise taxes or other taxes payable by the Executive with respect to the Gross-up Payment. KCSI shall cause the preparation and delivery to the Executive of a Certificate upon request at any time. KCSI shall, in addition to complying with this Paragraph 7(h), cause all determinations and certifications under Paragraphs 7(h)-(o) to be made as soon as reasonably possible and in adequate time to permit the Executive to prepare and file the Executive's individual tax returns on a timely basis. (i) Determination by the Executive. (i) If KCSI shall fail (A) to deliver a Certificate to the Executive or (B) to pay to the Executive the amount of the Gross-up Payment, if any, within 14 days after receipt from the Executive of a written request for a Certificate, or if at any time following receipt of a Certificate the Executive disputes the amount of the Gross-up Payment set forth therein, the Executive may elect to demand the payment of the amount which the Executive, in accordance with an opinion of counsel to the Executive ("Executive Counsel Opinion"), determines to be the Gross-up Payment. Any such demand by the Executive shall be made by delivery to KCSI of a written notice which specifies the Gross-up Payment determined by the Executive and an Executive Counsel Opinion regarding such Gross-up Payment (such written notice and opinion collectively, the "Executive's Determination"). Within 14 days after delivery of the Executive's Determination to KCSI, KCSI shall either (A) pay the Executive the Gross-up Payment set forth in the Executive's Determination (less the portion of such amount, if any, previously paid to the Executive by KCSI) or (B) deliver to the Executive a Certificate specifying the Gross-up Payment determined by KCSI's independent auditors, together with an opinion of KCSI's counsel ("KCSI Counsel Opinion"), and pay the Executive the Gross-up Payment specified in such Certificate. If for any reason KCSI fails to comply with clause (B) of the preceding sentence, the Gross-up Payment specified in the Executive s Determination shall be controlling for all prposes. (ii) If the Executive does not make a request for, and KCSI does not deliver to the Executive, a Certificate, KCSI shall, for purposes of Paragraph 7(j), be deemed to have determined that no Gross-up Payment is due. (j) Additional Gross-up Amounts. If, despite the initial conclusion of KCSI and/or the Executive that certain Payments are neither subject to Excise Taxes nor to be counted in determining whether other Payments are subject to Excise Taxes (any such item, a "Non-Parachute Item"), it is later determined (pursuant to subsequently-enacted provisions of the Code, final regulations or published rulings of the IRS, final IRS determination or judgment of a court of competent jurisdiction or KCSI s independent auditors) that any of the Non-Parachute Items are subject to Excise Taxes, or are to be counted in determining whether any Payments are subject to Excise Taxes, with the result that the amount of Excise Taxes payable by the Executive is greater than the amount determined by KCSI or the Executive pursuant to Paragraph 7(h) or Paragraph 7(i), as applicable, then KCSI shall pay the Executive an amount (which shall also be deemed a Gross-up Payment) equal to the product of: (i) the sum of (A) such additional Excise Taxes and (B) any interest, fines, penalties, expenses or other costs incurred by the Executive as a result of having taken a position in accordance with a determination made pursuant to Paragraph 7(h); multiplied by (ii) the Gross-up Multiple. (k) Gross-up Multiple. The Gross-up Multiple shall equal a fraction, the numerator of which is one (1.0), and the denominator of which is one (1.0) minus the sum, expressed as a decimal fraction, of the rates of all federal, state, local and other income and other taxes and any Excise Taxes applicable to the Gross-up Payment; provided that, if such sum exceeds 0.8, it shall be deemed equal to 0.8 for purposes of this computation. (If different rates of tax are applicable to various portions of a Gross-up Payment, the weighted average of such rates shall be used.) (l) Opinion of Counsel. "Executive Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that there is a reasonable basis to support a conclusion that the Gross-up Payment determined by the Executive has been calculated in accord with this Paragraph 7 and applicable law. "Company Counsel Opinion" means a legal opinion of nationally recognized executive compensation counsel that (i) there is a reasonable basis to support a conclusion that the Gross-up Payment set forth in the Certificate of KCSI's independent auditors has been calculated in accord with this Paragraph 7 and applicable law, and (ii) there is no reasonable basis for the calculation of the Gross-up Payment determined by the Executive. (m) Amount Increased or Contested. The Executive shall notify KCSI in writing of any claim by the IRS or other taxing authority that, if successful, would require the payment by KCSI of a Gross-up Payment. Such notice shall include the nature of such claim and the date on which such claim is due to be paid. The Executive shall give such notice as soon as practicable, but no later than 10 business days, after the Executive first obtains actual knowledge of such claim; provided, however, that any failure to give or delay in giving such notice shall affect KCSI's obligations under this Paragraph 7 only if and to the extent that such failure results in actual prejudice to KCSI. The Executive shall not pay such claim less than 30 days after the Executive gives such notice to KCSI (or, if sooner, the date on which payment of such claim is due). If KCSI notifies the Executive in writing before the expiration of such period that it desires to contest such claim, the Executive shall: (i) give KCSI any information that it reasonably requests relating to such claim; (ii) take such action in connection with contesting such claim as KCSI reasonably requests in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by KCSI; (iii) cooperate with KCSI in good faith to contest such claim; and (iv) permit KCSI to participate in any proceedings relating to such claim; provided, however, that KCSI shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax, including related interest and penalties, imposed as a result of such representation and payment of costs and expenses. Without limiting the foregoing, KCSI shall control all proceedings in connection with such contest and, at its sole option, may pursue or forego any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner. The Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as KCSI shall determine; provided, however, that if KCSI directs the Executive to pay such claim and sue for a refund, KCSI shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify the Executive, on an after-tax basis, for any Excise Tax or income tax, including related interest or penalties, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. The KCSI's control of the contest shall be limited to issues with respect to which a Gross-up Payment would be payable. The Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the IRS or other taxing authority. (n) Refunds. If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), the Executive receives any refund with respect to such claim, the Executive shall (subject to KCSI's complying with the requirements of Paragraph 7(m)) promptly pay KCSI the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by KCSI pursuant to Paragraph 7(m), a determination is made that the Executive shall not be entitled to a full refund with respect to such claim and KCSI does not notify the Executive in writing of its intent to contest such determination before the expiration of 30 days after such determination, then the applicable part of such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-up Payment required to be paid. Any contest of a denial of refund shall be controlled by Paragraph 7(m). (o) Expenses. If any dispute should arise under this Agreement after the Control Change Date involving an effort by Executive to protect, enforce or secure rights or benefits claimed by Executive hereunder, KCSI shall pay (promptly upon demand by Executive accompanied by reasonable evidence of incurrence) all reasonable expenses (including attorneys fees) incurred by Executive in connection with such dispute, without regard to whether Executive prevails in such dispute except that Executive shall repay KCSI any amounts so received if a court having jurisdiction shall make a final, nonappealable determination that Executive acted frivolously or in bad faith by such dispute. To assure Executive that adequate funds will be made available to discharge KCSI's obligations set forth in the preceding sentence, KCSI has established a trust and upon the occurrence of a Change in Control shall promptly deliver to the trustee of such trust to hold in accordance with the terms and conditions thereof that sum which the KCSI Board shall have determined is reasonably sufficient for such purpose. (p) Prevailing Provisions. On and after the Control Change Date, the provisions of this Paragraph 7 shall control and take precedence over any other provisions of this Agreement which are in conflict with or address the same or a similar subject matter as the provisions of this Paragraph 7. 8. Mitigation and Other Employment. After a termination of Executive's employment pursuant to Paragraph 4(d)(i) or a Change in Control as defined in Paragraph 7(d), Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, and except as otherwise specifically provided in Paragraph 4(d)(ii) with respect to health and life insurance, no such other employment, if obtained, or compensation or benefits payable in connection therewith shall reduce any amounts or benefits to which Executive is entitled hereunder. Such amounts or benefits payable to Executive under this Agreement shall not be treated as damages but as severance compensation to which Executive is entitled because Executive's employment has been terminated. 9. Notice. Notices and all other communications to either party pursuant to this Agreement shall be in writing and shall be deemed to have been given when personally delivered, delivered by facsimile or deposited in the United States mail by certified or registered mail, postage prepaid, addressed, in the case of KCSI, to KCSI at 114 West 11th Street, Kansas City, Missouri 64105, Attention: Secretary, or, in the case of the Executive, to him at 5639 High Drive, Shawnee Mission, Kansas 66208, or to such other address as a party shall designate by notice to the other party. 10. Amendment. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, waiver, modification or discharge is agreed to in a writing signed by Executive and the President of KCSI. No waiver by any party hereto at any time of any breach by another party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 11. Successors in Interest. The rights and obligations of KCSI under this Agreement shall inure to the benefit of and be binding in each and every respect upon the direct and indirect successors and assigns of KCSI, regardless of the manner in which such successors or assigns shall succeed to the interest of KCSI hereunder, and this Agreement shall not be terminated by the voluntary or involuntary dissolution of KCSI, KCSL or Railway or by any merger or consolidation or acquisition involving KCSI, KCSL or Railway, or upon any transfer of all or substantially all of KCSI's, KCSL's or Railway's assets, or terminated otherwise than in accordance with its terms. In the event of any such merger or consolidation or transfer of assets, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the surviving corporation or the corporation or other person to which such assets shall be transferred. Neither this Agreement nor any of the payments or benefits hereunder may be pledged, assigned or transferred by Executive either in whole or in part in any manner, without the prior written consent of KCSI. 12. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provisions were omitted. 13. Controlling Law and Jurisdiction. The validity, interpretation and performance of this Agreement shall be subject to and construed under the laws of the State of Missouri, without regard to principles of conflicts of law. 14. Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and terminates and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the terms of Executive's employment or severance arrangements. IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Agreement as of the 18th day of September, 1997. KANSAS CITY SOUTHERN INDUSTRIES, INC. By /s/ Landon H. Rowland Landon H. Rowland, President /s/ Danny R. Carpenter Danny R. Carpenter EX-12.1 6 KANSAS CITY SOUTHERN INDUSTRIES, INC. AND SUBSIDIARY COMPANIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in Millions)
Years Ended December 31, 1997 1996 1995(a) 1994 1993 Earnings: Pretax Income(Loss), excluding equity in earnings of unconsolidated affiliates $ 64.0 $167.2 $484.5 $148.9 $160.9 Interest Expense on Indebtedness 63.7 59.6 77.0 53.6 51.2 Portion of Rents Representative of an Appropriate Interest Factor 26.4 13.9 17.2 17.7 11.0 Equity in Undistributed Earnings of 50% Owned Affiliates 2.8 0.8 5.7 15.6 9.0 Distributed Earnings of Less Than 50% Owned Affiliates 3.7 0.9 0.1 0.5 Fixed Charges of 50% Owned Affiliates 6.0 1.3 1.3 0.9 1.4 Income (Loss) as Adjusted $162.9 $246.5 $586.6 $236.8 $234.0 Fixed Charges: Interest Expense on Indebtedness $ 63.7 $ 59.6 $ 77.0 $ 53.6 $ 51.2 Capitalized Interest 7.4 - - - - Portion of Rents Representative of an Appropriate Interest Factor 26.4 13.9 17.2 17.7 11.0 Fixed Charges of 50% Owned Affiliates 6.0 1.3 1.3 0.9 1.4 Total Fixed Charges $103.5 $ 74.8 $ 95.5 $ 72.2 $ 63.6 Ratio of Earnings to Fixed Charges 1.57* 3.30 6.14 3.28 3.68 * Includes one-time restructuring, asset impairment and other charges. Excluding these one-time items, the ratio for 1997 is 3.47. Note: Exclude amortization expense on intangible debt discount due to immateriality
EX-18.1 7 February 26, 1998 Board of Directors Kansas City Southern Industries, Inc. 114 West Eleventh Street Kansas City, Missouri 64105 Dear Directors: We have audited the consolidated financial statements included in the Kansas City Southern Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 1997 and issued our report thereon dated February 26, 1998. Note 1 to the consolidated financial statements describes changes in the Company's method of applying its accounting policy regarding the method of measuring the impairment of goodwill under APB 17 as a result of changing circumstances in the railroad industry and in the Company's structure. The change in this method of measurement relates to the level at which assets are grouped from the business unit level to the individual investment component level within the business unit. At the same time, there were changes in the estimates of future cash flows used to measure the recoverability of goodwill. The effect of the change in the method of applying the accounting principle is inseparable from the changes in estimate. Accordingly the combined effects are reported as a change in estimate. It should be understood that the preferability of one acceptable method of applying this policy over another has not been addressed in any authoritative accounting literature and in arriving at our opinion expressed below, we have relied on management's business planning and judgment. Based on our discussions with management and the stated reasons for the change, we believe that such change represents, in your circumstances, the adoption of a preferable alternative method of applying your accounting policy regarding the impairment of goodwill in conformity with Accounting Principles Board Opinion No. 20. Yours very truly, /s/ Price Waterhouse LLP EX-21.1 8 Page 1 Subsidiaries of the Company Kansas City Southern Industries, Inc., a Delaware Corporation, has no parent. All subsidiaries of the Company listed below are included in the consolidated financial statements unless otherwise indicated State or Percentage other Jurisdiction of of Incorporation Ownership or Organization Animal Resources, Inc. (3)* 49% Missouri BBOI Worldwide LLC (7) 50 Delaware Berger Associates, Inc. 100 Delaware Canama Transportation (15) 100 Cayman Islands Carland, Inc. (1) 100 Delaware Caymex Transportation, Inc. 100 Delaware DST Systems, Inc.* 41 Missouri FAM Holdings, Inc. 100 Delaware Fountain Investments, Inc. 100 Missouri Gateway Eastern Railway Company (13) 100 Illinois Gateway Western Railway Company (8) 100 Illinois Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V.*(14) 37 Mexico Janus Capital Corporation 83 Colorado Janus Capital International Ltd (6) 100 Colorado Janus Service Corp. (6) 100 Colorado Joplin Southern Corporation (12) 47 Missouri Joplin Union Depot* 33 Missouri Kansas City Southern Lines, Inc. 100 Delaware KC Terminal Railway 8 Missouri KCS Transportation Company 100 Delaware KCS Transport Co., Inc. (1) 100 Louisiana Landa Motor Lines (1) 100 Texas Louisiana, Arkansas & Texas Trans. Co. (1) 100 Delaware Martec Pharmaceutical, Inc. (3)* 49 Delaware Mexrail, Inc.* 49 Delaware Mid-South Microwave, Inc. 100 Delaware NAFTA Rail, S.A. de C.V. (15) 100 Mexico North American Freight Transportation Alliance Rail Corporation 100 Delaware Pabtex, Inc. (4) 100 Delaware Panama Canal Railway Company (16) 50 Cayman Islands Port Arthur Bulk Marine Terminal Co. (10) 80 Partnership PVI, Inc. 100 Delaware Rice-Carden Corporation 100 Missouri Southern Capital Corporation, LLC* 50 Delaware Southern Credit Corporation, Inc. (2) 100 Delaware Southern Development Company 100 Missouri Southern Group, Inc. 100 Delaware Southern Industrial Services, Inc. 100 Delaware The Kansas City Southern Railway Company 100 Missouri The Texas Mexican Railway Company* (9) 100 Texas TFM, S.A. de C.V.* (11) 80 Mexico Tolmak, Inc. 100 Delaware TransFin Insurance, Ltd. 100 Vermont Page 2 State or Percentage other Jurisdiction of of Incorporation Ownership or Organization Trans-Serve, Inc. (4) (5) 100 Delaware Veals, Inc. 100 Delaware Wyandotte Garage Corporation 80 Missouri * Unconsolidated Affiliate, Accounted for Using the Equity Method (1) Subsidiary of The Kansas City Southern Railway Company (2) Subsidiary of Southern Group, Inc. (3) Subsidiary of PVI, Inc. (4) Subsidiary of Southern Industrial Services, Inc. (5) Conducting business as Superior Tie & Timber (6) Subsidiary of Janus Capital Corporation (7) Unconsolidated Affiliate of Berger Associates, Inc. (8) Subsidiary of KCS Transportation Company (9) Subsidiary of Mexrail, Inc. (10) Subsidiary of Rice-Carden Corporation (11) Subsidiary of Grupo TFM (12) Subsidiary of Southern Development Company (13) Subsidiary of Gateway Western Railway Company (14) Subsidiary of NAFTA Rail, S.A. de C.V. (15) Subsidiary of Caymex Transportation, Inc. (16) Subsidiary of Canama Transportation Subsidiaries and Affiliates not shown, if taken in the aggregate, would not constitute a significant subsidiary of the Company. Subsidiaries and affiliates of DST Systems, Inc. are not shown. EX-23.1 9 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-69060, 33-50517, 33-50519) and in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-69648) of Kansas City Southern Industries, Inc. of our report dated February 26, 1998, appearing on page 39 of this Form 10-K. We also consent to the incorporation by reference of our report dated February 26, 1998 related to the consolidated financial statements of DST Systems, Inc., which appears in the DST Systems, Inc. Annual Report on Form 10-K, which is incorporated in this Annual Report on Form 10-K. /s/ Price Waterhouse LLP PRICE WATERHOUSE LLP Kansas City, Missouri March 12, 1998 F-1 EX-27.1 10
5 THIS SCHEDULE SUBMITTED AS EXHIBIT 27.1 TO FORM 10-K CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS OF KANSAS CITY SOUTHERN INDUSTRIES, INC., COMMISSION FILE NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1997 DEC-31-1997 33,500,000 0 177,000,000 0 38,400,000 373,100,000 1,745,800,000 518,600,000 2,434,200,000 437,500,000 805,900,000 0 7,100,000 1,100,000 690,100,000 2,434,200,000 0 1,058,300,000 0 951,800,000 0 0 63,700,000 79,200,000 68,400,000 (14,100,000) 0 0 0 (14,100,000) (.13) (.13)
-----END PRIVACY-ENHANCED MESSAGE-----