-----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, WIL6k8mP/QaZ7T8Bzci2hvfPRUsrJwEF8SIw4bWZkn4uFqRDTkCAxJbOVpirfQLP Tg1s9fI73oKsJuzQc+LqrQ== 0000054480-97-000024.txt : 19971105 0000054480-97-000024.hdr.sgml : 19971105 ACCESSION NUMBER: 0000054480-97-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971104 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-Q SEC ACT: SEC FILE NUMBER: 001-04717 FILM NUMBER: 97707702 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-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from to Commission File Number 1-4717 KANSAS CITY SOUTHERN INDUSTRIES, INC. (Exact name of Company as specified in its charter) Delaware 44-0663509 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 114 West 11th Street, Kansas City, Missouri 64105 (Address of principal executive offices) (Zip Code) (816) 983-1303 (Company's telephone number, including area code) No Changes (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 31, 1997 Common Stock, $.01 per share par value 107,627,371 Shares KANSAS CITY SOUTHERN INDUSTRIES, INC. FORM 10-Q SEPTEMBER 30, 1997 INDEX Page PART I - FINANCIAL INFORMATION Item 1. Financial Statements Introductory Comments 1 Consolidated Condensed Balance Sheets - September 30, 1997 and December 31, 1996 2 Consolidated Condensed Statements of Income - Three and Nine Months Ended September 30, 1997 and 1996 3 Computation of Primary Earnings per Common Share 3 Consolidated Condensed Statements of Cash Flows - Nine Months Ended September 30, 1997 and 1996 4 Notes to Consolidated Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 23 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 KANSAS CITY SOUTHERN INDUSTRIES, INC. FORM 10-Q SEPTEMBER 30, 1997 PART I - FINANCIAL INFORMATION Item 1. Financial Statements INTRODUCTORY COMMENTS The Consolidated Condensed Financial Statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Consolidated Condensed Financial Statements should be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 2 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars in Millions) (Unaudited)
September 30, December 31, 1997 1996 ASSETS Current Assets: Cash and equivalents $ 43.4 $ 22.9 Accounts receivable, net 173.7 138.1 Inventories 36.9 39.3 Other current assets 89.6 91.8 Total current assets 343.6 292.1 Investments held for operating purposes 679.7 335.2 Properties (net of $524.6 and $491.3 accumulated depreciation and amortization, respectively) 1,269.3 1,219.3 Intangibles and Other Assets, net 238.3 237.5 Total assets $2,530.9 $2,084.1 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Debt due within one year $ 107.2 $ 7.6 Accounts and wages payable 99.7 102.6 Accrued liabilities 170.1 134.4 Total current liabilities 377.0 244.6 Other Liabilities: Long-term debt 834.3 637.5 Deferred income taxes 359.9 337.7 Other deferred credits 137.0 129.8 Total other liabilities 1,331.2 1,105.0 Minority Interest in consolidated subsidiaries 22.1 18.8 Stockholders' Equity: Preferred stock 7.1 7.1 Common stock 1.1 0.4 Capital surplus - - Retained earnings 944.6 883.3 Net unrealized gain on investments 47.8 24.9 Shares held in trust (200.0) (200.0) Total stockholders' equity 800.6 715.7 Total liabilities and stockholders' equity $2,530.9 $2,084.1
See accompanying notes to consolidated condensed financial statements. 3 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars in Millions, Except per Share Data) (Unaudited)
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenues $273.6 $218.2 $764.0 $626.4 Costs and expenses 169.8 138.3 500.3 422.1 Depreciation and amortization 19.3 19.7 56.2 57.9 Operating Income 84.5 60.2 207.5 146.4 Equity in net earnings (losses) of unconsolidated affiliates: DST Systems, Inc. 5.6 56.3 17.4 63.2 Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (2.3) - (5.3) - Other 1.0 0.2 2.8 1.7 Interest expense (19.3) (16.1) (46.6) (43.2) Other, net 4.4 2.4 14.7 12.3 Pretax Income 73.9 103.0 190.5 180.4 Income tax provision 25.4 22.5 71.1 50.7 Minority interest in consolidated earnings 6.7 4.4 17.3 11.3 Net Income 41.8 76.1 102.1 118.4 Less: dividends on preferred stock 0.1 0.1 0.2 0.2 Net Income Applicable to Common Stockholders $ 41.7 $ 76.0 $ 101.9 $ 118.2 Computation of Primary Earnings per Common Share Weighted Average Primary Common Shares Outstanding (in thousands) 110,802 114,012 110,253 116,406 Primary Earnings per Common Share $ 0.38 $ 0.67 $ 0.92 $ 1.02 Cash Dividends Paid: Per Preferred share $ .25 $ .25 $ .75 $ .75 Per Common share .04 .03 .11 .10
See accompanying notes to consolidated condensed financial statements. 4 KANSAS CITY SOUTHERN INDUSTRIES, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Dollars in Millions) (Unaudited)
Nine Months Ended September 30, 1997 1996 CASH FLOWS PROVIDED BY (USED FOR): OPERATING ACTIVITIES: Net income $102.1 $118.4 Adjustments to net income: Depreciation and amortization 56.2 57.9 Deferred income taxes 14.0 8.1 Equity in undistributed earnings (14.9) (61.1) Changes in working capital items: Accounts receivable (25.7) (0.1) Inventories 4.0 3.9 Other current assets (2.0) 2.2 Accounts and wages payable (10.0) 2.3 Accrued liabilities 24.1 (64.8) Other, net 2.4 0.6 Net 150.2 67.4 INVESTING ACTIVITIES: Property acquisitions (57.1) (110.3) Proceeds from disposal of property 5.8 3.6 Investment in and loans with affiliates (298.8) (24.8) Net sales (purchases) of short-term investments 2.2 (31.5) Proceeds from disposal of investments - 8.8 Other, net 8.8 4.1 Net (339.1) (150.1) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 336.4 201.0 Repayment of long-term debt (82.0) (6.6) Proceeds from stock plans 17.7 10.8 Stock repurchased (47.1) (120.3) Cash dividends paid (15.4) (14.8) Other, net (0.2) 3.3 Net 209.4 73.4 CASH AND EQUIVALENTS: Net increase (decrease) 20.5 (9.3) At beginning of year 22.9 31.8 At end of period $ 43.4 $ 22.5
See accompanying notes to consolidated condensed financial statements. 5 KANSAS CITY SOUTHERN INDUSTRIES, INC. NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. In the opinion of Kansas City Southern Industries, Inc. ("Company"; "KCSI"), the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiaries as of September 30, 1997 and December 31, 1996, the results of operations for the three and nine months ended September 30, 1997 and 1996, and cash flows for the nine months ended September 30, 1997 and 1996. 2. The results of operations for the three and nine months ended September 30, 1997 and 1996 are not necessarily indicative of the results to be expected for the full year 1997. 3. The accompanying consolidated condensed financial statements have been prepared consistently with accounting policies described more fully in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. On July 29, 1997, the Company's Board of Directors authorized a 3-for-1 split of the Company's common stock, which was effected in the form of a stock dividend paid on September 16, 1997 to stockholders of record as of August 25, 1997. All share and per share data has been restated to reflect the stock split. The accumulation of the 1997 and 1996 first, second and third quarter Primary Earnings per Common Share does not total the Primary Earnings per Common Share for the nine months ended September 30, 1997 and 1996, respectively, as a result of repurchases of Company common stock. 4. Effective January 1, 1997, the Company realigned its business segments to better define the core industries in which it operates. The various components comprising the segment formerly known as Corporate & Other have been assigned to either the Transportation or Financial Asset Management segment. Transportation consists of: The Kansas City Southern Railway Company ("KCSR"); Southern Group, Inc.; Gateway Western Railway Company ("Gateway Western"); transportation-related KCSI Holding Company amounts; and transportation-related subsidiaries and equity investments, including Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana S. de R.L. de C.V.), Southern Capital Corporation, LLC ("Southern Capital"), and Mexrail, Inc. ("Mexrail"). Financial Asset Management includes Janus Capital Corporation ("Janus"), Berger Associates, Inc. ("Berger"), the Company's equity interest in DST Systems, Inc. ("DST"), as well as Financial Asset Management- related KCSI Holding Company amounts. Prior year's information has been realigned to reflect the new segment approach. During third quarter 1997, the Company formed Kansas City Southern Lines, Inc. ("KCSL") as a holding company for KCSR and all other transportation-related subsidiaries and affiliates. KCSL was organized to provide separate control, management and accountability for all transportation operations and businesses. On September 19, 1997, the Company announced its intention to separate its Transportation segment from its Financial Asset Management segment. On October 21, 1997, the Company announced that the separation would take the form of an initial public offering of approximately 60% of KCSL's equity. The offering is expected to occur early in 1998, subject to market conditions and completion of regulatory review and other processes. 6 As a result of the Company's decision to commence an initial public offering of KCSL, among other factors, management is in the process of performing a detailed review of the various assets of all Company subsidiaries. This review is being performed using the relevant accounting guidance (e.g., Statement of Financial Accounting Standards No. 121, Accounting Principles Board Opinion No. 17), and under the established accounting policies described more fully in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. This review is expected to be completed during fourth quarter 1997. 5. The Company's inventories ($36.9 million at September 30, 1997 and $39.3 million at December 31, 1996) primarily consist of material and supplies related to rail transportation. Other components of inventories are not material. 6. Investments in unconsolidated affiliates and certain other investments accounted for under the equity method generally include all entities in which the Company or its subsidiaries have significant influence but not more than 50% voting interest. Investments in unconsolidated affiliates at September 30, 1997 include equity interests in DST (approximately 41%), Grupo TFM (37%), Southern Capital (50%) and Mexrail (49%), as well as the Company's interests in other companies. As more fully discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, during first quarter 1997, Gateway Western was accounted for under the equity method as a majority-owned subsidiary while the Company awaited approval from the Surface Transportation Board ("STB") for the acquisition of Gateway Western. The STB approved the Company's acquisition of Gateway Western, effective May 5, 1997. Accordingly, the assets, liabilities, revenues and expenses of Gateway Western are included in the Company's consolidated financial statements. Additionally, the Company restated first quarter 1997 to include Gateway Western as a consolidated subsidiary as of January 1, 1997, and results of operations for the nine months ended September 30, 1997 reflect this restatement. DST has a Stockholders' Rights Agreement, which includes provisions providing that under certain circumstances following a "change in control" of KCSI, as defined in DST's Stockholders' Rights Agreement, substantial dilution of the Company's interest in DST could result. Additionally, the Company is party to certain agreements with Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") covering the Grupo TFM and Mexrail ventures. TMM (including its affiliates) owns approximately 38.4% of Grupo TFM and 51% of Mexrail. These agreements contain "change in control" provisions, provisions intended to preserve the Company's and TMM's proportionate ownership of the ventures, and super majority provisions with respect to voting on certain significant transactions. Such agreements also provide a right of first refusal in the event that either party initiates a divestiture of its equity interest in Grupo TFM or Mexrail. Under certain circumstances, such agreements could affect the Company's ownership percentage and rights in these equity affiliates. 7 Combined condensed financial information of unconsolidated affiliates is shown below (dollars in millions):
Financial Condition: September 30, 1997 December 31, 1996 DST Grupo TFM Other DST Grupo TFM Other Current Assets $ 215.0 $ 102.3 $ 25.7 $ 201.3 $ 1.2 $ 34.4 Non-current assets 1,048.2 1,885.7 257.1 920.3 4.2 331.7 Assets $1,263.2 $1,988.0 $282.8 $1,121.6 $ 5.4 $ 366.1 Current liabilities$ 109.8 $ 93.2 $ 11.0 $ 125.7 $ 1.2 $ 27.2 Non-current liabilities 348.0 1,106.7 196.2 300.7 - 267.7 Equity of stockholders and partners 805.4 788.1 75.6 695.2 4.2 71.2 Liabilities and equity $1,263.2 $1,988.0 $282.8 $1,121.6 $ 5.4 $ 366.1 Investment in unconsolidated affiliates $ 331.7 $ 296.0 $ 42.1 $ 283.5 $ 2.7 $ 39.7
Operating Results:
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenues: DST $159.8 $ 139.6 $473.9 $427.0 Grupo TFM (a) 100.0 - 107.0 - All others 17.8 8.1 50.6 23.3 Total revenues $277.6 $ 147.7 $631.5 $450.3 Operating costs and expenses: DST $138.3 $ 137.8 $407.7 $388.7 Grupo TFM (a) 89.9 - 96.9 - All others 18.4 8.3 45.6 22.0 Total operating costs and expenses $246.6 $ 146.1 $550.2 $410.7 Net income: DST $ 14.1 $ 138.6 $ 43.0 $155.4 Grupo TFM (a) (11.0) - (18.9) - All others 0.8 (0.8) 3.9 (0.7) Total net income $ 3.9 $ 137.8 $ 28.0 $154.7
(a) The operating results provided for Grupo TFM reflect its operation of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.) beginning on June 23, 1997. See discussion in Note 9 below. 8 7. For purposes of the Statement of Cash Flows, the Company considers all short-term liquid investments with a maturity of generally three months or less to be cash equivalents. a.Supplemental Cash Flow Information (in millions):
Nine Months Ended September 30, 1997 1996 Interest paid (excluding capitalized interest) $ 50.8 $ 52.7 Income taxes paid 44.5 106.9
The Company's income taxes paid for the nine months ended September 30, 1996 included the payment of federal and state income taxes resulting from the DST initial public offering transactions, which occurred in fourth quarter 1995. b.Noncash Investing and Financing Activities: In first quarter 1997, the Company issued approximately 246,000 shares of KCSI common stock under the Ninth Offering of the Employee Stock Purchase Plan ("ESPP"). These shares, totaling a purchase price of approximately $3.1 million, were subscribed and paid for through employee payroll deductions in 1996. In first quarter 1996, the Company issued approximately 305,400 shares of KCSI common stock under the Eighth Offering of the ESPP. These shares, totaling a purchase price of approximately $3.8 million, were subscribed and paid for through employee payroll deductions in 1994 and 1995. Certain Company subsidiaries and affiliates hold investments which are accounted for as "available for sale" securities as defined by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities." The Company records its proportionate share of any unrealized gains or losses related to these investments, net of deferred taxes, in stockholders' equity. The unrealized gain as of September 30, 1997, net of deferred taxes, related to these investments increased $22.9 million from December 31, 1996. The unrealized gain as of September 30, 1996, net of deferred taxes, increased $12.4 million from December 31, 1995. 8. Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") was issued in February 1997, effective for financial statements for interim and annual periods ending after December 15, 1997. The statement specifies the computation, presentation and disclosure requirements for earnings per share. The statement requires the computation of earnings per share under two methods: "basic" and "diluted." Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period (i.e., the denominator used in the basic calculation is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued). SFAS 128 requires the Company to present basic and diluted per share amounts for income from continuing operations and for net income on the face of the income statement. Although early adoption of SFAS 128 is not permitted, pro forma earnings per share amounts may be disclosed in the notes to the financial statements. Accordingly, if the Company's earnings per share had been computed in accordance with SFAS 128 for the three and nine months ended September 30, 1997 and 1996, pro forma earnings per share would have been as follows: 9
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Pro Forma Earnings per Share: Basic $ 0.39 $ 0.68 $0.95 $1.03 Diluted 0.38 0.67 0.92 1.02
9. As discussed more fully in Notes 2 and 11 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Mexican Government ("Government") awarded to Grupo TFM the right to purchase 80% of the common stock of TFM for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM holds the concession to operate over Mexico's Northeast rail lines for the next 50 years, with the option of a 50 year extension (subject to certain conditions). The remaining 20% of TFM was retained by the Government. The Government has the option of selling its interest through a public offering, or selling it to Grupo TFM after October 31, 2003 at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that Grupo TFM does not purchase the Government's 20% interest in TFM, the Government may require TMM and KCSI to purchase the Government's holdings in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Government's interest in Grupo TFM - see below). On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $297 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. The Company financed this contribution using borrowings under existing lines of credit. On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through the payment of the remaining $835 million U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and discount debentures ($400 million U.S.); (iii) proceeds from the sale of 24.6% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM, which includes a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the 10 agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Government has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. Based on the completed financing arrangements for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary (except for the possible capital call discussed above). As of September 30, 1997, Grupo TFM was in compliance with all provisions of the Contribution Agreement; accordingly, no additional contributions from the Company have been requested or made. As of September 30, 1997, the Company's investment in Grupo TFM was approximately $296 million. With the sale of 24.6% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.4%). The Company accounts for its investment in Grupo TFM under the equity method. In connection with the Company's investment in Grupo TFM, a Mexican company, matters arise with respect to financial accounting and reporting for foreign currency transactions and for translating foreign currency financial statements from Mexican pesos into U.S. dollars. The Company follows the requirements outlined in Statement of Financial Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"), and related authoritative guidance. Mexico's economy is currently classified as "highly inflationary" as defined in SFAS 52; accordingly, the U.S. dollar is Grupo TFM's functional currency, and any gains or losses from translating its financial statements into U.S. dollars will be included in the determination of its net income. Any equity earnings or losses from Grupo TFM included in the Company's results of operations will reflect the Company's share of such translation gains and losses. The Company will evaluate existing alternatives with respect to utilizing foreign currency instruments to hedge its U.S. dollar investment in Grupo TFM as market conditions change or exchange rates fluctuate. 10.In accordance with Statement of Financial Accounting Standards No. 58 "Capitalization of Interest Cost in Financial Statements That Include Investments Accounted for by the Equity Method" ("SFAS 58"), the Company has capitalized interest incurred on the borrowings under its lines of credit associated with the approximate $297 million capital contribution to Grupo TFM (see Note 9 above). Pursuant to SFAS 58, once Grupo TFM assumed operational control of TFM (June 23, 1997) and the planned principal operations of Grupo TFM commenced, capitalization of interest by the Company ceased. Interest capitalized by the Company for the nine months ended September 30, 1997 totaled $7.4 million. 11.In June 1997, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") were issued. SFAS 130 establishes standards for reporting and disclosure of comprehensive income and its components in the financial statements. SFAS 131 establishes standards for reporting information about operating segments in the financial statements. The reporting and disclosure required by these statements must be included in the Company's financial statements beginning in 1998. The Company is reviewing SFAS 130 and SFAS 131 and expects to adopt them by the required dates. 11 12. In July 1996, the Company was named as one of twenty-seven defendants in various lawsuits in Louisiana and Mississippi arising from the explosion of a rail car loaded with chemicals in Bogalusa, Louisiana on October 23, 1995. As a result of the explosion, nitrogen dioxide and oxides of nitrogen were released into the atmosphere over parts of that town and the surrounding area causing evacuations and injuries. Approximately 25,000 residents of Louisiana and Mississippi have asserted claims to recover damages allegedly caused by exposure to the chemicals. The Company neither owned nor leased the rail car or the rails on which it was located at the time of the explosion in Bogalusa. The Company did, however, move the rail car from Jackson to Vicksburg, Mississippi, where it was loaded with chemicals, and back to Jackson where the car was tendered to the Illinois Central Railroad Company ("IC"). The explosion occurred more than 15 days after the Company last transported the rail car. The car was loaded in excess of its standard weight when it was transported by the Company to interchange with the IC. The lawsuits in Louisiana and Mississippi are in different stages of progress. The Company filed motions seeking its dismissal in both the Louisiana and Mississippi actions. The motion was denied in Mississippi and is being appealed to the Mississippi Supreme Court. The motion awaits a hearing in Louisiana. Management believes that the Company's exposure with regard to liability in these cases is remote. The Company has had no significant changes in other outstanding litigation or contingencies from that previously reported in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 13.See the Recent Developments section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for significant transactions and events that will have an impact on the Company's future results of operations and financial position. 12 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The discussion set forth below, as well as other portions of this Form 10-Q, contains comments not based upon historical fact. Such forward-looking comments are based upon information currently available to management and management's perception thereof as of the date of this Form 10-Q. Readers can identify these forward-looking comments by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. The actual results of operations of Kansas City Southern Industries, Inc. ("Company"; "KCSI") could materially differ from those indicated in forward- looking comments. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company's Current Report on Form 8-K dated November 12, 1996 and its amendment, Form 8-K/A dated June 3, 1997, which have been filed with the U.S. Securities and Exchange Commission (File No. 1-4717) and are hereby incorporated by reference herein. Readers are strongly encouraged to consider these factors when evaluating any such forward-looking comments. KCSI, a Delaware Corporation organized in 1962, is a diversified holding company with principal operations in rail transportation and financial services. The Company supplies its various subsidiaries with managerial, legal, tax, financial and accounting services, in addition to managing other "non-operating" and more passive investments. During third quarter 1997, the Company formed Kansas City Southern Lines, Inc. ("KCSL") as a holding company for The Kansas City Southern Railway Company ("KCSR") and all other transportation-related subsidiaries and affiliates. KCSL was organized to provide separate control, management and accountability for all transportation operations and businesses. Effective January 1, 1997, the Company realigned its industry segments to more clearly reflect the Company's focus on its core businesses. The various components which formerly comprised the Corporate & Other segment were assigned to either the Transportation or Financial Asset Management segment. Accordingly, the Company's business activities by newly aligned industry segment and principal subsidiary companies are: Transportation - The Transportation segment consists of all transportation- related subsidiaries and investments, including: *KCSR, a wholly-owned subsidiary of the Company, operating a Class I Common Carrier railroad system; *Southern Group, Inc. ("SGI"), a wholly-owned subsidiary of KCSR, owning 100% of Carland, Inc. ("Carland") and managing the loan portfolio for Southern Capital Corporation, LLC ("Southern Capital," a 50% owned joint venture); *Gateway Western Railway Company ("Gateway Western"), an indirect wholly-owned subsidiary of the Company, operating a regional railroad system; *Equity investments in Southern Capital, Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. ("Grupo TFM," formerly Transportacion Ferroviaria Mexicana S. de R.L. de C.V., a 37% owned affiliate), and Mexrail, Inc. ("Mexrail," a 49% owned affiliate); *Various other consolidated subsidiaries; *KCSI Holding Company amounts. Financial Asset Management - This segment consists of all subsidiaries engaged in the management of investments for mutual funds, private and other accounts, as well as any Financial Asset Management-related investments. Included are: *Janus Capital Corporation ("Janus"), an 83% owned subsidiary; *Berger Associates, Inc. ("Berger"), an 87% owned subsidiary; *DST Systems, Inc. ("DST"), an approximate 41% owned equity investment; *KCSI Holding Company amounts. 13 RECENT DEVELOPMENTS Planned Public Offering of Transportation Business - On September 19, 1997, the Company announced the planned separation of its Transportation and Financial Asset Management segments. The form of the transaction will be an initial public offering of approximately 60% of KCSL's equity. The public offering is expected to occur early in 1998, subject to market conditions and completion of regulatory review and other processes. Operating Difficulties of the Union Pacific Railroad - As has been reported in the press, the Union Pacific Railroad ("UP") has experienced recent difficulties with its railroad operations, reportedly linked to its recent acquisition of the Southern Pacific Railroad. The Company has the largest interchange of rail traffic with the UP. The UP's difficulties have resulted in overall traffic congestion of the U.S. railroad system and have impacted the Company's ability to interchange traffic with UP, both for domestic and international traffic (i.e., to and from Mexico). This system congestion has resulted in certain equipment shortages due to the Company's rolling stock being retained within the UP system for unusually extended periods of time, for which UP remits car hire amounts. The Company has agreed to accept certain UP trains as diversion of traffic to assist in the easing of the UP's system congestion. For the nine months ended September 30, 1997, the Company had received only one such diverted UP train. The amount of trains to be diverted to the Company by UP, and the overall impact of the UP congestion problems, is not expected to have a material effect on the Company's 1997 result of operations. The Surface Transportation Board ("STB") issued an emergency service order on October 31, 1997, addressing the deteriorating quality of rail service in the Western United States. Key measures in the STB order, which is expected to facilitate resolution of problems in the West, include the granting to the Texas Mexican Railway ("Tex-Mex") access to Houston, Texas shippers, access to trackage rights over the more direct Algoa Route south of Houston, and a connection with the Burlington Northern Santa Fe Railroad at Flatonia, Texas. The order takes effect on November 5, 1997 and extends for 30 days initially. The STB plans another hearing for December 3, 1997 for a progress report from UP officials. Tex-Mex is a wholly-owned subsidiary of Mexrail. Mexico's Northeast Rail Lines - As disclosed previously, Grupo TFM, a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V. ("TMM") was awarded the right to purchase 80% of the common stock of TFM, S.A. de C.V. ("TFM," formerly Ferrocarril del Noreste, S.A. de C.V.) for approximately 11.072 billion Mexican pesos (approximately $1.4 billion U.S. based on the U.S. dollar/Mexican peso exchange rate on December 5, 1996). TFM holds the concession to operate over Mexico's Northeast rail lines for the next 50 years, with the option of a 50 year extension (subject to certain conditions). As previously disclosed, the remaining 20% of TFM was retained by the Mexican Government ("Government"). The Government has the option of selling its 20% interest through a public offering, or selling it to Grupo TFM after October 31, 2003 at the initial share price paid by Grupo TFM plus interest computed at the Mexican Base Rate (the Unidad de Inversiones (UDI) published by Banco de Mexico). In the event that Grupo TFM does not purchase the Government's 20% interest in TFM, the Government may require TMM and KCSI to purchase the Government's holdings in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Government's interest in Grupo TFM - - see below). On January 31, 1997, Grupo TFM paid the first installment of the purchase price (approximately $565 million U.S. based on the U.S. dollar/Mexican peso exchange rate) to the Government, representing approximately 40% of the purchase price. This initial installment of the TFM purchase price was funded by Grupo TFM through capital contributions from TMM and the Company. The Company contributed approximately $297 million to Grupo TFM, of which approximately $277 million was used by Grupo TFM as part of the initial installment payment. The Company financed this contribution using borrowings under existing lines of credit. 14 On June 23, 1997, Grupo TFM completed the purchase of 80% of TFM through the payment of the remaining $835 million U.S. to the Government. This payment was funded by Grupo TFM using a significant portion of the funds obtained from: (i) senior secured term credit facilities ($325 million U.S.); (ii) senior notes and discount debentures ($400 million U.S.); (iii) proceeds from the sale of 24.6% of Grupo TFM to the Government (approximately $199 million U.S. based on the U.S. dollar/Mexican peso exchange rate on June 23, 1997); and (iv) additional capital contributions from TMM and the Company (approximately $1.4 million from each partner). Additionally, Grupo TFM entered into a $150 million revolving credit facility for general working capital purposes. The Government's interest in Grupo TFM is in the form of limited voting right shares, and the purchase agreement includes a call option for TMM and the Company, which is exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In February and March 1997, the Company entered into two separate forward contracts - $98 million in February 1997 and $100 million in March 1997 - to purchase Mexican pesos in order to hedge against a portion of the Company's exposure to fluctuations in the value of the Mexican peso versus the U.S. dollar. In April 1997, the Company realized a $3.8 million pretax gain in connection with these contracts. This gain was deferred, and has been accounted for as a component of the Company's investment in Grupo TFM. These contracts were intended to hedge only a portion of the Company's exposure related to the final installment of the purchase price and not any other transactions or balances. Concurrent with the financing transactions, Grupo TFM, TMM and the Company entered into a Capital Contribution Agreement ("Contribution Agreement") with TFM, which includes a possible capital call of $150 million from TMM and the Company if certain performance benchmarks, outlined in the agreement, are not met. The Company would be responsible for approximately $74 million of the capital call. The term of the Contribution Agreement is three years. In a related agreement between Grupo TFM, TFM and the Government, among others, the Government has agreed to contribute up to $37.5 million of equity capital to Grupo TFM if TMM and the Company are required to contribute under the capital call provisions of the Contribution Agreement prior to July 16, 1998. In the event the Government has not made any contributions by such date, the Govern- ment has committed up to July 31, 1999 to make additional capital contributions to Grupo TFM (of up to an aggregate amount of $37.5 million) on a proportionate basis with TMM and the Company if capital contributions are required. Any capital contributions to Grupo TFM from the Government would be used to reduce the contribution amounts required to be paid by TMM and the Company pursuant to the Contribution Agreement. Based on the completed financing arrangements for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary (except for the possible capital call discussed above). As of September 30, 1997, Grupo TFM was in compliance with all provisions of the Contribution Agreement; accordingly, no additional contributions from the Company have been requested or made. As of September 30, 1997, the Company's investment in Grupo TFM was approximately $296 million. With the sale of 24.6% of Grupo TFM to the Government, the Company's interest in Grupo TFM declined from 49% to approximately 37% (with TMM and a TMM affiliate owning the remaining 38.4%). The Company accounts for its investment in Grupo TFM under the equity method. Stock Split and 20% Increase in Quarterly Common Stock Dividend - On July 29, 1997, the Company's Board of Directors ("Board") authorized a 3-for-1 split in the Company's common stock effected in the form of a stock dividend. The Board also voted to increase the quarterly dividend 20% to $0.04 per share. Both dividends were paid on September 16, 1997 to stockholders of record as of August 25, 1997. Amounts reported in this Form 10-Q have been restated to reflect the stock split. Common Stock Repurchases - The Company's Board has authorized management to repurchase a total of 33 million shares of KCSI common stock under two programs - - the 1995 program for 24 million shares and the 1996 program for nine million shares. During first quarter 1997, the Company purchased the final 2.4 15 million shares under the forward purchase contract disclosed in Note 8 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. With these transactions, the Company has repurchased approximately 27.3 million shares of its common shares, completing the 1995 program and part of the 1996 program. Gateway Western - KCS Transportation Company ("KCSTC," a wholly-owned subsidiary of the Company) acquired beneficial ownership of the outstanding stock of Gateway Western in December 1996. The stock acquired by KCSTC was held in an independent voting trust until the Company received approval from the STB on the Company's proposed acquisition of Gateway Western. The STB issued its approval of the transaction effective May 5, 1997. Because the Gateway Western stock was held in trust during first quarter 1997, the Company accounted for Gateway Western under the equity method as a majority-owned unconsolidated subsidiary. Upon STB approval of the acquisition, the Company consolidated Gateway Western in the Transportation segment. Additionally, the Company restated first quarter 1997 to include Gateway Western as a consolidated subsidiary as of January 1, 1997, and results of operations for the nine months ended September 30, 1997 reflect this restatement. RESULTS OF OPERATIONS Segment revenues, operating income and net income comparisons follow (dollars in millions):
Three Months Nine Months Ended September 30, Ended September 30, 1997 1996 1997 1996 Revenues: Transportation (KCSL) $ 142.7 $ 132.2 $ 416.9 $ 392.8 Financial Asset Management 130.9 86.0 347.1 233.6 Total $ 273.6 $ 218.2 $ 764.0 $ 626.4 Operating Income: Transportation (KCSL) $ 24.5 $ 22.7 $ 52.6 $ 49.6 Financial Asset Management 60.0 37.5 154.9 96.8 Total $ 84.5 $ 60.2 $ 207.5 $ 146.4 Net Income: Transportation (KCSL) $ 3.0 $ 5.2 $ 6.3 $ 7.4 Financial Asset Management 38.8 70.9 95.8 111.0 Total $ 41.8 $ 76.1 $ 102.1 $ 118.4
The Company reported third quarter 1997 earnings of $41.8 million, or $0.38 per share, compared to $76.1 million, or $0.67 per share in third quarter 1996. Third quarter 1996 earnings include a one-time gain of approximately $47.7 million, or $0.42 per share (after-tax), from equity earnings in DST, representing the Company's proportionate share of the gain recognized by DST in connection with the merger of The Continuum Company, Inc. ("Continuum," formerly a DST equity investment) with Computer Sciences Corporation. Exclusive of this one-time gain, the Company's earnings per share increased 52% over third quarter 1996. Consolidated third quarter 1997 revenues rose 25% compared to the same period in 1996 from improvements in both of the Company's segments. Operating income for the three months ended September 30, 1997 increased 40% (to $84.5 million) versus comparable 1996, largely due to higher revenues, together with lower proportionate growth in Financial Asset Management operating expenses as compared to revenues. Equity earnings in unconsolidated affiliates totaled $4.3 million in third quarter 1997, which was significantly lower than the prior period due to the one-time gain in 1996. Third quarter 1997 includes an estimated $2.3 million equity loss from Grupo TFM, which more than offset increased equity earnings from 16 DST (exclusive of the Continuum gain) and other investments. Interest expense for the three months ended September 30, 1997 was 20% higher than comparable 1996 from higher average debt balances in 1997 resulting from the investment in Grupo TFM. For the nine months ended September 30, 1997, consolidated earnings were $102.1 million, or $0.92 per share, versus $70.7 million, or $0.61 per share in comparable 1996, exclusive of the one-time Continuum gain. Year to date 1997 consolidated revenues increased 22% to $764.0 million compared to the same period in 1996, primarily due to the growth in assets under management in the Financial Asset Management segment and the addition of Gateway Western revenues. Operating expenses for the nine months ended 1997 increased at a lower proportionate rate than revenues compared to 1996, leading to a 42% improvement in operating income. Year to date 1997 equity earnings of unconsolidated affiliates increased over comparable 1996 (exclusive of the Continuum gain) due to higher DST earnings, offset by estimated losses at Grupo TFM. TRANSPORTATION (KCSL)
Three Months Ended Three Months Ended September 30, 1997 September 30, 1996 (in millions) Holding Holding Company and Company and Transpor- Consol- Transpor- Consol- tation- idated tation- idated Related Trans- Related Trans- KCSR Affiliates portation KCSR Affiliates portation Revenues $ 128.5 $ 14.2 $ 142.7 $ 125.5 $ 6.7 $ 132.2 Costs and expenses 92.5 10.1 102.6 86.6 6.6 93.2 Depreciation and amortization 13.6 2.0 15.6 15.1 1.2 16.3 Operating income (loss) 22.4 2.1 24.5 23.8 (1.1) 22.7 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM - (2.3) (2.3) - - - Other 0.5 0.4 0.9 - 0.1 0.1 Interest expense (9.4) (7.6) (17.0) (12.2) (1.9) (14.1) Other, net 0.8 (0.1) 0.7 1.1 (0.3) 0.8 Pretax income (loss) 14.3 (7.5) 6.8 12.7 (3.2) 9.5 Income tax provision (benefit) 6.3 (2.5) 3.8 5.5 (1.2) 4.3 Net income (loss) $ 8.0 $ (5.0) $ 3.0 $ 7.2 $ (2.0) $ 5.2
The Transportation segment contributed $3.0 million to the Company's third quarter 1997 earnings versus $5.2 million in third quarter 1996. Exclusive of the Company's equity in the estimated net losses of, and interest expense associated with, its investment in Grupo TFM, Transportation third quarter 1997 earnings were $7.7 million, 48% higher than 1996. This increase is attributable to higher KCSR net income, the inclusion of Gateway Western results in 1997, and 1996 non-recurring allocated Holding Company costs related to the Company's efforts with respect to the Union Pacific/Southern Pacific merger ("UP/SP merger"). KCSR third quarter 1997 revenues increased 2% over comparable 1996, primarily from a $2.4 million increase in domestic grain business on volume gains. Revenue improvements were also evident in chemical/petroleum, paper/forest products and unit coal. While total KCSR revenues increased over third quarter 1996, revenue carloadings decreased 1% quarter to quarter. This improvement in average revenue per carload is generally attributable to traffic mix and length of haul. Third quarter 1997 Holding Company and Transportation-Related Affiliates revenues increased over 1996 due to the inclusion of Gateway Western (consolidated effective January 1, 1997), offset partially by reduced revenues as a result of the dissolution of Southern Leasing Corporation ("SLC") in connection with the formation of the Southern Capital joint venture in October 1996. 17 Third quarter 1997 Transportation operating expenses increased 8% compared to third quarter 1996. KCSR experienced a 4% increase in operating expenses, primarily from higher operating lease expenses (payments to Southern Capital), partially offset by reduced depreciation as a result of the contribution and sale of rail property to the Southern Capital joint venture. While total third quarter 1997 KCSR operating expenses were higher than 1996, variable expenses as a percentage of revenues declined by 2%. This result highlights KCSR's efforts to maintain (or reduce) controllable cost components given anticipated revenue levels. Holding Company and Transportation-Related Affiliates costs and expenses increased over third quarter 1996 due to the inclusion of Gateway Western activity in 1997. The increase would have been higher if not for the non- recurring costs incurred in third quarter 1996 related to the UP/SP merger as discussed above, together with reduced costs and expenses due to the dissolution of SLC. During third quarter 1997, the Company recorded $2.3 million in estimated equity losses associated with its investment in Grupo TFM. KCSR recorded $0.5 million of equity income, reflecting KCSR's 50% share of Southern Capital third quarter earnings. Interest expense increased $2.9 million from third quarter 1996 because of interest associated with the indebtedness incurred to fund the Grupo TFM investment, partially offset by reduced interest due to the repayment of KCSR, Carland and SGI debt using proceeds from the Southern Capital transaction.
Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 (in millions) Holding Holding Company and Company and Transpor- Consol- Transpor- Consol- tation- idated tation- idated Related Trans Related Trans- KCSR Affiliates portation KCSR Affiliates portation Revenues $ 375.7 $ 41.2 $ 416.9 $ 370.4 $ 22.4 $ 392.8 Costs and expenses 285.5 32.7 318.2 272.0 23.0 295.0 Depreciation and amortization 40.9 5.2 46.1 44.6 3.6 48.2 Operating income (loss) 49.3 3.3 52.6 53.8 (4.2) 49.6 Equity in net earnings (losses) of unconsolidated affiliates: Grupo TFM - (5.3) (5.3) - - - Other 1.6 0.8 2.4 - 1.0 1.0 Interest expense (28.6) (11.0) (39.6) (36.5) (2.5) (39.0) Other, net 3.8 0.3 4.1 2.7 (0.8) 1.9 Pretax income (loss) 26.1 (11.9) 14.2 20.0 (6.5) 13.5 Income tax provision (benefit) 11.5 (3.6) 7.9 8.5 (2.4) 6.1 Net income (loss) $ 14.6 $ (8.3) $ 6.3 $ 11.5 $ (4.1) $ 7.4
The Transportation segment contributed $14.0 million to the Company's earnings for the nine months ended September 30, 1997, exclusive of estimated equity losses in, and interest expense associated with, Grupo TFM, compared to $7.4 million for the same period in 1996. This increase in earnings was attributable to higher earnings from KCSR as a result of reduced interest expense, the inclusion of Gateway Western in 1997 and the UP/SP merger costs incurred in 1996. Transportation revenues increased 6% compared to 1996. This increase was primarily attributable to the inclusion of Gateway Western revenues in 1997, together with a $5.3 million increase in KCSR revenues. The KCSR revenue gain was largely due to increased domestic grain revenues, particularly corn, as well as improved export grain, chemicals and petroleum products, and paper/ forest products. Similar to third quarter 1997, carloadings for year to date 1997 were down, yet revenue has increased due to the mix of traffic and length of haul improvements, as well as a greater focus on higher margin traffic. Holding Company and Transportation-Related Affiliates revenues reflect the Gateway Western revenues, offset partially by the lack of SLC revenues in 1997. 18 Year to date 1997 Transportation operating expenses increased 6% versus the same period in 1996. While total year to date 1997 KCSR costs and expenses increased over 1996, variable operating expenses decreased, including reductions in salaries and wages, fringe benefits, and supplies. Additionally, depreciation and amortization decreased by 8% for the reasons discussed above. These reductions were offset by higher fuel costs due to usage and fixed equipment lease charges to Southern Capital. Higher operating expenses from Holding Company and Transportation-Related Affiliates were attributable to the inclusion of Gateway Western, offset by the lack of SLC costs in 1997 and the 1996 non-recurring UP/SP merger costs. The Transportation segment reported equity losses from unconsolidated affiliates for the nine months ended September 30, 1997, reflecting the Company's estimated proportionate share of Grupo TFM's 1997 net loss. Year to date 1997 Transportation interest expense increased from 1996 as discussed above. Interest expense related to the indebtedness incurred in connection with the Company's investment in Grupo TFM was capitalized until the final installment of the TFM purchase price was made (June 23, 1997). Other, net increased for the nine months ended September 30, 1997 due to a one time pretax gain of $1.6 million recorded in first quarter 1997 resulting from the sale of track by KCSR. FINANCIAL ASSET MANAGEMENT
Three Months Ended Three Months Ended September 30, 1997 September 30, 1996 (in millions) Holding Holding Company and Company and Janus FAM- Consol- Janus FAM- Consol- and Related idated and Related idated Berger Affiliates FAM Berger Affiliates FAM Revenues $ 131.5 $ (0.6) $ 130.9 $ 85.9 $ 0.1 $ 86.0 Costs and expenses 66.7 0.5 67.2 43.5 1.6 45.1 Depreciation and amortization 3.3 0.4 3.7 3.2 0.2 3.4 Operating income (loss) 61.5 (1.5) 60.0 39.2 (1.7) 37.5 Equity in net earnings of unconsolidated affiliates: DST Systems, Inc. - 5.6 5.6 - 56.3 56.3 Other 0.1 - 0.1 - 0.1 0.1 Interest expense (1.5) (0.8) (2.3) (1.5) (0.5) (2.0) Other, net 2.7 1.0 3.7 1.1 0.5 1.6 Pretax income 62.8 4.3 67.1 38.8 54.7 93.5 Income tax provision (benefit) 24.9 (3.3) 21.6 15.6 2.6 18.2 Minority interest 6.7 - 6.7 4.4 - 4.4 Net income $ 31.2 $ 7.6 $ 38.8 $ 18.8 $ 52.1 $ 70.9
Financial Asset Management contributed $38.8 million to KCSI's 1997 third quarter consolidated earnings, an increase of 67% over comparable 1996, exclusive of the one-time gain from the Continuum merger. Average assets under management by Janus and Berger were 58% higher during third quarter 1997 than third quarter 1996, leading to a $44.9 and $22.5 million increase in revenues and operating income, respectively, over third quarter 1996. Assets under management increased $8.4 billion during third quarter 1997 as a result of net fund sales of $2.9 billion and market appreciation of $5.5 billion. Assets under management totaled $72.0 billion at September 30, 1997 ($67.9 billion at Janus; $4.1 billion at Berger) versus $47.0 billion at September 30, 1996. While revenues for the third quarter 1997 increased 52% over comparable 1996, costs and expenses increased at a lower proportionate rate, resulting in an improved operating margin. This improved margin (2% higher than third quarter 1996) was primarily attributable to increased average shareholder balances. 19 Third quarter 1997 equity earnings from DST totaled $5.6 million, significantly lower than 1996 as a result of the gain from the Continuum merger. Exclusive of this gain, equity earnings from DST increased 24%, primarily due to higher mutual fund, portfolio accounting, output processing and other revenues, together with improved operating margins compared to third quarter 1996.
Nine Months Ended Nine Months Ended September 30, 1997 September 30, 1996 (in millions) Holding Holding Company and Company and Janus FAM- Consol- Janus FAM- Consol- and Related idated and Related idated Berger Affiliates FAM Berger Affiliates FAM Revenues $ 348.2 $ (1.1) $ 347.1 $ 233.8 $ (0.2) $ 233.6 Costs and expenses 178.9 3.2 182.1 122.3 4.8 127.1 Depreciation and amortization 9.5 0.6 10.1 9.3 0.4 9.7 Operating income (loss) 159.8 (4.9) 154.9 102.2 (5.4) 96.8 Equity in net earnings of unconsolidated affiliates: DST Systems, Inc. - 17.4 17.4 - 63.2 63.2 Other 0.4 - 0.4 - 0.7 0.7 Interest expense (4.7) (2.3) (7.0) (4.2) - (4.2) Other, net 4.3 6.3 10.6 2.8 7.6 10.4 Pretax income 159.8 16.5 176.3 100.8 66.1 166.9 Income tax provision (benefit) 63.3 (0.1) 63.2 40.7 3.9 44.6 Minority interest 17.3 - 17.3 11.3 - 11.3 Net income $ 79.2 $ 16.6 $ 95.8 $ 48.8 $ 62.2 $ 111.0
For the nine months ended September 30, 1997, Financial Asset Management contributed $95.8 million to the Company's consolidated earnings, a 51% increase over the same period in 1996, exclusive of the Continuum gain. Higher earnings were attributable to a 49% increase in revenues (driven by growth in assets under management), a 60% increase in operating income and higher equity earnings. Assets under management increased $21.7 billion during the nine months ended September 30, 1997 from net fund sales and market appreciation. Shareowner accounts numbered more than 2.8 million as of September 30, 1997 (a 5% increase from December 31, 1996). Equity earnings from DST increased 53% over year to date 1996 (exclusive of the Continuum gain), largely due to the Company's proportionate share of a first quarter 1996 non-recurring charge recorded by DST related to Continuum. Exclusive of this first quarter charge, DST's 1997 earnings reflect the same trends noted in third quarter 1997. Year to date 1997 interest expense increased due to higher average KCSI Holding Company allocated debt balances during third quarter 1997, reflecting repurchases of KCSI common stock in first quarter 1997. A brief discussion of Janus and Berger activity during the nine months ended September 30, 1997 follows: Janus Janus continued to report growth in assets under management - a 45% increase from December 31, 1996. This increase is attributable to several factors, including, among others: (i) the investment performance of the Janus group of mutual funds, as evidenced by approximately 50% of (separately tracked) Janus fund products ranking in the first quartile when compared to their respective peer categories based on product performance over a rolling one-year period through September 30, 1997 (using data from Lipper Analytical Services, Inc.); (ii) growth through new investment money - approximately 46% of the growth in assets under management was due to net sales; and (iii) individual fund performance, particularly the Janus Overseas Fund and Janus Worldwide Fund, combining for $14.3 billion in assets under management as of September 30, 1997 compared to $4.8 billion at September 30, 1996. 20 Berger In September 1997, Berger launched the Berger Balanced Fund, which closed with $7.5 million in assets under management as of September 30, 1997. In February 1997, Berger assumed the advisory contract for the Omni Fund, renaming it The Berger Small Cap Value Fund ("Small Cap"). At September 30, 1997, assets under management for the Small Cap fund totaled approximately $114 million. Also, the Berger/BIAM International Fund (introduced in fourth quarter 1996) increased its assets under management to $124 million as of September 30, 1997. Exclusive of these new funds, assets under management of Berger's core funds increased approximately $130 million from December 31, 1996, reflecting market appreciation in excess of net redemptions during the nine months ended September 30, 1997. In January 1997, KCSI's ownership in Berger increased to approximately 87% (from 80%) due to Berger's repurchase of its common stock (for treasury) from a minority shareholder. The Company recorded $8.7 million in intangibles in connection with this transaction, which will be amortized over 15 years. TRENDS AND OUTLOOK The Company reported a 52% improvement in third quarter 1997 earnings per share compared to third quarter 1996. Year to date 1997 earnings per share were 51% higher than the same period in 1996. Third quarter and year to date 1997 earnings from the Financial Asset Management segment reflect continued growth in assets under management and revenues, as well as improved operating margins. The Transportation segment continued its earnings improvement (exclusive of the estimated equity losses and interest expense associated with Grupo TFM), reporting higher net income in third quarter 1997 than in either previous quarter in 1997 and comparable 1996. A current outlook for the Company's businesses for the fourth quarter of 1997 is as follows (refer to the first paragraph of "Overview" section of this Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments): i) KCSR - General commodities and intermodal traffic will continue to be largely dependent on economic trends within certain industries in the geographic region served by KCSR (as evidenced by the increase in domestic grain revenues during 1997 due to a strong corn crop). (I) Based on anticipated traffic levels, including consideration of recent rail mergers, fourth quarter 1997 revenues are expected exceed third quarter 1997. (I) Variable costs and expenses are expected to continue at levels proportionate with revenue expectations. (I) Unlike the first nine months of 1997, in which equipment lease costs exceeded comparable 1996 periods, lease costs in fourth quarter 1997 should be relatively comparable with the prior period because the Southern Capital joint venture was formed in fourth quarter 1996. Interest expense is expected to be higher in fourth quarter 1997 than comparable 1996 due to expense associated with the indebtedness incurred to finance the $297 million investment in Grupo TFM. (I) ii) As a result of the Company's decision to commence an initial public offering of KCSL, among other factors, management is in the process of performing a detailed review of the various assets of all Company subsidiaries. This review is being performed using the relevant accounting guidance (e.g., Statement of Financial Accounting Standards No. 121, Accounting Principles Board Opinion No. 17), and under the established accounting policies described more fully in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. This review is expected to be completed during fourth quarter 1997. (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments 21 iii) Financial Asset Management - Future growth will be largely dependent on prevailing financial market conditions, relative performance of Janus' and Berger's products, introduction and market reception of new products, as well as other factors. (I) Fourth quarter 1997 revenues and earnings for the Financial Asset Management segment will be impacted by overall market declines experienced in late October 1997. Costs and expenses should continue at operating levels consistent with the rate of growth, if any, in revenues. (I) iv)Equity Investments - The Company will continue to participate in the earnings from its equity investments in DST, Southern Capital and Mexrail. (I) However, the Company expects to report equity losses from Grupo TFM during the initial period of its operation of Mexico's Northeast rail lines.(I) LIQUIDITY AND CAPITAL RESOURCES Summary cash flow data is as follows (in millions):
Nine Months Ended September 30, 1997 1996 Cash flows provided by (used for): Operating activities $150.2 $ 67.4 Investing activities (339.1) (150.1) Financing activities 209.4 73.4 Cash and equivalents: Net increase (decrease) 20.5 (9.3) At beginning of year 22.9 31.8 At end of period $ 43.4 $ 22.5
During the nine months ended September 30, 1997, the Company's cash position increased $20.5 million from December 31, 1996. This increase was caused primarily by positive operating cash flows, offset by cash used for property acquisitions and Company common stock repurchases. Year to date 1997 operating cash flows increased $82.8 million compared to the same period in 1996. This increase was chiefly attributable to the 1996 payment of approximately $74 million in federal and state income taxes resulting from the taxable gains associated with the DST public stock offering completed in November 1995, offset partially by changes in other working capital components. Investing expenditures for the nine months ended September 30, 1997 included the Company's approximate $297 million capital contribution to Grupo TFM and KCSR road property additions. Cash from investing activities was generated primarily from the sale of short-term investments by Janus and proceeds from the disposal of property. Financing cash flows were generated through borrowings under credit lines in excess of repayments, essentially to fund the Grupo TFM capital contribution and the repurchase of approximately $47.1 million of Company common stock during 1997. Cash flows from operations are expected to increase during the remainder of 1997 from positive operating income, which has historically resulted in favorable cash flows. (I) Investing activities will continue to use significant amounts of cash. Future roadway improvement projects are expected to be funded by KCSR operating cash flow.(I) Based on the completion of financing for Grupo TFM, significant additional contributions from the Company to Grupo TFM are not expected to be necessary. (I) However, as discussed earlier, there exists a possible capital call ($74 million) if certain Grupo TFM benchmarks are not met. (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments 22 As discussed in the Recent Developments section above, TMM and the Company could be required to purchase the Mexican Government's interest in TFM in proportion to each partner's respective ownership interest in Grupo TFM (without regard to the Mexican Government's interest in Grupo TFM). Also, the Mexican Government's interest in Grupo TFM may be called by TMM and the Company, exercisable at the original amount (in U.S. dollars) paid by the Government plus interest based on one-year U.S. Treasury securities. In addition to operating cash flows, the Company has financing available through its various lines of credit (with a maximum borrowing amount of $560 million, of which $225 million was available at September 30, 1997). Because of certain financial covenants contained in the credit agreements, however, maximum utilization of the Company's available lines of credit may be restricted. The Company also has the ability to issue $500 million of securities under a Universal Shelf Registration Statement ("Registration Statement") filed in September 1993, as amended in April 1996. The Securities and Exchange Commission declared the Registration Statement effective on April 22, 1996; however, no securities have been issued. The Company believes its operating cash flows and available financing resources are sufficient to fund working capital and other requirements for the remainder of 1997, as well as other potential business opportunities that the Company is currently pursuing. (I) The Company's debt ratio (total debt as a percent of total debt plus equity) at September 30, 1997 was 54.0% compared to 47.4% at December 31, 1996. Company consolidated debt increased $296.4 million from December 31, 1996 (to $941.5 million at September 30, 1997), primarily as a result of borrowings to fund the Grupo TFM capital contribution and for the repurchase of common stock, together with the consolidation of Gateway Western indebtedness. Consolidated equity increased $84.9 million from December 31, 1996. This increase was primarily due to net income and a positive non-cash equity adjustment related to unrealized gains on "available for sale" securities held by affiliates, offset partially by common stock repurchases. The higher increase in debt, however, resulted in an increase in the debt ratio from December 31, 1996. During May 1997, Standard & Poor's Corporation ("S&P") and Moody's Investing Service ("Moody's") issued opinions of the Company's credit and senior secured debt ratings. S&P lowered its rating on the Company to BBB- from BBB+, but commented that the Company's outlook is stable. According to S&P, the reduced rating was a result of the Company's increased debt levels to fund share repurchases and its investment in the Mexican Northeast rail lines, combined with increased competitive pressures on the Company's core U.S. railroad operations. Moody's confirmed as unchanged its previous rating of the Company at Baa2. According to Moody's, this decision was based on the Company's diversified nature of businesses and the considerable strength of a number of assets whose market value exceeds book value. Subsequent to the Company's announcement to separate its Transportation and Financial Asset Management segments, both S&P and Moody's placed the Company on "watch" until the details of the form of the separation and the capital structure of each remaining entity are determined. (I) See the first paragraph of "Overview" section of Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, regarding forward-looking comments 23 PART II - OTHER INFORMATION Item 1. Legal Proceedings Part I, Item 1. Financial Statements, Note 12 to the Consolidated Condensed Financial Statements of this Form 10-Q is hereby incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 3.1 - The Company's By-Laws, as amended and restated as of May 1, 1997, are attached to this Form 10-Q as Exhibit 3.1 Exhibit 27.1 - Financial Data Schedule b) Reports on Form 8-K The Company filed a Current Report on Form 8-K dated July 9, 1997 reporting the payment of the remaining 60% of the purchase price for TFM, S.A. de C.V. (formerly Ferrocarril del Noreste, S.A. de C.V.), who holds the concession to operate Mexico's Northeast rail lines, by Grupo Transportacion Ferroviaria Mexicana, S.A. de C.V. (formerly Transportacion Ferroviaria Mexicana S. de R.L. de C.V.), a joint venture of the Company and Transportacion Maritima Mexicana, S.A. de C.V. The Company filed a Current Report on Form 8-K dated July 29, 1997 reporting the announcement of a 3-for-1 split in the Company's common stock to be effected in the form of a stock dividend and a 20% increase in the quarterly dividend. The Company filed a Current Report on Form 8-K dated September 19, 1997 reporting the announcement that the Company intended on separating its Transportation and Financial Asset Management businesses. 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on November 4, 1997. Kansas City Southern Industries, Inc. /s/ Joseph D. Monello Joseph D. Monello Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Louis G. Van Horn Louis G. Van Horn Vice President and Comptroller (Principal Accounting Officer) EX-3.1 2 BY-LAWS OF KANSAS CITY SOUTHERN INDUSTRIES, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE As amended and restated to May 1, 1997 ARTICLE I MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. Meetings of stockholders for any purpose may be held at such time and place, within or without the State of Delaware, as shall be designated by the Board of Directors and stated in the notice of the meeting. Section 2. Annual Meetings. The annual meeting of the stockholders, at which they shall elect directors and transact such other business as may properly be brought before the meeting, shall be held on the first Tuesday of May in each year unless the Board of Directors shall designate some other date therefor in April, May or June. To be properly brought before the meeting, business must be either (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before the meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, such a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the Corporation, not less than 45 days nor more than 90 days prior to the meeting; provided, however, that in the event that the meeting is designated by the Board of Directors to be held at a date other than the first Tuesday in May and less than 60 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, to be timely, the notice by the stockholder must be so received not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder and the name and address of record under which such stock is held and (iv) any material interest of the stockholder in such business. 2 Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2 of Article I; provided, however, that nothing in this Section 2 of Article I shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman of the annual meeting shall have the power to determine whether or not business was properly brought before the meeting in accordance with the provisions of this Section 2 of Article I, and, if the Chairman should determine that any such business was not properly brought before the meeting, the Chairman shall so declare to the meeting and any such business shall not be transacted. Section 3. Notice of Annual Meetings. Written notice of each annual meeting of the stockholders stating the place, day and hour of the meeting, shall be given to each stockholder entitled to vote thereat, at least ten (10) days before the date of the meeting. Section 4. Quorum. Except as otherwise required by statute, by the Certificate of Incorporation or by these By-Laws, the presence, in person or by proxy, of stockholders holding a majority in number of shares of the stock issued and outstanding and entitled to vote, shall constitute a quorum at all meetings of the stockholders. If, at any such meeting, such quorum shall not be present or represented, the stockholders present in person or by proxy shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present in person or by proxy, any business may be transacted which might have been transacted at the meeting as originally noticed. Section 5. Voting. Each holder of shares of common stock and preferred stock shall be entitled to vote on the basis of one vote for each voting share held by him, except as provided in the Certificate of Incorporation and except that in elections for directors when the holders of the preferred stock do not have the right, voting as a class, to elect two directors, each holder of voting shares shall be entitled to as many votes as shall equal the number of shares which he is entitled to vote, multiplied by the number of directors to be elected and he may cast all of such votes for a single director or may distribute them among the number to be voted for, or any two or more of them, as he may see fit. Section 6. List of Stockholders Entitled to Vote. The Board of Directors shall cause the officer who has charge of the stock ledger of the corporation to prepare and make, at least ten (10) days before every election of directors, a complete list of the stockholders entitled to vote at said election, arranged in alphabetical order, showing the address of and the number of shares of common stock and preferred stock registered in the name of each stockholder. Such list shall be open to the examination 3 of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the election, either at a place within the city where the election is to be held, and which place be specified, at the place where said meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of election during the whole time thereof, and subject to the inspection of any stockholder who may be present. Section 7. Inspectors. For each meeting of stockholders there may be appointed by the Board of Directors or by the Chairman of the meeting three (3) inspectors of election. If any inspector shall fail or be unable to serve as inspector or for any reason be unable to complete his duties, an alternate inspector shall be appointed by the Board of Directors or the Chairman of the meeting. The inspectors of election shall examine and canvass the proxies and ballots, and make and submit a signed report of the votes cast at the meeting, which shall be entered at large upon the records. Section 8. Inspectors' Oath. An inspector, before he enters on the duties of his office, shall take and subscribe an oath substantially in the following form before any officer authorized by law to administer oaths: "I do solemnly swear that I will execute the duties of an inspector of the election now to be held with strict impartiality and according to the best of my ability." Section 9. Special Meeting. Special meetings of the stockholders for any purpose or purposes may be called at any time by the Chairman of the Board of Directors, the Chief Executive Officer or the President, or at the request in writing of a majority of the Board of Directors, by giving ten(10) days written notice thereof to the stockholders. Business transacted at any special meeting of the stockholders shall be limited to the purpose stated in the notice. Section 10. Organization. The Chairman of the Board of Directors, and in his absence the Chief Executive Officer, the President or one of the Vice Presidents, shall call meetings of the stockholders to order and act as Chairman of such meeting. In the absence of all these officers, the Board of Directors may appoint a Chairman of the meeting. The Secretary of the Corporation shall act as secretary at all meetings of the shareholders; but the Board of Directors may designate an Assistant Secretary for that purpose before the meeting and, if no such designation shall have been made, then such designation may be made by the Chairman of the meeting. The conduct of any meeting of the stockholders shall be governed by such rules, regulations and procedures as the Chairman of the meeting, in his sole and exclusive discretion shall determine. Section 11. Stockholder Nomination of Directors. Not less than 45 days nor more than 90 days prior to the date of any meeting of the stockholders at which 4 directors are to be elected ("the Election Meeting") any stockholder who intends to make a nomination at the Election Meeting shall deliver a notice in writing (the "Stockholder's Notice") to the Secretary of the Corporation setting forth (a) as to each nominee whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the nominee, (ii) the principal occupation or employment of the nominee, (iii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the nominee and (iv) any other information concerning the nominee that would be required, under the rules of the Securities and Exchange Commission, in a proxy statement soliciting proxies for the election of such nominee; and (b) as to the stockholder giving the notice, (i) the name and address of the stockholder and (ii) the class and number of shares of capital stock of the Corporation which are beneficially owned by the stockholder and the name and address of record under which such stock is held; provided, however, that in the event that the Election Meeting is designated by the Board of Directors to be held at a date other than the first Tuesday in May and less than 60 days' notice or prior public disclosure of the date of the Election Meeting is given or made to stockholders, to be timely, the Stockholder's Notice must be so delivered not later than the close of business on the 15th day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever first occurs. The Stockholder's Notice shall include a signed consent of each such nominee to serve as a director of the Corporation, if elected. The Corporation may require any proposed nominee or stockholder proposing a nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation or to properly complete any proxy or information statement used for the solicitation of proxies in connection with such Election Meeting. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers. The general management of the business and affairs and all the corporate powers of the Corporation shall be vested in and exercised by its Board of Directors which shall exercise all of the powers of the Corporation except such as are by statute, or by the Certificate of Incorporation or by these By-Laws, conferred upon or reserved to the stockholders. The directors shall act only as a Board and the individual directors shall have no power as such. Section 2. Number, Term and Qualifications. The number of directors shall not be less than three nor more than eighteen, the exact number of directors to be determined from time to time by resolution adopted by a majority of the whole Board, and such exact number shall be eighteen until otherwise determined by resolution adopted by a majority of the whole Board. Directors need not be stockholders. 5 The Board of Directors shall be divided into three classes as nearly equal in number as possible. At each annual meeting of stockholders, successors to directors of the class whose terms then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders. When the number of directors is changed, any newly created directorships or any decrease in directorships shall be so apportioned among the classes as to make all classes as nearly equal in number as possible. Notwithstanding the foregoing, whenever the holders of the preferred stock shall have the right, voting as a class, to elect two directors at the next annual meeting of stockholders, the terms of all directors shall expire at the next annual meeting of stockholders, and then and thereafter all directors shall be elected for a term of one year expiring at the succeeding annual meeting. From and after January 19, 1990, no person who has attained the age of 72 shall be eligible to be nominated or to serve as a member of the Board of Directors, but any person who shall attain the age of 72 during the term of directorship to which he was elected shall be eligible to serve the remainder of such term; provided, however, that any person, regardless of age, who, on January 19, 1990, is an incumbent director, shall be eligible to be nominated for election and to serve one (1) additional term. Section 3. Election of Directors. Directors shall be elected at the annual meetings of stockholders by ballot in the manner provided in these By-Laws and the Certificate of Incorporation. Section 4. Newly Created Directorships and Vacancies. Newly created directorships and vacancies which shall occur in the Board of Directors because of death, resignation, disqualification or any other cause, may be filled by a majority of the directors then in office, though less than a quorum, pursuant to Section 223 of the General Corporation Law of Delaware. Such directors may, by resolution, eliminate any vacant directorship thereby reducing the size of the whole Board of Directors but in no event shall the size of the Board of Directors be reduced to less than three directors. No decrease in the Board of Directors shall shorten the term of any incumbent directors. Section 5. Resignations. Any director of the Corporation may resign at any time by giving written notice to the President or to the Secretary of the Corporation. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein. Unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Organization. The Board of Directors shall hold its organizational meeting as soon as practicable after the Annual Meeting of Stockholders. The Chairman of the Board of Directors, or in his absence the President, shall preside at all meetings of the Board of Directors. 6 Section 7. Place of Meetings. The Board of Directors may hold its meetings, both regular and special, at such place or places, within or without the State of Delaware as determined by the Board of Directors. Section 8. Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such times and at such places as shall from time to time be determined by the Board of Directors. Section 9. Special Meetings. Special meetings of the Board of Directors may be called at the request of the Chairman of the Board of Directors, the Executive Committee, or of the President, or of any three members of the Board of Directors. Notice of the time and place of such meeting shall be given either by mail to each director at least three (3) days before such meeting or personally, by telephone, or by telegram to each director at least twelve (12) hours before such meeting. Section 10. Quorum. A majority of the Board of Directors at a meeting duly assembled shall be necessary to constitute a quorum for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation or by these By-Laws. The act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum be present, without notice other than by announcement at the meeting. Section 11. Report to Stockholders. The President and Board of Directors shall make a report or statement of the affairs of the Corporation at each regular annual meeting of the stockholders subsequent to the first annual meeting. Section 12. Compensation. The directors may receive reasonable fees to be determined from time to time by the Board of Directors for services actually performed in attending meetings and for other services actually performed and the expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors. A director who is, at the same time, an officer or employee of the Corporation or of any subsidiary or affiliate, shall not be entitled to receive any compensation or fee for service as a director or as a member of any committee of the Board of Directors. Section 13. Consent of Directors in Lieu of Meeting. Unless otherwise restricted by the Certificate of Incorporation or By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or Directors or Committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or Committee. 7 ARTICLE III COMMITTEES Section 1. Executive Committee: Organization and Powers. There shall be an Executive Committee to consist of the Chairman of the Board of Directors, the Chief Executive Officer and two (2) or more non-officer directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors. The Board of Directors shall elect the members of the Executive Committee by vote of a majority of the whole Board of Directors and one member of the Executive Committee shall be elected as Chairman by the vote of a majority of the whole Board of Directors. The members of the Executive Committee shall be elected annually at the Board's organizational meeting or as soon as thereafter as possible. When the Board of Directors is not in session, the Executive Committee shall have and may exercise all the powers of the Board of Directors in the management of the business and affairs of the Corporation in all cases in which specific directions shall not have been given by the Board of Directors including, but not limited to, the power to declare dividends on the common and preferred stock of the Corporation, and to authorize the seal of the Corporation to be affixed to all papers which may require it. The members of the Executive Committee shall act only as a committee and individual members shall have no power as such. The Executive Committee shall have full power to act as the Nominating Committee, which, when acting as such, shall have the power and duty to make recommendations to the Board of Directors as to suitable nominees for election to the Board of Directors by the stockholders or by the remaining members of the Board of Directors, to fill newly created directorships and to fill any vacancies which shall occur. When acting as the Nominating Committee, it shall have the power to meet with and consider suggestions from such other members of the Board of Directors, stockholders, members of management, consultants and other persons, firms or corporations as they deem necessary or advisable in the premises to assist them in making such recommendations. The Chief Executive Officer shall not be eligible to vote upon any matter coming before the Committee when acting as the Nominating Committee. Section 2. Compensation and Organization Committee: Organization and Powers. There shall be a Compensation and Organization Committee to consist of three (3) or more non-officer directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors, each of whom shall be a "disinterested person" within the meaning ascribed thereto under Rule 16b-3 promulgated under the Securities Exchange Act of 1934 as amended from time 8 to time and interpreted by the Securities and Exchange Commission. The Board of Directors shall elect the members of the Compensation and Organization Committee by vote of a majority of the whole Board of Directors, and one member of the Compensation and Organization Committee shall be elected its Chairman by the vote of a majority of the whole Board of Directors. The members of the Compensation and Organization committee shall be elected annually at the Board's organizational meeting or as soon thereafter as possible. The Compensation and Organization Committee shall have the power: to authorize and determine all salaries for the officers and supervisory employees of the Corporation and subsidiary companies as may be prescribed from time to time by resolution adopted by the Board of Directors; to administer the incentive compensation plans of the Corporation, The Kansas City Southern Railway Company and the other subsidiaries of the Corporation in accordance with the powers and authority granted in such plans; and to determine any incentive allowances to be made to officers and staff of the Corporation and its subsidiaries. The Compensation and Organization Committee shall have the power to administer the Employee Stock Purchase Plan of the Corporation under which eligible employees of the Corporation and its subsidiaries and affiliates are permitted to subscribe to and to purchase shares of the Corporation common stock through payroll deductions. The Compensation and Organization Committee shall have full power: to act as the Stock Option Plan Committee to construe and interpret any stock option plan or similar plan of the Corporation and all options, stock appreciation rights and limited rights granted under this plan or any other plan; to determine the terms and provisions of the respective option agreements, including such terms and provisions as, in the judgement of the Committee, are necessary or desirable to qualify any of the options as "incentive stock options"; to establish and amend rules for its administration;to grant options, stock appreciation rights and limited rights under any stock option plan of the Corporation; to determine and designate the recipients of options, stock appreciation rights and limited rights; to determine and designate the dates that options, stock appreciation rights and limited rights are granted; to determine and designate the number of shares subject to options, stock appreciation rights and limited rights; to determine and designate the option prices and option periods; and to correct any defect or supply any omission or reconcile any inconsistency in any stock option plan of the Corporation or in any option, stock appreciation right or limited right to the extent the Committee deems desirable to carry any stock option plan or any option, stock appreciation right or limited right into effect. The Compensation and Organization Committee shall also have the power: to review the consolidated earnings of the Corporation and to make recommendations to the Board of Directors with respect to the allocation of funds to the Corporation's Profit Sharing Plan; and to review the results of the investment program of the Profit Sharing Plan and make reports thereof to the Board of Directors. 9 The Compensation and Organization Committee shall also have the power and duty to initiate, review and approve succession plans and major organizational plans and changes within the Corporation and its subsidiaries. Section 3. Audit Committee: Organization and Powers. There shall be an Audit Committee to consist of three (3) or more non-officer directors, the number of which being fixed from time to time by resolution adopted by a majority vote of the whole Board of Directors. The Board of Directors shall elect the members of the Audit Committee by vote of a majority of the whole Board of Directors and one member of the Audit Committee shall be elected as Chairman by a vote of a majority of the whole Board of Directors. The members of the Audit Committee shall be appointed by the Board of Directors to serve staggered three-year terms. The Audit Committee shall have the power and the duty to meet with and consider suggestions from members of management and of the Corporation's internal audit staff, as well as with the Corporation's independent accountants, concerning the financial operations of the Corporation. The Audit Committee shall additionally have the power to review audited financial statements of the Corporation and consider and recommend the employment of, and approve the fee arrangement with, independent accountants for both audit functions and for advisory and other consulting services. Section 4. Rules, Records and Reports. The Committees may make and adopt such rules and regulations governing their proceedings as they may deem proper and which are consistent with the statutes of the State of Delaware, the Certificate of Incorporation and By-Laws. The committees shall keep a full and accurate record of all their acts and proceedings and report the same from time to time to the Board of Directors. Section 5. Meetings. Regular meetings of the committees shall be held at such times and at such places as from time to time may be fixed by the committees. Special meetings of the committees may be held at such other times as may in the judgement of the Chairman or, he being absent, in the judgement of a member, be necessary. Notice of regular meetings need not be given. Notice of special meetings shall be given to each member by mail not less than three (3) days before the meeting or personally, by telephone or telegram to each member not less than twelve (12) hours before the meeting, unless the Chairman of the committee, or a member acting in that capacity in his absence, shall deem a shorter notice expedient. Section 6. Quorum. A majority of members of a committee shall constitute a quorum for the transaction of business and the act of a majority of those present shall be the act of the committee (except with respect to the Compensation and Organization Committee, in which any act of the Compensation and Organization Committee when acting as the Stock Option Plan Committee under any stock option plan, must be authorized and approved by at least (3) members). 10 Section 7. Subcommittees. A committee may appoint such subcommittees as it shall deem necessary. Section 8. Vacancies. Any vacancy in a committee shall be filled by a majority of the whole Board of Directors. Section 9. Substitute Members. Whenever at any time a member of any committee shall be absent from a meeting of that committee and it shall be necessary in order to constitute a quorum or, for other reason, it may be deemed expedient or desirable, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously designate a director (subject to the eligibility requirements set forth in Sections 2, 3, and 4 above) to serve and act in his stead; and in the event that the absence of a committee member shall be prolonged, such substitute member may, subject to the approval of the committee, continue to act for the term of its duration. A director so designated shall rank as a duly qualified member of the committee during incumbency, and shall be entitled to participate in its deliberations with the same force and effect as if elected in the manner herein elsewhere provided. Section 10. Compensation. Subject to the provisions of Section 12 of Article II of these By-Laws, each member of any committee may receive a reasonable fee to be fixed by the Board of Directors for services actually performed in attending meetings, and for other services actually performed, and shall receive expenses of attendance, if any actually incurred by him for attendance at any meeting of the committee. ARTICLE IV OFFICERS, AGENTS AND EMPLOYEES Section 1. Election of Officers. The Board of Directors at its annual organizational meeting, shall elect a Chairman of the Board of Directors and President of the Corporation, who shall be a member of the Board of Directors. The Board of Directors may elect a Chief Executive Officer and a Chief Operating Officer who shall be members of the Board of Directors. Section 2. Vice Presidents. The Board of Directors may, in its discretion, appoint an Executive Vice President and one or more additional Vice Presidents. Section 3. Other Officers. The Board of Directors shall appoint a Secretary, a Treasurer, a General Counsel and Comptroller. The Board of Directors may also appoint one or more Assistant Secretaries, and one or more Assistant Treasurers. Section 4. Powers, Duties and Responsibilities. The powers, duties and responsibilities of the officers and employees of the Corporation, which are not prescribed by statute, by the Certificate of Incorporation or by these By-Laws, shall be 11 defined in rules or regulations which may be adopted and from time to time modified or changed by the Board of Directors. Section 5. Vacancies. The Board of Directors shall, as soon as practicable, fill any vacancy in the office of Chairman of the Board of Directors or President. Any vacancy in any other office may be filled temporarily by the Chairman of the Board of Directors or the President. In case of temporary incapacity or absence of any of the officers, the Chairman of the Board of Directors, or the President, may make an appointment pro tem and confer on such appointee full power and authority to act in place of any of said officers or appointees so temporarily incapacitated or absent; but such appointment shall be subject to change by the Board of Directors or by the Executive Committee at any regular or special meeting. Section 6. Absence from Duty. No officer or employee of the Corporation shall be absent from duty without the consent of the President or the head of the department in which he is employed. Section 7. Resignations. Any officer may resign at any time giving written notice to the President or to the Secretary of the Corporation. Such resignation shall take effect at the date of the receipt of such notice, or at any later time specified therein and, unless otherwise provided therein, the acceptance of such resignation shall not be necessary to make it effective. Section 8. Removals. All officers and agents of the Corporation shall be subject to removal at any time by the affirmative vote of a majority of the members of the Board of Directors present at any meeting. All officers and employees not appointed by the Board of Directors shall hold their offices at the discretion of the Executive Committee or of the officer appointing them. Section 9. Term of Office. The officers of the Corporation shall hold office for one year and until their successors shall have been duly elected or appointed and qualified, or until they shall die, resign or be removed. Section 10. Salaries. The salaries of officers elected or appointed by the Board of Directors or by the Executive Committee, shall be fixed by the Compensation and Organization Committee. The salaries of all other officers and employees shall be fixed by the President, or by the heads of departments subject to the approval of the President; and the compensation of all officers and employees shall be subject to the control of the Board of Directors or of the Compensation and Organization Committee. No special compensation shall be paid to any officer or employee unless authorized by the Board of Directors, the Executive Committee or the Compensation and Organization Committee. 12 CHAIRMAN OF THE BOARD OF DIRECTORS Section 11. Duties. The Chairman of the Board of Directors shall preside at all meetings of the Stockholders and the Board of Directors at which he is present and perform such other duties as the Board of Directors may prescribe. In his absence, the President shall discharge the duties of the Chairman of the Board of Directors. CHAIRMAN OF THE EXECUTIVE COMMITTEE Section 12. Duties. The Chairman of the Executive Committee shall preside at all meetings of the Executive Committee. In the absence of the Chairman of the Executive Committee, his duties shall be discharged by the President. PRESIDENT Section 13. General Powers and Duties. The President shall have the general care, supervision and control of the Corporation's business and operation in all departments under control of the Board of Directors. The President shall have such other powers and perform such other duties as the Board of Directors may from time to time prescribe and shall perform such other duties as are incidental to the office of President. In the absence or incapacity of the Chairman of the Board of Directors, he shall preside at all meetings of the Board of Directors and stockholders. Section 14. Appointments. Except as otherwise provided by statute, the Certificate of Incorporation, or these By-Laws, the President may appoint such additional officers and may employ such persons as he shall deem necessary for the proper management of the business and property of the Corporation. VICE PRESIDENTS Section 15. Powers and Duties. The Vice Presidents shall have such powers and perform such duties as shall from time to time be conferred and prescribed by the Board of Directors or by the Executive Committee. The Executive Vice President shall, however, be the ranking officer in the affairs of the Corporation next below the President. SECRETARY Section 16. Duties. The Secretary, or, in his absence, an Assistant Secretary, shall attend all meetings of the stockholders, of the Board of Directors and of the Executive Committee, and shall record their proceedings. He shall report to the Board of Directors and the Executive Committee and through the respective Chairman. Section 17. Notice of Meetings. The Secretary shall give due notice of all meetings of the stockholders and of the Board of Directors and of the Executive 13 Committee, where such notice is required by law, by the Certificate of Incorporation, by these By-Laws, by the Board of Directors or by the Executive Committee. Section 18. Custody of Seal, Etc. The Secretary shall be custodian of the seal of the Corporation and of its records, and of such papers and documents as may be committed to his care by the Board of Directors or of the Executive Committee. He shall have power to affix the seal of the Corporation to instruments to which the same is authorized to be affixed by the Board of Directors or by the Executive Committee, and shall have power to attest the same. He shall perform such other duties as may be assigned to him by the Chairman of the Board of Directors, the President, the Board of Directors or the Executive Committee, or as may be prescribed in the rules or regulations to be adopted by the Board of Directors. Section 19. Duties of Assistant Secretaries. The Assistant Secretary or Secretaries shall perform such duties as may be assigned to him or them by the Board of Directors or by the Executive Committee or the President, or as may be prescribed in the rules or regulations, if any, to be adopted by the Board of Directors or the Executive Committee; and, when authorized by the Board of Directors or by the Executive Committee, he or they shall have the power to affix the corporate seal to instruments and to attest the same, and to sign the certificates of stock of the Corporation. TREASURER Section 20. Duties. The Treasurer, either in person or through competent and faithful assistants, shall receive, keep and disburse all moneys, belonging or coming to the Corporation; he shall keep regular, true and full accounts of all receipts and disbursements, and make detailed reports of the same to the President, to the Board of Directors or to the Executive Committee, through the Chairman of said Board of Directors or Committee, as and when required. Section 21. Other Duties. The Treasurer shall perform such other duties in connection with the administration of the financial affairs of the Corporation as the Board of Directors or the Executive Committee shall assign to him or as may be prescribed in the rules or regulations to be adopted by the Board of Directors or the Executive Committee. The Treasurer shall give bond in such amount as shall be required by the Board of Directors or by the Executive Committee. Any Assistant Treasurer appointed pursuant to the provisions of these By-Laws shall also give bond in such amount as shall be required by the Board of Directors or by the Executive Committee. GENERAL COUNSEL Section 22. Duties. The General Counsel shall render such legal services and perform such duties as the Board of Directors, Executive Committee, Chairman of the 14 Board of Directors, President or other elected or appointed officer may request from time to time. COMPTROLLER Section 23. Duties. The Comptroller shall have charge of the Accounting Department. He shall have the supervision and management of all accounts of the Corporation, and shall prescribe, enforce and maintain the system of bookkeeping, and the books, blanks, etc., for keeping the accounts of the Corporation. He shall have the cooperation of all departments. He shall keep regular sets of books, showing a complete record of the general business transactions of the Corporation, and for that purpose shall receive from the Treasurer, Assistant Treasurers and agents of the Corporation such daily or other reports of receipts and disbursements as he may require. Section 24. Custody of Contracts. The Comptroller shall have the custody of all written contracts and other similar written instruments to which the Corporation is a party. Section 25. Statements by Comptroller. The Comptroller shall render such statements of the affairs of the Corporation, shown by his books and records, as may be required for the information of the Board of Directors or of the Executive Committee, and shall by proper distribution and classification of the accounts under his charge, be prepared to furnish such reports as may be required by the Chairman of the Board of Directors, the President, the Board of Directors, and the Executive Committee, or any state or federal official. ARTICLE V CERTIFICATE OF STOCK Section 1. Provision for Issue, Transfer and Registration. The Board of Directors shall provide for the issue, transfer and registration of the capital stock of the Corporation in the City of New York or elsewhere, and for that purpose may appoint the necessary officers, transfer agents and registrars of transfers. Section 2. Certificates of Stock. Every holder of stock in the Corporation shall be entitled to have a certificate, signed by, or in the name of the Corporation by, the President or a Vice President and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned. Section 3. Facsimile Signatures of Certificates. Where a certificate is countersigned (1) by a Transfer Agent or an Assistant Transfer Agent or by a Transfer Clerk acting on behalf of the Corporation and (2) by a Registrar, the signature of the President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant 15 Secretary may be facsimile. In case any officer or officers who have signed, or whose facsimile signature or signatures have been used on, any such certificate or certificates shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the Corporation. Record shall be kept by the Transfer Agent of the number of each certificate, the date thereof, the name of the person owning the shares represented thereby, and the number of shares. Every certificate surrendered to the Corporation for transfer or otherwise in exchange for a new certificate shall be cancelled by perforation or otherwise with the date of cancellation indicated thereon. Section 4. Transfer of Stock. Transfer of stock of the capital stock of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by his attorney thereunto authorized by a power of attorney duly executed and filed with the Transfer Agent of the Corporation, and on surrender for cancellation of the certificate or certificates for such shares. A person in whose name shares of stock stand on the books of the Corporation and no one else shall be deemed the owner thereof as regards the Corporation. Section 5. Registrar and Transfer Agent. The Corporation shall at all times maintain a registrar, which shall in every case be a bank or trust company, and a transfer agent, to be appointed by the Board of Directors, in accordance with the requirements of the New York Stock Exchange, and registration and transfer of the Corporation's stock certificates shall be in accordance with the rules and regulations of said stock exchange. The Board of Directors may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. Section 6. Closing of Transfer Books; Record Date. The Board of Directors may close the stock transfer books of the Corporation for a period not more than sixty (60) days nor less than ten (10) days preceding the date of any meeting of stockholders or the date for payment of any dividend or the date for the allotment of rights or the date when any change or conversion or exchange of capital stock shall go into effect. In lieu of closing the stock transfer books as aforesaid, the Board of Directors may fix in advance a date, not more than sixty (60) days nor less than ten (10) days preceding the date of any meeting of stockholders, or the date for the payment of any dividend, or the date for the allotment of rights, or the date when any change or conversion or exchange of capital stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any such meeting, and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock and, in such case, such stockholders and only 16 such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of, and to vote at, such meeting and any adjournment thereof, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. ARTICLE VI SEAL Section 1. The authorized seal shall have inscribed thereon the name of the Corporation, the year of incorporation and the name of the state of incorporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise applied. ARTICLE VII FISCAL YEAR Section 1. The fiscal year of the Corporation shall commence on the first day of January of each year. ARTICLE VIII NOTICES Section 1. Form of Notice. Where notice, other than by publication, is required to be given by Delaware law, the Certificate of Incorporation or By-Laws, notice to directors and stockholders shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such directors or stockholders at such address as appears on the books of the Corporation. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Notice to directors may also be given personally, by telephone, by telegram or in such other manner as may be provided in these By-Laws. Section 2. Waiver of Notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated herein, shall be deemed equivalent thereto. 17 ARTICLE IX INDEMNIFICATION, AMENDMENTS AND MISCELLANEOUS Section 1. Indemnification. Each person who, at any time is, or shall have been, a director, officer, employee or agent of the Corporation, and is threatened to be or is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is, or was, a director, officer, employee or agent of the Corporation, or served at the request of the Corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall be indemnified against expense (including attorneys' fees), judgment, fines and amounts paid in settlement actually and reasonably incurred by him in con- nection with any such action, suit or proceeding to the full extent provided under Section 145 of the General Corporation Law of the State of Delaware. The foregoing right of indemnification shall in no way be exclusive of any other rights of indemnification to which any such director, officer, employee or agent may be entitled, under any By-Law, agreement, vote of stockholders or disinterested directors or otherwise. Section 2. Amendments. These By-Laws may be altered, amended or repealed by a vote of a majority of the whole Board of Directors at any meeting of the Board of Directors. The Board of Directors in its discretion may, but need not, submit any proposed alteration, amendment or repeal of the By-Laws to the stockholders at any regular or special meeting of the stockholders for their adoption or rejection; provided notice of the proposed alteration, amendment or repeal be contained in the notice of such stockholders' meeting. Section 3. Proxies. Unless otherwise provided by resolution of the Board of Directors, the President or, in his absence or disability, a Vice President, from time to time in the name and on behalf of the Corporation: may appoint an attorney or attorneys, agent or agents of the Corporation (who may be or include himself), in the name and on behalf of the Corporation to cast the votes which the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation any of whose stock or other securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporations or to consent in writing to any action by such other corporation; may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent; and may execute or cause to be executed in the name and on behalf of the Corporation and under its corporate seal all such written proxies or other instruments as may be necessary or proper to evidence the appointment of such attorneys and agents. EX-27.1 3
5 THIS SCHEDULE, SUBMITTED AS EXHIBIT 27.1 TO FORM 10-Q, CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME OF KANSAS CITY SOUTHERN INDUSTRIES, INC., COMMISSION FILE NUMBER 1-4717, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-31-1997 SEP-30-1997 43,400,000 0 173,700,000 0 36,900,000 343,600,000 1,793,900,000 524,600,000 2,530,900,000 377,000,000 834,300,000 0 7,100,000 1,100,000 792,400,000 2,530,900,000 0 764,000,000 0 556,500,000 0 0 46,600,000 190,500,000 71,100,000 102,100,000 0 0 0 102,100,000 .92 0
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